Has Capitalism Failed?
Capitalism should not be condemned, writes Ron Paul, since we haven't had capitalism. A system of capitalism presumes sound money, not fiat money manipulated by a central bank. Capitalism cherishes voluntary contracts and interest rates that are determined by savings, not credit creation by a central bank. It's not capitalism when the system is plagued with incomprehensible rules regarding mergers, acquisitions, and stock sales, along with wage controls, price controls, protectionism, corporate subsidies, international management of trade, complex and punishing corporate taxes, privileged government contracts to the military-industrial complex, and a foreign policy controlled by corporate interests and overseas investments. FULL ARTICLE
Comments (189)
You'll never understand free-market capitalism until you understand that there is no such thing as fiat money. You'll never understand libertarianism until you understand that opposition to fractional reserve banking is unlibertarian. You'll never understand money and inflation until you understand the real bills doctrine.
Published: April 16, 2008 10:43 AM
Capitalism has not failed however the hybrid socioeconomic model of capitalism and socialism has: Somehow someway mankind must be purged of the want of something for nothing!
Published: April 16, 2008 11:04 AM
Both capitalism and Marxism have failed:
Find my essay, "Marxism and Capitalism," in
here:
http://corporateamericawhatwentwrong.blogspot.com/
Published: April 16, 2008 12:00 PM
Capitalism has not failed, since this is not a free market. The concept of corporate and state financial leverage has failed the people.
This more than ever is a call for free markets and populist financial oversight.
Consider this:
If our banks have
If our banks are charing us x% interest, and inflation is >x%, do we make money by doing nothing?
Who has brought us into this multiple-uphill battle? The people? No.
http://www.WilliamBunker2008.blogspot.com
Published: April 16, 2008 12:34 PM
Correction: If our banks have
Second, if inflation is greater than our interest rating, do we make money by doing nothing?
Our banks should be cut out as middlemen, since they have no money. A slave is cut out of the system, as they have no right to their own work or the profit from it. Are our banks enslaved? Are we enslaved?
Central banks and market leverage movers have attacked us to make our labor not produce profit for us, and for this economy to be destroyed.
Published: April 16, 2008 1:10 PM
To me, this remains one of Ron Paul's strongest speaches ever.
Published: April 16, 2008 1:19 PM
To: Mike Sproul
Dear Mike,
You'll never understand free-market capitalism until you understand that there is such a thing as fiat money. You'll never understand libertarianism until you understand that fractional reserve banking is unlibertarian. You'll never understand money and inflation until you understand Austrian Economics.
Have a nice day :-)
Published: April 16, 2008 1:21 PM
Isn't there an .mp3 somewhere of Dr. Paul actually delivering this speech himself before Congress? I mean no disrespect to Dr. Floy Lilley, but I'd rather listen to the original speech when such things are available.
I bought The Revolution: A Manifesto on Monday. I'm half-way through it.
Published: April 16, 2008 7:08 PM
Money tied to a fixed object such as gold or a commodity will cause constant deflation as the economy expands but the money supply doesn't.
Deflation causes it's own problems of a similar amount to inflation.
Published: April 16, 2008 7:43 PM
Except gold does expand, at around 3 - 5% p.a., if Mark Skousen's figures are correct, so this is an empty objection.
Published: April 16, 2008 7:54 PM
Furthermore, "deflation" or "inflation" due to an increase in the amount of gold has the benefit of being honest. Either "deflation" occurs because gold is more scarce or "inflation" occurs because somebody put more gold into the market -- which is way more desireable than the alternative of the central bank "creating" more fiat money and giving it to the banksters.
Published: April 16, 2008 8:26 PM
Do you know what a deflationary spiral is? It is as bad for businesses as inflation.
Unexpected economic growth would cause multiple businesses to be unable to repay debts because every year their income is less in dollar terms while the loan they took out was in older lower valued money.
You haven't actually thought this through have you? You do not realise that the real economy is constantly expanding so the money supply needs to stay in pace with this otherwise deflation will result and possibly deflationary spirals.
The best system would be where the money supply increased at pace with the economy to produce steady low inflation. Hey wait, that is what we have now!
The increases in money supply are not caused "honestly" as you put it, but they still have a better effect than a deflationary gold standard would be.
An honest increase in the money supply would be one which benefits all citizens equally and so would be used for necessary government expenditure on defence, law and order, needed infrastructure etc.
As much as you hate to admit it this would produce better results than a deflationary Gold standard.
Published: April 16, 2008 9:14 PM
What is the real value of the medium of exchange? Is it the same as the nominal value?
When you ponder these questions in the light of subjective valuation you will find that the stock of money is not the medium of exchange and so the real value is not limited by the stock of money.
The elementary step of recognizing the potential difference between the nominal value and the real value is helpful. Also it is important to understand the function of the medium of exchange and the harm that comes from conceptually losing sight of its purpose.
Alchemy was proven to be a pseudoscience and likewise counterfeiting is a pseudo-monetary policy. The alchemist has to lie to convince anyone that he (she) has made gold out of lesser elements. The interventionist has to lie to convince anyone that there is now more wealth!
Published: April 16, 2008 9:55 PM
Back to (Austrian) Econ 101 for Owen... :)
Published: April 16, 2008 10:03 PM
Back to Maths 101 for Peter.
If X is exchanged for y and the quantity of Y increases (real goods and services, therwise known as GDP) whilst X remains constant (fixed gold amount) then the exchange value of X in terms of Y will increase.
For Peter who didn't finish year 3 maths, this means that the value of money will steadily increase causing deflation or "a steady decline in prices for real goods".
Amazing what a little common sense yields eh?
Published: April 16, 2008 10:10 PM
A gold standard will be self checking. If gold is reaching an excessive value, more gold production will shift from non monetary to monetary uses of gold. Likewise, if gold is falling in monetary value, production will shift to the non monetary uses of gold.
Not to mention the fact that platinum, palladium, silver and other substances can be moved around as bullion for very large transactions, taking the pressure off of gold.
Yet further, most gold will be sitting in 100% reserve faults, being traded on a paper or electronic ledger or as banknotes, not circulating physically, so there will not be the pressure of actually moving the commodity.
Will there be a mild PRICE deflationary trend. Yes. This is a good thing as it will enhance savings and will benefit the lowest classes of people the most.
Inflationary fiat money, such as the Federal Reserve, is nothing short of the rape of the people by the banks. That is by far the most accurate way to describe what the Fed and the banks are doing to us.
Published: April 16, 2008 10:49 PM
Dr. Paul is the only politician who speaks reason.
The liberals who are the first to call him a nut are also the first ones in line with their hands out seeking recourse from a system that could never offer it to them.
Published: April 16, 2008 11:23 PM
Owen
"this means that the value of money will steadily increase causing deflation or "a steady decline in prices for real goods".
Wouldn't a decline in prices for goods make more goods available to more consumers? How is the "value of money" related to the rate of profit? If the objective of producers is to satisfy consumers, wouldn't lower prices be beneficial to both?
Published: April 16, 2008 11:28 PM
Inquisitor says:
Except gold does expand, at around 3 - 5% p.a., if Mark Skousen's figures are correct, so this is an empty objection.
Where do you get this figure from? I googled mark Skousen and gold inflation and got this:
Annual production increases at a steady 1-2% a year
http://www.savingadvice.com/forums/banking-insurance-investing/13048-gold-inflation-market-indicator.html
That is consistent with the figure of 1.7% cited by
http://www.dailyreckoning.com.au/dollars-gold/2006/12/04/
It is also commensurate with world population grwoth over the past 100 years.
Owen says:
Do you know what a deflationary spiral is? It is as bad for businesses as inflation.
The best system would be where the money supply increased at pace with the economy to produce steady low inflation. Hey wait, that is what we have now!
You have this back to front. The GDP increase is mostly a reflection of (monetary) inflation. If you adjust nominal GDP for the increase in the money supply then you get the real GDP.
If gold supply grows at about the same rate as world population growth, then we might expect it to maintain purchasing power quite well.
But suppose that mine supply dried up. In that case the purchasing power of gold might well steadily increase over time. You are right that for people whose mindsets are conditioned to inflation this would come as a shock. But if a drop in prices were generally expected then it would have little effect on the economy other than to lower interest-rates by the expected degree of deflation.
On this, Mises commented:
If the opinion that the prices of all commodities will drop becomes general, the short-term market rate of interest is lowered by the amount of the negative price premium. Thus the entrepreneur employing borrowed funds is secured against the consequences of such a drop in prices to the same extent to which, under conditions of rising prices, the lender is secured through the price premium against the consequences of falling purchasing power.
A secular tendency toward a rise in the monetary unit’s purchasing power would require rules of thumb on the part of businessmen and investors other than those developed under the secular tendency toward a fall in its purchasing power. But it would certainly not influence substantially the course of economic affairs.
Published: April 16, 2008 11:54 PM
I don't want to quote Ralph Nader, so I will quote his father!
Capitalism in the USA will never fail - Socialism will bail it out!
Published: April 17, 2008 12:06 AM
Mark_B:
You are wrong. Firstly deflation surprises are devastating to businesses, much moreso than inflation surprises.
