Comments (13)

• David C

  Once upon a time there was a truck driver who decided he wanted to get his delivery to market quicker. So being the thoughtfull guy he was, he stuck the cab at the back of the freight instead of the front - that way the goods would get to market first, right?

  So now he's driving down the freeway, with the cargo in front, and the driver cab in the back, and the truck starts to veer off to the side of the road. The debate is: should he slam on the brakes and risk jack-knifing or turn the wheel and risk being whiplashed around (it could wreck and burn either way)?

  Hmmmm, tough call. I guess the debate of wether he should have pushed the cash out ahead of time, oops, I mean cargo, will half to wait till the next delivery. He realy was a nice guy.

  Published: January 15, 2006 6:31 PM

• GMB

  You couldn't let it all crash like what was the prefferred method under fractional reserve Gold. Because now they have got it set up not just like an elephant balancing on its trunk. But like an elephant balancing on its trunk next to a cliff.

  I think they ought disregard consumer prices altogether if trying to engineer a soft landing.

  Of course I'd want them to find a way to phase in 100% backed precious metals. But I'm only talking about coming down from a bubble right now.

  They should look at investment asset markets and try and let the prices of these ease downward slowly with total disregard for consumer prices.

  Because Austrian business cycle theory predicts that one of the adjustments that needs to be made is that investment asset prices will have to fall in relation to consumer prices.

  Its after these adjustments are made that the hammer needs to come down and really tight money be reinstituted. If the stock market or the real estate market then took off that's when you would move quickly to stop them going up. That is when the really tight money could feasibly be reinstituted.

  When they tighten they ought to do so by jacking the Reserve Asset ratio a little bit. And never let it go the other way. Because if they carried this on and we finally got to 100% backed fiat. Then it would be just a matter of repealing legal tender laws and banking licensing laws. And then competing 100% metals monies would be on an equal footing.

  And once all these monies are on an equal footing I think we know that fiat money would not be the winner of that particular contest.
  

  Published: January 15, 2006 8:56 PM

• billwald

  Exactly what happens when a bubble pops? People who expected to get something for nothing got nothing. People who thought they were smarter than the market obtained a valuable lesson, most at a lower cost than 4 years in college.

  Published: January 16, 2006 1:20 PM

• GMB

  I'm expecting it could be a lot more expensive then that. Not just for the investors too. That a perfectly free economy might take it all in its stride may not be much consolation.

  And its not clear who would take advantage to the crisis. Some crash in the stock market is one thing. But the potential for a much greater meltdown than the 30's is there the way they have all aspects of finance so leveraged.

  Published: January 16, 2006 9:49 PM

• Yancey Ward

  Bubbles do happen, even with a free-market money, but central banks make the bubbles bigger and more dangerous by bailing out the fools who, as Billwald noted, expected something for nothing. Central banks socialize the costs of stupidity.

  Published: January 17, 2006 9:45 AM

• GMB

  I don't think bubbles COULD happen without fractional reserve. That is to say in a settled 100% backed environment with a number of competing metals.

  It might happen sometime in the transition. But I would suggest that the metal that might be subject to a large increase in its supply..... enough to create a bubble without fractional reserve..... I would suggest that in practice that metal would only be used for the interest component of loan contracts. If it was to be used for loan contracts at all.

  In the 'Mystery of Banking' Rothbard shows that you need a price reduction, in most cases, to reduce the requirement of money for holdings. That is to say to reduce the demand for money for holdings.

  A reduction for the demand for money in this way may mean that purchasing power spills into the stock market.

  But dig the implied stability here. I think it would be an almost eeiry stability. Since you would need massive consumer price deflation even to allow a stock market run-up.

  Really. What stock market bubble could get of the ground if you need the price level to be dropping away precipitously in order to provide the purchasing power for a stock-market bubble?

  I think the Austrians may sometimes underestimate transitional problems. But I don't think they are zealous enough in projecting the great advantages of the monetary some of them envisage. To my mind it would be just fantastic.

  Published: January 21, 2006 6:14 PM

• Paul Edwards

  GMB,

  I'm with your on your assessment on the advantages of honest money. It would be fantastic and i mean that in the non-utopian respect as do you. I also agree that I'd like to emphasize these benefits more myself, but i find my bandwidth used up almost entirely on explaining first the nature and consequences of our present corrupt system and how these problems would be resolved by a free market. It's an effort, and people's minds are surprisingly drenched in Keynesianism and egalitarianism. So few Americans have any grip at all on why affluent countries are affluent, and why poor countries are poor. But I suppose when life gets bad enough more will want to know the truth about that. For now they are thinking of how they would improve the world if only they possessed the reigns of power. We have a long way to go.

