Whenever I see charts in the daily articles about recessions, I see that there were lots of recessions during the previous gold standard. If it’s the Miseans/Rothbardians contention that the gold standard prevents the business cycle, then was there something wrong with the previous gold standard? If so what? Any articles you can point me to?
what recessions are you talking about? years would be nice.
what was wrong with the gold standard? the government controlled the money, thru threatened and actual use of force, by forcing that taxes be paid with the money that they controlled. of course, under a gold standard the “official” mafia has far less control over money than a worthless paper system.
Everything you could possibly want to know and more is in Rothbard’s History of Money.
The problem with the previous gold standard was that the government would allow banks to go off it when it looked like they would go out of business due to the fractional reserve policies they used. If they had a true gold standard then there wouldn’t be as many (or any?) business cycles since they could only loan what they had on hand but banks just don’t work like that.
Here’s one that goes back to 1895.
The DJIA graph tends to show a generally rising market. It only tracks the price of a selected group of stocks which, as far as it goes, is fine. However, in what are those prices expressed? Dollars of a generally declining value; a decline which differs during different periods. If we keep printing more and more baseless currency, then it is to be expected that such a curve would be generally positive.
What was wrong is that it forced banks to shrink the money supply when their fractial reserve inflation got out of hand, thus forcing a recession back to real interest rates.
Of course, whether or not that’s wrong depends on your point of view. If you want to preserve your savings, that’s actually not wrong but extremely necessary.
The previous answers are inadequate, and they are so because the pat ideological position of the Austrians on the cycle is overblown. There were recessions before there was government sponsored central banking. There is a natural credit cycle in a free market. The most that can be claimed for metallic systems is that they avoid large scale inflation much better than non-metallic ones, over the course of multiple cycles - but the further extreme claim that only government mistakes or non-metallic money causes the cycle, is false.
The cycle is caused in large part by monetary phenomena as the Austrians correctly describe. The key driver in this process is not government anything, but interest rates long being well below their equilibrium level, and the ability of any form of accepted credit expansion to keep them there. Long enough for bubble imbalances to occur, leading to misallocation of capital and the rest of it. Yes, fiat money has all of these features. No, these features are not specific to fiat money. Yes, bank credit is “gratuitous”, as Mises never tires of pointing out. But so is all credit. And men free to engage in any form of finance they deem prudent, will extend credit, sometimes excessively. In pure engineering terms, credit is a positive feedback that leads to inherent instability. Yes there are countervailing force in free markets, which can restore more sustainable prices and rates, and thus correct misallocations. But they take time to operate and will do so only after imabalances have reached a critical scale. In other words, only by inducing failure and crash. The cycle is endogenous, it is not fundamentally caused by the monetary authorities or their mistakes.
The Austrians have been driven to claim otherwise in part because the Keynesians blamed the great depression on the gold standard itself. If the gold standard were responsible for a rigidity that increased the amplitude of the cycle, and can cause as much damage as the world economic system sustained in the 1930s, then the gold standard is not desirable - so runs the Keynesian position. The Austrians counter by pointing to the role of excess monetary expansion in the immediately preceding boom, and effectively blame the great depression on the young 1920s Fed. This is pure finger pointing on both sides, and tendentious. One side argues that the gold standard run correctly would not have led to the great depression (which is true, but in fact the gold standard as it existed legally at the time was too loose to enforce such “run correctly” policy, but was rigid enough to break horribly in the banking crisis of 1930-1932); the other argues that rigidly staying on gold and forcing the money supply to contract whenever gold left the country (as happened massively in the early 30s), and then forcing any bank that could not redeem in gold to fail and close - drastically shrunk the money supply just when that was the worst possible thing to do, and so spread entirely unnecessary destruction. This is also true - without the gold standard having been the cause of the crisis in the first place.
