Transcending Politics

submitted by jwithrow.
Click here to get the Journal of a Wayward Philosopher by Email

Journal of a Wayward Philosopher
Transcending Politics

October 20, 2016
Hot Springs, VA

Just as the technology of printing altered and reduced the power of medieval guilds and the social power structure, so too will cryptologic methods fundamentally alter the nature of corporations and of government interference in economic transactions… And just as a seemingly minor invention like barbed wire made possible the fencing-off of vast ranches and farms, thus altering forever the concepts of land and property rights in the frontier West, so too will the seemingly minor discovery out of an arcane branch of mathematics come to be the wire clippers which dismantle the barbed wire around intellectual property. Arise, you have nothing to lose but your barbed wire fences!” – Timothy C. May

The S&P closed out Wednesday at $2,144. Gold closed at $1,270 per ounce. Crude Oil closed at $51.72 per barrel, and the 10-year Treasury rate closed at 1.75%. Bitcoin is trading around $630 per BTC today.

Dear Journal,

Today is little Maddie’s birthday! I still remember, two years ago to the day, witnessing her first breath of life. I can see it in my mind’s eye just a clearly as I see the computer screen in front of me. She has become a fantastically sweet and clever young lady in two years time, and her father’s cup runneth over with pride and joy.

Due to scheduling constraints, we actually celebrated her birthday on Tuesday. A few months back I asked Madison what she wanted to do for her birthday. “I want to ride Leo the horse!”, she responded without hesitation. So that’s exactly what we did. Continue reading “Transcending Politics”

The Only Debate Topic That Matters

submitted by jwithrow.
Click here to get the Journal of a Wayward Philosopher by Email

Journal of a Wayward Philosopher
The Only Debate Topic That Matters

September 29, 2016
Hot Springs, VA

Loading up the nation with debt and leaving it for the following generations to pay is morally irresponsible. Excessive debt is a means by which governments oppress the people and waste their substance. No nation has a right to contract debt for periods longer than the majority contracting it can expect to live. ” – Thomas Jefferson

The S&P closed out Wednesday at $2,171. Gold closed at $1,327 per ounce. Crude Oil closed at $47.12 per barrel, and the 10-year Treasury rate closed at 1.57%. Bitcoin is trading around $605 per BTC today.

Dear Journal,

Nearly one-third of all Americans – almost 100 million people – tuned in to watch the first presidential debate earlier this week. This represents an increase in viewership by nearly 40% from the 2012 presidential debates, and it almost rivaled television’s biggest draw – the Super Bowl – which received 112 million viewers last year. Apparently the debate was aired on television throughout Europe as well.

I see these numbers and the first thing that pops into my head is a question: how in the world do the ratings agencies know how many people are sitting on the couch in front of a given television?

I didn’t spend too much time with this, but all of the numbers I have seen reference “viewers” and “people”, not “households”. They are very specific about this.

I can’t help but think about poor Winston in George Orwell’s 1984 – he sits down in front of his telescreen and while he is watching it, it is also watching him… Continue reading “The Only Debate Topic That Matters”

The Zenconomics Report June Issue

submitted by jwithrow.
Click here to get the Journal of a Wayward Philosopher by Email

Journal of a Wayward Philosopher
Zenconomics Report June Dispatch

June 28, 2016
Hot Springs, VA

The S&P closed out Monday at $2,000. Gold closed at $1,330 per ounce. Crude Oil closed at $46.71 per barrel, and the 10-year Treasury rate closed at 1.46%. Bitcoin is trading around $650 per BTC today.

Dear Journal,

There will be no official entry today. Instead, I would like to invite you to subscribe to the Zenconomics Report in time to receive our first official issue. We will be sending out the monthly dispatch on June 30 to members of the Zenconomics Report mailing list.

The Zenconomics Report will cut through all of the noise, clap-trap, hoop-la, misinformation, and propaganda circling the financial markets. The financial media typically analyzes the markets from a binary perspective of “good versus bad”, often with an underlying agenda to push. This does seekers of financial information a major disservice, and it sets them up to crash and burn when the next Black Swan makes its appearance.

The digital age has made information nearly free for everyone with an internet connection, but this created an unforeseen problem. With the flood gates of information open, how do you know what information is good and what information is not so good? Continue reading “The Zenconomics Report June Issue”

A Case for Monetary Independence

by Lucas M. Engelhardt – Mises Daily:monetary

“Sound money and free banking are not impossible — they are merely illegal. Freedom of money and freedom of banking are the principles that must guide our steps.” — Hans Sennholz

When I was asked to give the Hans Sennholz Memorial Lecture, I was uncertain what I should speak about. Should I give an inspirational, autobiographical talk about life as a young academic? Should I present cutting edge research? Should I advocate for better policy in some “hot” political topic? In the end, I looked at the title of the lecture — this was the Hans Sennholz Memorial Lecture. So, I decided that I should present something Sennholzian — especially since I am a Grove City College alumnus, though I was never a student of Sennholz — who had retired before I was a student here.

The only problem was that I knew embarrassingly little about Hans Sennholz. I had heard him speak — in the same room where I was going to speak — once. But, I only remembered two things about him. First, I remembered his German accent. Second, I remembered a brief story that he told about his experiences in academic publishing. Apparently, Harvard asked him to write an article — I don’t think he mentioned what — so he did, they published it, and he was paid $15 for his efforts. He thought this must be some mistake. Not much later, Harvard approached him again, so he wrote for them again — they printed it, and he received another $15. He decided to stop writing for Harvard. (Sennholz’s academic publishing experience is quite different from mine. I wrote an article that I sent to one of the American economic journals. They decided not to print it, and I paid them $100.)

Anyway, after realizing that I should discuss something Sennholzian, and realizing my own ignorance of Sennholz’s work, I hit the library and reserved every book by Sennholz in the state of Ohio’s library system. As I flipped through them: Age of Inflation; Debts and Deficits; The Great Depression: Will We Repeat It?; Money and Freedom a central theme emerged, and it’s the theme in the quote that I began with: Sound money and free banking. So, I hope to present to you today what I call a case for monetary independence — that is, a case for the separation of money and State. To make this case, I will consider a number of different institutional arrangements for how the monetary system may be organized.


