Patterico's Pontifications

5/8/2014

You Really Want Government in Control of the Money? Do You Want to Change That Answer?

Filed under: General — Patterico @ 7:52 pm

In my posts about the gold standard, fractional reserve banking, and money, one theme comes up again and again in comments: money is built on trust, and must have value backing it.

My question is: why in the world would you want the government involved in money?

People seem to take it as a given that governments have to be the ones who make money. But that’s not so, at all.

The other day I told the long and interesting story of how money came to be. In short, the original barter system cried out for a common medium of exchange to lubricate the workings of commerce — because, say, a lawyer who wanted to buy eggs from a farmer could not count on the farmer wanting his legal services at the same moment. So people sought to exchange their goods and services for commodities that others would readily accept. Naturally, people sought the most desirable commodities that would be widely accepted, durable, divisible, scarce, and otherwise suitable as a medium of exchange. Most societies settled on gold and silver as the medium of exchange containing the best mix of characteristics required for a medium of exchange. The longer version is here.

There are two things about gold and silver at this point. First: their value was measured in weight. Most commonly used currencies were originally defined by the weight of gold they represented. A dollar represented a bit less than 1/20 of an ounce of gold. A British pound was roughly 1/4 of an ounce of gold. And so forth. Critics call this valuation of the dollar “arbitrary” — but once you knew the weight of the gold a particular unit would buy, you knew what it was worth.

Second: nothing about any of this required government. Entrepreneurs could coin money, and provide a service by standardizing the weights of coins upon which people could rely. Indeed, there are many examples in history, including in the United States, of private coinage.

But then, government took over. Tom Woods explains the process by which this happens:

First, society adopts a commodity money, as described above. (As I noted above, for ease of exposition we’ll choose gold, but it could be whatever commodity the market selects.) Government then monopolizes the production and certification of the gold. Paper notes issued by banks or by governments that can be redeemed in a given weight of gold begin to circulate as a convenient substitute for carrying gold coins. These money certificates are given different names in different countries: dollars, pounds, francs, marks, etc. These national names condition the public to think of the dollar (or the pound or whatever) rather than the gold itself as the money. Thus it is less disorienting when the final step is taken and the government confiscates the gold to which the paper certificates entitle their holders, leaving the people with an unbacked paper money.

This is how unbacked paper money comes into existence. It begins as a convertible substitute for a commodity like gold, and then the government takes the gold away. It continues to circulate even without the gold backing because people can recall the exchange ratios that existed between the paper money and other goods in the past, so the paper money is not being imposed on them out of nowhere.

My, that is a dramatic flourish, that reference to government confiscating gold. That could never actually happen in America, though. Right?

Wrong. It already happened. A mass confiscation of gold by government took place in this country in 1933. Did you know that? It happened when FDR issued Executive Order 6102. (And you thought Obama’s executive orders were bad!)

FDR’s gold confiscation meant private owners were obliged to take their coins, bars or gold certificates to a bank, and exchange them for dollars at the prevailing rate of $20.67 per ounce. Over the next year, the president then raised his official gold price to $35 per ounce, effectively cutting 40% off the dollar in a bid to stoke inflation and spur the economy.

It continued to be illegal to own gold in the U.S. (without a special license) from 1933 to 1974, at which point we were safely off the gold standard. Which is not to say you can’t own gold nowadays. You can get it for the reasonable price of under $1300 an ounce!

Nowadays, currencies are not tied to gold in any manner. That is due to government’s taking over control of the money supply.

And guess what? Oddly enough, governments all over the world have run up unsustainable debt. Go figure.

Also, inflation has taken place on an unprecedented scale. Coke was 5 cents in 1886. And it was 5 cents in 1959 — and all 70+ years in between. There’s even a Planet Money episode about it. The reasons for the stability of the price are varied, including a quirky and unwise contract, and the size of coin slots in vending machines. But, ultimately, the thing that pushed Coke off its 5-cent price was abandoning the gold standard, and the resulting inflation. It took a few years, but the prices of the inputs eventually rose to such a degree that Coke had to raise its price.

If unsustainable debt and runaway inflation don’t sell you on fiat money, how about the bank bailouts? Those were pretty awesome, right? And impossible without fractional reserve banking and the abandonment of the gold standard.

BONUS ANTI-FED RANT: I still haven’t gotten to the natural brake that the gold standard places on runaway inflation — for that, stay tuned! — but the point of this post is to show that government control of the money supply is neither necessary nor desirable. If you still think the steady hand of the Fed is the best thing since sliced bread, let me offer this: Ben Bernanke making a fool of himself. The audio peters out after a few minutes, but give it a couple three minutes and get your guffaw muscles ready.

As Tom Woods notes in Rollback: Repealing Big Government Before the Coming Fiscal Collapse, Bernanke told a gathering of academics in January 2007:

Together with the knowledge obtained through its monetary-policy and payments activities, information gained through its supervisory activities gives the Fed an exceptionally broad and deep understanding of developments in financial markets and financial institutions. . . .

In my view, however, the greatest external benefits of the Fed’s supervisory activities are those related to the institution’s role in preventing and managing financial crises.

In other words, the Fed can prevent most crises and manage the ones that do occur.

Finally, the wide scope of the Fed’s activities in financial markets — including not only bank supervision and its roles in the payments system but also the interaction with primary dealers and the monitoring of capital markets associated with the making of monetary policy — has given the Fed a uniquely broad expertise in evaluating and responding to emerging financial strains.

The bubble burst later that year. Heckuva job, Benny.

The Fed did a lot to create the housing bubble. And this is the fool who you want to put in charge of your money? Rather than trusting the distributed intelligence of the market to set interest rates, you want them to be determined by a clown like this?

End the Fed. End government control over our money. Let’s return to a true free market where individual decisionmakers determine prices, interest rates, and other important factors of the economy.

Stop the rule of the know-it-alls who end up knowing nothing.

It can be done. But first you have to understand why. That’s why I took the time to write this. And if you made it this far, great. I hope this post and other recent posts are causing some of you to look a little differently at government and its relationship to our money. Please let me know if that applies to you.

106 Responses to “You Really Want Government in Control of the Money? Do You Want to Change That Answer?”

  1. NOW do you want to change that answer??

    Patterico (9c670f)

  2. At the time, Greenspan, had hiked rates for two years, on rate sensitive APR, that reset at the new point, this was the legacy that Bernanke had inherited,

    narciso (3fec35)

  3. I remember years ago that I had a $1 “Silver Certificate”. I thought it was interesting. I probably kept it, wonder where it is.

    MD in Philly (f9371b)

  4. *sigh*

    This is like arguing with a flat earther or someone who just cannot see why perpetual motion machines won’t work.

    Yes, Bernanke is a crook. That does not mean that the Fed must be shut any more than Obama being a crook means that we need to be done with representative government.

    The main reason that specie currently stops inflation is that it stops pretty much all economic activity. If you REALLY want to have that economic doomsday you are so sure is coming, implement your ideas. It will happen damn quick.

    Kevin M (b357ee)

  5. Yes, FDR grabbed all the gold in 1933. But the market crashes of 1928, 1987, 2000-2001 and 2008 all happened while gold was freely traded. The length of the depression had nothing to do with this, but other, more direct economic foolishness.

    The country was officially on the gold standard during most of the 1800s, yet this did not stop panics, bank failures or long lingering depressions. Why? Because it is impossible to operate an economy on the gold standard and nobody tried. Since government wouldn’t print money, private banks did.

    Since there was no regulation, you just had to take your chances that the dollar drawn on the First State Bank of Omaha would be worth that cold dollar they promised, that they printed money in some relation to their gold holdings, or that they would still have some gold when you showed up to collect.

    Why did people do this? Because otherwise it wasn’t possible to do business. And of course there were crooks and stuff happened.

    If the happy day should come when the Feds both monopolize money and enforce a hard currency the crash will be sudden and hard. Hopefully, it won;t be so bad we don’t have the next election where the fools will be shown the door.

    Kevin M (b357ee)

  6. yes, but were they as profound as the ones in the 20th century, Smoot Hawley, turned a cyclical downturn into the Great Depression, ’87 was but a blip, the hiking of rates into 2000, did make the downturn a little sharper, and what bagel we are in today, well ‘it’s not the best of all possible worlds’

    narciso (3fec35)

  7. If unsustainable debt and runaway inflation don’t sell you on fiat money, how about the bank bailouts? Those were pretty awesome, right? And impossible without fractional reserve banking and the abandonment of the gold standard.

    And failure to bail them out would have been far worse than mere inflation (which, by the way we have not really seen yet, much to my surprise).

    The real culprit was not the banks or the mortgages themselves, but the derivatives and the silly-ass idea that you could write insurance to protect against a market crash.

    AIG sold insurance against mortgage-backed securities losing value. It wrote a lot of it. These securities then were traded like actual money, since they theoretically could not lose value, and other things were tied to them.

