A New Golden Age?
The new issue (on sale today) of Worth magazine features an article on "A New Golden Age" by Nathan Lewis which is a nice recap of the history of the gold standard showing that we (along with the Roman's) thrived on a gold standard only to succumb to paper inflations. "It is practically a truism that the decline of currency quality is mirrored in the decline of world power."
Lewis has a new book Gold: The Once and Future Money.
Comments (32)
Don't look now, but we seem to be thriving just fine on paper (for now anyway). If you're worried about inflation (and who isn't) then it seems easier to just buy the assets/investments (gold or otherwise) that you want with dollars now (and as you get them) instead of waiting for the currency to change. Pay off the mortgage, buy equities foreign and domestic, avoid bonds and savings accounts redeemable in dollars, etc...
Published: February 13, 2008 3:11 PM
I stopped reading Nathan Lewis's book at the point that he defended fractional reserve banking. A gold standard with central-bank monopoly backed factional-reserve banking are incompatible and per se inflationary. It would not signficantly differ from the current system. He is not much of a sound money advocate.
Published: February 13, 2008 3:25 PM
Mike:
Fractional reserve banking is perfectly defensible. If a bank issues 100 checking account dollars, against which it holds 10 paper dollars and IOU's worth $90, then each of those dollars is fully backed by the bank's assets, and the bank causes no inflation. Look up the real bills doctrine for further explanation.
Published: February 13, 2008 3:56 PM
it's not backed, because the bank did not promise an IOU in exchange for cashing out the account, it promised money.
Published: February 13, 2008 4:00 PM
Mike Sproul,
Your percentages are wrong. At 10% Fractional Reserve a $100 deposit would turn into $1,000. 100 is 10% of 1,000, so with your $100 in their vault the bank can hand out IOUs up to a total of $1,000.
Published: February 13, 2008 7:45 PM
Anyone that believes fractional reserve banking is okay and not a form of socialism for the bankers and those they lend money to (socialism for some rich) would definitely have their beliefs altered by de Soto's masterpiece called Money, Bank Credit, and Economic Cycles (available on this site at the link below):
http://mises.org/books/desoto.pdf
It changed my view of the world, that's for sure.
Published: February 13, 2008 8:12 PM
IOU's are assets?
What I'd like to see is a Visa Gold Card that actually holds assets in gold. They still get their 3% transaction fee, and I don't get hit with the inflation tax.
Published: February 14, 2008 9:33 AM
IOU's are assets?
Technically yes. They can be bought and sold just like any other asset. Their value can be anywhere between nothing and almost face value, depending only the probability and proportionality that they will be honored.
Published: February 14, 2008 10:26 AM
That is a great suggestion. I have sent the same idea to MasterCard. Why don't you write VISA and suggest the real gold card!
Published: February 14, 2008 11:27 AM
Nelson: "If you're worried about inflation (and who isn't) then it seems easier to just buy the assets/investments (gold or otherwise) that you want with dollars now ..."
Keynesians and monetarists want everyone to believe that monetary inflation does nothing but raise all prices at the same rate, so no harm is done. That's one of the main differences between those schools of econ and Austrian econ.
Austrian econ teaches that monetary inflation 1) causes the business cycle in which enormous amounts of capital are wasted and 2) unfairly redistributes income to the people who receive the new money first. I don't know about you, but those things bother me.
Published: February 14, 2008 12:18 PM
Austrian econ teaches that monetary inflation 1) causes the business cycle in which enormous amounts of capital are wasted and 2) unfairly redistributes income to the people who receive the new money first. I don't know about you, but those things bother me.
I'm just being pragmatic. Nothing I said contradicts what you said. I agree that a relatively stable currency is optimal. I admittedly doubt that a gold standard is the best answer though.
But even if it is, Ron Paul will have to wait at least 4 more years it seems. In the meantime there's nothing saying we must store our wealth in dollars.
Published: February 14, 2008 1:56 PM
Just an aside... the entrepreneur types in the world view money more as a tool than a goal. Generally speaking, they hold their wealth in equity and productive assets, not dollars or gold. In other words, don't spend too much time worrying about currency. It is important from a taxation and efficiency standpoint, but its value shouldn't be overestimated.
