Here are my answers just returned to a journalist asking questions:
1) In which way do the central banks contribute to the problems we see now?
The central bank created the problem in the first place. Low interest rates and a defacto guarantee to bailout everyone (the Greenspan and now Bernanke PUT) caused the housing bubble which in turn led to such things as reduced lending standards, mortgage-backed securities and financial corruption.
2) Can or should the government or central banks do anything to prevent a collapse of the banking system, at this point? Why not?
No, they should do nothing except unwind the existing bailout measures and return their policies to normal. They should be put out of business.
3) What will be the consequences of the continued attempts by the authorities to prevent more bank failures and the seizing up of the credit markets?
Bailout policies are what turn normal recessions into depressions. Look at the US in the 1930s and 1970s and Japan in the 1990s. In each case government undertook aggressive bailout policies designed to keep incumbent shareholders and managers in place by propping them up with credit and policies to keep prices high. The result was decade long periods of higher unemployment and stagnation.
4) Is a world without central banks possible or desirable? Please explain.
Central banks are unnecessary and harmful. It is both possible and desirable to eliminate them. Some of their functions could be handled by the market institutions such as the clearing house function. Setting interest rates could and should be done by the market. Persistent and erratic inflation of the money supply is not desirable so that the function would be eliminated and control of the money supply would be returned to the market in the form of gold and silver mining production which is very consistent and difficult to manipulated because it takes “real money” to mine precious metals.
5) How does the lack of a gold standard contribute to the problem?
A gold standard is the most important part of the solution because it ties government’s hands from deficit spending and inflation. However, fractional reserve banking is also a big contributor to the problem of monetary instability, inflation and the business cycle. We need to abolish fractional reserve banking on demand deposits and return to laws pertaining to deposits and warehousing that existed prior to central banking and indeed continue to exist today in all other warehousing contracts. This would mean that every dollar deposited into a demand deposit account would have to be maintained on reserve by the bank. There would be no reserve requirements for bond proceeds, CDs or other time deposits. This would take the leverage and instability out of the monetary system.
6) How would one prevent that the gold standard is abandoned at the first sight of serious problems, as has been the case in the past – and also when countries have attempted to peg their currencies to the US dollar?
The Treasury and the Fed should not be permitted to issue paper dollars, only gold and silver coins, and private mints should also be able to issue gold and silver coins so that the money supply is market determined (and that the ratio of precious metals in monetary use and other uses would be in harmony). We should have a coin-based system, not a gold-exchange system that allows the Treasure to “fudge” with the money supply. The dollar should be fixed in a weight of silver because that is what emerged on the market (true gold was used as money in large transactions, but we only went on a gold standard because the British made bad monetary decisions when they were on a fixed ratio of gold to silver and Gresham’s Law went into effect). There should be no fixed ratio of gold to silver, but people should be free to use both as money. Checks and debit cards would still exist and indeed debit cards could automatically translate gold demand deposits into silver-denominated purchases. These basic tenents should be written into all Constitutions to block the actions of government, but not to forestall innovations of the market.
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anyone see the markets today? another 600 point drop with 5 minutes to go AND gold has recovered it’s earlier losses and is back up around $900.
Last I saw Treasuries were down. Looks like gold is displacing Treasuries as the ultimate safe haven. Buy up if you have not already, it’s not too late.
Just for grins, how much gold should one have on hand, if one were to have gold on hand?
I would say at least 30% of your liquid assets (house excluded).
LVM:
Writing from Peru, and you should see the interest there is (at the academic level!) in Austrian School of Economics. Keynes is dead. Long live Mises!!!
What journalist contacted you and are your answers going to be published? Should we as readers cut and paste you answers and put them in financial blogs?
I’m curious about the last paragraph:
The Treasury and the Fed should not be permitted to issue paper dollars
Paper currency does have a few things going for it, though: it’s convenient to carry, it’s difficult to counterfeit, and it’s difficult to tamper with. (You can shave a coin, but you can’t shave a bill.)
I wonder what type of future Mr. Thornton envisions for paper currency. While I agree that we can’t trust the government to issue it, if we returned to sound money, and the free market were left alone, would we see an “evolution” of paper currency?