Leaving the blame games of the 30s to the past, the reality is that no system that leaves men free to extend or withhold credit any way they please, can avoid the consequences of an increase in fiduciary media without any corresponding long term capital being available to support it. The instability of the credit system is simply one of the prices of freedom, and cannot be abolished without abolishing economic freedoms that are in themselves far more valuable and important than any alleged economic security to be gained by destroying them. Hayek had this right in “Road”, and it applies to attempts to destroy freedom of credit just as much as it applies to attempts to destroy free direction of the employment of capital through central planning. Free man can and will at time err, and err grieviously.
Some modern Austrians like to pretend that any error caused by free entrepeneurs cannot possibly lead to a large amplitude cycle, because they can’t all make similar mistakes at the same time etc. This is naive and contradicted by literally centuries of practical experience. (For a long view of the cycle, read Kindleberger’s Financial History of Western Europe). Men are inventive at creating new money substitutes, and any overly tight regulation of one money form will simply push demand into others, while Gresham’s law will ensure the innovative forms are fully used. Modern Austrians are free to offer 100% reserve gold backed money and invite everyone to use it - but nobody will.
We can still have sounder or less sound money, and sounder or less sound banking and finance. In recent times, monetary authorities have been too loose and have tried to cure every passing economic ailment with larger doses of new money creation. It is better to instead steer for price stability by using bank rate to combat rising bubbles before they get going - but that requires all other economic actors to behave responsibly, too. Including governments in their fiscal policies, consumers in their debt and savings decisions, businesses in their capital planning, international bodies and bilateral adjustments to meet large trade imbalances, etc. None of it forthcoming recently.
There is, in other words, blame enough to go right round, and to spare. And the pat ideological answers are inadequate. The Austrians have a good diagnosis of part of what drives the cycle, but too limited a sense of how deep it goes, and their stock prescription will not avoid business cycles. Nothing will, while men remain free. We simply bear the cost of cycles as part of the price of freedom and human fallibility, and try to limit their amplitude etc. In the long run, too much is being asked of monetary policy by all concerned, and long run price stability with some crisis flexibility and economic freedom, is the most that any form of it can actually deliver.
One man’s opinion…
Methinks you don’t truly understand the Austrian Business Cycle Theory…
I don’t think anyone was trying to give an ‘adequate’ answer anyway, just enough information to help them out a bit. Maybe point them in the right direction.
How does this explain that whole industries are ‘taken out’ by business cycles, most notably being the Banking Industry? If every little mom and pop general store were to extend credit to their customers this wouldn’t effect the entire economy if there were a crop failure or foreign imports undercutting the local steel mill.
But if the money supply is inflated on a great scale – with or without government involvement – then we see massive economy wide depressions usually starting in one sector of the economy and spreading to the others.
So Mises coming up with his business cycle theory before the Great Depression doesn’t matter in this finger pointing game then?
If you look at previous banking activities (clicky link I posted above) you will see that there has never really been a pure gold standard in the US. Banks have always practiced fractional reserve ‘credit’ expansion and the government has always backed them up to some degree when things got out of hand. The periods where things were kept conservative never resulted in a boom-bust cycle but the opposite isn’t true for the credit expansion times.
I don’t think anyone is talking about the abolishment of the credit system. The credit system based on monetary inflation is what the Austrians generally want to abolish.
If I have accumulated capital reserves and decide to loan them out to someone who values them enough to pay me for their immediate use then, unless thay just take the money and run, this would in no way lead to a boom-bust cycle or infringe on anyone’s freedoms. But if I loan out capital I don’t actually own causing prices to rise for everyone and devaluing the commodity I don’t actually possess but am granting someone the use of then I think maybe some people might have the opinion that I’m infringing on their freedoms.
Ask the Liberty Dollar folks how free we are to offer 100% commodity backed money…
So theft and fraud on a large scale can and will lead to consequences that effect the population as a whole? Who woulda thunk?
I know they have been practicing fractional reserve banking for 400 years or so – too lazy to look up the exact date. Now there are many things that can affect a whole economy, famine, disease, war, but the business cycle is attributed to the inflation of the money supply to my understanding – I can be wrong on this.