Published: February 14, 2008 2:11 PM
Fractional reserve banking is the greatest investment in the world if you are a banker. If you are not a banker, you are welcome to defend it, but you are being robbed blind. Fools and their money are soon parted--by fractional reserve bankers.
Published: February 14, 2008 2:20 PM
It is a shame we have strayed so far from money's roots that anyone defends fractional reserve banking. Originally, paper money was a receipt for an amount of gold on deposit at the bank. (google gold certificate for an image.) The gold was the money. The paper was only a claim to the money. With that understanding, it is impossible to accept that more than one receipt can be printed for the same piece of gold. But now everybody believe the paper is the money. (In fact, the Govt has proclaimed it.) With that, why would one need any reserves? What even are reserves in such a system?
Published: February 14, 2008 6:22 PM
Hi Nelson,
You are a fool if you believe that those who create money and those who are lent it do not profit immensely from it. Your point that entrepreneur's do not hold money is beyond the point - they get it, spend it (largely on capital goods, which includes stocks), and benefit largely because they get to spend the newly created money before prices have risen much, if at all, in response to the expansion of the money supply.
Bankers arguably profit the most, then those who first receive fiat money in the form of loans, then those who receive this money (producers of capital goods or stock holders being the most likely to receive this money), and so on and so on.
The issue isn't whether they hold large currency reserves - it's the unfair pricing advantage combined with money they may well not have been lent under a 100% reserve backed currency regime.
About the doing just fine bit - get back to me in five years. Hell, even one. Seen what is going on in the credit markets lately? Just the beginning of the "unforeseen" negative results of 15 years of unchecked expansion of the money supply. The US has never seen a similar situation, as the expansion of the money supply prior to the Great Depression is dwarfed by recent events.
Published: February 14, 2008 10:16 PM
"Generally speaking, they hold their wealth in equity and productive assets, not dollars or gold. In other words, don't spend too much time worrying about currency. It is important from a taxation and efficiency standpoint, but its value shouldn't be overestimated." -Nelson
The order of events in any economic action is: save, invest, consume. It is a subset of savings which constitutes investment, and a subset of investment which constitutes consumption. For the same reason that it is a subset of sacrifice which constitute speculation, and a subset of speculation which constitutes profit. There is no way to avoid this chain of pre-requisites.This chain is attacked at its base by inflation (paper).
Let me tell you why it is difficult to overestimate the problem with paper. Paper is the basis for valuing the assets about which you speak, as those with mortgages are now finding out. If you are just as happy to hold your assets for decades as months, then inflation might not matter as much, but when you desire consistent systematic gains, then you want something free-market, not paper. I believe that decresing the fungibility of assets by tying their value to a monopoly-money system is an attack on individuals' right to pursue happiness.
Also, gold, the inelastic commodity, does not pair well with fractional-reserve banking. Instead of increasing the elasticity of the money supply to accomidate fractional-reserve banking, fractional-reserve banking should be eliminated to accomidate an inelastic money supply. But, alas (surprise!), those who rule through the redistribution of public credit prefer debt to the rule of law.
Published: February 14, 2008 10:47 PM
Jonathan Bostwick:
>>"Your percentages are wrong. At 10% Fractional Reserve a $100 deposit would turn into $1,000. 100 is 10% of 1,000, so with your $100 in their vault the bank can hand out IOUs up to a total of $1,000."
The percentages are correct. At 10% reserves, a bank holds 10 paper dollars in its vault, plus IOU's worth $90, and it can have 100 checking account dollars backed by those assets. Or, as you say, it can hold 100 paper dollars plus IOU's worth $900 as backing for 1000 checking account dollars. The interesting question is whether the bank's multiplication of the money supply causes inflation. The answer is no, since every increase in the money supply is matched by an increase in the bank's assets.
Published: February 14, 2008 11:53 PM
You are claiming that the bank would operate at 10% fractional reserve on your deposit but loan out the remaining $90 at 100% reserve. Thats nonsense.