  Published: January 21, 2006 7:50 PM

• Paul Edwards

  On the question of the transitional problems of getting back to honest money, I would be interested to hear more from you on that. From my perspective, i can see hardly any. As Rothbard lays it out, it’s a matter of arithmetic. How much gold is in fort Knox and elsewhere and how much money is out there: checking accounts, savings, fed notes, cashable aspects of insurance policies and misc. Define each dollar as a warehouse receipt for this gold, move the gold to the banks or warehouses, with the gold redeemable on demand, abolish the fed, voila, what pain?

  The only discomfort this would afford us is that it would not penalize the banks for their fraudulent transgressions to date.

  If we wanted to mitigate some of the bank's unearned gains in capital in this process, we could first perform a money contraction prior to going honest. That would be painful, as it would result in a 1-2 year correction, but it would be undeniably fairer and healthier for the economy as well.
  

  Published: January 21, 2006 8:09 PM

• GMB

  Sure.

  But I think this money business needs a lot more fervour. Since it is one of two lynch-pins, that if achieved (in my view) then all the rest 'will follow with complete certainty even in the midst of chaos'. That is to say if we get THESE right then the weight of social processes will be such that a bias toward further liberty will be inherent.

  One thing we can do for which there is no plausible excuse for others to oppose is for central banks to alter their demand management policies. To increase the reserve asset ratio when they want to dampen demand and to create cash when they want to increase demand AND TO FORSAKE ALL OTHER MECHANISMS.

  That way the RAR keeps increasing until it gets to 100%. Why I say there is no plausible opposing excuse is that there are no transition problems and also by their own goals, worthy or not, this will make central bank monetary policy increasingly more predictable. It will make it easier for them to hit their marks.

  So I cannot see any worthy excuse that they could come up with to oppose such demands. And that being the case one could be quite haughty about these demands.

  And as I pointed out above, from there it would be only time and the repeal of legal tender and banking laws between the system and a metals-based one.

  Published: January 21, 2006 8:45 PM

• GMB

  I think there are still transitional problems with that. Since now the changeover price would be massive.

  Rothbard thought there might be inflation but he thought it would be one-off. But what about if afterward the velocity of circulation dropped precipitously. It stands to drop by two-thirds or more.

  Supposing the implied Gold Price on changeover is $30 000 now. It might be that since Rothbard advocated this changeover the information revolution has intervened to produce massive pseudo-Money Supply which is nonetheless capable of influencing aggregate demand.

  (Massive pseudo-money and enhanced velocity.)

  And that even at that price it would be hard to say if the amount of Gold available would take up the slack of the aggregate demand that is needed.

  And it would be giving foreigners $30 000 worth of USD just for one ounce of Gold. Not initially but from after the change-over.

  Which sort of begs the question as to whether Gold is still the natural metal of circulation. It might be that its more natural for Gold, Silver, Palladium and Platinum to all play a part. And that therefore their prices need not balloon out a great deal more then they are currently.

  That sort of changeover just strikes me as a bit uncertain and risky. Just because the powers that be have allowed the current system to get so treacherously out of hand.

  Supposing the change-over had happened in 1980. Nowhere near the same uncertainties I would think. And it might have been a goer but the administration of the time had plans to starve the Soviet Union of funds that were a great deal more comprehensive then they let on at the time.

  There is a lot of cash I think that has leaked out of America and its not clear what would be done with that. Or whether Chinas and others debt holdings could be brought in for Gold. Although I mention that just in passing and am not putting it out necessarily as a fatal flaw in the scheme.

  Sure I think this scheme ought to be kept on the table. But strategically I think forcing a move toward backing the fiat 100% ought to be something that we should be working on in the meantime. After all the changeover from 100% fiat to 100% Gold under the exact same scheme is likely to be a lot cleaner.