Fully Dependent National Central Banks

Let’s start with the worst case — a central bank that is fully dependent on the political system. In effect, in such a system, the Treasury would have the power to create money at will. Economists generally agree that such a system would lead to very high rates of inflation. Government spending is popular — the left loves their social welfare programs, while the right likes funding a large military. However, taxes are politically unpopular — especially with those that have to pay them. So, it is unsurprising that governments typically run deficits. If the government were given direct control over money creation, one can expect that deficits would be funded largely by the creation of new money, as the effects of money creation are much easier to hide than the effects of taxation or decreases in spending.

The end result that economists expect with this framework is that hyperinflation becomes a very real possibility. Historically, hyperinflations tend to occur when large deficits are funded with money creation. This isn’t shocking — a $1 bill costs just about $0.07 to print, so money production is quite profitable. It’s a cheap way of raising funds for the government, and zeros are cheap. So, as prices go up and the money loses value, the Treasury can maintain their profits simply by adding zeros. Eventually, we end up with a Zimbabwe scenario. I have 180 trillion Zimbabwe dollars that I bought on eBay for $15 — and that included protective plastic sleeves. I suspect the sleeves are more valuable than the money inside them, but the point is: zeros are cheap. That being the case, there is virtually no limit to the inflation that a Treasury could create if it were giving the power to create money directly. For this reason, most economists now suggest that central banks should be independent.


Independent National Central Banks

In some ways, the claim that money should be independent of the State is a bit blasé. Over the past twenty or thirty years, the mainstream economics literature has converged around the idea that central banks — which govern monetary policy — should be independent of the governments that they operate under. Alberta Alesina and Larry Summers (Summers is the former Treasury Secretary under President Clinton, and former Director of the National Economic Council) found that independent central banks have better inflation performance — without having higher unemployment or more economic instability than countries with central banks that are less independent. Even President Obama has been clear that he supports a “strong and independent Federal Reserve” — an odd statement given that he has appointed all five of the current members of the Board of Governors, and appears to be looking to appoint more.

And the reality is that the Federal Reserve is not very independent. Dincer and Eichengreen, in a paper in the International Journal of Central Banking, ranked the United States’s Federal Reserve System as one of the four least independent central banks in the world — along with India, Singapore, and Saudi Arabia.

Beyond the institutional connections, there are clear policy connections between the Federal Reserve and government spending. After controlling for the state of the economy, a $1 deficit appears to be funded by about $0.30 of additional monetary base. So, while the Fed is not funding the government dollar-for-dollar, there does appear to be a very close connection between the two. The reason is simple: the Fed, under its current ideology, targets interest rates. If the government borrows a lot, it will drive interest rates up. So, the Fed produces more money to put into loan markets to drive rates back down to their target levels. The end effect is that the Fed is funding a significant portion of the government’s deficits.

So, is this any better than a fully dependent central bank? As many economists love to say — it depends. When the time comes, will the Fed decide to fight inflation rather than continue to fund government deficits? It is impossible to say for certain — though I will say two things. First, mainstream macroeconomists seem to have achieved a consensus that fighting inflation is a very important goal of monetary policy; perhaps the most important goal in most countries at most times. Second, the leadership of the Federal Reserve is convinced that, at the moment, inflation is not much of a concern. Whether they will change their minds in time, and have the political fortitude to stand up to a government that will, in all likelihood, still be deficit spending, is uncertain enough that I won’t speculate one way or the other.


Independent, Discretionary, International Central Banks

As we know, the Federal Reserve is not very independent. So, what does it take to make a central bank independent? Based on Nergiz Dincer and Barry Eichengreen’s research, the most independent central banks are mostly found in the Eurozone — where the European Central Bank is in control of monetary policy.

Is this international system a “better” one, though? Let’s take this to an extreme — an extreme which some people have suggested — and consider the benefits and drawbacks of such a system. Let us imagine that all central banks ceded their authority to the International Monetary Fund, which then acted as a single one-world central bank.

This system does, admittedly, have a number of very real benefits. Trade is certainly easier when there is a common currency. Decreased worries regarding exchange rate fluctuations encourage long-term investment projects across national boundaries, which can increase productivity by locating capital where it will be most productive, rather than where worries about currency stability are smallest. The IMF can be expected to be independent of any single government’s pressure to fund deficits — or at least more independent than a national central bank would be.

The drawbacks, however, are substantial. In his book The Tragedy of the Euro, Philipp Bagus suggests that the formation of the Eurozone created a tragedy of the commons in which weak economies — such as Greece, Portugal, and Spain — had incentives to run large budget deficits, funded, indirectly, by the European Central Bank. As the first recipients of newly created money, deficit-running economies can spend the money before it has its full impact on prices — thereby gaining at the expense of those countries that run more balanced budgets. This naturally creates an incentive for countries to run budget deficits — and, in fact, to compete for running the largest ones. This is a recipe for some combination of exceptionally high inflation — if the central bank were to accommodate the deficits or exceptionally high interest rates — if the central bank were to stand its ground.

While it may be that an international central bank could stand its ground more effectively than a national central bank could, recent experience in Europe raises questions about whether international central banks actually will stand their ground.

I want to make one last point about the danger of an entirely unified system: when doing risk management — and a lot of policy is really just risk management — one needs to pay attention to the worst case scenarios. As long as the central bank has discretion, the odds that — at some point in its history — the central bank is going to make a very large mistake is very high. The question then becomes: what is Plan B? We have seen in recent years that national-level hyperinflation, though terrible, has been fairly easy to recover from. The reason can best be seen by examining Zimbabwe. In its hyperinflationary episode in 2008, the internal economy of Zimbabwe was so disrupted that the gross national income per capita had fallen to its lowest level in forty years. However, since that time, gross national income per capital has more than doubled to its highest level since 1983. How did this happen? Zimbabweans abandoned their hyperinflated currency in favor of some combination of the euro, US dollar, and South African Rand — all of which were stable when compared to the Zimbabwe dollar. The adoption of a currency that is more stable gave people confidence to engage in market transactions again — which unfettered resources that had been largely unusable in a hyperinflationary environment.