    Like most of the life insurance in the world. Can you imagine the harm if all the life insurance, all the annuities and other payments all became worthless at the same time?

    And that was just one aspect of the looming meltdown. The problem was not the bailout and the problem was not even the mortgages (only something like $1 trillion of mortgages became delinquent). It was the crazed way that everyone had used everyone else’s leverage to leverage their stuff. Cat’s cradle of interlocking puffery.

    Now, yes, this would not have been possible with a gold standard. But it also wasn’t made inevitable by the lack of same. It happened because the financial industry was run by a group of crazy people and Chairman Greenspan let them do it.

    The bailout was necessary. So was shooting the boards of about 10 corporations, and the Federal Reserve Board. Sadly, only the first was done.

    Kevin M (b357ee)

  8. Right, and all these banks decided to do this all at once, or was this because of govt mandates going back to 1993, read Reckless Endangerment,

    narciso (3fec35)

  9. Narcisco, the longest depression the US ever faced started in 1873 and lingered until the end of the century. The first part (1873-1879) is called the Long Depression, and the full period (until 1896) is called the first Great Depression.

    The Depression of the 30′s is hard to measure since FDR was so hellbent on making everything worse.

    Kevin M (b357ee)

  10. If this is such a great idea why isn’t there anyplace in the world (as far as I know) where its implemented? Its all fiat money and the dollar seems better than most.

    James B. Shearer (9233b4)

  11. From: Nebuchadnazar Khan, Supreme Lord of the Known Universe
    To: Lord Patterico, Minister of the Exchequer
    cc: Lord Boiltheminoil, Minister of Societal Harmony and Serenity
    RE: Proposal to privatize the Royal Mint

    Have received your proposal and arguments. Please draft an edict for my signature.
    nk

    B, hold off on the boiling oil until I’ve seen P’s draft edict.

    Seriously, Patterico, if not the government who? And we’d all like to see the plan.

    nk (dbc370)

  12. A mass confiscation of gold by government took place in this country in 1933. Did you know that? It happened when FDR issued Executive Order 6102.

    That’s really astonishing and galling, merely a variation of Obama forcing people to buy a product/service (ie, health insurance), no ifs, ands or buts. Or legislators in Connecticut who recently set up a requirement that all gun owners have to trudge over to their local government office to register their Colt or Smith and Wesson.

    When I think of all the people who bemoan “big business” — particularly the Occupy Wall Street crowd — but who blithely overlook the fact that while about all businesses at least don’t force the consumer to pay for a business’s goods and services, the government, by contrast, mandates that the populace hand over its money for the goods, if you will, and services run by the public sector, I can’t help but snicker and guffaw.

    Mark (99b8fd)

  13. Narcisco–

    The sub prime loans were not the cause of the crash. Again, if that was all it was the bailout would have been small — we did exactly that with the S&L failures of the 80′s. It was the bundling of mortgages into CDOs, writing insurance on them and then using these instruments as collateral for other transactions that cause the failure. Whole companies were brought down by marginal losses larger than they could sustain in the short term, so they failed too. Other companies relying on paper from these failing companies found their collateral was no good, their loans were called and the whole house of cards came down.

    But none of this argues for the gold standard, just as nothing Obama does as President argues for a King.

    Kevin M (b357ee)

  14. How did we survive for the first 124 year, how will the record look by 2037?

    narciso (3fec35)

  15. *sigh*

    This is like arguing with a flat earther or someone who just cannot see why perpetual motion machines won’t work.

    That is not an argument. It’s just an attempt to start one.

    Patterico (a21054)

  16. According to an infallible source (the internet) about 5.6 billion troy ounces of gold have been mined in the history of the world. In today’s prices, that’s about $7.3 trillion. About 10% of that is in industrial goods, 50% in jewelry, and 40% in “investments”, and we’ll assume that all of it can be counted as the basis for the currency. Do you want to limit the world’s economy to $7.3 trillion? If not, if the available means of exchange is some multiple of that, how is it different from “printing money”?

    nk (dbc370)

  17. If this is such a great idea why isn’t there anyplace in the world (as far as I know) where its implemented?

    Because it impoverishes countries faster than Marxism. The express coach to serfdom.

    Kevin M (b357ee)

  18. Smoot Hawley, turned a cyclical downturn into the Great Depression

    Beyond that, even more so since I understand other major economies in the world weren’t quite as moribund as the US ended up in the 1930s/1940s (disregarding the effect of world-war turmoil), was the absurdly high incomes taxes in the US, up to the 80 percentile range, particularly those aimed at the investment class.

    When I finally became aware of this and then heard about various major economists long being puzzled why America was in such a slump during the Great Depression, I wanted to say, “get a clue, Sherlock!”

    Another thing: It was Republican Herbert Hoover who rightly deserves blame for making the Great Depression great, but not because he was an uncaring elitist rightwinger wrapped up in the ethos of survival of the fittest. No, it was because under his watch, income tax rates soared to the 80s. IOW, Hoover was clap-happy about the notion of making the wealthy pay their fair share. Of course, FDR wanted to make a debacle even more of a disaster, since he supported the idea of pushing tax rates up to the 90-percentile level.

    So a combination of squish and liberalism screwed up things over 60 years ago, and probably will do the same in years to come.

    Mark (99b8fd)

  19. Narcisco, the longest depression the US ever faced started in 1873 and lingered until the end of the century. The first part (1873-1879) is called the Long Depression, and the full period (until 1896) is called the first Great Depression.

    The Depression of the 30′s is hard to measure since FDR was so hellbent on making everything worse.

    From that crazy reactionary New York Times:

    Historians long attributed the turmoil to a “great depression of the 1870′s.” But recent detailed reconstructions of 19th-century data by economic historians show that there was no 1870′s depression: aside from a short recession in 1873, in fact, the decade saw possibly the fastest sustained growth in American history.

    And this from a reporter who still tries to sell the myth of the “robber barons.”

    Patterico (68d1df)

  20. If this is such a great idea why isn’t there anyplace in the world (as far as I know) where its implemented? Its all fiat money and the dollar seems better than most.

    The same reason there is no government without corruption, nor any government that allows a true free market without accommodating rent seeking from all kinds of supplicants. The incentives for our governing betters do not cause them to have society’s best interests at heart. Seriously: you think governments do things because they are a “good idea”???

    Patterico (e369c3)

  21. Let’s say that all money is backed by actual gold, one for one.

    I want to buy a house and I go down to the bank for a loan. I am the best damn credit risk they ever did see and I have collateral to boot, so they loan me the money. I buy the house and the buyer puts it in his bank. The new bank now has a new deposit and loans it out to another home buyer. Who gives it to another seller ….

    It would seem that this money is multiplying, now backed not just by gold, but by houses and stuff as collateral. The N loans of the same gold-backed dollars have not required any more gold to enter the picture.

    Soon, a wise guy figures out a way to make some derivative money on this, perhaps selling mortgage insurance to the banks. Other schemes ensue and pretty soon we have another crash when the market turns. As it will.

    The only real difference here is that 1) it is extremely hard to get credit, or in fact to get money at all, as there is no good way to increase it. God help you if productivity is increasing and mining is not. Everyone is a thrifty saver, spending only when they have the money in hand. This is the kind of economy we usually call “a depression.”

    But heck, there probably isn’t any inflation.

    Kevin M (b357ee)

  22. That is not an argument. It’s just an attempt to start one.

    It’s the frustration of firing cannonballs at a mud fort.

    Kevin M (b357ee)

  23. Now, yes, this would not have been possible with a gold standard. But it also wasn’t made inevitable by the lack of same. It happened because the financial industry was run by a group of crazy people and Chairman Greenspan let them do it.

    Really.

    It had nothing to do with the incentives and moral hazard created by a system where everybody knows government will bail out “too big to fail” institutions.

    No, instead it is due to a sudden influx of “crazy people” in positions of financial power. There was just an outbreak of mental illness?

    You don’t really mean that. Even as hyperbole it doesn’t wash. All of a sudden the basic character of all these people changed?

    Patterico (c5d14d)

  24. #21 and the buyer seller puts it in his bank

    Kevin M (b357ee)

  25. When did we ever have derivative insurance, we never needed such a thing,

    narciso (3fec35)

  26. Patterico,

    I do not defend the system where the bailouts happened without (or mostly without) personal cost to the bankers. Had I written the laws, there would be serious jail time, and possibly executions, for that kind of financial skulduggery. But, again, a gold standard is worse since the NORMAL operation of that system is worse than the occasional operation of the current one.

    Sam has been the clearest in explaining this, so I refer you to his posts, which you should try refuting directly rather than posing the the same questions again. Asked and answered, as they say.

    Kevin M (b357ee)

  27. every little economic geegaw, the war on poverty, wage and price controls, Burns calliope of interest rates, the Opec oil shock, unhinged the economic framework,

    narciso (3fec35)

  28. By crazy people, I mean the folks who decided that it would be a good idea to take a bunch of mortgages, divorce them utterly from their collateral, replace that collateral by some guy’s pinky-swear promise to make it all good if it goes tits up, write options and other side-bets against them, then use these “securities” to underwrite things like grandma’s pension.