In your scenario that bank has $100 of assets and $190 in liabilities. Thats 52% fractional reserve.
Published: February 15, 2008 12:29 AM
The order of events in any economic action is: save, invest, consume.
This can not be the case for one must have something to save in order to save and that something can only come from investment. The order must be invest then consume and/or store and/or reinvest the surplus.
If one has no money to invest then they must instead invest time and labor. Savings can not come ex nihilo.
Published: February 15, 2008 8:39 AM
You are a fool if you believe that those who create money and those who are lent it do not profit immensely from it.
A fool I may be, but did I ever claim that bankers and government didn't profit from money creation?
Even with bank notes redeemable in gold fractional banking can take place. Dealing with gold itself (or other commodity of intrinsic value) would stop fractional banking and governments taxing by inflation but that wouldn't be efficient from a storage and transportation standpoint.
So if we're not going to use a commodity with intrinsic value, then it doesn't matter what we use (or whether we say it is backed or not backed) because the same problems remain. I suppose we could ban fractional reserve banking altogether (or deal only with banks that don't use it) but again that is not related to whether or not our currency should be backed by gold.
Published: February 15, 2008 9:04 AM
Nelson,
In your example, savings must still come before investment because one is choosing to allocate one's time and labor away from consumption activities and is, instead, investing it into processes which one hopes will allow greater consumption later.
The reason why Austrian's focus so much on gold is not because gold has intrinsic value. Even by saying such a thing, one must question your knowledge of the very basic tenets of Austrian Economics. Gold has many intrinsic qualities, the combination of which, for whatever reason, have come to be valued by individuals through many many generations of social activity and exchange.
The only reason why Austrians want to 'go back' to gold is indeed because that is what the individuals of society, through billions of exchange decisions and thousands of years had chosen in the past. There is nothing holy about gold itself, and Austrians wouldnt care what material individuals chose as a commodity of indirect exchange.
The fact that, again, through billions of individual decisions gold was chosen in the past is what makes it holy to Austrians -not the gold itself, but the many valuations which resulted as gold being chosen. As such, it is seen as a logical starting point for a return to a sound money policy.
Published: February 15, 2008 11:28 AM
Jonathan Bostwick
"You are claiming that the bank would operate at 10% fractional reserve on your deposit but loan out the remaining $90 at 100% reserve. Thats nonsense.
In your scenario that bank has $100 of assets and $190 in liabilities. Thats 52% fractional reserve."
Here's the T account:
ASSETS........................................LIABILITIES
10 paper dollars deposited....10 checking account dollars issued
farmer's IOU worth $100..........90 checking account dollars lent to farmer.
That's 10% reserves, and 100 checking account dollars are backed by $100 worth of cash and IOU's.
Here's the T account that you're thinking of:
ASSETS........................................LIABILITIES
100 paper dollars deposited....100 checking account dollars issued
-90 paper dollars (lent)
+farmer's IOU worth $90
Bot notice that the paper dollars lent to the farmer are not the bank's liabilities, so they don't show up on the liability side. It's 10% reserves, with $100 worth of assets backing $100 worth of liabilities.
Published: February 15, 2008 11:54 AM
Nelson:
"did I ever claim that bankers and government didn't profit from money creation?
Even with bank notes redeemable in gold fractional banking can take place. Dealing with gold itself (or other commodity of intrinsic value) would stop fractional banking and governments taxing by inflation but that wouldn't be efficient from a storage and transportation standpoint. "
You are giving too much credit to gold standard advocates. Their argument collapses if:
1) Paper dollars are not fiat money, but are backed by the assets of the central bank that issued them
2) Fractional reserve banking by private banks is not inflationary, since it does not affect the assets and liabilities of the central bank.
These are two of the fundamental ideas of the real bills doctrine, which you can look up by clicking on my name below.
Published: February 15, 2008 12:02 PM
I'm no banking expert, but I see what appears to be a problem with the anti-fractional reserve position some here are arguing for. If fractional reserve banking is something that happens naturally in a completely free market and not involving any coercion, how could it be a bad thing? In the absence of government, we'd still have fractional reserve banking--it's just that the reserve ratio would be determined on the market by the countless decisions of freely interacting bankers and customers. The calls for banning it are a serious form of coercion that is not acceptable if natural rights are to be respected.