This solution, though, required the existence of alternative currencies to switch to. What would happen if a single world central bank made a similar mistake? The answer is not at all clear, but I suggest that a worldwide hyperinflation, if it were to occur, would seriously disrupt the division of labor, and thereby lead to a collapse in the worldwide standard of living. The recovery would not be easy, as it would require the reintroduction of a new currency that is actually trusted by the people enough that they would accept it as a medium of exchange. Historically, some countries have succeeded at reintroducing a re-based form of their own currency — but there are also many cases, Zimbabwe among them — where the reintroduction failed.

Given, then, that there would be strong incentives toward hyperinflation, the odds of a hyperinflation actually occurring in a system with a single world central bank, at some point, are far from zero. In fact, given a sufficiently long time period, hyperinflation — or at least some form of serious monetary mismanagement — becomes highly likely. Is this risk worth the advantages? In my assessment, they are probably not.

Monetary Policy Rules

All that has been said thus far has assumed that money is produced by some human monetary policymaker that has some discretion about how much money they can produce. A popular alternative is a rule-based monetary policy. In this case, the political system sets up a monetary policy rule which, somehow, they are unable to alter. This rule then automatically decides what monetary policy should be.

There are several such rules that have been proposed. Milton Friedman’s constant money growth rule was one early — and remarkably simple — example. Friedman suggested that the money supply should grow at a constant rate near 3 or 5 percent. Given that production, on average, grows at a similar rate, this rate of growth will lead to an overall level of prices that is basically stable over the long run. Since Friedman, a number of other rules have been proposed. John Taylor famously proposed his rule which is based on a combination of recent inflation and the recent state of the economy relative to its long-term trend. Scott Sumner suggests what he calls Nominal GDP targeting — an idea not original to Sumner, nor does he claim it to be.

Rather than criticizing each of these individually, I will suggest a few difficulties with this institutional arrangement — regardless of the specific content of the rules.

The primary difficulty, of course, is the political one. Any political system that is strong enough to establish a monetary policy rule is strong enough to modify it — or discard it. So, what would it take for the monetary policy rule to be established and then left alone? We know that there are times that policymakers are actually strong enough to implement a policy, but would not be strong enough to eliminate it. I think of Social Security as an example. In this case, the policy created an interest group — and a popular one — that would fight for the policy to continue. Everyone loves their Grandma, and everyone’s Grandma loves Social Security — so it is such a popular program today that no politician would be willing to seriously attempt to eliminate it. For us to do this with monetary policy, we’d need to have a monetary policy rule that created a popular interest group that would resist any changes to that rule. How to do that is not clear to me — but I may just be uncreative at coming up with political solutions.

Even if we were to solve the political problem, these rules all share in common certain economic problems — primarily one of measurement error. Any use of economic data must acknowledge that discussing data from a scientific standpoint, such as saying that the overall price level will rise if the money supply increase sufficiently quickly, is different from saying that a particular measurement of that variable will act in a specific way. The Consumer Price Index, Producer Price Index, and GDP Deflator all seek to communicate the “overall price level” — but they all have weaknesses.

That is: the statistics that we can actually measure don’t align perfectly with the scientific conceptions that they are designed to estimate. In short: in reality, there is error in any macroeconomic measurement. For scientific purposes, this is something we can deal with. As long as our statistics are reasonably well correlated with the underlying reality that we care about, errors can be expected to, in a sense, cancel out, on average. So, as long as actual prices, on average, act like the CPI, and as long as the true money supply, on average, acts like M2, then any statistical connection between CPI and M2 would be expected, on average, to reflect the actual relationship between money and price levels.

But, policymaking is an entirely different matter — it’s far closer to engineering than science. That being the case, the errors are, in a sense, exactly what matter. If our measure of the money supply is temporarily undermeasuring the true money supply, then we’ll end up creating too much money under a Friedman rule. Is this temporary? Yes, but in the world of economics, temporary things are exactly those things that create economic disruptions.

An additional economic problem with these rules is that they assume that, in a sense, the world is, or should be, static. The Friedman Rule and Nominal GDP targeting both implicitly assume that overall price levels or total spending in the economy should not change. Why not? The Taylor Rule implicitly assumes that the equilibrium real interest rate in the economy should not change. Again, why not? The economic world is a dynamic one in which change is one of the very few constants. At its most fundamental level, economic activity is the use of resources to satisfy our preferences based on our technical know-how. But all three of these are in constant flux. We are continuously using, creating, exhausting, and discovering resources. We are continuously changing our preferences. Our technical know-how is continuously changing as we learn new things and unlearn others. Why then would we expect macroeconomic aggregates — even if we could measure them perfectly — to remain constant? So, rule-based policymaking has serious economic problems because of mismeasurement and the natural dynamism of the real world. Perhaps fortunately we will likely never experience these problems as the political problems with getting such rules established are likely to be insurmountable.


Market-Based Money

Our final stop in the spectrum of monetary independence is a truly independent currency — that is, a money that has no legal advantages or disadvantages when compared to other goods. In short: a free market in money where moneys are free to compete with one another to attain the favor of users. Anyone who wishes may introduce their own money — so I could print Engelhardt dollars in my basement — and try to convince people to use them. The only restriction would be that fraud would be banned — so no one else could mimic my Engelhardt dollars.

In such a system, I would expect that moneys would be governed by the normal, everyday actions of entrepreneurs that do so well satisfying so many of our desires. As they respond to demand and competition from other suppliers, the supply of money would grow at the pace that the market determines. If more of a particular money is demanded, that money will rise in value — increasing the profitability of producing it — leading those entrepreneurs that produce it to produce more, and drawing other entrepreneurs toward producing money that is similar — and therefore competitive — with that money.

As entrepreneurs respond to demand, one would expect that the value of a winning money is likely to be fairly stable over long periods of time — not perfectly stable, of course, as there is often a delay between a change in demand and changes in production to meet that demand. But, the market will reward those money producers that do the best job providing a money that people actually want to use.

