I'm reading Greaves, and I'm confused. I need help...

Economics Economics Questions
1

I’m reading Percy Greaves “Understanding the dollar crisis” and I am totally lost. I am reading chapter 6 “The Cause of the Great Depression.” I became totally lost and confused when I reached page 190 where Greaves explains how the “three-name short-term paper” system works. SOCIALISM SUCKS. IT makes things way to f***in complicated. For instance…

“A typical transaction (under the “three-name short-term paper” system) might be the Ford Motor COmpany selling FOrds to a dealer in San Francisco. The dealer would sign a note in which he agreed to pay for these cars at the end of ninety days. Then, if the Ford Motor Company did not want to wait ninety days for its money, it would take this note to its bank. It would endorse the note and discount it at the current rate of interest. It would then get the money, less the interest charged. Then if the bank should need more cash, the bank could take this note to its Federal Reserve for Federal Reserve Notes. Everybody would then be happy, and when the Ford dealer paid off the note, Federal Reserve Notes equal to the amount of the loan would be withdrawn from circulation.”

-First of all, what is meant by the Ford motor company “discounting the note at the current rate of interest?”

-What is meant by “current rate of interest?”

-What is meant by “less the interest charged?”

-What is meant by the “federal reserve discount rate?”

-Why would the bank take the note to the federal reserve?

HELP!!! I’m CONFUSED

Either Greaves sucks as a teacher, or I’m just an idiot, or socialism makes things way too complicated.

LONG LIVE LAISSEZ-FAIRE!!!

I don’t understand this at all. Probably b/c that is the method behind socialism. Make s*** so complicated for people that they just don’t care enough to know any better. sigh anyways, if somebody could please explain this to me I would greatly appreciate it. Thanks.

2

BTW I hate Socialism, too. But these ideas have nothing to do with socialism. They have to do with banking in general.

3

Oh OK, so I was making it out to be more complicated than what it was. And yes, these ideas with interest don’t have anything to do with socialism. I was cramming a little too much reading into one day. Plus, in case you couldn’t tell, I’m a novice when it comes to monetary policy, hence why I’m reading the book I am reading. Thanks a bunch. To me, anything having to do w/ the federal reserve is socialist. Karl Marx, as I’m sure you know, considered a central bank as one of the primary means to his utopia. Economics, I’m finding, as simple as it may be, when you consider human action, can easily be turned into rocket science when the natural laws of human action are manipulated.

So basically, to put it in the simplest of terms, the initial purpose of the federal reserve was:

  • To “sort of” print money out of thin air and give it to banks so they could give out loans.

  • Once those loans were paid off by the borrowers, the banks/lenders would then give that money --less the interest-- back to the Federal Reserve.

  • The Federal Reserve would then keep that money out of circulation to avoid inflation.

And one more question…

Right before World War II, 40% of every reserve note was backed by gold. Would I be correct in saying that this policy is completely bogus. Because, first of all, value is subjective, meaning, it cannot be measured by any unit, just like you can’t measure love. When I see things like, “the market value of gold has risen to $1,100 an ounce”, who the hell determines this stuff? How can you mathematically determine this stuff when value is naturally subjective? Meaning, value changes from person to person, from hour to hour, from place to place. Everybody is different.

So sorry for the mouthful. I don’t mean to sound pushy, but I am dieing to learn this stuff. Thank you so much for taking the time to read my never ending questions. You are awesome. Seriously. [:)]

4

I have read another ten pages ahead and I have what seems like another 20 questions to ask. It deals with the behavior of the fed during WW I. If you don’t have the time to sit and read all of my questions I understand.

5

TY for the kind words.[:)]

If you are dying to learn this stuff, are you reading the easy intro material? Like What has Govt Done to Our Money, by Rothbard. Economics in one Lewsson, by Hazllit. And there is a very informative video about the Fed by the Mises organization, dont remember the name, but a search will turn it up.

The purpose of the Fed [if I remember right] was

  1. To be a “lender of last resort.” Say a bank was in such horrible shape that no other bank would be foolish enough to risk lending it money it desperately needed? Answer: The new Federal Reserve Bank, meaning the taxpayer would be the dummy who gives them money.

  2. To print more money all the time, and give it to the govt and the banks for free.

  3. To make sure the big banks faced less competition from each other and from small banks by making them all play by the new rules imposed by the Fed. Every bank has to be a member of the Fed, or deposit money in a bank that is a member.

The Fed is not interested in avoiding inflation. Why this is so depends on if you believe Austrian or Keynesian economics.