Secondly, just as the worldwide value of oil would drop precipetously tomorrow if vast supplied were detected underground which would be more than 5 times current known reserves, the same case would happen with Gold. If masses of gold or valuable metals were found in some mine then instantly upon that news the value of all gold, and hence the value of all items valued in gold, would be devalued also. What is the point of this? This PROVES that ALL known reserves of oil are computed into current prices, and so in the same way ALL KNOWN amounts of gold are computed into current gold prices. A melting of a necklace into a gold coin would not alter the value of money relative to gold.
It is called the EFFICIENT MARKET HYPOTHESIS, I thought you would have heard of it being an Austrian. So the quantity of gold and precious metals is fixed excepting only to surprises much the same way as oil is priced.
Guess what? If there were too many surprises you might find gold being the worst possible choice for a curency because it's valoue would constantly wildly swing completely unrelated to any market activities.
Free_Sovereign:
Because the money borrowed against in order to achieve that profit will need to be paid back in lower and lower amounts of dollars. If deflation rates are expected this is ok, but when there is unexpectedly high deflation (which is possible) it could cause many marginal firms to go bankrupt.
To be safe from defaulting on it's debt a firm needs inflation/deflation surprises to always be above the zero inflation rate.
Fusgerm:
"You have this back to front. The GDP increase is mostly a reflection of (monetary) inflation. If you adjust nominal GDP for the increase in the money supply then you get the real GDP."
So I suppose the massive increase in resouirces and good and services used and sold now compared to 50 years ago is a dream? Crap. Economic growth is a real phenomenom and you are one of the only people in the world I have ever heard deny it.
"But if a drop in prices were generally expected then it would have little effect on the economy other than to lower interest-rates by the expected degree of deflation."
...and if that drop in prices was not expected then business paying fixed interest loans over the near term using constantly decreasing income will go BANKRUPT. Then you have the bad result you and Mises are evading.
...and I hate to break it to you but growth in gold stocks of 1.7% is not even clost to global Real GDP growth (you know that thing you don't believe happens) which was above 3% annually for the last 35 years.
Published: April 17, 2008 2:02 AM
Owen brought up a lot of interesting points to look at.
I've asked myself this question a lot about the high 'price' of gold once a gold standard is used. Would it be unsafe to wear gold (risk of being robbed), etc?
Regarding the gold standard, countries in the world used the gold as money at different times throughout history. Perhaps a question that can be asked to the commentators over here is what case studies have been done on deflation-related problems during these gold standards?
For instance, during the prosperity of the 1950's (which i hear gold standard advocates talk about), how did businesses deal with deflation related problems?
I believe that if there is a true free market and gold standard, the way we do business will be drastically different. For instance, a business will not commit to taking in debt if there's a risk of deflation. Probably then interest rates will hover around 0-2%? Or maybe some interesting refinancing schemes?
I'm just giving my opinion here so we may open our minds to the possible mechanisms developed by the free market if a gold standard is imposed.
Hope to see some more ideas! :-)
Published: April 17, 2008 6:16 AM
The previous inflation causes entreprenurial error (both non-purposeful in the case of entrepreneurs that don't know that artificially low interest rates can't last, and purposeful in the case of entrepreneurs or management who are looking to sell out or sell options based on artificial paper profits)
There were long deflationary periods during the 1800s in America were the purchasing power of the dollar doubled in the span of several decades, and the economy kept on growing.
@Owen's second comment:
Entrepreneurs would adjust to the fact that the purchasing power of money would go up over time - you're right about one thing, however, and that is that credit wouldn't be so easy - but guess how it is made easy in today's world? Bankers & borrowers benefit by stealing the value of holders of dollars (retirement account holders, those on fixed incomes, regular labor) and lenders.
Deflationary spirals don't occur in a vacuum, and economic growth is perfectly possible in a society with gradual deflation caused by productivity gains as opposed to sudden deflation which manifests itself as a correction of previous mal-investments (Note that the damage has already been done in the case of this second kind of deflation, it's just not reflected in paper losses yet)
You're arguing against a gold standard without understanding what would take place in it.
@Peter - That's right, Owen needs to read Money, Bank Credit, and Economic Cycles and then get back to us.
@Owen's third comment:
What's wrong with the gradual increase of the purchasing power of money when it is expected, which it would be in a 100% reserve backed system?
What about the huge amount of benefits to be derived for knowing that your currency would hold its value, that retirees could expect the value of their money to go up over time, and that bankers could not misappropriate the real goods of others by expanding the money supply?
@Mark - Amazing how few people realize expansion of the money supply = gradual confiscation of the wealth of the people.
@esgreat - The only gold standard worth discussing is one based on 100% reserves. The one we had in the'50s was the equivalent of a several percent reserve backed system at best, which is not the comparison you should be looking at.
19th century American economic history, where there was a good bit of deflation (mixed in with bouts of inflation for an overall 'steady' price level over 100 years time) and a ton of economic growth. But the numbers and data for this is surprisingly sparse.
Published: April 17, 2008 7:06 AM
Owen writes:
Economic growth is a real phenomenom and you are one of the only people in the world I have ever heard deny it.
What I said was that most of the annual increase in nominal GDP can be explained by (monetary) inflation. I'm not sure how you deduce from this that I am one of the only people in the world to deny economic growth. Have you already calculated real GDP from nominal GDP using money-supply growth as the price-deflator (instead of the conventional price-index), and if so which money-supply measure did you use?
if that drop in prices was not expected then business paying fixed interest loans over the near term using constantly decreasing income will go BANKRUPT
You could say something equally absurd of the current inflationary environment: If the rate of inflation drops unexpectedly then a business paying a fixed interest loan and earning lower-than-expected nominal income (due to a drop in inflation) will go BANKRUPT, since current fixed interest-rates already factor in a higher inflation-rate.
You can be sure of one thing: that gold would maintain its purchasing power far better than the dollar, and that therefore interest-rates would be MORE predictable, not less.
Cheers
Published: April 17, 2008 7:36 AM
"The best system would be where the money supply increased at pace with the economy to produce steady low inflation. Hey wait, that is what we have now!
The increases in money supply are not caused "honestly" as you put it, but they still have a better effect than a deflationary gold standard would be.
An honest increase in the money supply would be one which benefits all citizens equally and so would be used for necessary government expenditure on defence, law and order, needed infrastructure etc.
As much as you hate to admit it this would produce better results than a deflationary Gold standard."
Owen, you'd best rid of your arrogant demeanour. You did not deal with the fact that the gold standard increases more or less in step with productivity gains.
The current system has nothing to do with increasing at the pace of growth, FYI. Hence Bruce's comment to you was perfectly justified. You do not even know the basics of Austrian econ. An honest increase in the money supply would be one that reflects real variables in the economy, and no more and no less. Central banking is automatically disqualified, to everyone's joy, banking socialists notwithstanding.
esgreat, that faux gold standard is not what Austrians advocate.
Fusgerm, he gives the figure in his Vienna & Chicago. I've given the page citation before on this blog. E-mail him about it if you want to get his response.
Published: April 17, 2008 7:49 AM
In response to Owen:
Entrepreneurs takes risks. A risk being a risk, how is this risk any different to any other? Anyway, perhaps there is even a way around it by using different legal agreements, or perhaps some insurance. At least if the market is determining the prices then you don't have some arbitrary changes in the money supply. How long's the longest fiat currency lasted? How long's gold lasted?
Published: April 17, 2008 7:54 AM
Thanks for the comments!
I'm an Asian novice who just got into knowing Austrian econ. It seems like I have a lot of homework to do...maybe someone can give me a self-study guide :-p? I've read some articles from Murray Rothbard, but the text from Mises is a little difficult to understand...
In my country there are many advocates of 'Islamic Banking'. I know 'Islam' sounds scary to some people, but from a Google glance it looks interesting.
Firstly, they call for a currency backed fully by gold (Gold Dinar). Next, by definition Islamic banking necessitates 100% reserve banking. Apparently Shariah law prohibits "creation of money from money" and other usury laws.
Any comments on this?
Published: April 17, 2008 8:14 AM
esgreat, start with Callahan's Economics for Real People and Carl Menger's Principles of Economics. Later move on to Rothbard's What has the Fed done to our money? and Mises' Theory of Money and Credit (hope I got the titles right.) If you have the time either Mises' Human Action or Rothbard's Man, Economy and State are must-reads.
Published: April 17, 2008 8:42 AM
Esgreat: “I've asked myself this question a lot about the high 'price' of gold once a gold standard is used. Would it be unsafe to wear gold (risk of being robbed), etc?”
Good questions! Keep in mind that gold, in dollar terms, has always been high and always will be. Without a gold standard, the dollar will continue to lose value and gold will become even more expensive than it is. Under a true gold standard, the dollar will quit losing value and gold will stop appreciating.
Esgreat: “Regarding the gold standard, countries in the world used the gold as money at different times throughout history. Perhaps a question that can be asked to the commentators over here is what case studies have been done on deflation-related problems during these gold standards?”
You have to go back to the middle ages to find a pure gold standard. When Spain stole the gold of American natives in the 16th century, the flow of gold into Europe caused mild inflation for almost the whole century. In the 1800’s, banks in the US regularly got around the gold-enforced limitations on the money supply by printing boat loads of paper money and causing regular financial panics. Every single instance of deflation in the 1800’s came from the collapse in the value of paper money, not the use of gold.