As Sennholz observed in many of his writings, there’s something about gold that makes it a particularly good money. And that something is not just some undefinable “X Factor.” It’s a list of traits. As laid out in Sennholz’s Money and Freedom, gold is useful, but unessential, easily divisible, highly durable, storable and transportable. So, the fact that gold — in many cases operating alongside the remarkably similar, but somewhat less valuable silver — was, historically, what emerged as money on the free market. Like Sennholz, I also agree that it seems fairly likely that, if people were left to their own devices, they would again use gold as money.

The question then is: what would it take for us to establish a market-based money? When I first read Sennholz’s Inflation or Gold Standard? I read his plan for reform — and on nearly every step, I said to myself “Well, we’ve already done that.” Only a couple points remained. When Sennholz wrote Money and Freedom in 1985, his original intent was just to update Inflation or Gold Standard? — but he realized that the world had changed enough in the ten or so years since Inflation or Gold Standard? was written that a new book was required. So, he laid out a new plan for reform. It ends up very little has changed in the past thirty years — so Sennholz’s plan from 1985 is mostly still relevant to us today.

The first step: Legal tender laws must be repealed. Allow private debt payments to be written so that they can be repaid however the borrower and lender find acceptable. As Sennholz notes — this move isn’t really particularly radical. If the federal government wishes to receive its own fiat currency in payment for taxes, no one is preventing them from continuing to do so. If it prefers to borrow and repay in its own fiat currency, that is also fine. Similarly, if any private business or individual wishes to continue using paper dollars exclusively, they are free to do so. The only difference is that people would also be free NOT to deal in paper currency. To some degree, we already have this freedom in most of our transactions. When selling goods and services, businesses are permitted to refuse — or require — payment in any form they like. Legally in the US, only debt falls under the legal tender provision. Again, the legal change we’re asking for is not radical.

A second step is what I call “Honesty in Minting.” The US mint produces gold and silver coins — which have a legal tender value that is a small fraction of their metal value. Under Gresham’s Law, these coins are hoarded while paper money — which is worth far more in exchange than the paper it is printed on — is used as money. This should stop. Rather than stamping a Silver Liberty with a phony legal tender value, simply stamp it with its weight and purity. The back of a Silver Liberty should say 1 oz fine silver. I’d note that it already does include this — it just appends the rather silly “ONE DOLLAR” designation as well. This creates confusion for any business that may want to accept gold or silver coins by suggesting that the coin is worth one dollar when its metal value is worth far more than that. Simply eliminating the one dollar designation would make these coins far more usable in transactions, by allowing them to be traded for their fair value.

In addition to honesty in minting, additional freedom in the banking system would also make the market for money more competitive. For example, free entry in banking should be allowed. Banks should be free to accept deposits and offer check-writing and debit-card services denominated in any currency, or any commodity, that depositors and banks find acceptable.

Technically, you can have deposits in the US that are denominated in foreign currencies — but the minimum deposits tend to be prohibitively high — I found one account that you could open for a mere $50,000 or so. Allowing free entry for banks that specialize in foreign currencies would make the possibility of using alternative moneys real to more than just those that are exceptionally wealthy. In addition, banks should no longer be required to be members of the FDIC or Federal Reserve System. As with any organization, banks should be allowed to join if they believe that the benefits outweigh the costs, and not to join if they believe the costs outweigh the benefits.

Again, these are not radical moves. I am not calling for the end of the FDIC — though I confess that I would like to see it vanish. I am not calling for the abolition of the Federal Reserve — though, again, I am convinced that that would, on the whole, be a good thing. I am simply asking that these organizations be opened up to the normal market forces of competition from competitors who are free to enter or exit the market, producing innovative products that may operate alongside — or may replace — those products currently being provided by the Federal Reserve and FDIC.

I will close as I began, with Sennholz. The last paragraph of Money and Freedom declares to us:

Sound money and free banking are not impossible; they are merely illegal. This is why money must be deregulated. All financial institutions must be free again to issue their notes based on ordinary contract. In a free society, individuals are free to establish note-issuing banks and create private clearinghouses. In freedom, the money and banking industry can create sound and honest currencies, just as other free industries can provide efficient and reliable products. Freedom of money and freedom of banking, these are the principles that must guide our steps.

Article originally posted at

A Portrait of the Classical Gold Standard

by Marcia Christoff-Kurapovna – Mises Daily:gold standard

“The world that disappeared in 1914 appeared, in retrospect, something like our picture of Paradise,” wrote the economist Cecil Hirsch in his June 1934 review of R.W. Hawtrey’s classic, The Art of Central Banking (1933). Hirsch bemoaned the loss of the far-sighted restraint that had once prevailed among the “bankers’ banks” of the West, concluding that modern times “had failed to attain the standard of wisdom and foresight that prevailed in the 19th century.”

That wisdom and foresight was once upon a time institutionalized throughout an international monetary culture — gold-based, wary of credit, and contemptuous of debt, public or private. This world included central banks including the Bank of England, the Bank of France, the Swiss National Bank, the early Federal Reserve, the Imperial Bank of Austria-Hungary, and the German Reichsbank. But the entrenched hard-money ideology of the time restrained all of them. The Bank of Russia, for example, which once required 50 percent to 100 percent gold backing of all notes issued, possessed the second largest gold reserves on the planet at the turn of the twentieth century.

“The countries that were tied together in the gold standard system represented to a not inconsiderable degree a community of interest in and responsibility for the maintenance of economic and financial stability throughout the world,” recounted Aldoph C. Miller, member of the Federal Reserve Board from 1914 to 1936, in The Proceedings of the Academy of Political Science, in May 1936. “The gold standard was the one outstanding symbol of unity and economic solidarity which the nineteenth century world had developed.”

It was a time when “automatic market forces,” as economists of the day referred to them, prevailed over monetary management. Redeemability of money in (fine) gold ensured, within limits, stability in foreign exchange rates. Credit was extended only as far as reserve ratios would allow, and central banks were required to keep fixed reserves of gold against notes-in-circulation and against demand deposits.


When Markets Dominated Monetary “Policy”

Gold flows regulated international price relationships through markets, which adjusted themselves accordingly: prices rose when there was an influx of gold — for example, when one country received a debt payment from another country (always in gold), or during such times as the California or Australian gold rushes of the 1870s. These inflows meant credit expansion and a rise in prices. An outflow of gold meant credit was contracted and price deflation followed.