According to Keynesian economics, all problems are caused by people not spending money. Inflation makes sure they spend, because if they save, their money will go down in value as time goes on.

According to AE, inflation is having more money in existence than before. This will cause prices to be higher than they were, obviously. But the govt and the banks dont care. They get the money first, hot off the presses, and spend it before prices go up. After all, it is their very spending which causes prices to go up AFTER they have finished.

Value is subjective means every single person has a different price he is willing to pay for a given thing, say a gallon of milk. But there is only one price in the supermarket for the milk. It is determined by supply and demand, meaning the sellers best guest of what price will make him the most money by attracting more customers and yet getting a good price from them.

Similarly, when gold is $1100 an ounce, it means that someone is willing to actually sell his gold for $1100 an ounce to anyone who wants it, but no one [in the market where gold is bought and sold] is willing to sell it for less. I don’t know much about this, but there is apparently a meeting place place where gold is bought and sold, just like stocks are bought and sold at the NY Stock Exchange, for example. Naturally, nowadays it can be done online.

When they say that a reserve note is backed by gold, it means that the govt or the bank has promised that you can walk into an office somewhere and trade in your paper money for real live shiny gold. This is no longer the case for any money in the world, I think. It stopped being so for the dollar in 1971.

I don’t know anything about Greaves’ book. You sound like you are just beginning your search for knowledge on these fascinating matters. Are you sure that book is the place to begin?

6

Ask away. It’s a good quiz for me. If I tire, you’ll be the first to know [wink].

7

Again thanks a million. Your answers were helpfull. Well, first, i read Ron Paul’s “Audit the Fed” book. On the back of his book, he has a highly recommended reading list. There were four books at the beginner level. One of them was Rothbard’s “What has government done to our money.” Another one in the beginner list was Percy Greaves “Understanding the dollar crisis” (the book I am reading now). This particular book is litterally an entire one week seminar, greaves gave to a college in Buenos Aires. The book is 300 pages. The first 200 pages I have read. So far–up till around page 200 the material is pretty simple to understand becasue it mostly focuses on Human Action and pre-central bank monetary policy. Greaves doesn’t get into central banks until around page 200…which is where I am at right now…hence my confusion LOL. So again, thank you so much for breaking things down for me. I have turned monetary policy into my very own unhealthy obsession. Just ask my wife. She’ll tell ya.

8

And yes, i have read Hazlitt’s “Economics in one Lesson.” As a matter of fact, I read it right before I started reading the book I am reading right now. I guess, the main reason why I am so confused is b/c in his book, Hazlitt stresses how the free market can’t be determined using charts, graphs and statistics. The free market just simply is what is, kind of like an ecosystem. Disrupt its natural balance (human action) and you create this snowball effect of chaos.

9

As Walter Block once said, all a graph type prediction can do is extend a staright line into the future.

LOL. How would a guy in the sixties know to insert into his graph of the furutre “Bill Gates invents Windows here.” “Cell phone invented here.” “Russian empire collapses here.” “Housing bubble here.”

A graph can work if the same forces are at work all the time. Like the graph of a bomb dropping under the force of gravity from a moving airplane. But they cannot tell you when new surprise forces will pop up, can they?

What I don’t get is why is this confusing you?

10

Nah, that part doesn’t confuse me. Like I’ve been saying, the whole idea of a central bank and the chain reactions it causes are what confuse me. "This interest rate, that interest rate, money supply here, inject money there, make profit off this discount rate from the fed, as opposed to the discount rate from the local bank, ahhhhhhhhhhhhhhhhhhhhhhh!!! What I have learned are that central banks make shit way too complicated. It becomes so hard to follow the math. At least it does for me. Do you understand what I am trying to say? I understand the free market I really do. I guess what I am trying to understand is the anatomy and physiology of how the money moves around under a centeral bank. sigh

11

But again, I suppose maybe that is the whole point of socialism. Make finance so darn complicated, that people just don’t even bother trying to understand it. One thing I don’t have is a mathematical mind.

Its interesting what I read concerning the actions of the fed and the government after WW I. Their actions pretty much consisted of this idea of doing absolutely nothing. Amazing how effective it was. lol anyway, thanks again.

12

Yes, It’s definately complicated. Can’t say I have it down myself.

I found that for me [he of short attention span] following posts, listening to a tape, watching a video, reading a short article that catches my fancy, is the way to learn AE. I find a Rothbard article [as opposed to book] unusually helpful. He cuts to the chase. And I enjoy Walter Block, of course.