    Kevin M (b357ee)

  29. Real wages soared in the decade beginning in 1879 once we got off the greenback standard and back on the gold standard.

    Patterico (0dc069)

  30. Seriously: you think governments do things because they are a “good idea”???

    Governments do things that will help perpetuate their existence. Is it a more evil thing than the profit motive of the free market?

    nk (dbc370)

  31. Also, just to be clear, because we have a bit of a moving target here: does anyone still dispute that a bank creates money when it takes your deposit, lends out all but a fraction, and then lets you write checks on the full amount?

    Because it feels like some of you are saying of course that doesn’t happen, I don’t care what all these bankers say — and others are saying OK it happens but it is critical to this awesome fiscal situation we find ourselves in.

    Can I get a clear idea of which argument
    I am supposed to be responding to?

    Patterico (a21054)

  32. Governments do things that will help perpetuate their existence. Is it a more evil thing than the profit motive of the free market?

    Evil is not the question. The profit motive leads entrepreneurs to create wealth by creating value for consumers where none existed before. Government simply engages in plunder by taking from one person and giving to another — thus depriving the market of resources that could otherwise be used to create value. It’s not a question of the motive being pure or evil in either case. It’s a question of whether the incentive is to create value and satisfy consumer needs, or to satisfy rent-seekers and deprive the economy of resources that would otherwise be put to productive uses.

    Patterico (a21054)

  33. Yes, banks create money when they make loans. If people don’t like the word “create” we can call it “convert”. They convert our collateral or productivity/potential to pay it back to a number with a $ sign in front on a piece of paper. That’s money.

    But I think that’s an argument for fiat money, not against it. What the banks do would be fine if they kept their paper wealth between themselves and did not use it to inveigle real $s from the broader economy thereby devaluing them.

    nk (dbc370)

  34. A reasonably trustworthy and dependable common currency enables capitalism more than disables it. It makes the flow of goods and services faster. Crude example but “one denarius for one quart of wheat and for three quarts of barley” is more efficient than walking around town with three quarts of barley looking to buy one quart of wheat.

    nk (dbc370)

  35. Kevin M, I directly refuted you on the so-called Long Depression,

    Also, I think the better reading of the history of the 1800s is that government policies enabling credit expansion created booms and busts, which were moderated by the gold standard.

    Patterico (1daa89)

  36. A reasonably trustworthy and dependable common currency enables capitalism more than disables it. It makes the flow of goods and services faster. Crude example but “one denarius for one quart of wheat and for three quarts of barley” is more efficient than walking around town with three quarts of barley looking to buy one quart of wheat.

    Of course. It also allows entrepreneurs to calculate profit and loss which is critical to the efficient allocation of resources. Money makes the world go around. Do you think I am saying something different??

    Patterico (1daa89)

  37. 20

    The same reason there is no government without corruption, nor any government that allows a true free market without accommodating rent seeking from all kinds of supplicants. The incentives for our governing betters do not cause them to have society’s best interests at heart. Seriously: you think governments do things because they are a “good idea”???

    So you are saying this cannot happen unless a government allows it and no government will ever allow it. So why are we discussing something that can never happen?

    There are lots of places in the world with governments and fiat currencies much worse than ours. What do the inhabitants of such places turn to as an alternative to the local fiat currency? Gold or better run fiat currencies like the dollar or the euro?

    Why have the Chinese invested in dollars rather than gold?

    James B. Shearer (9233b4)

  38. If I understood your argument, I apologize. I thought that you were arguing against a centralized (government) legal tender in favor of various privately-agreed upon means of exchange. Which I thought is inconsistent with an argument against fractional reserve banking.

    nk (dbc370)

  39. My idea. No fractional reserve banking. Any transaction with a $ in front of it must be backed by existing, printed money. Banks can borrow the printed money from the United States Treasury at face value plus a reasonable interest rate payable over a reasonable number of years.

    Gold idea. With only $7.3 trillion (at today’s prices) in gold existing worldwide, some version of fractional reserve banking will have to come into being otherwise the economy is strangled. Why bother?

    nk (dbc370)

  40. If I *misunderstood*

    nk (dbc370)

  41. And, I don’t know why borrowing from the Fed should be a bad thing. Hot money already exists. I don’t mean stolen. Big Bank borrows from Big Money Market at 4% lends to Broadway Bank at 8% which lends to Gus Slumlordopoulos at 13%.

    nk (dbc370)

  42. 31.Also, just to be clear, because we have a bit of a moving target here:

    Well, as long as you admit it.

    Can I get a clear idea of which argument I am supposed to be responding to?

    Well, could I?

    First I was explaining the origin of banking to explain why banks fail.
    That was coupled with notes on why gold was not a super-currency compared to fiat paper.
    Then I was explaining the rationale of fractional reserve banking in the modern economy.
    And now apparently you want an explanation of why the government should have a monopoly on money.

    Every time the errors or fatal flaws with one anarcho-capitalist argument are brought up you leap right to the next one.
    Now if we were sitting at a table, and you had an outline of your points, and I had the references needed, we could go over each of them in a comprehensive and organized manner. This is just chaos, and it isn’t really setting things up for you to get useful information rather than just random sound bite refutations.

    Since we have jumped though . . .

    My question is: why in the world would you want the government involved in money?

    I believe I brought that up in the first or second thread on this.
    Okay, sure, it is completely absurd to trust government with money. I admitted that.
    Now then, who were you proposing an alternative?
    Oh right, a big corporation, like say . . . Enron.
    Or perhaps a big billionaire, like say . . . George Soros.
    Or maybe just a big cartel, like say . . . the NBA.
    Or better yet just big theorists, like say . . . well, Ron Paul.
    You really want any of them in control of the money? Do you want to change that answer?

    Now, as it happens, I know all that history of money. And while it is accurate up to a point, it lies about the grand finale. In particular that Times-Herald article “How Private Coinage Became Illegal.” Let us look:

    “It’s tough to do business if you have no cents. So businesses themselves came to the rescue, minting more than 25 million mostly one- and two-cent copper, lead or brass pieces, more than enough to fill the needs of trade in the Northern states.”

    Seems reasonable enough.

    “When Lindenmueller refused to allow a New York railroad to redeem his tokens for the promised goods, . . .”

    Well that’s not very good.

    “Private coinage was banned by Congress not because it didn’t work, but because it did.”

    And . . . there is our lie.

    If the person who issued the private coinage refused to honor it, then by definition it did NOT work.
    The person who minted those tokens promised they were worth something then refused to honor that promise.
    He lied.
    Saying it worked is a lie.
    You can try to parse around all you want, but particularly after claiming that bank runs means banks are engaging in fraud, there is absolutely no other way to describe this, and no way at all to defend it.

    The article you cite after that then compounds the lie by a bit of adept misdirection, thus:

    “Paper notes issued by banks or by governments that can be redeemed in a given weight of gold begin to circulate as a convenient substitute for carrying gold coins.”

    Wait a minute . . . “paper notes issued by banks”?
    Isn’t that . . .
    Wouldn’t that . . .
    HEY!!!!
    Why yes, that is precisely the sin of fractional reserve banking that you have been condemning.
    Worse, it truly and literally IS the banks creating their own money out of thin air.
    And it caused a great deal of upheaval and shenanigans when it was legal, something I alluded to previously.
    But now the government putting a stop to it is a great and mighty sin?

    Then of course we come to the history that is not covered, part of which is that element, and part of which involves issues from the Revolutionary War, which traced to issues before the Revolutionary.
    To begin with, England had its mercantile policy, which basically called for the colonies to feed raw materials to England in exchange for manufactured goods in order to keep a good balance of trade. Part of that involved restricting trade from the colonies to only England directly. Another part involved outlawing manufacturing in the colonies.
    These policies caused a severe shortage of specie within the colonies before the Revolutionary War. That caused the usual problems with keeping the economy going. And of course it caused a severe problem with financing the war.
    To get around it, the various colonial governments issued, of course, paper money.
    This was, of course, a mess of its own.
    To try and get it all under control, the Constitution contained three very specific provisions:
    Article I, Section 8
    To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;
    Article I, Section 10
    No State shall . . .; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts;
    Article VI, Paragraph 1
    All Debts contracted and Engagements entered into, before the Adoption of this Constitution, shall be as valid against the United States under this Constitution, as under the Confederation.

    Together they provided that the U.S. would redeem all of that garbage paper money the States had issued, the States would never issue such junk again, and there would be a single authority with power over legal tender going forward.

    Now it is true that up until the Civil War banks were issuing their own bank notes, but that was just paper currency. As noted though, that currency was never particularly stable, and so it was first consolidated into a number of national banks, and then consolidated into just the Federal Reserve Notes.
    Those consolidations were done explicitly to reduce the amount of “money” created at will by the private banks.