To wit: today, businesses can choose to accept various privately-issued credit cards (Visa, Mastercard, Discover, et. al.). In a future of sound money and 100% reserve banking, would businesses also choose to accept various bank notes as equivalent to coin money?
I think the answer would be yes. Furthermore, I think the banks would compete with each other not just in terms of convenience and low fees, but also in terms of trustworthiness—each bank would compete to demonstrate that its notes were the most trustworthy; that the bank always had ample reserves on hand to redeem 100% of its notes…
Until three days ago I thought the Fed was a government organization. If we pay 3bn a day (as a nation) to the Fed as interest on our debt, is it far to say that every man, woman and child is paying $5 a day?
I will see if the site http://www.thezeitgeistmovement.com/ becomes active tomorrow. I will change my way of thinking abut my country and the Financial System as a whole. The advent of the Central bank in 1913 was the beginning of a nightmare. I am emptying my account at the Bank of America tomorrow. I cannot condone this anymore. I’ve read that the Fed’s balance sheet has gone from 900bn to 1.5tn in the last month. Five companies linked to the Fed have added 150bn in the stock market when it went down by 600bn. This is an amazing thing. If this were France of the past we’d be leading them up to have their heads lopped off. Do we need revolition to end this?
The journalist works for a prominent Swedish publication and we will provide a link when it is available, but you can also send this information to others if you wish.
Dear James R:
Re Paper Money
I don’t have anything against paper money, only the Treasury issuing it! If they can issue it then they can issue more than they have gold on reserve. I envision a system where the government doesn’t keep the gold, we do (and our banks). Checks are a form of paper money–fine.
A gold coin is easy to carry around compared to 900 $1 bills and is actually hard to counterfeit. Coins have a staggered edge so you can shave them. Gold coins have a look, a feel, and their own sound–bling!!!!!!!
The future is electronic transactions, but it should be built around gold.
How could a bimetallic standard of gold and silver remain stable when the ratio of the 2 metals is subject to variable rates of mining? If the supply of one increased relative to the other, couldn’t one run into problems that preferences for one or the other would keep flip-flopping and unstable exchange rates between the two lead to uncertainty as to which coin one would prefer?
Bill K,
you are of course quite right. I don’t think that any one who has given a specie standard more than a cursory thought and who understands basic economics would call for a perpetual fixed ratio be set between various metals. Instead the only feasible method is to allow them to float in value with each other. The current market ratio would be well publicized and electronic commerce would automatically take care of any conversions (and fees). Transactions in specie would consult the current ratio + a conversion fee if the market deemed that appropriate. With modern communications, the harms of bimetallism do not have to overshadow metals in the future. The periodic glut and scarcity of the various metals will no longer plague the economy if there is no governmental price fixing between the metals.
Thanks! It’s great to have these succinct answers–especially after reading the Economics of Housing Bubbles (and also de Soto’s)! Not only interesting, it’s important to see them printed for larger audiences.
Mr Thornton,
I Have no argument with the broad thrust, but I must protest at this line:
‘…..unwind the existing bailout measures and return their policies to normal’.
Return their policies to normal? Their ‘normal’ policies got us into this mess………….
Silver is the better metal for creating coins that would actually be carried and used in commerce because it is less valuable and could be struck in smaller denominations. A $1.00 gold coin would be tiny, but $1.00 in silver is still big enough to be useful.
The real solution is to strike coins by weight rather than denomination so that all prices could fluctuate. We could then develop a new jargon for coinage like tenths, fifths, and halves to refer to ounces of metal, or perhaps finally go to a metric system and use whole numbers of grams.
Initially, contracts could be converted from being denominated in dollars to whatever the parties agreed on in terms of gold or silver (or they could continue the contract in worthless fiat money as contracted, too
. Cash would be converted to gold using the pathetic stores the government still owns at the rate already proposed by Rothbard and others (divide the amount of cash by the amount of gold to get the conversion rate). After that, everyone would be free to do business as they please.
I disagree that “bailout policies” prolong depressions. They are in themselves neither pro-boom nor pro-bust. They are a sideshow of policy idiocy, destructive of capital and economic progress. In doing this, it is true, they create fear in businesses. But the lion’s share of fear is the result of the refusal of government to get off the (monetary) stage. The inmates are, in effect, still in charge of the asylum.
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