Esgreat: “For instance, during the prosperity of the 1950's (which i hear gold standard advocates talk about), how did businesses deal with deflation related problems?”
A lot of confusion is caused by not distinguishing between a gold standard and fractional reserve banking. A pure gold standard is one in which the paper money is redeemable in gold and banks must keep 100% reserves on demand deposits. If your gold standard is limited to gold backing, but you keep fractional banking, you’re still going to have booms and busts like we have always had. The business cycle began in the Italian city states, such as Venice, around the 15th century, a time when gold and silver coins were money and no one even thought of using paper money. Bills of exchange were still not very common. But bankers who stored gold coins for people figured out that they could loan their depositors gold to other people with simple accounting entries. People found it safer to make payments to others by having their banker deduct from their account and add to the account of the person the wanted to pay rather than carry gold coins around. It worked well until bankers had loaned out 50 times more gold than they had stored and someone defaulted on a loan. Then the whole house of cards came tumbling down. I’m not aware of serious deflation during the 1950’s, but if it occurred, it wasn’t because we supposedly were on a gold standard, but because of fractional banking.
Esgreat: “I believe that if there is a true free market and gold standard, the way we do business will be drastically different. For instance, a business will not commit to taking in debt if there's a risk of deflation. Probably then interest rates will hover around 0-2%? Or maybe some interesting refinancing schemes?”
As several other have pointed out, the money supply will continue to grow at 2-3% annually, according to Reisman, or faster according to others, through mining. If the economy grows at 2-3% annually, there will be no deflation or inflation. But let’s consider the benefits of mild deflation. They’re obviously hypothetical since we have no history of such a period, but I think we can guess what it might be like. Consumers would be less likely to borrow for durable goods and save for them instead, though they would probably borrow for housing. How would they pay for their house with falling prices? They would have to take small wage cuts every year, just as they expect small increases now. But even as their wages lag behind inflation today, and they become poorer as a result, the wage cuts would probably lag behind deflation and make wage earners wealthier each year. In other words, the falling value of their house would be offset by the rising value of their wages. Still, the mortgage amount would remain fixed, but with increased savings the interest rate would be low. And people would have an incentive to make a large downpayment and pay off the loan soon.
If the deflation was consistently 2-3%, businesses could plan for it as they do for mild inflation. But they would be inclined to invest savings rather than borrowing money, just as consumers are. In short, everyone would have the incentive to save instead of borrow. With increased savings, interest rates would be extremely low, making borrowing for new business ventures much easier.
But probably the best thing about deflation would be the ending of the redistribution of income that inflation causes. With inflation, those who receive the new money first (usually government or financial firms) spend it on assets before the new money causes price inflation. Those who receive the money last, usually wage earners, get it after prices have gone up and the money is worth less. So wealth transfers from wage earners to government employees and financial firms. That’s one reason that people in financial services enjoy the highest average wages in the nation.
Published: April 17, 2008 8:44 AM
All these people screaming about deflation when using gold standard have no idea what they are talking about.
They have their minds so clouded by fiat money system that they are trying to aplly it to everything else.
When using gold standard the whole economy would be based mainly on exchange (like it was for millenia), not on LOANS so there would be no need for increasing the money supply!
Do you advocates of fiat money really beleive that truly free market using gold as exchange would destroy itself? - I think it has been proven countless times in history that more freedom always brings more prosperity.
Published: April 17, 2008 9:38 AM
owen says:
"It is called the EFFICIENT MARKET HYPOTHESIS, I thought you would have heard of it being an Austrian."
so you've swallowed the emh, hook line and sinker, eh? perhaps, with the enormous insight you've gained through emh, you'd like to quote us the odds of warren buffett achieving his investment returns for the last fifty years on chance alone? finance graduates crack me up!
Published: April 17, 2008 10:10 AM
I see the word "deflation" used two different ways here. Just as inflation is used to refer to rising prices or an increase in the money supply, deflation can mean the reverse of either.
Slow, steady price deflation would be the likely result under a 100% reserve gold standard. I would argue that this is benign. It would be just like the computer industry is today, for example, but over all goods and services. Wages would not necessarily fall either, since labor productivity would be increasing.
On the other hand, monetary deflation could only happen if gold were physically destroyed or lost. Sure, it's theoretically possible, but how likely is it compared to the near certainty of bank runs or collapsing credit bubbles under fractional reserve or central banking?
The best way to avoid sudden contractions in the money supply is to not artificially expand it beyond the supply of real resources in the first place.
Published: April 17, 2008 10:29 AM
to mike sproul:
if we're arguing about semantics, here's a typical definition of fiat i dragged from the web:
1. An arbitrary order or decree.
2. Authorization or sanction: government fiat.
[Medieval Latin, from Latin, let it be done, third person sing. present subjunctive of fierī, to become, to be done.]
your rbd argument is that the currency owes its value due to its backing. whilst there is an intrinsic component in the dollar's value, there must also be a percentage value attributable to fiat, otherwise the government would tolerate other monies. instead, they are treated as investments, and taxed accordingly.
Published: April 17, 2008 10:42 AM
"pr" is absolutely right. i try to always speak of rising or falling prices, as the classical definition of deflation/inflation has been corrupted.
it sounds pedantic, but i don't think austrians can be too careful in not using the "i" and "d" words for anything but monetary phenomena. clarity of meaning must be a first step in educating the lay public on the money swindle.
Published: April 17, 2008 10:55 AM
PR, deflation (in its proper sense) can occur whenever the supply of gold relative to demand for it falls (or conversely, demand for it increases, with all else remaining equal.) The idea is that there is not enough gold going around. But as I've pointed out, gold does increase enough to prevent such a scenario, and besides, other metals can complement it if worse came to worse. I think Mark, Fusgerm, WisR and Fundamentalist have all pretty much demonstrated so far that this is a bogeyman.
Published: April 17, 2008 11:23 AM
Newson:
"whilst there is an intrinsic component in the dollar's value, there must also be a percentage value attributable to fiat, otherwise the government would tolerate other monies."
Do governments have a choice in the matter? Does Mexico prevent its citizens from using dollars? Currency crosses borders all the time. And what about checking account dollars, credit card dollars, gift certificates, overdrafts, etc.? The existence of that kind of derivative money obviously affects the demand for paper dollars, and would, on quantity theory principles, drive down the value of the paper dollar, with no stable solution short of zero value. This puzzle disappears once you recognize that the value of the paper dollar is determined by the amount of backing at the Fed--not by the supply and demand for dollars.
Published: April 17, 2008 11:34 AM
Price deflation and economic growth can co-exist, and they make for a better marriage than between monetary inflation and economic growth.
Economic growth between 1801 and 1900 was around 5400%. There was a mild deflationary trend in prices.
Economic growth between 1901 and 2000 was around 2300% and dollar lost 97% of its value.
Published: April 17, 2008 1:23 PM
Price deflation and economic growth can co-exist, and they make for a better marriage than between monetary inflation and economic growth.
Economic growth between 1801 and 1900 was around 5400%. There was a mild deflationary trend in prices.
Economic growth between 1901 and 2000 was around 2300% and dollar lost 97% of its value.
Published: April 17, 2008 1:25 PM
Owen: “If masses of gold or valuable metals were found in some mine then instantly upon that news the value of all gold, and hence the value of all items valued in gold, would be devalued also… If there were too many surprises you might find gold being the worst possible choice for a curency because it's valoue would constantly wildly swing completely unrelated to any market activities.”
Gold has lost value in every major gold strike. The Spanish learned that in the 16th century. It happened in California during the gold rush of 1849. But such events are rare and the effects temporary. Gold has never caused problems like the hyperinflations of the 20th century. The alternatives for money aren’t between perfect money and not perfect money, but between the best of all imperfect forms of money. Gold has proven itself as the best alternative for millenia. Paper money, or any form of money controlled by the government, has proven to be the absolutely worst form. Western nations have experimented with paper money for the past 400 years and met with disaster every single time without exception. In the 20th century, the state convinced people that the Fed would solve the problems with paper money, so people quit discussing it. But the 20th century has witnessed the worst financial crises in the history of mankind. What are the chances of another huge gold strike happening? Far less than those of a major oil find happening.
Published: April 17, 2008 3:30 PM
Our banks should be cut out as middlemen, since they have no money.
Published: April 17, 2008 4:23 PM
Since there is much discussion about inflation and deflation I am curious if anyone would like to read my two blog entries about recession and depression. I would be interested in your feedback. Here they are:
1. http://moneyandethics.blogspot.com/
2. http://economicwisdom.blogspot.com/
Published: April 17, 2008 5:16 PM
mike sproul says:
"Do governments have a choice in the matter? Does Mexico prevent its citizens from using dollars? Currency crosses borders all the time. And what about checking account dollars, credit card dollars, gift certificates, overdrafts, etc.? The existence of that kind of derivative money obviously affects the demand for paper dollars, and would, on quantity theory principles, drive down the value of the paper dollar, with no stable solution short of zero value."
that there isn't demand for paper money wasn't my contention, but this is merely a logical consequence of legal tender laws. yes, mexicans have held dollars as a superior store of value vis-a-vis the peso, because traditionally the fed has conducted a tighter monetary policy than the mexican central bank. but mexicans cannot pay taxes in dollars anymore than americans can settle with the irs in roubles, and all foreign currency holdings are subject to taxation, so there are significant obstacles to competing monies.