I also know that a (relatively) free market is a recent phenomena in European history. Merchantilism was practiced in one form or another for a long, long time and had led to many ‘large amplitude cycles’. If all the cotton traders depend on government protections for their industries and the government suddenly drops those protections then you will have large scale reallocation of capital by the previously profitable cotton traders.
How can an economic actor behave responsibly if the Central Bank’s actions send false signals throughout the economy? If they inflate to keep interest at a target rate (or for price stability) no one can determine if this is higher, lower or equal to the ‘true’ market rate. Then people make entrepreneurial decisions based on the profitability of the project at the artificial interest rate having no clue if it is profitable at the ‘true’ rate or whatever future artificial rate the Fed arbitrarly decides is the new target.
And where exactly does the power to ‘coin money and determine value of’ give them the right to tamper with the interest rates to begin with? Oh, it’s one of their implied powers…
If we want to remain Free we must allow large scale counterfeiting and theft from the citizens by Big Central Government and the Banking Cartel. What a wonderfully Orwellian world view you have.
Freedom is Slavery… Doubleplusgood
I guess it’s too much to ask for them to practice a hands off monetary policy where the interest rates are set by market actors and fractional reserve banking results in bankruptcy when the banks can’t fulfill their contractual obligations like any other business in the market then?
You think the government would look kindly on me renting out the use of all the vacant houses in my sister’s neighborhood for the upcoming Super Bowl in the new stadium a few miles from her house?
“Methinks you don’t truly understand the Austrian Business Cycle Theory…”
I think I understand it at least as well as any man living. I also think essential parts of it are undeveloped, and as original propounded, some are unsound, Which is par for the course, and Austrian econ remains a critical contribution to our understanding of modern economies etc. What instead you have detected is merely that I disagree with the usual ideological line on Austrian business cycle theory, and as usual some like to pretend informed disagreement with their own opinions cannot exist.
“How does this explain that whole industries are ‘taken out’ by business cycles, most notably being the Banking Industry?”
First, the claim is a non sequitur, since the business cycle can be as endogenous as you please and take out whole industries. Second, the claim is empirically false, since even industries that suffer widespread failure in a depression continue and revive in one form or another if they provide any sort of essential service - while many industries have ceased to exist for technological or other economic viability reasons, none has for fundamentally monetary ones; Companies sure, industries no; Third, bank failure was widespread under free banking in a few places including the US, but never to the point of “taking out” the whole industry.
“If every little mom and pop general store were to extend credit to their customers this wouldn’t effect the entire economy”
In fact it would, but it is also a red herring, since there are scads of other financial institutions and arrangements besides note issuing banks; Kuwait had a bubble financed entirely by post dated checks,.Northern Germany had a bubble financed by coin clipping and chains of bills of exchange. Old regime France inflated by issuing state offices complete with promised salaries at stipulated ratios to the purchase price, and in some cases legal monopolies or portions of the excise tax sold along with them. Insurance and reinsurance, merchant bills and acceptances, over-assigned fractional shares of unrealized profits on ocean voyages, unpaid company shares bought on margin - anything and everything can be and generally has been hypothecated, and if it is done enough it can finance a bubble.
Money is what the market will accept as money, and changes at different points in economic development, and at different points in the cycle. Indeed, the chief cause of monetary tightness during the down part of the cycle is more and more people reverting to narrower categories of substitutes they will accept as money. (It never has been only one commodity, and that in pure and physical form, incidentally).
“So Mises coming up with his business cycle theory before the Great Depression doesn’t matter”
No, it really doesn’t. Because the cycles were there under the gold standard, pre Fed and post Fed, non US and US. But it was Keynes’ attack on classical economics that touched off the blame game in question. The theory available to Mises at the time was clearly insupportable at material points (notably the continued reliance on a variety of the wage fund theory and a hopelessly inaccurate statement of the effect of extending total investment beyond the level renumerative at sustainable long term interest rates - Mises is reduced at points to claiming that the shortest investments always give the highest returns by that confusion). Hayek is the one who answered the Keynesians, initially none too successfully I might add (in correspondance I mean - the Pure Theory of Capital was the developed answer), when he relied entirely on Mises.