The efficiency of that standard was not impeded by the major central banks in such a way that “any disturbance of economic or financial character originating at any point in the world which might threaten the continued maintenance of economic equilibrium was quickly detected by foreign exchanges,” Miller, the Federal Reserve board member, noted in his paper. “In this way, the gold standard system became in a very real sense a regime or rule of economic health, a method of catching economic disturbances in the bud.”

The Bank of England, the grand master of them all, was the financial center of the universe, whose tight handle on its credit policies was so disciplined that the secured the top spot while not even holding the largest gold reserves. Consistent in its belief that protection of reserves was the chief, and only important, criterion of credit policy, England became the leading exporter of capital, the free market for gold, the international discount market, and international banker for the trade of other countries, as well as her own. The world was in this sense on the sterling standard.

The Bank of France, wisely admonished by its founder, Napoleon, to make sure France was always a creditor country, was so replete with reserves it made England a 500 million franc loan (in 1915 numbers) at the onset of the World War I. Switzerland, perhaps the last “19th-century-style” hold-out today with unlimited-liability private bankers and strict debt-ceiling legislation, also required high standards of its National Bank, founded in 1907. By the 1930s that country had higher banking reserves than the US; the Swiss franc was never explicitly devalued, unlike nearly every other Western nation’s currency, and the country’s domestic price level remained the most stable in the world.

For a time, the disciplined mindset of these banks found its way across the Atlantic, where the idea of a central bank had been long the subject of hot debate in the US. The economist H. Parker Willis, writing about the controversy in The Journal of the Proceedings of the Academy of Political Science, October 1913, admonished: “The Federal Reserve banks are to be ‘bankers’ banks,’ and they are intended to do for the banker what he himself does for the public.”

At first, the advice was heeded: in September 1916, almost two years after its founding on December 23,1913, the fledgling Fed worked out an amendment to its gold policy on the basis of a very conservative view of credit. This new policy sought to restrain “the undue and unnecessary expansion of credit,” wrote Fed board member Miller, in an article for The American Economic Review, in June 1921.

The Bank of Russia, during the second half of the nineteenth century steered itself through the Crimean War, the Russo-Turkish War, the Russo-Japanese War, impending Balkan wars — not to mention all that was to follow — and managed to emerge with sound fiscal policies and massive gold reserves. According to The Economist of May 20, 1899, Russian holdings were 95 million pounds sterling of gold, while the Bank of France held 78 million sterling worth. (Austria-Hungary held 30 million sterling worth of gold and the Bank of England 30 million sterling worth of both gold and silver.) “Russia up to the very moment of rupture [with Japan, 1904–1905], was working imperturbably at the progressive consolidation of her finances,” reported Karl Helfferich of the University of Berlin, at a meeting of The Royal Economic Society [UK] in December 1904. “Even in years of industrial crises and defective harvest, her foreign trade showed an excess of exports over imports more than sufficient to compensate payments sent abroad. And, as guarantee her monetary system she has succeeded in a amassing and maintaining a vast reserve of gold.”

These banks, in turn, drew on the medieval/Renaissance and Baroque-era banking traditions of the Hanseatic League, the Bank of Venice, and Amsterdam banks. Payment-on-demand “in good and heavy gold” was like a blood-oath binding the banker-client relationship. The transfer of credit “did not arise from any such substitution of credit for money,” noted Charles F. Dunbar, in The Quarterly Journal of Economics of April 1892, “but from the simple fact that the transfer in-bank saved the necessity of counting coin and manual delivery of every transaction.”

Bankers were forbidden to deal in certain commodities, could not make loans or create credit for the purchase of such commodities, and forbade both foreigners and citizens from buying silver on credit unless the same amount in cash was in the bank. According to Dunbar, a Venetian law of 1403 on reserve requirements became the basis of US banking law on the deposits of public securities in the late 1800s.

After the fall of bi-metallism in the 1870s, gold continued to perform monetary functions among the main countries of the Western world (and the well-administered Bank of Japan). It was the only medium of exchange and the only currency with unrestricted legal tender. It became the vaunted “measure of value.” Bank currency notes were simply used as auxiliary to gold and, in general, did not enjoy the privilege of legal tender.


The End of An Era

It was certainly not a flawless system, or without periodic crises. But central banks had to act in an exceptionally prudent manner given the all-over public distrust of paper money.

As economist Andrew Jay Frame of the University of Chicago, writing in The Journal of Political Economy, in January 1912, noted: “During panics in Britain in 1847 and 1866, when cash payments were suspended, the floodgates of cash were opened [by The Bank of England], the governor sent word to the street that solvent banks would be accommodated, and the panic was relieved.” Frame then adds: “However, this extra cash and the increased loans that went with it were very quickly put to an end to avoid credit expansion.”

The US was equally confident of its prudent attitude. Aldoph Miller, writing of Federal Reserve policy, remarked: “The three chief elements of the policy of a central bank or system of reserve holding institutions are best disclosed in connection with the attitude towards 1) gold 2) currency 3) credit.” He noted proudly: “The federal reserve system has met [these] tests on the whole with remarkable success.”

But after World War I, a different international landscape was left behind. England had been displaced as the center of international finance; the US and France emerged as the chief post-war creditor countries. The mechanism of the gold standard to which depreciated currencies could be related no longer existed. Only the US was left with a full gold standard. England and France had a gold bullion standard and other countries (Germany, primarily) had a gold-exchange standard.

A matrix of unbalanced trade relationships began to saturate the international economy. Then, with so many foreign countries attendant upon its speculative boom, the US manipulated its own domestic credit policies to ease credit and exchange-standard controls. This eventually culminated in an international financial crisis of 1931. Under Bretton Woods (1944), the gold standard was effectively abandoned: domestic convertibility was illegal and the role of gold was very constrained in favor of the dollar.

“It was, at least in theory, simple enough in the old days,” wrote a wistful W. Randolph Burgess, head of the New York Federal Reserve, in 1938. “In the present strange new world, where the old gold portents have lost their former meaning, where is the radio beam which the central banker may follow? What is the equivalent of gold?”

The men of his era and of the late nineteenth century understood the meaning of such a question and, more importantly, why it is one that must be asked. But theirs was a different world, indeed — one without “QE,” ZIRP,” or “Unknown Knowns” as fiscal policy. And there were no helicopters, either.