    And so the whole thing winds up circling back on itself.
    You are outraged that we do not have a hard currency of absolute value and that banks are allowed to “create” money on their own initiative.
    You blame the government for this.
    As part of denouncing the government for its shoddy oversight, you denounce them for preventing banks, and any other private entity, from creating “currency” they refuse to redeem, with no control over the minting, and indeed permit them to just create money on their own initiative whenever they feel like because that is “properly” “free market”.

    And THEN we come to whether or not we should amend the Constitution because of some economic theory being promoted with lies, misdirection, and redacted history.
    I’ll just say “Federalist #44, 4th and 5th paragraphs, by James Madison,” and consider that sufficient.

    Sam (e8f1ad)

  43. 35.Kevin M, I directly refuted you on the so-called Long Depression,

    Well, no, you didn’t.
    Your link had someone saying there was an alternative take on the Long Depression, but it was completely absent any actual evidence of such.

    Now I went and did some looking, and through everyone’s most despised source I discovered that it is Milton Friedman with that alternative view, in A Monetary History of the United States: 1867-1960. (Which is co-written with Anna Jacobson Schwartz.)
    Now not having read it myself (and with no guarantee I would understand it even if I did read it), I of course cannot comment on his views. I do note though that Milton Friedman also wrote a paper, The Crime of 1873 ( http://www.unc.edu/~salemi/Econ006/Friedman_Crime_1873.pdf ), which suggests that he felt “something” rather bad happened then. (Which I do not understand fully, but which I can identify as the government ending the minting of silver coins. Hey wait! The government can mess stuff up by changing what specie it issues? Didn’t someone say that awhile ago? Oh yeah, I did.)

    Also, I think the better reading of the history of the 1800s is that government policies enabling credit expansion created booms and busts, which were moderated by the gold standard.

    And yet, dispute over the Long Depression not included, booms were shorter and shallower and the busts were longer and deeper during the 1800s than they were once the Federal Reserve was created, with the exception of the Great Depression of course, becoming even more obvious after WWII when the destructive New Deal taxation started to be eliminated.

    And, of course, what enabled that credit expansion?
    Oh right, banks making their own fiat currency, which is bad except when it is good.

    Sam (e8f1ad)

  44. Also, just to be clear, because we have a bit of a moving target here: does anyone still dispute that a bank creates money when it takes your deposit, lends out all but a fraction, and then lets you write checks on the full amount?

    No. But see #21. Even if all currency was backed by gold, a bank “creates money” every time someone deposits someone else’s spent loan proceeds.

    To avoid that, you have to mark the gold certificates from the first loan as “currently being used” or something, so that nobody makes another loan based on them, until the original loan is repaid. But why anyone would take such notes is beyond me. If I were a bank I’d prefer the virgin stuff.

    So, the gold standard does not prevent money from being created, although it happens slower since the bank cannot make 10 loans on the same money at once. They have to wait for a cycle.

    Kevin M (b357ee)

  45. So, does a gold standard prevent large financial fraud? Surely not one that implicates major political figures, involves corrupt government spending, bankrupts large companies and presages a massive economic panic?

    Two words: Credit Mobilier. Apparently not.

    Kevin M (b357ee)

  46. Can I get a clear idea of which argument
    I am supposed to be responding to?

    I share this frustration.

    Kevin M (b357ee)

  47. The main difference between the gold standard and the modern system is that central banks can print money willy-nilly.

    They aren’t supposed to — it is supposed to be connected in some measure with the value of goods and services in the economy, erring ever so slightly for inflation rather than deflation. But sometimes they do, and there is a temptation to do stupid stuff like monetize debt (this does not really work, but appears to for a time).

    But even if the country is officially on a gold standard, they can cheat and just print money, too.

    The only difference in the behavior of banks is how fast they can “create money.” Because they reloan money in either case.

    Kevin M (b357ee)

  48. I like how the Luddites are still working with hypotheticals as realities.

    Reminds me of Climate Scientists, Solar Scientists, Social Scientists, etc., trained observers, ruthless rationalists.

    /sarc off

    gary gulrud (e2cef3)

  49. It is good that we’re discussing fundamental transformation of Amerikkka afore its finished.

    Watch this space.

    gary gulrud (e2cef3)

  50. Another thing — the Constitution mandates a gold/silver standard. The federal government should have passed an amendment to give themselves the power to print fiat currency.

    But they didn’t. They just slowly and successfully changed society’s thinking about money.

    A dollar backed by nothing is yet another extraconstitutional adventure that highlights how far detached America’s become from the country our Founders hoped to create.

    Tom Elliott (1c479d)

  51. All of our Capitalist faithful acknowledge as the kerygma of their faith, that the free flow and access to information is critical to its success:

    http://globaleconomicanalysis.blogspot.com/2014/05/another-bell-ringing-discrepancy-gallup.html

    Nice republic you had there, chimpchump. Have another banana.

    gary gulrud (e2cef3)

  52. These are the best days of your life:

    http://globaleconomicanalysis.blogspot.com/2014/05/25-54-labor-force-vs-employment-men-vs.html

    Suck it up, kids.

    gary gulrud (e2cef3)

  53. Wait a minute . . . “paper notes issued by banks”?
    Isn’t that . . .
    Wouldn’t that . . .
    HEY!!!!
    Why yes, that is precisely the sin of fractional reserve banking that you have been condemning.

    Not if the notes are backed by gold.

    Patterico (9c670f)

  54. But even if the country is officially on a gold standard, they can cheat and just print money, too.

    You mean people are free to commit fraud? Maybe so, but not legally. They can also cheat and put a gun to your head and demand money. But not legally.

    Kevin M, do banks create money when they take a deposit from x and loan all but a fraction to y, while allowing x to write checks on the full amount of the deposit?

    Patterico (9c670f)

  55. Sam,

    I reject your premise that credit would be nonexistent without fractional reserve banking. If the system outlawed it — as a fraudulent effort to award full title to the same property to two persons who have not agreed to share that title — the system would find a different way to finance capital acquisition. There are any number of proposals out there. We already have stocks, money market accounts, CDs, etc. Not everything has to be a demand deposit — and, as many of you have noted, banks can certainly draw up their contracts to limit people’s access to money. Which will change the behavior or some, but not all. Under a hard money system with full reserves, savings would be increased, and savings would drive investment, rather than being totally disassociated from it.

    You’ve heard of the Austrian theory of the boom/bust cycle, I take it? And I assume you reject it. I’ll probably do a post on that, but I would be interested to hear your refutation.

    In short (for the benefit of others), the theory posits that the central bank, by setting interest rates artificially low, distorts the marketplace by encouraging malinvestment in higher order capital goods that are further removed from the need to satisfy immediate consumer demand.

    That sort of investment occurs naturally in the unhampered market economy when consumer demand slows, meaning people save more, making more money available for investment, which naturally lowers interest rates.

    By contrast, when the central bank does it artificially, credit is widely available and cheap, despite no decrease in consumer demand and no increase in savings. Then you have a fight for resources between inputs for businesses seeking to satisfy consumer demand, and inputs for businesses seeking to invest in higher-order capital goods.

    The result is increase in the prices of inputs (inflation) due to the artificially increased demand for the inputs, and ultimately consumer demand wins out and the artificially created market for higher-order capital goods craters. Which is exactly what happened in the Great Depression.

    That’s a hastily typed out version, and when I do the post I will try to make it clearer with more examples. But the business cycle in the unhampered market economy depends on a relationship between savings and investment. Fractional reserve banking, and central bank control over interest rates, both largely disconnect that crucial relationship.

    Which is why you get the x bubble and the y bubble and the z bubble.

    All the while with people haughtily telling you that it is simply UNTHINKABLE that we would do things any other way.

    Your thoughts? (Preferably without the sarcastic tone you adopted in a couple of recent comments.)

    Patterico (9c670f)

  56. By the way, Sam, I don’t mean to be complaining that YOUR argument is a moving target. It’s not. It’s more a general complaint that I am arguing with several different people and some of you (Sam) accept that banks create money and some (daleyrocks) don’t and some (Kevin M) I can’t pin down, at least that I can recall.

    I am getting back the complaint that my arguments are a moving target, but I don’t think so. I think it’s all of a piece. Fractional reserve banking, hard money, interest rates determined by the market, Austrian boom/bust cycle — these things are all, honestly, related in my mind. So I don’t see it as ping-ponging from one topic to another. Rather, I see it as making the same argument in different ways.

    Patterico (9c670f)

  57. 35.Kevin M, I directly refuted you on the so-called Long Depression,

    Well, no, you didn’t.
    Your link had someone saying there was an alternative take on the Long Depression, but it was completely absent any actual evidence of such.

    OK. How about this?