Published: April 17, 2008 6:21 PM
Inquisitor says:
Fusgerm, he gives the figure in his Vienna & Chicago. I've given the page citation before on this blog.
I have found the reference on p145 of my paperback copy of Vienna & Chicago:
The amount of world gold stocks increases every year 1 to 5 percent, depending on annual production (Skousen 1996:86). Even the gold rushes of California, Australia and South Africa never increased the aggregate world gold stock by more than 5% in any one year.
Now this statement certainly tallies with the estimate that mine supply increases on average by 1-2% p.a. Even during gold rushes, the supply did not exceed 5% pa, so we would expect that at other periods it would be much lower.
I would be content to leave the matter there, were it not that Skousen also includes a chart copied from Rufus S Tucker[1934] which contradicts his own statement: it shows mine supply increase peaking in 1853 (the height of the Californian gold rush) at 12% pa.
Does anyone have access to the raw data which shows total above gound supply in each year since 1800 (say)? It seems fairly important. An average mine-supply increase of 5% pa would be grotesquely high. By comparison, M1 has grown at an average annual rate of approx 5.5% since 1960, M2 by 7%, and M3 by 8%.
Published: April 17, 2008 6:36 PM
I'm afraid I do not.
Published: April 17, 2008 6:48 PM
I am new. I'd like to direct my comments toward Owen for two reasons: he seems to be very enthusiastic, and he has made comments that sound as though he approves of the mixed economy in the United States.
Taking us back to the question of the blog: has capitalism failed? The answer is no. Many have made comments regarding the level of "success" of the United States economy. However, I think that anyone can easily see that the United States has never allowed capitalism and has, in fact, imprisoned any that have attempted to practice capitalism (by failing to pay taxes). As Murray Rothbard wrote, the full expression of capitalism is anarchy and the full expression of anarchy is capitalism.
In order to experience capitalism, one must be experiencing anarchy. Therefore, no American anecdote can serve to answer the question of the blog. However, the very goals and nature of capitalism can very directly and precisely answer the question.
In order to determine the success or failure of capitalism, we must determine its goals. Most of the bloggers have been focusing on the utility of the American system. However it is not even necessary to examine the utility of a capitalistic system, because utility is not the proper goal of capitalism: it just so happens that the ethical system of capitalism tends to achieve the goals of utilitarianism. The proper goal of capitalism, as Rothbard points out in his For a New Liberty: The Libertarian Manifesto (available from mises.org in pdf and audio format), is freedom from aggression against the property of individuals. Capitalism is a goal in and of itself: if we were to establish capitalism, we would have already achieved our goal of capitalism, that is freedom from coercion.
So, capitalism has not failed, for the following reason: it is not primarily a means to some sort of utility, but it is the end that we seek. If capitalism is established, it's goal is accomplished.
Now that we've examined the amazing and insurmountable virtues of capitalism. I'd like to flatly point out that our mixed economy has failed, because it, inherently is not achieving the end of capitalism. It continues to uphold the interests of our oligarchical government, rather the interests of individual A and individual B and individual C, &c.
The only possible system that can succeed is capitalism, because it is the end; the only possible system that does not inherently fail is capitalism, because it is the end.
Published: April 18, 2008 12:26 AM
@PR - That is a beautiful statement on how deflation of the money supply under a 100% reserve based gold standard cannot happen.
@ Ryan - Sure, but you have to admit that the US in the 19th century is probably the closest example of capitalism that history gives us. And it did beautifully, raising US to the most powerful (economically) country in the world.
@Oilshock - Where do you get those growth numbers? I've been looking for specific growth numbers of the US economy (no matter the measure) for a while online, and can't find much. Do you know where you can get some form of yearly numbers?
Published: April 18, 2008 4:10 AM
the answer is to take away from Banks the ability to create money but not to fix the currency to a gold standard.
There are better fixed regimes than gold.
There can be electronic money held on central banks systems, the total quantum of which cannot be changed or else is constantly increased by a low percentage such as 5%. Such systems replicate a gold standard but eliminate the potentially disastrous effects of deflation on the economy. Increases in the money supply can be spend by the government on basic items such as courts, defence, police and infrastructure.
Published: April 18, 2008 11:06 AM
Owen: “the answer is to take away from Banks the ability to create money.”
Good luck with that! It will ever happen. The banking lobby is too strong and the politicians and economists too ignorant. Only Austrian economists see the problem with fractional banking. Mainstream econ denies it’s a problem at all because in their eyes, money is neutral. Besides, the Dutch Republic outlawed fractional banking in the 17th century and still had financial crises. In order to avoid carrying around gold coins, businessmen used bills of exchange, essentially IOU’s. At one point, the monetary value of the bills of exchange exceeded 20 times the total stock of gold money in the nation. When one debtor defaulted, the entire system collapsed and caused a major crisis. Laws against fractional banking are too easy to subvert.
Owen: “… but not to fix the currency to a gold standard There are better fixed regimes than gold… There can be electronic money held on central banks systems, the total quantum of which cannot be changed or else is constantly increased by a low percentage such as 5%.”
Friedman proposed the computer solution decades ago. But how do you know it would be better than gold? It has never been tried before and is purely hypothetical. As with all hypothetical things, we can’t anticipate the myriad of problems it might cause. Why opt for a hypothetical solution when gold has proven itself for millenia? How much evidence of the superiority of gold as money do you need if 5,000 years isn’t enough?
Published: April 18, 2008 11:37 AM
Owen, did you just back pedal in your last comment???
A more general comment:
All human action is risky. As someone said, we can't consider alternatives between perfect and imperfect money. We can only consider best alternatives. Even given a true free market with a gold standard, if (as an illustration) a calamity strikes in which food becomes scarce, you would rather have owned food than gold (unless you have found a way to make gold edible and nutritious).
I think that most people here would agree that the first matter is to remove any element of unjust coercion from every aspect of human life. After that is done, people like Professor Sproul can have their day if they'd like. Just don't throw me in jail if I refuse to use your money or pay your tribute in your currency.
Published: April 18, 2008 11:58 AM
I am opposed to the idea of government spending the money into the economy. It is a license for government to go overboard with spending sooner or later. Government can change rules in a heart beat (5% which I think is too fast will soon become 6,7,10 15).
WisR,
I found the data set from the following site
http://www.measuringworth.com/usgdp/
Published: April 18, 2008 12:17 PM
Just something to think about: since the birth of the United States, there have been ongoing arguments over capitalism vs socialism. There have been arguments over going gold or not. One thing has remained constent though, throughout the centuries; the United States of America is still the most diverse (both economically and socially) and properous country in the world. Those who think we can live fully engaged (100% on either side of the isle), are either hopeless romantics or out of touch.
Published: April 18, 2008 2:40 PM
A computer system would be better than gold simply because it can exactly replicate gold and/or adjust money supply slightly to eliminate adverse effects of Gold.
fundaMENTAList:
Austrians are NOT the only people who found the fault with fractional reserve banking nor were they the first. Have a look on www.prosperityuk.com nimwit.
With regard to an electronic system being vulnurable to government interference..um...duh...how is a gold standard any less vulnurable? They both rely on the same government to support and defend them. We are talking about the same government right?
Published: April 18, 2008 2:51 PM
Unless the government can magically boost the supply of gold, a commodity standard is a much greater shackle on it than anything else.
Published: April 18, 2008 4:53 PM
Owen,
You're going to have to convince everyone that the electrical charges of the computer system you refer to are EXTREMELY valuable. Be prepared for a daunting task.
Published: April 18, 2008 6:42 PM
Owen: "A computer system would be better than gold simply because it can exactly replicate gold and/or adjust money supply slightly to eliminate adverse effects of Gold."
You don't and can't know that. A computer controlling the money supply is total fantasy. No one has ever tried it. The only thing that you can guarantee about a computer-controlled money supply is that it won't work the way it's supposed to on paper. It will have many unintended consequences.
Governments have always tried to control money. From the first day that the ancient Babylonians coined gold money, they began diluting the gold with base metal. But at least with gold as money, government's attempts to ruin it are visible to all and the people have no one but themselves to blaim if they allow the government to do it. But with a computer, owned by the government, no one will know until it's too late what the government has done.
Published: April 18, 2008 6:50 PM
With regard to an electronic system being vuln[e]rable to government interference..um...duh...how is a gold standard any less vuln[e]rable? They both rely on the same government to support and defend them.
You're making a wrong assumption - that government makes money, and use of money, happen, but this is not so - government imposes A currency by way of legal tender laws, but only people decide what to use as money. Gold does not require a government to function as money. Besides, historically, the State has been the greatest enemy of gold as money, by way of substitution, debasement or frank expropriation.
A computer system would be better than gold simply because it can exactly replicate gold and/or adjust money supply slightly to eliminate adverse effects of Gold.
A computer system does not "replicate" gold any more than a checkbook does. Computer systems are accounting systems, nothing more.