Article originally posted at

Don’t Be Fooled by the Federal Reserve’s Anti-Audit Propaganda

by Ron Paul – Ron Paul Institute for Peace and Prosperity:Ron Paul

In recent weeks, the Federal Reserve and its apologists in Congress and the media have launched numerous attacks on the Audit the Fed legislation. These attacks amount to nothing more than distortions about the effects and intent of the audit bill.

Fed apologists continue to claim that the Audit the Fed bill will somehow limit the Federal Reserve’s independence. Yet neither Federal Reserve Chair Janet Yellen nor any other opponent of the audit bill has ever been able to identify any provision of the bill giving Congress power to dictate monetary policy. The only way this argument makes sense is if the simple act of increasing transparency somehow infringes on the Fed’s independence.

This argument is also flawed since the Federal Reserve has never been independent from political pressure. As economists Daniel Smith and Peter Boettke put it in their paper “An Episodic History of Modern Fed Independence,” the Federal Reserve “regularly accommodates debt, succumbs to political pressures, and follows bureaucratic tendencies, compromising the Fed’s operational independence.”

The most infamous example of a Federal Reserve chair bowing to political pressure is the way Federal Reserve Chairman Arthur Burns tailored monetary policy to accommodate President Richard Nixon’s demands for low interest rates. Nixon and Burns were even recorded mocking the idea of Federal Reserve independence.

Nixon is not the only president to pressure a Federal Reserve chair to tailor monetary policy to the president’s political needs. In the fifties, President Dwight Eisenhower pressured Fed Chairman William Martin to either resign or increase the money supply. Martin eventually gave in to Ike’s wishes for cheap money. During the nineties, Alan Greenspan was accused by many political and financial experts — including then-Federal Reserve Board Member Alan Blinder — of tailoring Federal Reserve policies to help President Bill Clinton.

Some Federal Reserve apologists make the contradictory claim that the audit bill is not only dangerous, but it is also unnecessary since the Fed is already audited. It is true that the Federal Reserve is subject to some limited financial audits, but these audits only reveal the amount of assets on the Fed’s balance sheets. The Audit the Fed bill will reveal what was purchased, when it was acquired, and why it was acquired.

Perhaps the real reason the Federal Reserve fears a full audit can be revealed by examining the one-time audit of the Federal Reserve’s response to the financial crisis authorized by the Dodd-Frank law. This audit found that between 2007 and 2010 the Federal Reserve committed over $16 trillion — more than four times the annual budget of the United States — to foreign central banks and politically influential private companies. Can anyone doubt a full audit would show similar instances of the Fed acting to benefit the political and economic elites?

Some fed apologists are claiming that the audit bill is part of a conspiracy to end the Fed. As the author of a book called End the Fed, I find it laughable to suggest that I, and other audit supporters, are hiding our true agenda. Besides, how could an audit advance efforts to end the Fed unless the audit would prove that the American people would be better off without the Fed? And don’t the people have a right to know if they are being harmed by the current monetary system?

For over a century, the Federal Reserve has operated in secrecy, to the benefit of the elites and the detriment of the people. It is time to finally bring transparency to monetary policy by auditing the Federal Reserve.

Article originally posted at The Ron Paul Institute for Peace and Prosperity.

Risk Update: Belief in Central Bank Proclamations

by Jeff Clark – Hard Assets Alliance :central bank proclamations

Did you know that just two days before the SNB announced they would no longer peg their currency to the euro, SNB VP Jean-Pierre Danthine stated the following to Swiss broadcaster RTS?

“We’re convinced that the cap on the franc must remain the pillar of our monetary policy.”

They changed their mind in 48 hours? Far more likely is that they didn’t want to telegraph the move in advance.

What about the massive QE effort undertaken by the ECB—should we be confident this will solve their problems? No, because according to French bank Société Générale, it isn’t big enough!

The potential amount of QE needed is €2-€3 trillion. Hence, for inflation to reach close to a 2.0% threshold medium term, the potential amount of asset purchases needed is €2-€3 trillion, not a mere €1 trillion.

That is ludicrous and what we should expect from those that view the world through an economic model. The fact that many investors also see this insanity for what it is partially accounts for gold’s positive response…

• “The belief in central banks as the providers of market stability suffered a serious blow last week.” (Chief commodity strategist Ole Hansen at Danish bank Saxo)

• “But to think the ECB has a magic wand and will change all the situation in Europe by its magic wand, in my opinion is not the appropriate reasoning.” (Jean-Claude Trichet, Mario Draghi’s predecessor
at the ECB, who can now speak freely about central bank actions)

What about the US Fed balance sheet?

“The Fed’s balance sheet is a pile of tinder, but it hasn’t been lit… inflation will eventually have to rise.” (Former US Federal Reserve Chairman Alan Greenspan, who can now also speak freely)

By the way, he added this in the same interview:

Question: “Where will the price of gold be in five years?”
Greenspan: “Higher.”
Question: “How much?”
Greenspan: “Measurably.”

What all this means to us is that it’s dangerous to your wealth to believe central banker proclamations (at least while they’re in office). Gold, in spite of its volatility, is more trustworthy—it answers to no one, can’t be created with the click of a button, and has never required the credit guarantee of a third party.

Article originally posted in the February issue of Smart Metals Investor at

The Folly of the Fed’s Central Planning

by Ron Paul – Ron Paul Institute for Peace and Prosperity:Ron Paul

Over the last 100 years the Fed has had many mandates and policy changes in its pursuit of becoming the chief central economic planner for the United States. Not only has it pursued this utopian dream of planning the US economy and financing every boondoggle conceivable in the welfare/warfare state, it has become the manipulator of the premier world reserve currency.

As Fed Chairman Ben Bernanke explained to me, the once profoundly successful world currency – gold – was no longer money. This meant that he believed, and the world has accepted, the fiat dollar as the most important currency of the world, and the US has the privilege and responsibility for managing it. He might even believe, along with his Fed colleagues, both past and present, that the fiat dollar will replace gold for millennia to come. I remain unconvinced.