    Orthodox economic historians have long complained about the “great depression” that is supposed to have struck the United States in the panic of 1873 and lasted for an unprecedented six years, until 1879. Much of the stagnation is supposed to have been caused by a monetary contraction leading to the resumption of specie payments in 1879. Yet what sort of “depression” is it which saw an extraordinarily large expansion of industry, of railroads, of physical output, of net national product, or real per capita income [emphasis mine]? As Friedman and Schwartz admit, the decade from 1869 to 1879 saw a 3-percent per-annum increase in money national product, an outstanding real national product growth of 6.8 percent per year in this period, and a phenomenal rise of 4.5 percent per year in real product per capita.

    . . . .

    It should be clear, then, that the “great depression” of the 1870s is merely a myth – a myth brought about by misinterpretation of the fact that prices in general fell sharply during the entire period. Indeed they fell from the end of the Civil War until 1879. … Unfortunately most historians and economists are conditioned to believe that steadily fall prices must result in depression: hence amazement at the obvious prosperity and economic growth during this era.

    Never mind the conclusion. Dispute the facts cited in this passage — the figures cited at the end of the first paragraph — if you can.

    Or, alternatively, concede them but mount your argument that this was all somehow awful anyway.

    Patterico (9c670f)

  58. If a late-comer is welcome,

    The problem with gold or any commodity is that production of the commodity often falls out of sync with other commodities being produced. The posters here have alluded to shipwrecks — suddenly and unexpectedly decreasing the money supply — and gold rushes — when the supply almost as suddenly, if less unexpectedly, increases. (We expect that increasing demand for money and increasing degrees of exploration and technology will drive the production of the commodity higher, but we can’t predict when a new rich field will open. )

    The historic solution is a bi-metallic standard — gold AND silver — and at present commodity traders speak of “a market basket” of more than two strategic metals. One assumes that the average of two or more will be less shock-prone than any one measure alone.

    I guess I’d be curious about how to use such a mix . Who decides what commodities go into the basket, in what proportions, and how “useful” metals, like silver (was critical to photograpy, now, not so much) are adjusted as time and technology march on.

    Pouncer (415203)

  59. People seem to take it as a given that governments have to be the ones who make money. But that’s not so, at all.

    Maybe the problem started when governments started minting coins.

    Sammy Finkelman (d22d64)

  60. I have eight one-ounce gold disks and a two-ounce gold bar. I take them to Apple Vault, who stores them for me for a charge of one ounce of copper per year (which I pay), and gives me ten one ounce of gold receipts, payable on demand to the bearer of the receipt.

    I can spend those receipts as if they were the gold pieces. People know Apple Vault and trust that the receipts are valid. We can go to Apple Vault and verify that the receipt is valid and that there is gold in Apple Vault if we should desire to have gold in exchange for the receipt.

    This is the creation of paper currency. It is a form of money, but it is not money created with a fractional reserve (well, it can be considered a strange fractional reserve solution where the fraction equals 100%; most don’t consider 100% of something to be a fraction of that something.)

    Apple Vault grows. Now it has over a hundred thousand of ounces of gold.

    The Duke comes calling with a platoon of knights, he’s out of spendable gold. He’s brought his grandfather’s old crown as security, and wants to borrow 100 ounces of gold in exchange for it; he’ll return the gold and reclaim the crown at the end of the summer campaign. Apple Vault weighs the crown, measures the volume, examines the stones, and agrees. The Duke does not want receipts for gold deposit, he’s going abroad, where Apple Vault is mostly unknown. He and the knights depart with 100 ounces of gold disks. You can consider this a revokable sale, a pawning, a loan, a deposit, … the reserves of Apple Vault are unchanged, the crown replacing the value of 100 ounces of gold. While this looks like the creation of money, it’s not.

    The King comes. He wants to borrow 200 gold on his IOU for security. The King does not want actual gold, he wants 200 receipts for gold ounces, something he can carry about. He’ll redeem the IOU the day after Christmas, and give you 20 ounces of gold as a gift. Apple Vault gulps. This is fraud. This is the King. This is fraud. This is the King. What are the chances that 99,000 ounces of gold will leave the vault through redemption of receipts by Christmas? The reserve has never fallen by more than a thousand in a year. Fraud. King. Apple Vault asks the King for a pardon in having committed this fraud, in addition to the IOU. Done. The King leaves with the 200 gold receipts, Apple Vault considers were to store the IOU, on the shelf with the crown, and now, where to put the pardon?

    That loaning was the creation of money with a fractional reserve. Today we’d call this an unsecured personal loan to the King, and we’d call the pardon a bank charter.

    htom (412a17)

  61. Kevin M, do banks create money when they take a deposit from x and loan all but a fraction to y, while allowing x to write checks on the full amount of the deposit?

    I answered this 3 times now (21, 44, 47).

    But again. Of course they do. But they ALSO do this under a gold standard. Just slower.

    Every time they loan money they “create” it since they still have the deposit they loaned, but some other account and/or bank has the loan proceeds which are separate, new, money. And that deposit is available to be loaned. Ad infinitum.

    They just can’t loan the SAME deposit 20 times, but they do “create money” in the way you mean.

    Kevin M (b357ee)

  62. #59, instead of quoting Friedman directly, you quote a source that quotes Friedman. Not exactly a second opinion.

    But, I’ve seen other sources that suggest that output and employment never cratered like in 1929, but that prices fell instead (deflation over 1873-1895 was 44% in England, according to one source). When prices are falling you get some producers have to step up their efforts to maintain the same income (e.g. farmers) and this depresses prices further, but output IS up.

    Also, the Panic cause a number of major “too big to fail” banks to fail and the destruction of the banking system took decades to undo. This was, no doubt, a force behind the bailouts of 2009.

    Kevin M (b357ee)

  63. From: Nebuchadnazar Khan, Supreme Lord of the Known Universe
    To: Lord Patterico, Minister of the Exchequer, Count Travis
    cc: Lord Boiltheminoil, Minister of Societal Harmony and Serenity; Lord Treehugger, Minister of Green Things and Stuff
    RE: Proposal to privatize the Royal Mint

    Have adopted your ideas with some minor modifications.
    – As a kind and beneficent ruler I grant leave to my subjects, individual and corporate, to utilize any means of exchange any contracting parties may, from time, mutually agree upon, except that
    – All payments made by Our Government for obligations of the government shall be in Government-issued scrip which shall be legal tender everywhere for all private transactions and refusal to accept it shall be dealt with by the Ministry of Societal Harmony and Serenity, except that
    – All payments made to our Government for taxes, fees, fines, penalties, or any other obligations owed Us, shall be in gold, platinum, silver, or chocolate bars.

    As a token of Our regard for your services, please accept Travis County for yourself and your heirs in perpetuity.

    And on a related subject, you are aware of the rising costs of oil and Treehugger has been whining about something he calls its “environmental impact”. A technique called sous-vide has come to my attention. Please confer with Treehugger and Boiltheminoil for a joint feasibility study.
    nk

    Lots of luck with Travis County.

    nk (dbc370)

  64. Not if the notes are backed by gold.

    By definition (by which I mean historical precedent of the links you referenced in support of this), the banks would be issuing more notes than their reserves, and so the surplus notes would not actually be backed by gold.

    I reject your premise that credit would be nonexistent without fractional reserve banking. If the system outlawed it — as a fraudulent effort to award full title to the same property to two persons who have not agreed to share that title — the system would find a different way to finance capital acquisition.

    Yes it would. Things like . . .
    The Greek and Roman Patron-Client System
    Manorialism-Feudalism
    Big Man/Potlach
    All sorts of methods.
    The key difference between the two groups is that one is based on direct exchange of physical wealth and the other is based on indirect exchange of promissory notes.

    As a further issue, money market and CDs are NOT methods of capital acquisition, and neither are joint stock companies. They are methods of risk sharing in investing. Those are two completely different things. Just being able to form a joint stock company in no way means you will be able to have the capital liquidity you need to run it.
    Or are you going to make stock into currency and have people exchanging share certificates in the stores? I do recall Joe Haldeman (who wrote The Forever War) including that concept in some of his stories for ultra-high level trading, but on a functional basis for a package of chewing gum?

    In short (for the benefit of others), the theory posits that the central bank, by setting interest rates artificially low, distorts the marketplace by encouraging malinvestment in higher order capital goods that are further removed from the need to satisfy immediate consumer demand.

    Well . . . yes; I know.
    What you are missing is that the opposing theory posits that the central bank shouldn’t be going this far and instead restricting itself to only interfering to ensure the money supply during periods of brief disruption in order to stabilize the economy and prevent disastrous bank runs and cross-sector recessions when bubbles, which are inevitable under any system, burst.

    Just as a gun is a tool so is a bank, and in particular a central bank.
    It can be used properly and to a good end or improperly to a bad end.
    Would I love to see the Federal Reserve stop with the quantitative easing and other Keynesian and neo-Keynesian nonsense?
    Absolutely.
    Would I love to see the Federal Reserve ended and other Austrian School and anarcho-capitalist nonsense?
    Absolutely not.
    Insisting that it is a binary choice is a logical fallacy.