  Published: January 21, 2006 9:12 PM

• Paul Edwards

  Hi GMB,

  I have to confess i didn't follow you very well. There is nothing about the transition that would change the demand for money. People would still use dollars just as they do today. Many people would even be clueless that anything had really changed at all aside from this fixed dollar-gold relationship. A few would simply be aware that if they withdraw their money from a bank, they could do it in dollar bills or gold coins etc on a very specific and permanent ratio. The dollar would be to gold what the inch is to a foot, i.e. a permanent ratio, and it would be illegal to create more dollars beyond what was needed as a money substitute for the new gold coin minting at this ratio. FR banks would either be treated as fraudulent, or at least bank runs and personal private losses would be called part of life.

  Almost, or more likely, just plain everyone would continue to calculate in dollars.

  The question of the nationality of dollar owners would not be relevant. Whoever owns US dollars, owns that calculated proportion of US gold. Period. Conversely, all early gold owners are likely to benefit from this transition. That will always be the case when a commodity becomes money, the demand for the commodity increases naturally. There are always bigger winners than others in life, it can’t be avoided. What is important is that on net, and in the long run, more win when the market is free and the dollar is a gold dollar.
  

  Published: January 21, 2006 10:26 PM

• GMB

  Hmmmmmmm.

  How much do you think the change-over value would be if it was made now? And lets figure out what the knock-on effects would be.

  Now supposing the Feds had half as many ounces at Fort Knox and in New York as they currently have. The reccomended change-over value would be twice as much right?

  What if the amount of gold they had was only one tenth. Then the change-over value would be ten times your original estimate right?

  Now at some point there would be problems with this. I imagine there would be with the amount of gold you have now.

  Reisman advocated the Rothbard change-over in his book. 'Capitalism'. But he hasn't reccomended it again on the audio on this site. Maybe its looking less viable as time goes by.

  Rothbard may have sized up the situation at the time and seen it as doable. But he might not think so now if he was around.

  Is it Hulsman who thinks that the natural transaction metal would now be silver?

  The scheme would predjudice one metal over the others.

  Look I suppose its a matter of judgement as to whether its still a viable deal. But it doesn't mean we ought not be trying to get some of the other things done also.

  Published: January 21, 2006 11:16 PM

• GMB

  I had to drag this one up again because I didn't manage to convey just how optimistic things are if we could at first get to 100% backed fiat.

  Now the people who support the idea of a central bank have no valid short or medium or long-term excuse not to acquiesce in making the central bank move gradually to 100% backing.

  That is to say to follow a policy of increasing the Reserve Asset Ratio when they want to dampen demand and creating cash when they want to increase demand. And to forsake all other demand management methods. Perhaps they still could have the discount rate but be forced to make it so high that the banks would only use it in a bank run.

  This cannot be rationally opposed by them. Because by their own lights they want to be able to control demand. And the higher the Reserve Asset Ratio is the easier it is for the Fed to hit what it aims at in terms of aggregate demand.

  Once we have 100% backing we have a situation where there is no plausible reason for the discount rate. Not even any plausible Keynesian reason, if that doesn't sound too paradoxical to Austrians.

  Without the discount rate and the practice of the central banks lending to the commercial banks there is then no plausible reason for banking licensing. And we are then pretty close to free competition of financial institutions at least as far as fiat is concerned. And even metallic-backed banking is on more of an even footing when competing against fiat.

  The only leg to kick out from underneath this cess-pit of financial unrighteousness will then be the legal tender laws. It may be from here metallic monies will start grabbing market share already........

  But dig this:

  FROM HERE IT WILL BE IN WASHINGTON'S INTEREST TO CONSPIRE TO REPEAL LEGAL TENDER.

  Why is this so? Well consider their debt position. And consider a situation where they are increasing the cash outstanding (and therefore pretty much the entire money supply under 100% backing) by about 4% per year.

  Well they can plead due diligence for their creditors can't they? But that would be high enough for all these metallic monies to be flowing into the system.

  The new monies will cause inflation for sure. Because they add to the total money supply. But the beautiful thing about what I am describing is that the inflation will be wholly expressed in the fiat currency. Since the metal currencies will not fall below the world price of their constituent metals. So even though Washington (under this circumstance) can plead innocence and due diligence to their creditors the value of the currency will fall through the floor. Getting Washington off the hook for maybe three quarters or more of your national debt.

  But it won't hurt the economy because it will only happen at a time when the take-up of sound money is substantial and growing.

  And when this happens I will weep tears of joy no matter my personal circumstances. It will be like when communism died and we can re-release "Love Shack" all over again and dance about like fools.

  Now this is my plan.

  It is going to work.

  So take it to your leaders.

  Published: January 28, 2006 9:54 PM