“there has never really been a pure gold standard in the US”
So much the worse for the pure gold standard. Institutions that have never existed except in abstraction are not great candidates for proven economic reliability, you know. But also, the US is not remotely the world. Also, the US had a period when central banking was systematically attacked by the state (by Andrew Jackson, specifically), and it hardly proved any more workable or stable. And the reason is given above and in my earlier reference to economic history - what functions as money is not up to an academic purist or an ideologue, but is decided by practical men in the real world. Mises too his everlasting credit knows this, because Mises is first an economist, and only secondarily an ideologue competing with other ideologies. His contemporary followers typically do not.
“the government has always backed them up”
False, see above in re Jackson. But it is a trivial point.
“The periods where things were kept conservative never resulted in a boom-bust cycle”
There are no such periods, except immediately following a previous bust. Which washes excesses and optimism out of the system, but in an entirely temporary manner. No government edict can make it permanent. Notice, the policy prescription of forbidding all issuance of fiduciary media of any kind, can only be enforced by the most draconian government edicts, and state policing.
“I don’t think anyone is talking about the abolishment of the credit system.”
Actually, in practice yes you are, and so was Mises. Which is why it is hopelessly unworkable. A gold standard isn’t unworkable, but it is impossible to enforce a prohibition on using any money substitutes in place of the favored commodity money. And as soon as they are accepted by a free market, and Gresham begins to operate, you are back to a gold exchange standard in all but name. We got there for reasons, it wasn’t a grand conspiracy, the same reasons would continue to operate, and the parallel innovations would be made again. You cannot forbid the underlying phenomenon of credit on which the imbalances are based.
“The credit system based on monetary inflation is what the Austrians generally want to abolish.”
The operative word being “want”. What is money? Can any Austrian economist decide and legislate what it shall be? Mises himself will tell you the matter is entirely up to the market.
“If I have accumulated capital reserves and decide to loan them out”
Ah yes, but what if you haven’t accumulated anything and decide to loan anyway, and others value your promises enough to treat them as money? Because that is the pure phenomenon of credit, credit granted to you by others who treat your promises as being as good as money. Or more accurately, you have accumulated plenty but lend it three times over. “The government should prosecute you for fraud”. Why, where is the fraud if a man says, I will lend my capital 3 times over? The original arguments Mises deploys against the issuance of fiduciary media beyond monetary cover are flat slanderous to those who did so. Men make promises and some can perform some of them. It is not the case that all banks that issued beyond monetary cover fail. But it is the case that any extension of credit beyond the level of prior real savings out of income, act in exactly the same way on real allocations, regardless of whether any of it goes through money or all of it goes through money substitutes.
I note in passing that it is also just as possible for large scale deployments of savings to fail to cover their costs through mere forecast error, and that such errors if large enough also have exactly the same cyclical effects - because the causal process from monetary inflation to misallocation losses passes through forecast errors, and if those are absent, financing simply works. Because there is no one to one necessary relation between savings deployed and anticipated reward actually reaped. Do what you will, capital is at hazard, as the lawyers say. This is not a reason to support artificially increased forecast errors all at once through overly loose monetary policy. But it is enough to show that the occasions of loss involved are not removable by a government edict.
