Comments (18)

• Mike Sproul

  Lew:

  "People should be free to use any money they can get each other to accept."

  I agree. As long as bankers and customers agree on terms, would you go one step further and add that I can issue money that is physically convertible into gold only one day per year? One day per century? Or what if the money was occasionally convertible at MY option, rather than the customers' option? What if it was convertible into into 1 oz. of silver or, at my option, something with a current market value of 1 oz.? What if I stood ready to buy back the money I had issued, not with gold, but with bonds of equivalent value? What if my bank operated on fractional reserves? What if I suspended all kinds of convertibility until such time as people stopped using my money (or it began to lose value), at which time I agreed to buy it back with something of equivalent value?

  I would approve of all of the above. Would you?
  

  Published: October 14, 2008 9:55 AM

• David C

  "All these restrictions need to be repealed as a step toward monetary reform."

  After some thought, I repectfully disagree. There is a saying, individuals are destined by choices, but systems by circumstance. The system is not going to change, why should they? They have the power to print money.

  It reminds me of the copyright cartel. Everybody knew the system was messed up, everyone knew it wasn't working and needed reform. But seeking reform was a complete waste of time. The solution was technologies that anatomized, redundant and p2p networks, and encryption. Now even though many still give lip service to copyright, they are dead and completely unenforceable. You could nuke cities over it, and it would still be completely unenforceable. In fact, I would argue that this change happening through the system is not even desirable. It is far better for people to assert and protect their own rights without a system, than otherwise.

  Well, the same is true with money. We've had government in our lives so long, we just assume we need some kind of government cooperation to make any financial system work. But lets say the opposite is true. After all, money is a medium of exchange, a unit of account, and a store of value. Similar to copyright, it needs no physical manifestation in a specific place. Lets say it is even desirable that the government never reforms, never uses honest money ever again, and always taxes the maximum income it can, and always tries to attempt maximum price controls and central planing over the economy. We have options today other societies haven't because we are in the computation age and the information age. Perhaps it's more desirable that we forget how to make the government work and assert our own rights. Just like the copyright cartel, there will be scattered victims, but it is so hard to enforce that we are all better off anyhow.

  For example, lets say they pounce on random businesses. So what, the owner is in another country under an alias. Lets say they take all the companies assets. So what, he's insured, his policy is guaranteed to cost less than his taxes. What kind of threat can they put on us that matches sucking away over 40% of our income for life? That matches all our savings and value of our money going to zero? Even if they shot people, the backlash would hurt them more than it helps them.
  

  Published: October 14, 2008 10:29 AM

• Anonymous

  "People should be free to use any money they can get each other to accept."

  I can get many people to accept the US Dollar.

  Published: October 14, 2008 10:46 AM

• Person

  Mike_Sproul: What if I suspended all kinds of convertibility until such time as people stopped using my money (or it began to lose value), at which time I agreed to buy it back with something of equivalent value?

  So, at any time in which it would actually matter, and in which you haven't kept your word about the money's backing, you'll devalue it to the point where you can technically meet the letter of your obligations while having actually fleeced investors?

  Sounds GREAT! Sign me up! ^_^

  That plan for money sounds like a good idea up to that point. Most people would prefer their money being backed by a diverse array of goods that the bank actually, you know, has.

  Published: October 14, 2008 11:05 AM

• Anthony

  Lew: "In many ways, this proposal finds support in the work of F.A. Hayek, who also advocated competitive currencies. But this one goes further in allowing a full free market in minting money by private firms."

  This seems to imply that Hayek's proposal wasn't in support of giving full freedom to private firms to provide money of their own brand, doesn't it?

  Hayek (Denationalisation of Money, http://www.iea.org.uk/files/upld-book431pdf?.pdf):

  "Competition would provide better money than would government

  I believe we can do much better than gold ever made possible. Governments cannot do better. Free enterprise, i.e. the institutions that would emerge from a process of competition in providing good money, no doubt would." (p. 110)

  "People would learn to trust the new money only if they were confident it was completely exempt from any government control. Only because they were under the sharp control of competition could the private banks be trusted to keep their money stable." (p. 122)

  What disqualifies the monetary order proposed by Hayek from being "a full free market in minting money by private firms"? Have I misunderstood Lew Rockwell's words?