At its inception the Fed got its marching orders: to become the ultimate lender of last resort to banks and business interests. And to do that it needed an “elastic” currency. The supporters of the new central bank in 1913 were well aware that commodity money did not “stretch” enough to satisfy the politician’s appetite for welfare and war spending. A printing press and computer, along with the removal of the gold standard, would eventually provide the tools for a worldwide fiat currency. We’ve been there since 1971 and the results are not good.

Many modifications of policy mandates occurred between 1913 and 1971, and the Fed continues today in a desperate effort to prevent the total unwinding and collapse of a monetary system built on sand. A storm is brewing and when it hits, it will reveal the fragility of the entire world financial system.

The Fed and its friends in the financial industry are frantically hoping their next mandate or strategy for managing the system will continue to bail them out of each new crisis.

The seeds were sown with the passage of the Federal Reserve Act in December 1913. The lender of last resort would target special beneficiaries with its ability to create unlimited credit. It was granted power to channel credit in a special way. Average citizens, struggling with a mortgage or a small business about to go under, were not the Fed’s concern. Commercial, agricultural, and industrial paper was to be bought when the Fed’s friends were in trouble and the economy needed to be propped up. At its inception the Fed was given no permission to buy speculative financial debt or U.S. Treasury debt.

It didn’t take long for Congress to amend the Federal Reserve Act to allow the purchase of US debt to finance World War I and subsequently all the many wars to follow. These changes eventually led to trillions of dollars being used in the current crisis to bail out banks and mortgage companies in over their heads with derivative speculations and worthless mortgage-backed securities.

It took a while to go from a gold standard in 1913 to the unbelievable paper bailouts that occurred during the crash of 2008 and 2009.

In 1979 the dual mandate was proposed by Congress to solve the problem of high inflation and high unemployment, which defied the conventional wisdom of the Phillips curve that supported the idea that inflation could be a trade-off for decreasing unemployment. The stagflation of the 1970s was an eye-opener for all the establishment and government economists. None of them had anticipated the serious financial and banking problems in the 1970s that concluded with very high interest rates.

That’s when the Congress instructed the Fed to follow a “dual mandate” to achieve, through monetary manipulation, a policy of “stable prices” and “maximum employment.” The goal was to have Congress wave a wand and presto the problem would be solved, without the Fed giving up power to create money out of thin air that allows it to guarantee a bailout for its Wall Street friends and the financial markets when needed.

The dual mandate was really a triple mandate. The Fed was also instructed to maintain “moderate long-term interest rates.” “Moderate” was not defined. I now have personally witnessed nominal interest rates as high as 21% and rates below 1%. Real interest rates today are actually below zero.

The dual, or the triple mandate, has only compounded the problems we face today. Temporary relief was achieved in the 1980s and confidence in the dollar was restored after Volcker raised interest rates up to 21%, but structural problems remained.

Nevertheless, the stock market crashed in 1987 and the Fed needed more help. President Reagan’s Executive Order 12631 created the President’s Working Group on Financial Markets, also known as the Plunge Protection Team. This Executive Order gave more power to the Federal Reserve, Treasury, Commodity Futures Trading Commission, and the Securities and Exchange Commission to come to the rescue of Wall Street if market declines got out of hand. Though their friends on Wall Street were bailed out in the 2000 and 2008 panics, this new power obviously did not create a sound economy. Secrecy was of the utmost importance to prevent the public from seeing just how this “mandate” operated and exactly who was benefiting.

Since 2008 real economic growth has not returned. From the viewpoint of the central economic planners, wages aren’t going up fast enough, which is like saying the currency is not being debased rapidly enough. That’s the same explanation they give for prices not rising fast enough as measured by the government-rigged Consumer Price Index. In essence it seems like they believe that making the cost of living go up for average people is a solution to the economic crisis. Rather bizarre!

The obsession now is to get price inflation up to at least a 2% level per year. The assumption is that if the Fed can get prices to rise, the economy will rebound. This too is monetary policy nonsense.

If the result of a congressional mandate placed on the Fed for moderate and stable interest rates results in interest rates ranging from 0% to 21%, then believing the Fed can achieve a healthy economy by getting consumer prices to increase by 2% per year is a pie-in-the-sky dream. Money managers CAN’T do it and if they could it would achieve nothing except compounding the errors that have been driving monetary policy for a hundred years.

A mandate for 2% price inflation is not only a goal for the central planners in the United States but for most central bankers worldwide.

It’s interesting to note that the idea of a 2% inflation rate was conceived 25 years ago in New Zealand to curtail double-digit price inflation. The claim was made that since conditions improved in New Zealand after they lowered their inflation rate to 2% that there was something magical about it. And from this they assumed that anything lower than 2% must be a detriment and the inflation rate must be raised. Of course, the only tool central bankers have to achieve this rate is to print money and hope it flows in the direction of raising the particular prices that the Fed wants to raise.

One problem is that although newly created money by central banks does inflate prices, the central planners can’t control which prices will increase or when it will happen. Instead of consumer prices rising, the price inflation may go into other areas, as determined by millions of individuals making their own choices. Today we can find very high prices for stocks, bonds, educational costs, medical care and food, yet the CPI stays under 2%.

The CPI, though the Fed currently wants it to be even higher, is misreported on the low side. The Fed’s real goal is to make sure there is no opposition to the money printing press they need to run at full speed to keep the financial markets afloat. This is for the purpose of propping up in particular stock prices, debt derivatives, and bonds in order to take care of their friends on Wall Street.

This “mandate” that the Fed follows, unlike others, is of their own creation. No questions are asked by the legislators, who are always in need of monetary inflation to paper over the debt run up by welfare/warfare spending. There will be a day when the obsession with the goal of zero interest rates and 2% price inflation will be laughed at by future economic historians. It will be seen as just as silly as John Law’s inflationary scheme in the 18th century for perpetual wealth for France by creating the Mississippi bubble – which ended in disaster. After a mere two years, 1719 to 1720, of runaway inflation Law was forced to leave France in disgrace. The current scenario will not be precisely the same as with this giant bubble but the consequences will very likely be much greater than that which occurred with the bursting of the Mississippi bubble.