As for the supposedly "deflationary" effects of gold, the deflationary effect is a result of production, Owen, and not some magical effect related to gold itself. If you have a fixed amount of gold and an increasing amount of, let us say, t-shirts, the value of the t-shirt will lower in terms of the quantity of gold. Why would this be a "bad" thing, you will have to explain, instead of just asserting it out of pure faith.
Published: April 18, 2008 6:51 PM
The bad thing Francisco is called deflation. Have a look at it in a dictionary. It can be a bad thing. Just as can high inflation or inflation shocks.
If a gold currency was not influenced by a government at all, then the vaults who held the gold would go straight back to printing off a few extra gold-convertible notes for themselves again. Fractional reserve banking was a natural phenomenom before governments even attempted to regulate currencies. Ever heard of a gold smith? Money would continue to be issued in fiat and an unstable world financial system would still result. Go back to economics 101. There needs to be minimal government involvement in order that fractional reserve banking DOESN"T HAPPEN.
An electronic currency is backed by the government's control of the country and the ability to raise taxes.
A gold currency will inherenty expand exponentially and unsustainably because private banks have an incentive to practice fractional reserve banking. What is to stop them? If one bank did it they could get found out but if there were say 4 banks in a country like NZ then they could collude to exponentially increase the money supply at the expense of the people of the country. And with Libertarian no-restrictions on the economy this would be legal.
Banking cartels becoming the richest in the world and thereby dominating the world through their wealth would result because they could endlessly print money and there would not be a possible "run"that could cripple the cartel which could share gold reserves between it to avert any run.
Banking needs to regulated in some way such as at the very least a legal fixed gold to dollar price as in the bretton woods system. Without this we would head towards the abyss...fast.
Therefore, electronic fixed or steadily increasing currencies backed by the country's government is a far better option than a free-market, gold-backed currency.
Published: April 18, 2008 8:30 PM
Fundamentalist, you wrote "When Spain stole the gold of American natives in the 16th century, the flow of gold into Europe caused mild inflation for almost the whole century" and similar things. Actually, that and the silver flow acted well into the 18th century; according to Belloc's "The Servile State" the total inflation was around 200% (nominal prices rose threefold), which is only a low annual rate (by our standards); and it was not mild - it had serious effects on groups with revenues set in nominal terms, like the English monarchy. The way it worked out, certain classes in middleman countries like England and Holland made lasting gains, while countries at the beginning and end of the value chain (Spain, Portugal, Poland, Turkey, etc.) were impoverished either by having their productive base hollowed out or by exporting real commodities for currency that was declining in value.
Owen, bullion standard deflation is self regulating because of Real Balance Effects (particularly the Pigou Effect, but see also the Keynes Effect). Problems only come up with shocks (basically, while the balances are building up). Fiat currency issues by private actors are a non-problem, if they aren't put in a privileged position; if they try it to the extent that it is material, they go broke as people stop accepting their currency. At lower levels, it is constructive when they are implementing "Real Bills Doctrine" but backing it with their own real assets as an ultimate guarantee or insurance - the doctrine is only unsound to the very real extent that currency issues are backed by assets that turn out not to have the value supposed after all. (And, of course, the real economic activity that generates flows through to bullion production too; bullion is an asset class.)
Published: April 18, 2008 10:46 PM
P M Lawrence,
So if the banks in a large part of the USA decide to form a cartel and inflate the supply of gold backed notes, exponentially expanding the money supply...you say that that bank will get found out?
In New Zealand today all the banks print money hand over fist and no-one is bothering to initiate co-ordinated action to make them bankrupt. Why? People can't be bothered. You would need to co-ordinate a large number of the population to act at exactly the same time. People do not want to hold millions of dollars of gold. They put it in the banks to keep it safe. They don't want it at home. There would be a huge spate of burglaries.
Eventually banks would consolidate into large cartels or mega-banks and would be practially immune to "runs" because of their size. All the bank needs to do is carefully limit its individual exposure to any one creditor to less than 20% of its total gold reserves and it could comfortably multiply it's ussued currency by 5 times. It has no obligation to let anyone know how much gold it has anyway.
Then it does a secret deal with an overseas bank in an unnamed country to get a ":reserves guarantee" and it can then go and multiply its issued currency by ten times.
Then it does this again and again as banks consolidate internationally and we end up with one or two big banks that collude tyo endlessly print money because it is not possible for internation co-operative action to bring them down and there is no law to force them to reveal how much gold they actually have.
So the system crashes P M Lawrence. Do you know why? Because the gold system requires a government support to succeed and prevent the above scenario from happening.
And if you conceed that government support is needed then gold backed currency is not the best option - electronic fixed or steadily increasing currency is.
Published: April 19, 2008 1:17 AM
Owen - Why have you not responded to the definitions of different types of deflation spelled out above.
One kind is a gradual fall in prices in relation to money.
One kind is a correction and adjustment to previous inflation of the money supply, an inflation that could not have occurred without fractional reserve banking and bankers expanding the money supply - creating money out of thin air.
The first kind is the only kind that would happen in a true 100% reserve banking system (one where abuses did not occur, yes this has rarely happened in history)
The second is a result of previous artificial expansion of the money supply.
Are you saying the first kind is bad? And if so, why? You still haven't explained why besides saying things like 'deflation can be bad' and 'we could enter into a deflationary spiral'. Actually, the only deflationary spirals that have ever occurred took place after a large artificial expansion of the money supply.
Here's a study you might find interesting, though you have to pay for more than just the summary:
http://www.nber.org/digest/apr04/w10329.html
In Good Versus Bad Deflation: Lessons from the Gold Standard Era (NBER Working Paper No. 10329), authors Michael Bordo, John Landon Lane, and Angela Redish look back at deflationary periods of the late 19th century. These economists find that, contrary to conventional wisdom, deflation may well be more positive than negative.
Bordo, Landon Lane, and Redish focus on the price level and growth experience of the United States, Britain, and Germany during the late 1800s. This period, not unlike the present era, was notable for low inflation or even deflation, for rapid expansion resulting largely from technological innovation, and for a credible and internationally accepted gold standard. The researchers work from the premise that deflation might be good, bad, or even neutral. Good deflation, they maintain, occurs when aggregate supply of goods (say from technological advances, improved productivity, and the like) increases faster than aggregate demand, resulting in falling prices. Bad deflation in turn occurs when aggregate demand falls faster than any growth in aggregate supply. Negative money shocks, for example, that are non-neutral over a significant period - such as occurred later during the Great Depression -- would generate "bad" deflation. Indeed, the authors say, such might be the case in Japan today. A neutral impact o f deflation, meanwhile, might occur where monetary neutrality holds despite negative money shocks.
The researchers identify separate "supply shocks," "money supply shocks," and "non-monetary demand shocks" on output and prices. Their analysis is grounded in a model of money supply under the international gold standard. Their results indicate that deflation in the three leading industrial nations in the late 19th century reflected both positive aggregate supply shocks and negative money supply shocks. Yet the latter had only a minor effect on output. The evidence thus suggests that deflation in the 19th century was primarily good, or at the very least neutral.
Something to think, at least.
Published: April 19, 2008 1:52 AM
WisR:
I quite clearly said that the deflationary shocks were the ones which caused the problems. Constant low deflation can be dealt with in much the same way as steady low inflation.
You referred to these as "Negative money shocks"
"for example, that are non-neutral over a significant period - such as occurred later during the Great Depression -- would generate "bad" deflation."
You obviously didn't read my posts. You have to go right back up to the top and start again.
Published: April 19, 2008 2:12 AM
for clarity, why not just make a habit of saying 'price inflation/deflation' or 'monetary inflation/deflation'.
Published: April 19, 2008 3:44 AM
I know I said this before but isn't the obvious alternative to paper money be gold and silver coinage? Paper or precious metal? . . .
Published: April 19, 2008 7:45 AM
"Go back to economics 101. There needs to be minimal government involvement in order that fractional reserve banking DOESN"T HAPPEN."
Assertion upon assertion... no, we don't need "regulation". What we need is to get the government out of meddling with money. Regulation is fiction concocted by economists who cannot handle much else than numbers. Stop trying to rationalize government on such flimsy accounts. Familiarize yourself with texts on the gold standard and free banking, rather than telling others to learn basic econ...
Published: April 19, 2008 7:52 AM
Owen, could you actually provide an example of such a cartel that lasted, WITHOUT government aid, as opposed to being the fiction of overimaginative individuals?
Published: April 19, 2008 7:55 AM
Owen, of course the banks would get away with it under your scenario - they have the privileges to consolidate their position. Without those, of course they would get found out; their cartel wouldn't hold up, and people would spot things and start bank runs and so on if they tried to go it alone - the customers would have somewhere else to go. We can see from history that bullion systems do not need government support to make them work; they were how things were done before governments intervened.
Published: April 19, 2008 8:23 AM
PM Lawrence: ", that and the silver flow acted well into the 18th century;"
Thanks! I didn't know that. Very interesting.
PM Lawrence: "The way it worked out, certain classes in middleman countries like England and Holland made lasting gains, while countries at the beginning and end of the value chain (Spain, Portugal, Poland, Turkey, etc.) were impoverished either by having their productive base hollowed out or by exporting real commodities for currency that was declining in value."