    All the while with people haughtily telling you that it is simply UNTHINKABLE that we would do things any other way.

    I don’t mean to come off haughty, but there are consequences to all systems, both positive and negative, and high level incompatabilities between them.
    At a certain point, if you want to build a building of a certain size you are going to need a foundation of a certain type and a frame of certain materials. You can dismiss anyone for telling you otherwise for being haughty, but it is not going to make your building stand up, particularly in an earthquake zone.

    Your thoughts? (Preferably without the sarcastic tone you adopted in a couple of recent comments.)

    I’m trying not to be sarcastic, but when you present arguments in certain ways, and support them with links that directly contradict themselves within two sentences, it begins to get difficult to keep advocacy for my personal preferences out of it.
    You don’t want me to be haughty telling you that the system you are advocating is incompatible with modern financing then do not tell me that the system must either function the way you like or be completely fraudulent and doomed.

    By the way, Sam, I don’t mean to be complaining that YOUR argument is a moving target. It’s not. It’s more a general complaint that I am arguing with several different people and some of you (Sam) accept that banks create money and some (daleyrocks) don’t and some (Kevin M) I can’t pin down, at least that I can recall.

    To be clear, I do not accept that banks create money. I simply said that I would accept the premise and move on to pointing out the consequences.
    I agree with both dalerocks and KevinM that what the banks are doing does not qualify as money creation. However, that gets into arguing different theories. Which;

    I am getting back the complaint that my arguments are a moving target, but I don’t think so. I think it’s all of a piece. Fractional reserve banking, hard money, interest rates determined by the market, Austrian boom/bust cycle — these things are all, honestly, related in my mind. So I don’t see it as ping-ponging from one topic to another. Rather, I see it as making the same argument in different ways.

    They are. And as it goes I said the same thing myself back at the beginning – that the topic involves so many intrinsically linked factors that it is difficult to impossible to discuss one without at least mentioning the others.
    Which is why I said this was really just an awful format to try and do it in and that we need to be sitting at a table, with references, and an outline, and going over things in a more formal fashion.
    I would even go so far as to say that when we don’t, it is guaranteed that we are going to wind up talking past each other on definitions and coming off truly obnoxious in our dissents.

    I would further amplify that by something I realized several years ago in regards to philosophy, theology, political ideology, and economics (which I consider inextricably linked anyway). That is:
    All treatises on such are predicated on having THE First Cause.
    These First Causes are ALWAYS “self-evident”, and thus not only do not need to be proven but are not.
    From them are derived “obvious” effects.
    From those are derived “clear” prescriptions (for law, government, and so forth).
    By enacting those “clear” prescriptions, it is shown that the “self-evident” First Causes are absolutely true, and thus they are proven anyway.
    This is an absolute of the discipline.
    All theorists write this way.
    All students of the theories proceed from that point.
    I am not condemning the students for doing so, though I have a good deal of disdain for the theorists for setting it up that way, I am merely observing an event and preparing myself to account for it.

    (Sidebar/Disclosure: I have encountered precisely ONE treatise that did NOT assert its First Cause was universal and absolute – the Declaration of Independence. That doesn’t mean it does not contain assertions of First Causes, only that it is honest enough to admit they are OUR First causes only. That is key contributing factor to why I am a fanatical believer in the American system.)

    How is this relevant?
    You are asserting the Austrian School/anarcho-capitalist view with its “self-evident” declarations.
    Daleyrocks, KevinM, myself, and others are asserting alternative views of one variety or other. (I am mostly a Smithian, I cannot speak for them.)
    Our belief systems are inherently incompatible. It is like a Trinitarian and a Uniitarian discussing Christology. There are fundamental disagreements to the point that even stating them is a direct and personal attack.
    How to get past that is one of those meta-questions that I expect people will still be trying to answer in the next millennium. How we do it is what matters.

    Never mind the conclusion. Dispute the facts cited in this passage — the figures cited at the end of the first paragraph — if you can.

    I thought I already did.
    I’m not being flippant, I mean:
    Now not having read it myself (and with no guarantee I would understand it even if I did read it), I of course cannot comment on his views.

    I really already admitted that I cannot refute Friedman’s position, and I won’t pretend that I can.

    Or, alternatively, concede them but mount your argument that this was all somehow awful anyway.

    Once again, you are insisting on a binary resolution.
    Just because I cannot refute them does not mean I must concede them and I do not.
    As for mounting a counter-argument, the existence of a valid counter-argument is inherent in what you quoted – that Friedman’s views are in direct opposition to the conventional wisdom (aka, “scientific consensus) about the Long Depression.
    Clearly there are two opposing viewpoints.
    I would say clearly, neither one of us is qualified to expound directly on the topic, and so both of us are left with appeals to authority to support our positions. (Or, “your religious book says one thing, my religious book says another.”)

    Again, I am not trying to be haughty, or sarcastic, or arrogant, though I’m sure I slip, particularly as things move from observation to advocacy.
    And the deeper we go into the contending theories, the more incompatible things will get.

    Sam (e8f1ad)

  65. I think that’s pretty much how paper money first came into being when the Mongols occupied China. I’m not sure about the chocolate bars.

    nk (dbc370)

  66. And I am not being a smartass. I dispute that our monetary system came down from the government. I propose that it grew out of what the merchants and moneylenders — the market — told the government was needed.

    nk (dbc370)

  67. A currency board (where the money is backed not by gold or silver, but by some other currency) can work and is a form of hard money.

    http://en.wikipedia.org/wiki/Currency_board

    The biggest problem is a country can abolish it.

    http://en.wikipedia.org/wiki/Argentine_Currency_Board

    Sammy Finkelman (d22d64)

  68. Coke was 5 cents in 1886. And it was 5 cents in 1959 — and all 70+ years in between.

    I don;t know about Coca Cola, but prices rose slowly between 1900 and 1914 and then doubled \by 1920. in 1920 we had teh great Deflation and porices dropped by about 45% – first wholesale prices in May and then retail prices around Decemeber, bankrupting many businesses.

    Prices also dropped during the Great Depression 1929-1933, so that they were about back where they were in 1913.

    they double from 1940 to 1948. The bog thing taht the “do-nothing” Congress was doing nothing about was inflation.

    And then the inflation sudddenly…

    VANISHED!

    Economists had no explanation for it. Milton Friedman claimed that very low interest rates was tight money.

    What had happened wa sthat inventory control broke down <i. in an expansion </I.

    Inflation was at 7% in 1957 because the fed was "fighting " Then they cut interest rates at the beginning of 1958 and things went back to normal.

    There had also been Korean war inflation, stemming froma real shortage in commodities.

    Inflation was running at about 1%, maybe close to 2% when on December 5, 1966, the Fed decided to "fight inflation" and created the Great Inflation which lasted some 30 years.

    What do you know? Just when they decided to "fight" it, it got higher.

    Because the porinciple cause of inflation is high interest rates.

    It only came to an end because of falling oil prices, I think. This needs more study. Volcker didn't end it..

    Sammy Finkelman (d22d64)

  69. Comment by Kevin M (b357ee) — 5/8/2014 @ 8:59 pm

    the silly-ass idea that you could write insurance to protect against a market crash. </i.

    They somehow didn't understand that that's what they were doing. They had the math to prove exactly how risky it was supposed to be.

    <i AIG sold insurance against mortgage-backed securities losing value.

    Using a different word than insurance.

    They were basically trying to insure against a depression. You can’t do that.

    The concept that the general value of things could drop was missing. The concept that housing prices could drop was missing.

    Sammy Finkelman (d22d64)

  70. Patterico, at 57: how does that theory explain the fact that there were bubbles, and boom/bust cycles, before the creation of central banks?

    aphrael (db1491)

  71. Ludicrous blog post even by government employee standards. The U.S. government is in control of money in the U.S. because of Art. I, Sec. 8 of the U.S. Constitution. Duh.

    As far as how a government can foster and implement a proper monetary policy, read “The Theory of Money and Credit,” by Ludwig von Mises. Every correct answer you need about money and monetary policy is in that treatise.

    Lawrence Westlake (4fc30a)

  72. it’s called the business cycle, do they still teach that in macroeconomics?

    narciso (3fec35)

  73. Lawrence, I really think you would be much happier chatting with the other court chamberlains in the Mensa Society smoking lounge than slumming with us idiots. Give it some thought before you drive by again to enlighten us with your mystic wisdom.

    nk (dbc370)

  74. Sammy (@71)

    The Credit Default Swaps only function as insurance and would work so long as the downturn was mild, or the default was isolated. But there was a saddle-point past which the would all happen at once, and — like insuring Los Angeles against The Big One — the insurer cannot meet the call.

    What was a problem was that these things were in turn collateral.

    Kevin M (b357ee)

  75. *the failures would

    Kevin M (b357ee)

  76. One problem was government mandated (and legally impregnable) credit ratings.

    We may not realize how much trouble was caused by relying on 3rd party impartial evaluators.