The fiat dollar standard is worldwide and nothing similar to this has ever existed before. The Fed and all the world central banks now endorse the monetary principles that motivated John Law in his goal of a new paradigm for French prosperity. His thesis was simple: first increase paper notes in order to increase the money supply in circulation. This he claimed would revitalize the finances of the French government and the French economy. His theory was no more complicated than that.

This is exactly what the Federal Reserve has been attempting to do for the past six years. It has created $4 trillion of new money, and used it to buy government Treasury bills and $1.7 trillion of worthless home mortgages. Real growth and a high standard of living for a large majority of Americans have not occurred, whereas the Wall Street elite have done quite well. This has resulted in aggravating the persistent class warfare that has been going on for quite some time.

The Fed has failed at following its many mandates, whether legislatively directed or spontaneously decided upon by the Fed itself – like the 2% price inflation rate. But in addition, to compound the mischief caused by distorting the much-needed market rate of interest, the Fed is much more involved than just running the printing presses. It regulates and manages the inflation tax. The Fed was the chief architect of the bailouts in 2008. It facilitates the accumulation of government debt, whether it’s to finance wars or the welfare transfer programs directed at both rich and poor. The Fed provides a backstop for the speculative derivatives dealings of the banks considered too big to fail. Together with the FDIC’s insurance for bank accounts, these programs generate a huge moral hazard while the Fed obfuscates monetary and economic reality.

The Federal Reserve reports that it has over 300 PhD’s on its payroll. There are hundreds more in the Federal Reserve’s District Banks and many more associated scholars under contract at many universities. The exact cost to get all this wonderful advice is unknown. The Federal Reserve on its website assures the American public that these economists “represent an exceptional diverse range of interest in specific area of expertise.” Of course this is with the exception that gold is of no interest to them in their hundreds and thousands of papers written for the Fed.

This academic effort by subsidized learned professors ensures that our college graduates are well-indoctrinated in the ways of inflation and economic planning. As a consequence too, essentially all members of Congress have learned these same lessons.

Fed policy is a hodgepodge of monetary mismanagement and economic interference in the marketplace. Sadly, little effort is being made to seriously consider real monetary reform, which is what we need. That will only come after a major currency crisis.

I have quite frequently made the point about the error of central banks assuming that they know exactly what interest rates best serve the economy and at what rate price inflation should be. Currently the obsession with a 2% increase in the CPI per year and a zero rate of interest is rather silly.

In spite of all the mandates, flip-flopping on policy, and irrational regulatory exuberance, there’s an overwhelming fear that is shared by all central bankers, on which they dwell day and night. That is the dreaded possibility of DEFLATION.

A major problem is that of defining the terms commonly used. It’s hard to explain a policy dealing with deflation when Keynesians claim a falling average price level – something hard to measure – is deflation, when the Austrian free-market school describes deflation as a decrease in the money supply.

The hysterical fear of deflation is because deflation is equated with the 1930s Great Depression and all central banks now are doing everything conceivable to prevent that from happening again through massive monetary inflation. Though the money supply is rapidly rising and some prices like oil are falling, we are NOT experiencing deflation.

Under today’s conditions, fighting the deflation phantom only prevents the needed correction and liquidation from decades of an inflationary/mal-investment bubble economy.

It is true that even though there is lots of monetary inflation being generated, much of it is not going where the planners would like it to go. Economic growth is stagnant and lots of bubbles are being formed, like in stocks, student debt, oil drilling, and others. Our economic planners don’t realize it but they are having trouble with centrally controlling individual “human action.”

Real economic growth is being hindered by a rational and justified loss of confidence in planning business expansions. This is a consequence of the chaos caused by the Fed’s encouragement of over-taxation, excessive regulations, and diverting wealth away from domestic investments and instead using it in wealth-consuming and dangerous unnecessary wars overseas. Without the Fed monetizing debt, these excesses would not occur.

Lessons yet to be learned:

1. Increasing money and credit by the Fed is not the same as increasing wealth. It in fact does the opposite.

2. More government spending is not equivalent to increasing wealth.

3. Liquidation of debt and correction in wages, salaries, and consumer prices is not the monster that many fear.

4. Corrections, allowed to run their course, are beneficial and should not be prolonged by bailouts with massive monetary inflation.

5. The people spending their own money is far superior to the government spending it for them.

6. Propping up stock and bond prices, the current Fed goal, is not a road to economic recovery.

7. Though bailouts help the insiders and the elite 1%, they hinder the economic recovery.

8. Production and savings should be the source of capital needed for economic growth.

9. Monetary expansion can never substitute for savings but guarantees mal–investment.

10. Market rates of interest are required to provide for the economic calculation necessary for growth and reversing an economic downturn.

11. Wars provide no solution to a recession/depression. Wars only make a country poorer while war profiteers benefit.

12. Bits of paper with ink on them or computer entries are not money – gold is.

13. Higher consumer prices per se have nothing to do with a healthy economy.

14. Lower consumer prices should be expected in a healthy economy as we experienced with computers, TVs, and cell phones.

All this effort by thousands of planners in the Federal Reserve, Congress, and the bureaucracy to achieve a stable financial system and healthy economic growth has failed.

It must be the case that it has all been misdirected. And just maybe a free market and a limited government philosophy are the answers for sorting it all out without the economic planners setting interest and CPI rate increases.

A simpler solution to achieving a healthy economy would be to concentrate on providing a “SOUND DOLLAR” as the Founders of the country suggested. A gold dollar will always outperform a paper dollar in duration and economic performance while holding government growth in check. This is the only monetary system that protects liberty while enhancing the opportunity for peace and prosperity.

Article originally posted at The Ron Paul Institute for Peace and Prosperity.

Book Excerpt: Set Money Free

submitted by jwithrow.51aY6kQeBpL._SY344_BO1,204,203,200_

The following is an excerpt from Chris Rossini’s new book titled “Set Money Free: What Every American Needs to Know About the Federal Reserve”. Chris does a magnificent job of breaking down the Federal Reserve System, monetary policy, and free market economics in a way that is comprehensive yet easy to understand. Chris also had the foresight to lay the book out as a quick-reference guide which makes it a tremendous tool to have on hand. Continue reading “Book Excerpt: Set Money Free”