I'm not so sure about that interpretation. The gold did end up in the Dutch Republic and England, but that was because they grew their manufacturing base rapidly while the other countries, especially Spain, continued to rely on plunder and agriculture. The countries of the old Roman Empire still held agriculture in the highest esteem while commerce and manufacturing were virtually despised. The Ottoman Empire continued to grow economically; it was still a wealthy super power well into the 18th century. I don't think the Ottomans and Spanish became poorer; they just didn't grow as fast as the two countries where capitalism was born.
Published: April 19, 2008 9:23 AM
I'm afraid de Soto, in his book on banking, would agree with Owen on the ease of fractional banking. De Soto points out that it's difficult for a single bank to carry out fractional banking. But several banks working together have less of a problem. If you extend the reach of cooperating banks to the entire nation, you in effect have the Federal Reserve. So national banks, like Bank of America with thousands of branchs, would have the same effect on money as does the Fed. To stop that, the government would have to limit the number of branches a bank can have. That would be the case in free banking anyway. Otherwise, the government would have to impose a 100% reserve requirement. In either scenario, you have a lot of government involvement in the banking industry.
I see the chances of either happening as about those of a snowball in hell, because only Austrians think the money is not neutral. Meanwhile, we should all just accept the mess and learn to make money off it.
Published: April 19, 2008 9:31 AM
Owen,
If a gold currency was not influenced by a government at all, then the vaults who held the gold would go straight back to printing off a few extra gold-convertible notes for themselves again. Fractional reserve banking was a natural phenomeno[n] before governments even attempted to regulate currencies. Ever heard of a gold smith? Money would continue to be issued in fiat and an unstable world financial system would still result. Go back to economics 101. There needs to be minimal government involvement in order that fractional reserve banking DOESN"T HAPPEN.
There is nothing inherently wrong with fractional reserve banking as long as two conditions exist: one, the bank has the capability of paying back his depositors by borrowing or liquidating, and two, there is no government interference in the form of bail outs or legal defaults (allowing banks to stop paying back its debtors), which is the same as legalizing fraud. Fractional reserve banking is a dangerous business even if it “naturally” occurs, since there are inherent risks that may be too large for many investors and stockholders. However, it is a fact that precisely because of government interference (in the money supply and in the form of regulations), fractional reserve banking is the norm today and more prevalent than even before. The reason is that governments can protect banks from having to liquidate (going bankrupt) which generates the moral hazard we see today. Fractional reserve banking is prevalent because of government and not despite it.
About fiat currency, you are confused about the term: a bank issuing a note that has no backing in specie is NOT fiat currency – it is still a promise to pay in specie whether the bank can do it or not. Fiat currency or fiat money is an issuance by government mandate, meaning that the issuer does not have an obligation to pay in specie and it mandates people to use it to pay debts and taxes – it is money “because I said so”, hence, fiat
An electronic currency is backed by the government's control of the country and the ability to raise taxes.
Raise taxes to be paid in what, the same electronic currency? This is circular thinking. The government still issues a currency in some form of promise to pay (the Federal Reserve Notes), because economic calculation is done on a currency base, and not in numbers stored in a spreadsheet. I insist that electronic currency does not exist, that you are thinking of the accounting system that credits or debits money from bank accounts, but the bank account still accounts for bills and coins.
A gold currency will inherent[l]y expand exponentially and unsustainably because private banks have an incentive to practice fractional reserve banking. What is to stop them?
Bankruptcy, for one – a note is still a promise to pay, otherwise it is fraud. What stops banks from “infinitively” expand the supply of notes? What stops then is the potential to borrow from other banks to pay back debtors. The issuance of bank notes against gold that does not exist will make the notes lower in value in the market against the same gold, enticing people to withdraw gold for immediate purchases. The issuance of notes does not happen without consequences.
If one bank did it they could get found out but if there were say 4 banks in a country like NZ then they could collude to exponentially increase the money supply at the expense of the people of the country. And with Libertarian no-restrictions on the economy this would be legal.
Owen, they would still have to pay back in specie when the depositors come to collect their savings. Remember that notes cannot be issued from nothing, otherwise people would not use banks or accept their notes. The ONLY organization that makes people accept their notes by fiat is the State, not banks.
Banking cartels becoming the richest in the world and thereby dominating the world through their wealth would result because they could endlessly print money and there would not be a possible "run" that could cripple the cartel which could share gold reserves between it to avert any run.
Owen, the problem is that this would not go unnoticed. An “infinite” number of notes would create an inflation problem, making people take their savings out of banks and place them in investments or in immediate purchases – that would generate the bank run. Also, a banking cartel is a silly idea, that stems from the assumption that business people would abandon their preferences in order to agree with others to limit their market share – that does not happen in a free market, especially if some banks do not agree to join the cartel.
Banking needs to regulated in some way such as at the very least a legal fixed gold to dollar price as in the [B]retton [W]oods system. Without this we would head towards the abyss...fast.
This argument begs the question, Owen: why do you assume the dollar needs to be fixed to a gold price, and what does that have to do with regulating banks? Why can’t the State regulate banks and leave the gold alone, or why do you assume banks need to be regulated in the first place? Again, you are looking at this in the wrong way - the problem is not gold, it is government interference of the market by issuance of fiat currency.
Therefore, electronic fixed or steadily increasing currencies backed by the country's government is a far better option than a free-market, gold-backed currency.
I have not read a single convincing argument that would lead to this conclusion. Therefore, your conclusion is a non sequitur.
Published: April 19, 2008 1:33 PM
Inquisitor:
You refuted my conclusion without adressing any ofthe premises upon which it is based. Therefore your refutation is not valid.
Francisco Torres:
You need to leard how banks work mate. When someone withdraws their money to buy something then the shop they buy from will then deposit that money. Guess where? In bank! And if the bank has a monopoly of over any geographic area then simply deciding to spend your money will not change a thing.
A fractional reserve bank can only be "found out" as you say if EVERYONE does it at the same time. This is more and more unlikely the larger and more 'cartelised the banking inductry gets.
Remember because of the nature of the banking product (money) the natural size of banks is always lager and larger not smaller. The smallers ones get swallowed up. That is why in Australia they have the "Four Pillars" law preventing the four major banks from merging or being sold. Because without government prevention this would happen.
Face it. Frational reserve banking is the natural state of the banking industry.
Published: April 19, 2008 6:12 PM
Owen, I don't waste time refuting assertions. As I said, I want an actual example of such a cartel that has no government propping it up, and not just half-baked reasoning. All you've done so far is assert, ad nauseam.
Published: April 19, 2008 6:30 PM
BTW, on this monopoly BS please take the time to read Dominick Armentano's works, where he eviscerates the case for the "anti-trust" myth.
Published: April 19, 2008 6:32 PM
i dont know how the term bank derived.
if the goldsmith at first had fully backed gold receipts - then i guess it wasnt a bank.
if the term bank itself means holding fractional reserves of some sort then thats what it means. i guess the 100% backed reserves alternative would be called a "gold warehouse" or or 'gold storage and investment.'
the storage terms (would be contractually spelled out.)
if you made a deposit of 100 grams of gold and let the gold warehouse lend out 10 grams (risk capital) to be repaid with interest, well, you would still have 90 grams in your gold holding and hopfuly the 10 grams would be repaid to the gold warehouse at a profit.
is that how 100% reserves would work?
Published: April 19, 2008 6:46 PM
Inquisitor:
"I don't waste time refuting assertions." Sounds like the words who has no idea about how to carry on an aduklt argument.
The petrol companies are prevented by the government of New Zealand from acting as a cartel.
They are not supported the the NZ government at all. They face only regulation restraining their actions.
They have been accused of increasing prices in concert because it benefits them all. It is obvious that they do this because it is in their best interests. So would banks.
So consider this your example. And you are refuted.
Published: April 19, 2008 7:38 PM
Your attempts at argumentation thus far have been lacking, so the fact that anyone here even bothers with you should be viewed as charity at best. What I'll consider it as is an attempt at evasion, as I asked for an example of a cartel that formed and remained stable without government aid, not speculative claims regarding cartels that allegedly would've formed, which is what anti-trust theorists claim but rarely, if ever, try to prove. I am asking for proof that, absent government aid, such cartels would be stable. D. Armentano has given good empirical and theoretical reasons to doubt this.
Published: April 19, 2008 8:00 PM
Inquisitor, I don't find your arguments convincing at all, and BTW there is not enough gold *physically* in the world to cover all transactions and savings. Perhaps 100 years ago, yes.
Published: April 19, 2008 8:16 PM
Francisco Torres:
"Raise taxes to be paid in what, the same electronic currency? This is circular thinking. "
I'm not sure if this is what you meant, but there's a sense in which this is not circular. In 1690, Massachusetts paid its soldiers in newly-issued paper shillings that were declared acceptable for taxes in lieu of silver shillings. This tied the paper shilling to the silver shilling, as long as Mass. was capable of collecting taxes. But this was not always the case, so the paper shilling fell relative to the silver shilling. Mass. then issued new paper shillings and lent them in exchange for IOU's denominated in paper shillings. These new paper shillings were backed by assets denominated in paper shillings. There was a certain circularity, but it worked. (see my paper "The Quantity Theory versus the Real Bills Doctrine in Colonial America" by clicking on my name above.)
Published: April 19, 2008 8:24 PM
Clemence, to the first point I really don't care, to the second Rothbard and Reisman have both addressed this, so yawn.