    1. Appraisals of houses.

    2. Audits by accounting firms.

    3. Credit ratings.

    All these things failed, once they were mandatory, and above criticism.

    Sammy Finkelman (bcd7c8)

  77. All money is fiat money. Gold has no intrinsic value. Using it as money based on a presumption of scarcity is a fool’s errand. Ask Spain.

    In your dream scenario where there is no inflation there’s also no risk capital for things like the Internet. You want a growing GDP, you need a growing money supply.

    brian (88f8f3)

  78. Ludicrous blog post even by government employee standards. The U.S. government is in control of money in the U.S. because of Art. I, Sec. 8 of the U.S. Constitution. Duh.

    As far as how a government can foster and implement a proper monetary policy, read “The Theory of Money and Credit,” by Ludwig von Mises. Every correct answer you need about money and monetary policy is in that treatise.

    Mises will tell me why my post opposing government power over money is wrong!!!

    Patterico (9c670f)

  79. The gold standard has one tremendous virtue: the quantity of the money supply, under the gold standard, is independent of the policies of governments and political parties. This is its advantage. It is a form of protection against spendthrift governments.

    – Ludwig von Mises

    Patterico (9c670f)

  80. Get ready for some irony, as represented by three quotes.

    Nowadays, currencies are not tied to gold in any manner. That is due to government’s taking over control of the money supply.

    And guess what? Oddly enough, governments all over the world have run up unsustainable debt. Go figure.

    Also, inflation has taken place on an unprecedented scale. . . . If unsustainable debt and runaway inflation don’t sell you on fiat money, how about the bank bailouts? Those were pretty awesome, right? And impossible without fractional reserve banking and the abandonment of the gold standard.

    BONUS ANTI-FED RANT: I still haven’t gotten to the natural brake that the gold standard places on runaway inflation — for that, stay tuned! — but the point of this post is to show that government control of the money supply is neither necessary nor desirable.

    – Patterico, in this post.

    Ludicrous blog post even by government employee standards. The U.S. government is in control of money in the U.S. because of Art. I, Sec. 8 of the U.S. Constitution. Duh.

    As far as how a government can foster and implement a proper monetary policy, read “The Theory of Money and Credit,” by Ludwig von Mises. Every correct answer you need about money and monetary policy is in that treatise.

    –Lawrence Westlake

    The excellence of the gold standard is to be seen in the fact that it renders the determination of the monetary units purchasing power independent of the policies of governments and political parties.

    . . . .

    The gold standard did not collapse. Governments abolished it in order to pave the way for inflation. The whole grim apparatus of oppression and coercion, policemen, customs guards, penal courts, prisons, in some countries even executioners, had to be put into action in order to destroy the gold standard.

    . . . .

    The classical or orthodox gold standard alone is a truly effective check on the power of the government to inflate the currency. Without such a check all other constitutional safeguards can be rendered vain.

    – Quotes from Ludwig von Mises, The Theory of Money and Credit

    See how Mises lines up with Lawrence Westlake, and reveals how stupid Patterico’s rant against government control over money was?

    Get the impression Lawrence Westlake doesn’t have the slightest idea what he’s talking about?

    Patterico (9c670f)

  81. this author, puts the whole Austrian school, in the context of opposition to the uniquely dirigiste regime, that reigned until the collapse of CreditAnstalt;

    http://hayekcenter.org/?p=887

    narciso (3fec35)

  82. Patterico, at 57: how does that theory explain the fact that there were bubbles, and boom/bust cycles, before the creation of central banks?

    Austrians have typically explained such cycles as stemming from inflationary practices often caused by quasi-central banking cartels and other government interference encouraging inflation.

    The financial panics of 1873, 1884, 1893, and 1907 were in large part an outgrowth of . . . reserve pyramiding and excessive deposit creation by reserve city and central city [New York City] banks. These panics were triggered by the currency drains that took place in periods of relative prosperity when banks were loaned up.

    Moreover, banks, especially the larger ones, were encouraged in their inflationary credit creation by the firmly entrenched expectation that they would be freed from fulfilling their contractual obligations in times of difficulty by the legal suspensions of cash payments to their depositors and note-holders that recurred during panics throughout the 19th century.

    As Rothbard shows in his masterful discussion of the National Banking era in A History of Money and Banking in the United States (pp. 132-79), every panic was preceded by an expansion of the money supply. And during the panic of 1873, there was no contraction of the money supply, while there was a very mild one in 1884.

    We have not tried a true laissez faire system, because government always interferes. But the theory nicely explains why higher-order capital goods production was hardest hit in the Great Depression. And it predicted the bursting of the housing bubble, at a time when “Clueless Ben” Bernanke was assuring the country all was well.

    Patterico (9c670f)

  83. “My question is: why in the world would you want the government involved in money?”

    Why do you think the founders did?

    “But, ultimately, the thing that pushed Coke off its 5-cent price was abandoning the gold standard, and the resulting inflation. It took a few years, but the prices of the inputs eventually rose to such a degree that Coke had to raise its price.”

    How much have computing prices changed since we left the gold standard?

    But lastly, how is setting a gold standard not the government having control?

    cbuund (74098c)

  84. Mr. P.:

    Since we’re almost to the point of “Godwinning” this argument, I thought I’d let you know that you’re doing an excellent job so far in defense of the gold standard. I appreciate the fact that you understand the argument for it well and you’re hitting the correct sources. (Nice point about the contradictions inherent in the 1873 “Long Depression”, btw.)

    As far as other sources for you, you might see if you can dig up a copy of “Breaking the Banks: Central Banking Problems and Free Banking Solutions” by a gent named Richard M. Salsman. It’s out of print but gives an interesting general history of banking in the U.S. Not surprisingly, of course, you find in an amazing coincidence that state and federal government issue of paper currency always inevitably leads to inflation, recession/depression and crash with predictable regularity even under **gasp** a GOLD STANDARD!!! /sarcasm

    Don’t get too frustrated with the fiat monetists. I know that it’s like arguing with a religionist or a progressive but, as Rand put, you can’t force a mind. Just put up your info on the gold standard and let the seeds sprout in receptive minds. Good luck.

    J.P. (bd0246)

  85. 82. “Get the impression [___________] doesn’t have the slightest idea what he’s talking about?”

    Let’s face it, the number one obstacle to Truth in this world is the absence of vigilance on our own part over our own mind.

    We tolerate trash for our cares, we ladle out vomit because it serves our purpose, our self-image, our bottom line that we, let alone the impressionable believe falsehood.

    gary gulrud (e2cef3)

  86. I really like my $200 car, so much I spent a $1000 on it in January. But I’d still give it up for the right opportunity.

    http://losangeles.cbslocal.com/2014/05/08/man-79-beaten-after-accidentally-bumping-into-car-in-grocery-store-parking-lot/

    gary gulrud (e2cef3)

  87. “FDR’s gold confiscation meant private owners were obliged to take their coins, bars or gold certificates to a bank, and exchange them for dollars at the prevailing rate of $20.67 per ounce. Over the next year, the president then raised his official gold price to $35 per ounce, effectively cutting 40% off the dollar in a bid to stoke inflation and spur the economy.”

    In 1934 (“over the next year”) GDP grew over 10%. This is not a bad thing.

    cbuund (74098c)

  88. “My question is: why in the world would you want the government involved in money?”

    Why do you think the founders did?

    “But, ultimately, the thing that pushed Coke off its 5-cent price was abandoning the gold standard, and the resulting inflation. It took a few years, but the prices of the inputs eventually rose to such a degree that Coke had to raise its price.”

    How much have computing prices changed since we left the gold standard?

    But lastly, how is setting a gold standard not the government having control?

    It is good to remember that there was quite a bit of disagreement on various topics among “the Founders.” I think they tend to be treated as a lumpy whole these days, probably because the disagreements that they had amongst themselves seem to pale in comparison to the difference between the ideals they shared, on one hand, and the support for an oppressive central government that so many accept these days, on the other.

    The gold standard acted to brake some of the excesses back then. As Walter Williams has observed: “Our founders feared fiat money.” They had good reason to; during the Revolutionary era, states issued paper currency not backed by gold, and the Continental Congress issued Continentals, which were later famously worthless for various reasons, including British counterfeiting, and the colonies’ decision to continue to issue fiat money backed by nothing. (Governments like to inflate during times of war.)

    Government control of coinage in a gold standard system is quite different from wanting the government to control the money supply in an era (today) completely untethered from any mechanism that can serve to brake government’s natural and historic tendency to debase (inflate) the currency. Government-caused inflation expands governmental power and reduces (or, as today, merely delays) the consequences of irresponsible borrowing.

    The primary money controversy in the days of the founding, I believe, was the argument over whether to have a central bank. Hamilton favored it. Jefferson and Madison opposed it — but Madison eventually gave in once the precedent was established.