Published: February 15, 2008 12:06 PM
In your example, savings must still come before investment because one is choosing to allocate one's time and labor away from consumption activities and is, instead, investing it into processes which one hopes will allow greater consumption later.
"choosing to allocate one's time and labor away from consumption activities" is not "savings" it is "investing". Maybe Austrian economics would be better off by not using the words "savings, investing and consumption" since the terms are all relative anyway. It is enough to say that some allocations of resources are for immediate benefit and others are for future (and potentially greater) benefit. The later allows individuals (and by extension societies) to have a higher sustainable benefit flow over time than the former.
The fact that, again, through billions of individual decisions gold was chosen in the past is what makes it holy to Austrians -not the gold itself, but the many valuations which resulted as gold being chosen.
And the same argument could be made in favor of paper money.
Published: February 15, 2008 1:19 PM
When, precisely, in the absence of central banking, has paper money come into play and lasted?
Published: February 15, 2008 1:40 PM
When, precisely, in the absence of central banking, has paper money come into play and lasted?
The Chinese government issued money in the 10th century.
Published: February 15, 2008 1:57 PM
What are the specifics of the currency? Was it illegal to trade in other currencies? The specific sentence you countered referred to gold as a market-chosen currency. Modern paper money regimes enjoy no such status. The one form of paper money that perhaps it could be said of that it was market-chosen is that which arose under free banking, but I am not sure how successful it was.
Published: February 15, 2008 2:15 PM
The specific sentence you countered referred to gold as a market-chosen currency. Modern paper money regimes enjoy no such status.
Neither is gold the market-chosen currency in modern economies, at least not at the retail level. If I tried to buy a chicken nugget at a fast food chain with a gold nugget the person at the register wouldn't even accept it (not that I would trade a gold nugget for a chicken nugget, but you get the idea). I'm all for allowing people to trade in gold if they want to. There are even some digital gold websites set up for exactly that purpose. But government issued gold backed currency I am not for... since the tie to gold can be broken at any time, it is best not to pretend the bond exists in the first place.
Btw, has anyone out there tried a game called A Tale in the Desert? It allowed people to build various things, including printing presses. At the time I played, some created their own bank notes... actually there were even more than one type of bank note developed by different people (money itself wasn't a game concept, it just had resources like wood, grass, iron and gold that you could use, but no "money"). Most of these were backed by commodities (and at least one was backed by a market with different redeemable values depending on what people were selling at any given time). There were "laws" in place (proposed and voted for by the people, but enforced by the game itself) that allowed "printed marks" that could only be used by the "owners" to prevent counterfeiting. Watching players "invent" paper money on their own, and how useful it became, was quite interesting. As far as I know, nothing prevented the bankers from "cheating" although none did as far as I am aware.
Published: February 15, 2008 2:46 PM
Nelson, although there are exceptions, few gold standard advocates here are for a government-imposed gold standard. What is usually demanded is that government redeem its notes for gold, but that is a constraint on government, not on its citizens.
Published: February 15, 2008 4:57 PM
What is usually demanded is that government redeem its notes for gold, but that is a constraint on government, not on its citizens.
But that's not necessary. You can already "redeem" paper for gold by buying gold. Granted this would be at market rates instead of fixed rates, but this shouldn't make much difference if you only held paper for short periods of time before converting it. Like I said earlier, there are already private web banking sites that will provide this service.
Published: February 15, 2008 5:11 PM
"When, precisely, in the absence of central banking, has paper money come into play and lasted?"
In 1685, The french colony in quebec issued playing card money, which came and went until about 1750. In 1690, Massachusetts issued paper money, and all the other colonies followed by 1710. It lasted until about 1750 when Britain suppressed it. Meanwhile, private banks in America and Europe issued Bills of Exchange that circulated as money, up until the twentieth century.
Click on my name below to look up sources on American colonial currency.
Published: February 18, 2008 12:10 AM