  Published: October 14, 2008 11:39 AM

• Andrew

  "People should be free to use any money they can get each other to accept."

  They actually are: Ithaca, NY prints its own money, for example. There is no prohibition.

  The problem is with being *forced* to accept fiat currency for all debts, public and private.

  Published: October 14, 2008 11:40 AM

• michael

  Hi all,

  This time I come not with the answers, but with a question.

  Rockwell says, of Paul Krugman, "..his views on the crisis are identical to the kind of fallacy-ridden central planning that caused the downturn of 1929 to turn into the Great Depression. Put his ideas in charge, and we are doomed."

  So my question is this. Suppose back in 1932 there had been no Big Government bailout of the financial system. And as a result all the banks would have failed like a line of dominos. And everyone's money would have been lost.

  True, there would have been no artificial distortion of market mechanisms. But as well there would have been no credit, no cash and no customers to buy the no stuff in the stores. Would this have been better than what actually happened?

  To apply this question today, suppose Mr Bush and the various world leaders had all said "no bailout". And as a result the stock and bond markets would have crashed, not just partway down but to the floor. And the huge, huge overhang in derivatives would have just sunk without a ripple. And again, there would have been no available credit.

  Wouldn't the most direct result have been the wiping away of many years of capital accumulation, the rise of massive unemployment and a freeze on all forms of economic activity? And wouldn't this be such a grave development that it would take years to correct before we could again attain the level we were on just last year?

  And how would such a condition be different from "a Depression"?
  

  Published: October 14, 2008 12:14 PM

• Michael A. Clem

  So my question is this. Suppose back in 1932 there had been no Big Government bailout of the financial system. And as a result all the banks would have failed like a line of dominos. And everyone's money would have been lost.
  
  First, if there had been no creation of the Federal Reserve back in 1913, the unrestricted boom of the 1920's wouldn't have occurred, and there would have been no need for a Great Depression to have occurred. Same thing with today's crisis.
  
  Okay, you say, but since it has happened, now what? As commentators on Mises have already been saying over and over, and what people like Mises, Rothbard, and Hayek long ago said about the Depression, the unhindered market will fix the mess and make the necessary corrections faster and easier than any government bailout plan can. Just as the government prolonged the Great Depression, any current bailout will prolong our current crisis, not shorten it.
  The "hair of the dog that bit you" will just delay the inevitable and necessary response to the crisis.
  How bad will it be? As bas as it needs to be to correct the previously overextended credit and clear out the bad debts. We can let the market do it quickly, or we can let government spread and extend the pain for who knows how long.
  

  Published: October 14, 2008 12:40 PM

• fundamentalist

  Michael: “True, there would have been no artificial distortion of market mechanisms. But as well there would have been no credit, no cash and no customers to buy the no stuff in the stores.”

  Not necessarily. Hayek’s “Profits, Interest, and Investment” is the clearest summary of the Austrian business cycle that I have found. Unfortunately it’s hard to find. Not online anywhere or for sale. I had to borrow a copy from the University of Texas at El Paso. But to summarize, don’t confuse money with wealth. Wealth is the sum of things and services we have. Some of that wealth was wasted in the boom, but most of it still exists. All that happens in the depression phase is that the money supply falls to a level more closely matching actual savings. (Remember that during the boom, the money supply was artificially pumped up to levels far exceeding savings.) The money supply falls as banks fail and companies default on loans. As the money supply falls, prices fall with it and accounting profits fall.