    Soon, Jefferson was warning: “We are to be ruined by paper, as we were formerly by the old Continental paper.” He warned of a “bank bubble.” Soon enough, we got the Panic of 1819, and a call for hard money. But it never happened, and the 1800s had bank panics (largely resulting from state laws preventing banks from having more than one branch!) and other government interference with the free market.

    As for the question: how is setting a gold standard not government control? read my last few posts. All refer to one I did on the history of money, and how the gold standard arose. But I’ll explain it again, briefly.

    The idea is that the gold standard arose, as money must, organically — within the context of a free market demand for a medium of exchange to facilitate what are essentially barter transactions between people who have created wealth by supplying goods or services others want. Government simply providing a currency that is based on a certain weight of gold creates no immediate concern. The worry is over the potential for abuse — because government has incentives to debase the currency in ways that the market cannot correct.

    The problem arises when government interferes with the unhampered market economy. Specifically, when government monopolizes the right to coin money; passes laws that allow banks to suspend payments in gold (as it did repeatedly in the 1800s); grabs the gold (as it did in 1933); inflates the currency; and the like.

    As for computing prices, that is a situation where rapid technological development, together with the laws of supply and demand, create a “deflation” in the price of a particular good so rapid that it outstrips any government effort to control it. I’m glad you brought up the example, because it illustrates the basic fallacy of those who fear deflation, claiming that people will always delay a purchase when prices are falling. Yes, people sometimes wait out a purchase of a smartphone or a computer because they hope prices will fall and quality will increase — but ultimately, just about everybody buys one.

    Deflation is not a phenomenon to be feared, I submit, in an unhampered market economy. It is a problem only when government has already interfered in other critical aspects of the economy, such as setting minimum wages, or passing laws that allow unions to force themselves on workers who don’t want them. When wages cannot fall below a certain level by law, deflation poses a problem for businessmen — but when the unhampered market economy can respond to such adjustments, the dreaded prospect that we might have to spend less for a higher quality good, as we do with computers, seems less frightening.

    Blaming the free market economy for its inability to deal with deflation, when government has taken away the very tools that entrepreneurs use to address that phenomenon, is obviously unfair. A natural and smooth business cycle should take place when government stays out of economic affairs. Unfortunately, government is seemingly always “here to help” — and so the smooth transitions we should see, never seem to actually occur.

    I’ve spent enough time on this comment that I think I will turn it into a post.

    Patterico (9c670f)

  89. Sammaricolicious!

    Colonel Haiku (2601c0)

  90. #ISprainedMyIndexFinger

    Colonel Haiku (2601c0)

  91. “FDR’s gold confiscation meant private owners were obliged to take their coins, bars or gold certificates to a bank, and exchange them for dollars at the prevailing rate of $20.67 per ounce. Over the next year, the president then raised his official gold price to $35 per ounce, effectively cutting 40% off the dollar in a bid to stoke inflation and spur the economy.”

    In 1934 (“over the next year”) GDP grew over 10%. This is not a bad thing.

    FDR established cartels, gave his blessing to price-fixing, destroyed livestock and crops, and doled out public works projects in return for Democratic votes. Do you support all this too, because of a crude correlation to an increase in GDP from the very trough of the worst Depression in the country’s history?

    Patterico (9c670f)

  92. Since we’re almost to the point of “Godwinning” this argument, I thought I’d let you know that you’re doing an excellent job so far in defense of the gold standard. I appreciate the fact that you understand the argument for it well and you’re hitting the correct sources. (Nice point about the contradictions inherent in the 1873 “Long Depression”, btw.)

    . . . .

    Don’t get too frustrated with the fiat monetists. I know that it’s like arguing with a religionist or a progressive but, as Rand put, you can’t force a mind. Just put up your info on the gold standard and let the seeds sprout in receptive minds. Good luck.

    Thank you for the words of support. As much resistance as I am getting from some, I would like to think it is causing some people to rethink their basic assumptions about money. Nothing wrong with that.

    Patterico (9c670f)

  93. My basic assumption about money is one can never have enough!

    Colonel Haiku (2601c0)

  94. “It is good to remember that there was quite a bit of disagreement on various topics among “the Founders.””

    True, but we can all agree on what made it into the text of Article I, Section 8:

    “To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures;”

    “As for the question: how is setting a gold standard not government control? read my last few posts. All refer to one I did on the history of money, and how the gold standard arose. But I’ll explain it again, briefly.”

    Let’s say it’s 1893, and we have the gold standard. What’s the argument against Free Silver?

    “Yes, people sometimes wait out a purchase of a smartphone or a computer because they hope prices will fall and quality will increase — but ultimately, just about everybody buys one.”

    And then they lose money when the thing they own is now dropping in price. But anyway, the point with pointing to computing is that you’re mismeasuring inflation or deflation if you just fixate on one product. Inflation/deflation are about changes to general price levels, not about what technological or other factors are changing the costs of one thing relative to others.

    cbuund (74098c)

  95. “FDR established cartels, gave his blessing to price-fixing, destroyed livestock and crops, and doled out public works projects in return for Democratic votes. Do you support all this too, because of a crude correlation to an increase in GDP from the very trough of the worst Depression in the country’s history?”

    Do you think those things helped growth? The quote you posted said the confiscation and other factors were an attempt to stoke growth. Did they?

    cbuund (74098c)

  96. Let’s take the discussion here, since I just did an entire post incorporating my comment 90.

    You’re free to repost your comments there, cbuund.

    Patterico (9c670f)

  97. “Also, just to be clear, because we have a bit of a moving target here: does anyone still dispute that a bank creates money when it takes your deposit, lends out all but a fraction, and then lets you write checks on the full amount?”

    Patterico – I accept that, because they are creating money out of a deposit, not thin air. This is the point where we have been talking past each other. Figure 2 of that BOE paper you keep linking. Banks leverage their capital, not their deposits. The fraction of deposits they are required to keep on deposit with the Fed is for liquidity purposes. The calculations are the risk based capital having a more direct impact on lending activity of banks are the risk based based capital ratios, which are tailored to the balance sheets of each bank.

    By the same token are you still insisting that a bank can make loans without assets on hand, because I have still seen no proof of that.

    daleyrocks (bf33e9)

  98. Money, it’s a crime I think. It’s ok if you share it fairly but don’t take a slice of my pie, please.

    happyfeet (8ce051)

  99. By the same token are you still insisting that a bank can make loans without assets on hand, because I have still seen no proof of that.

    Yes. All they need is a fraction of the asset.

    Patterico (9c670f)

  100. Or, alternatively, the whole asset — and then they need only a fraction of the deposit to allow checks to be written on the whole deposit.

    It all depends on how you want to characterize it.

    I’m saying the same thing over and over.

    Patterico (9c670f)

  101. It’s quite shocking that the basic concept of fractional reserve banking and its effect on the money supply has to be argued over.

    cbuund (74098c)

  102. Patterico @101 and 102 – This is where you and I disagree and I think we are talking past each other as evidenced by your comment 52 on the more recent thread:

    1. You can posit the theory that banks had to have the assets on hand to make the loan. But then you have to admit that they don’t have to have the assets on hand when they simultaneously honor a check written by the depositor for amounts that have already been lent out. Thus, money is created when the checks are honored. Or:

    2. You can posit the theory that the funds never left the account, and that the bank simply created money when it made the loan.

    Either way you look at it, money has been created. What is dishonest is to look only at one half of each portrayal — the half of #1 where assets had to be there to make the loan, and the half of #2 where assets have to be there to honor the check — and pretend that the other halves of each portrayal (where money is created) never happened.

    I deny your claim of being dishonest and instead claim you fail to understand what I am saying.

    Against ordinary deposits banks are required to hold a 10% reserve of liquid assets as a cushion against runs or liquidity crunches. That ratio is set by the government based upon historical experience of depositors withdrawing their money.

    Is this unicorn like deposit account which may or may not actually get created when a loan is created of the same character as a savings account or checking account? My argument is absolutely not. The reserve ratio on those average accounts is set at 10% because average withdrawals are not expected to exceed that amount.

    What is the percentage amount of a loan expected to be withdrawn? My argument is 100%, otherwise the person taking out the loan doesn’t need the loan or is an idiot. That unicorn deposit needs a 100% reserve.

    daleyrocks (bf33e9)

  103. Lord almighty, it’s the same argument from two days ago. Only when the aggregate withdrawals exceed the aggregate deposits PLUS the 10% or whatever reserves! does the bank begin to have a problem. At that point, the bank is still quite solvent provided its loans are for the most part good. At that point, the bank can then sell its loans to another bank and use the proceeds from that sLe to meet ongoing withdrawal demands.

    WTP (066be7)

  104. “Only when the aggregate withdrawals exceed the aggregate deposits PLUS the 10% or whatever reserves! does the bank begin to have a problem.”

    WTP – Thank you. The bank must have the assets on hand. The BOE paper Patterico has linked a few times also supports that position as they show in Figure 1.2 and in the text following.

    daleyrocks (bf33e9)


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