Published: April 19, 2008 8:28 PM
Would you care to re-state the arguments? AFAIK Rothbard just said that *any* quantity of gold was optimal. That does not seem credible.
Published: April 19, 2008 8:41 PM
Dr. Paul,
This was an excellent article, you hit the nail on the head squarely. The issue basically is a moral one.
Which way should the country go? By way of theft
or honesty. Gold has been shown throughout history to keep Man most honest and create wealth for all, go off of the Gold Standard and you have slowing progress and increased poverty.
Capitalism is a recent discovery and to the degree it is practiced it will create prosperity, strangle it with countless socialistic jury rigged laws and down hill we go.
Is why the Soviet Union collapsed, the arch enemy of Capitalism so difficult to understand?
Published: April 19, 2008 8:52 PM
Fractional reserve banking is libertarian... but only if it is open and disclosed. This allows the market mechanism to work and apply pressure to banks who set their reserves too low. Depositors can avoid banking with those who set their reserves too low.
But without that disclosure, fractional reserve banking is a fraud.
Published: April 19, 2008 9:50 PM
Inquisitor has the ability to add nothing to a debate and still claim he is right.
His assertion that banks could not tend towards larger rather than smaller businesses is absurd.
Banks did not and do not trade on their reserve ration but rather on their ability to convert their currency to gold. A large fractional reserve bank could do this just as well as a small 100% reserve bank whilst creating a maneagable amount of money from thin air.
yawn...
Published: April 19, 2008 10:31 PM
Brandybuck:
Fractional reserve banking is a natural phenomenom and stems from the inability of the average bank customer to see insude the bank and the abank to diffuse the potential for collapse by constantly expanding its exposure.
As a consequence a common practice of banks these days is to syndicate their exposure to different companies so they never hold more than a certain amount of money with any one business. For example if it was possible to lend to $200million to one business or $40million each to five business it will choose the latter.
See how if it chooses the $40million option the chances of all creditors coming to the bank for their money at the same time is drastically reduced.
The magic of reserve banking!
If you assert that gold-backed banks need some legal regulation to force them to disclose reserves then you are advocating government intervention into a supposedly "private" area.
So are you saying Rothbard was wrong? I for one am saying that free-for-all banking is not viable because it produces fraud just like you said.
Published: April 19, 2008 10:38 PM
Clemence --
I'm curious to know what criteria you used to determine that there's not enough gold to cover the current volume of transactions.
Published: April 19, 2008 11:54 PM
Charles Manson:
Banks create money. It is not their business to worry about how much is already out there. WHATEVER their gold reserves there is the incentive to fractionally-reserve these and create more money.
If it pays more and produces only marginally more risk then why not do it. Doing the opposite (not fractionally-reserving) would be the irrational thing to do.
Published: April 20, 2008 1:32 AM
i sent this message to my credit union...."hello...i have been reading about a phenomenon called 'fractional reserve banking.'
if the pehenomenon is true and in existence does secu participate in 'it'.
what i mean is - if every share account holder and checking account holder approached the credit unions and demanded their cash money - could secu be able to say..."strange request, but sure credit union customer, here is your cash. (or simething similar)" and then hand over the customers deposits (not pixie dust assets) in full."
this is the reply i received............"Thank you for your message. Every branch will attempt to meet all reasonable member demands for cash. Each branch can not hold the excess cash but will hold enough cash for what is deemed to be normal usage for that specific branch. We cannot provide large amounts in cash to a member on demand, but we can certainly at the time of the request order the funds for delivery at a later period.
State Employees' Credit Union is committed to protecting member deposits. As required by law, annual reserves are set aside for additional protection. SECU is also insured by the NCUA. The National Credit Union Administration (NCUA) is an independent United States government agency that insures the deposits of credit union members nationwide."
is there someting i could have added to get a more thorough answer?
what and where are the 'annual reserves'? are these reserves the 'thin air money' often spoken about?
"Each branch can not hold the excess cash" what would the excess cash be?
Published: April 20, 2008 2:30 AM
Fundamentalist, you wrote "The gold did end up in the Dutch Republic and England, but that was because they grew their manufacturing base rapidly while the other countries, especially Spain, continued to rely on plunder and agriculture. The countries of the old Roman Empire still held agriculture in the highest esteem while commerce and manufacturing were virtually despised. The Ottoman Empire continued to grow economically; it was still a wealthy super power well into the 18th century. I don't think the Ottomans and Spanish became poorer; they just didn't grow as fast as the two countries where capitalism was born."
This is incorrect. The gold (and silver, which kept coming in from mines and extended the duration of these processes) didn't end up in England and Holland, it went through them as middlemen. Also, in that time frame, their manufacturing bases weren't built up, their carrying trade and overseas possessions were - and that build up was on the back of the middleman function.
The Ottoman Empire's resources shrank from the (mostly silver) inflation, and that in turn led to all sorts of capitulations and concessions from the 18th century on; the total resources didn't shrink much, but they started passing into European hands.
Clemence, "there is not enough gold *physically* in the world to cover all transactions and savings" is wrong, in two ways. First, there are actually very considerable supplies that are not economical to extract at today's prices, that you probably haven't allowed for. Second, gold prices would rise if it was needed for that much coin (you wouldn't go back to the same old coins as before, you would have, say, 1/3 or 1/4 oz coins denominated in hundreds or more likely thousands of today's US$).
Owen, when you write "a common practice of banks these days is to syndicate their exposure to different companies so they never hold more than a certain amount of money with any one business. For example if it was possible to lend to $200million to one business or $40million each to five business it will choose the latter. See how if it chooses the $40million option the chances of all creditors coming to the bank for their money at the same time is drastically reduced.", you are describing what they try, but it's a good idea that doesn't work once things get too big, because all the diversifying comes around again (think "fallacy of composition").
It was the thinking behind the Mexican loans problem in the '80s. There, they tried lending to lots of different Mexican businesses - but the aggregate effect flowed throughout Mexico, so they ended up with a common pattern of defaults affecting the whole of their Mexican portfolios.
Published: April 20, 2008 4:15 AM
Owen, I've added more than you have with your meaningless assertions, which BTW you have been unable to prove. I do claim that I am right, in the sense that you've offered not a stitch of proof for anything you've said so far. I only put in effort proportional to the amount you put in.
Clemence, you're discussing the amount of gold in terms of a fiat currency. That is where the problem rests.
Published: April 20, 2008 7:45 AM
owen says:
"The petrol companies are prevented by the government of New Zealand from acting as a cartel.
They are not supported the the NZ government at all. They face only regulation restraining their actions."
you've forgotten to ask how this situation come about. the nz wholesale fuel market is hardly competitive, with only one refinery, jointly owned by the four majors, who also import refined product using the same ships, and share the same port.
there is only one competing importer, gull petroleum (with its own port at mt manganui).
so why not more competition? go look at the complex maze of government legislation to open a new refinery or fuel port, the opposition by nimbies, and the powerful green lobby, and well as the large capital outlays for a small population, and you'll understand why there are no new entrants into the market.
australia with seven refineries is only marginally better, with the government red-tape and special-interest groups thwarting any major capital investment in refining capacity or ports. there are laws allowing only certain types of fuel to be imported, and the individual states have different fuel norms, preventing fuel from freely passing from one to another.
also, in australia, check out how badly caltex was doing from refining in the nineties, and you'll appreciate they're only just now compensating for the long, lean years.
as regards the retail market, the anti-trust body (accc) has all sorts of screwy rules against undercutting competitors' prices, as well as gouging etc.
fuelwatch (wa) has been effective in hurting small operators, despite the planners' (stated) best intentions. now it's going to be rolled out nationwide.
Published: April 20, 2008 9:01 AM
PM Lawrence: "This is incorrect. The gold (and silver, which kept coming in from mines and extended the duration of these processes) didn't end up in England and Holland, it went through them as middlemen. Also, in that time frame, their manufacturing bases weren't built up, their carrying trade and overseas possessions were - and that build up was on the back of the middleman function."
I don't agree at all. Check out Israel's "The Dutch Republic" and De Vries's "The First Modern Nation." The Dutch started the industrial revolution.
PM Lawrence: "The Ottoman Empire's resources shrank from the (mostly silver) inflation, and that in turn led to all sorts of capitulations and concessions from the 18th century on; the total resources didn't shrink much, but they started passing into European hands."
That's simply not true. Years ago I read a two-volume economic history of the Ottoman empire by a Turkish economist. I'll get the name if I can find it. The Ottoman's had very little trade with Europe until the 19th century because the Europeans didn't have anything the Ottoman's wanted. Almost all of their trade was with China and India, and it was vast. The concessions the Empire gave to Europeans meant almost nothing to the Empire because they were such a tiny part of their total trade. Ottoman manufacturing didn't really begin to suffer from European competition until the late 19th century. And the Ottoman's ended each century wealthier than they began it, but the growth was very small. Europe didn't harm the Ottoman economy; it simply grew faster. Traditional economics in which the state controlled prices and confiscated property held the Ottoman Empire back, not the Europeans.
Published: April 20, 2008 9:09 AM
newson:
Most of what you describe: small population, prohibitive entry costs...are pure free-market economic factors.