  But not all banks will fail, only the weakest ones. Roosevelt punished the strong banks along with the weak ones and made people think that all banks were failing. The strong ones will buy up the assets of the failed ones. When all the weak banks have gone and the money supply stops falling (it won’t fall below the level of real savings), then profits will be low and wages will be high relative to consumer goods. Surviving businesses will find it profitable to invest in labor-saving equipment and growth will resume. Real wealth will not have disappeared so much as fake money has evaporated. Prices will be low enough that people with money will start buying again. That’s how these cycles worked for centuries before the government decided it was smart enough to interupt and wound up making everything worse.

  The current bail out will do nothing but cause price increases by injecting more fake money into the economy. Those price increases will create accounting profits without producing more goods/services. Those profits will encourage more investment in consumer goods industries and make the shortage of capital goods worse. This shortage is what causes the boom to bust in the first place. So instead of the small bust we might have had, we’ll have a much bigger bust later next year.
  

  Published: October 14, 2008 1:39 PM

• Yancey Ward

  michael (non-Clem),

  Fundamentalist has already addressed it, but I would like to reinforce his comment- you wrote, above:

  Wouldn't the most direct result have been the wiping away of many years of capital accumulation

  This, in my opinion, is the most common misperception in economic thought, and it is one often held even by people that should actually know better (such as businessmen and economists!). Money is a measuring stick only, not the things themselves. This applies to accumulated capital. A recession/depression can dissipate capital if greatly prolonged, but such prolongation is always caused not by the fall in money supply, but by the attempts to prevent the readjustment of prices, and what you lose in dissipation you more than make up for in the realignment of capital to more profitable lines of utilization.

  Published: October 14, 2008 6:27 PM

• billwald

  Say there was only one major currency in circulation . . . how would this change the picture? Would not eliminating the money changers be a step in the right direction?

  Published: October 14, 2008 7:28 PM

• David Spellman

  I heard Zimbabwe is letting people use any currency they want nowadays.

  Maybe I can get my employer to start paying me in Euros.

  Published: October 14, 2008 7:56 PM

• Francisco Torres

  Say there was only one major currency in circulation . . . how would this change the picture?

  Depends... Who issues it?

  Would not eliminating the money changers be a step in the right direction?

  You mean, by killing them?

  Published: October 14, 2008 11:59 PM

• newson

  to fundamentalist and the rest:
  "profits, interest, and investments" -
  jeff tucker informs me that the hayek collection pdf on mises.org includes the most salient bits of this work.

  Published: October 15, 2008 6:00 PM

• newson

  to fundamentalist and the rest:
  "profits, interest, and investments" -
  jeff tucker informs me that the hayek collection pdf on mises.org includes the most salient bits of this work.

  Published: October 15, 2008 6:01 PM

• Ian

  I have a question. I have been a recent convert (only two years) but there is one thing I cannot get my mind around and I hope you guys can square me away.

  If the US was to revert to a gold standard and the rest of the world maintained its current fiat system. Would not there be a massive capitol flight of gold from the US? I understand the value of gold would be driven up by the fiat currencies exchanging it but it seems to me that the entire world would need to go back to a gold standard for it to work here.

  Otherwise we would be required to pay out in gold what we receive in fiat, unless we required foreign countries to also deal in gold to trade with the US, which could destroy trade as they may resist.

  I look forward to your response(s) as I have been struggling with this on my own and thankfully none of my friends have asked me as I describe the evils of the Fed and where we have gone wrong.

  Published: October 15, 2008 7:39 PM

• andy

  If you look on ebay over the last few months gold coins have gone way up in value. A few months ago i bought a 1/10 ounce gold coin for about 95 dollars including shipping. Today a gold coin closed for 120 dollars including shipping; a near 20% increase, putting an ounce at close to 1,200 dollars. Why is spot price of gold sitting under 900 when physical gold coins are nearly 300 dollars more?

  Gold Coin:

  http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&ssPageName=STRK:MEWAX:IT&item=160291111644

  Published: October 15, 2008 9:18 PM

• Peter

  The spot price is for 400oz LBMA bars. Coins and minted bars never trade at spot. Though a 30% markup is rather extreme - you can buy gold coins far cheaper than that.

  Published: October 15, 2008 11:36 PM