There is no prohibitive government legislation in New Zealand preventing a fuel port or refinery. That is crap. If someone wanted to do it they could there is no reason why the New Zealand government in their protectionist/interventionist mindset would not encourage it.
Duh, it would increase competition.
But no-one wants to because it is plainly uneconomic to do so.
The same line of reasoning holds true for banks and the possiblity that nationwide loan defaults would bring down a fractional-reserving bank IS THE VERY REASON why banks would expand world-wide to reduce the likelihood of this hurting them.
Can't you see? The banking market in it's natural state encourages:
(1) Fractional-reserve banking;
(2) Contunuous world-wide expansion;
(3) Cartels;
This is enough reason to put the many in grave danger of the mega-banking few and therefore enough reason for some regulation and controls on our meduim of exchange.
Published: April 20, 2008 6:50 PM
Fundamentalist, you wrote "The Dutch started the industrial revolution". So what? England and Holland had acquired lasting wealth before that (by the mid 18th and late 17th centuries respectively). It was represented in the ways I described.
"The Ottoman's had very little trade with Europe until the 19th century because the Europeans didn't have anything the Ottoman's wanted"; the first part is wrong, even though the second part is almost completely accurate if you are talking about goods and services they wanted (they did bring in English gardeners, for instance). That is precisely why there was a bullion flow that way - to pay for goods that the Turks didn't want European goods for (and yes, in regard to India and China, Turkey was a middleman too - but it also exported its own products).
"The concessions the Empire gave to Europeans meant almost nothing to the Empire because they were such a tiny part of their total trade". Possibly you aren't familiar with concessions and capitulations. They weren't trade concessions, by and large, but grants of extraterritoriality in regard to one sector or another (sometimes geographical). You may be counting these sectors as still Ottoman, from whose sovereignty they were under, when the resources had been compromised as far as being Ottoman went. You may also not have been counting the resources that were de jure European at the beginning of the period, that the Ottomans had tapped into with raids and tribute, which they then lost.
"Ottoman manufacturing didn't really begin to suffer from European competition until the late 19th century". Why this emphasis on manufacturing and competition from European manufacturing? While completely true, it has nothing to do with these economic processes, which was the internal dislocation caused by exporting for depreciating currency - not external competition at all, with manufacturing or otherwise. The most significant effect came from exporting less finished goods for bullion and so not retaining them and value adding to them for local needs (and so winding back the capital that did the value adding), not from any competition.
Published: April 20, 2008 8:50 PM
"...deflation surprises are devastating to businesses, much moreso than inflation surprises."
From what I understand, consumers are always more important than producers, and consumers certainly enjoy deflation surprises more than inflation surprises.
Even as producers (of hourly-wage labour), humans appear to be hurt more by inflation surprises because their wages always lag -- whereas businesses will respond to deflation surprises by cutting wages asap and/or laying off people (fortunately prices also tend to decrease so as consumers those laid off can afford to last a bit longer between gigs).
Mind you, I'm not even a second-rate economist. Seems, though, to be the gist of what Dr. Paul was saying about letting markets do their thing without government intervention.
Published: April 20, 2008 9:26 PM
Published: April 20, 2008 11:08 PM
owen says:
"There is no prohibitive government legislation in New Zealand preventing a fuel port or refinery. That is crap. If someone wanted to do it they could there is no reason why the New Zealand government in their protectionist/interventionist mindset would not encourage it.
Duh, it would increase competition.
But no-one wants to because it is plainly uneconomic to do so."
on paper, there is no specific prohibition from opening either port facilities nor refineries, but there are rafts of laws regarding use of waterways, and also the siting, and operation of heavy industrial plants. you'll find the green lobby quite powerful in nz, and there are plenty of opportunities for "stakeholders" to thwart any proposed development using existing laws.
(the nz labor party depends on green votes, as you're probably well aware).
as long as free entry into the market isn't barred, then the market isn't a cartel. cartellization is not defined by number of market players (could in theory even be a sole player), but denial of entry to market.
it's probably no accident that only the well-capitalized oil majors can wade through the legislation regarding chemical processing, shipping etc.
banking is only cartellized in australia and nz because of the central banks' iron control over new entrants. until banks are treated in the exactly same manner as ordinary companies, there is no free market and the cartel stays.
why can't you start up owenbank p/l as a $2 shelf-company tomorrow, and use your superior financial insights to grab market-share from the majors?
Published: April 21, 2008 12:51 AM
Newson:
Balony. Those are merely public safety laws and exist for all forms of activity be they public or private in New Zealand.
They would not add greatly to the difficulty in establishing an oil port or refiner in NZ. Compared to the tens of millions it would take to establish such an investment, and then the many millions more at risk over the first few years of operation, these would only constitute a few million at most and would likely cost less than the economic evaluations and financing costs that would need to be done also.
You are clutching at straws. The New Zealand government would allow anyone who wanted to build one the right to do as but there is just no need because the capacity of the existing one is enough for the entire country's needs.
There is no economic case for one being built, that being the case.
WisR:
If you believe that a constant low rate of inflation is what caused the 30's depression...you've gotta have a look at your economics 101 man. It was caused by the DEFLATION SHOCK. If the money supply was continued to be increased at a constant low rate so that CPI inflation remained within 0 - 3% then there would have been no depression. You gotta do better than that mate.
I have already explained to you that a gold standard is potentially much worse than a Steadily Increasing Money Supply (SIMS) system because a gold system allows Fractional reserve banking which would not be possible under a SIMS.
If you propose to enact regulations to stop gold-backed banks from fractionally reserving then you have just broken the cose of Austrian 101 - no government intervention in the economy.
My assertions:
(1) The ultimate goal is one main thing - to achieve a stable or stadily increasing money supply;
(2) steady increase in the money supply could pay for government spending on defence and law and order;
(3) Gold backed systems without government regulation allow fractional reserve banking which is just the same as what we have now - banks could counterfeit money though constant expansion, cartels and non-disclosure of their reserves.
Published: April 21, 2008 4:24 AM
Inquisitor:
Oil companies in New Zealand have regularly been accused of operating as a cartel. This is based on analysis of their actions.
Read "Man, Economy and State" by Rothbard who clearly says that cartels are possible and natural features if a free market.
Ever heard of economic game theory? There is a long established FACT that given certain sets of conditions firms are likely to choose the option that would give them the best return BASED ON THEIR EXPECTATIONS OF WHAT OTHER PARTICIPANTS DO. In the case of oil and banking gues what? The commidity is identical and therefore there are only two ways to compete: Price and service. The CARTELS are not as stupid as you and quite obviously found that they can make more money by raising the prices and acting more like a joint-monopoly than individual competitors.
Geeze you are the only person I have ever hear claim to the non-existence of cartels. People on all sides of the economic divide agree on their existence.......except you.
I also think this is just embarrasing for you because the very first comment you made on this topic was proved wrong by almost everyone else (that gold expands at 3-5% annually). It is more than half that in real life. You know real life? the thing all the rest of us are dealing in....After that...constantly on the backpedal and unable to come up with any arguments at all really. Sad. Kepp going though it is entertaining if nothing else...
Published: April 21, 2008 5:37 AM
Owen, can you actually replicate arguments without thereby misrepresenting them? No, it seems not. I asked, and continue to ask for, proof of a cartel, acting in a monopolistic fashion, in absence of the government, not counterfactual scenarios based on your imagination. You ignore both Rothbard's and mainstream economists' arguments against the stability of cartels, conveniently - and also work done by D. Armentano eviscerating conventional monopoly theory. PM Lawrence has also highlighted your failure to prove the stability of this arrangement. You have not succeeded at this, so now you're attempting (and failing at) character assassination. The figure I provided can be found in Skousen's work, so the error would be his, not mine.
Published: April 21, 2008 7:53 AM
Owen, you constantly refer to economics 101 - which "economics 101"? Keynesian? Monetarist? Marxian? Austrian? New classicist? Post-keynesian? Which? They all have different theoretical accounts for the phenomena in question. As per usual you're making assertions without proving any basis for them.
Published: April 21, 2008 8:03 AM
PM Lawrence: “"The Dutch started the industrial revolution". So what? England and Holland had acquired lasting wealth before that (by the mid 18th and late 17th centuries respectively).”
It’s important because you seem to think the Dutch did nothing but shipping. The wealth gained from the carrying trade happened before the rebellion of the Dutch against Spain when Antwerp was a major port. Holland did not enjoy that luxury. Antwerp stayed with Spain after the rebellion and declined as a center of trade. Holland took over some of that trade, but for the most part the Dutch achieved their wealth and supremacy from manufacturing in the 17th century. Again, see Israel and De Vries for proof.
PM Lawrence: "The Ottoman's had very little trade with Europe until the 19th century because the Europeans didn't have anything the Ottoman's wanted"; the first part is wrong, even though the second part is almost completely accurate if you are talking about goods and services they wanted (they did bring in English gardeners, for instance).
By “very little trade”, I meant as a percentage of total foreign trade, and it I am correct. You need to read some Turkish economists, not just European ethno-centric ones. The two-volume series I mentioned earlier is “History of the Ottoman Empire, 1300-1914” by Halil Inalcik, Suraiya Faroqhi, Bruce McGowan, Donald Quataert, Sevket Pamu