“causing prices to rise for everyone and devaluing the commodity I don’t actually possess”
Um, every single free market action anyone makes, changes the real exchange value of every other commodity in existence. Whether a credit action or a consumption demand or a business venture. When someone honestly thinks they are furthering social cooperation and will turn a profit investing a large sum in some line of business, but are wrong and instead make losses and fail, they thereby damage everyone else. But no libertarian or conservative accepts this as a reason to curtail the freedom of entrepeneurs to invest as they see fit. Possible negative externalities to economic action by others, are again just one of the prices we pay for liberty. When a financier extends credit to an entrepeneur he is making exactly such a deployment, yes he is changing prices, no changing prices is not a crime for which anyone can or should run to the government demanding redress. If the financier lent wisely he will make profits, if poorly he will make losses, real capital will be misallocated and some of it lost, and the whole society will suffer thereby. The people who think this bare possibility is an adequate reason to curtail the economic liberty of those involved are called socialists.
We do not give up essential liberty seeking every last ounce of economic security from changes that might be brought about by the actions of others. Including their - entirely free - credit decisions.
“Ask the Liberty Dollar folks how free we are to offer 100% commodity backed money…”
Denominate it in gold or silver ounces not US dollars, use electronic bookkeeping and online exchange rather than trying to horn in on the Fed’s legal note issue monopoly, and there is no problem. Personally I’d leave them alone regardless, and know that they wouldn’t get to first base trying to replace FRNs.
“theft and fraud on a large scale can and will lead to consequences”
Banking is not theft, nor is it fraud (particularly not in the fiat money era where there are no promises that anyone can fail to make good on), and it is and always has been merely crank-ness to pretend otherwise. It is every bit as ridiculous as inflationist nonsense in the past. Worse, I can demonstrate that the argument is formally equivalent to the demands of past socialist parties to outlaw interest or profit, and that the same arguments used to show they were “just jawing” and demanding one sided improvements to a trade they voluntarily approved without them, run equally against the “banking is theft” claim.
First, you can take the position of the bankers at any time. All you have to do is hold bank shares instead of bank deposits. If banking is such an easy profitable industry, a veritable license to steal, then quit whining and join them. Just don’t expect the exchange value of your assets to be perfectly stable. Over time, you will do far better than you would in gold, to say nothing of bank deposits or physical notes. But at some times gold will do much better, at others the reverse, as with any commodity exchange. You are in no way forced to hold large bank deposits in nominal currency, instead.
In the past one might try to argue that this would be impractical for many people or that the shares could not be profitably held given transactions costs or what have you. But this is clearly not the case today. Transaction costs for even tiny numbers of shares are quite low, and the convenience of checkable deposits is widely available against all sorts of share accounts. You can’t be exploited by both sides of a transaction. Either one side of it is so unfair one would be a fool to stand it - in which case you need only take the other side - or the risks and benefits have something to be said for them on both sides. Since you aren’t forced to take this or that side, you can’t be oppressed in the matter. The side you choose to stand on, you have chosen freely. You therefore judge that side to be preferable, all things considered, for a person in your circumstances. That means you believe yourself to be benefitted by taking your own side of the transaction. Claiming that the person on the other side of it wrongs you and is robbing you, but not being willing to step into his shoes, is exactly the slanderous mix of which former socialists were guilty, when they denounced profit as theft, but were unwilling to lend the value of their labor to anyone interest-free.
You may of course still argue that this or that monetary regime is unwise or that we can do better - that’s fine. But arguing that banking is theft is tendentious crankery of exactly the form Mises and company spent their lives refuting.
“the business cycle is attributed to the inflation of the money supply to my understanding”
The business cycle is caused by real losses of value to deployed real capital. Those real losses are in turn caused by misallocation of capital to less urgent uses, while more urgent ones have gone unfufilled. A leading cause of such misallocation, but by no means the only one possible, is a sustained period of interest rates being far below their sustainable long-term level. And a leading cause of such interest rate error across the market, but by no means the only cause that can bring it about, is monetary expansion at rates beyond the rate at which the free demand for money as a good, increases. Also known as a fall in the exchange value of money.
Notice, mere monetary expansion is not a fall in the exchange value of money - the demand for money is normally increasing continually, as is the wealth of the entire society. Mises correct calls for a monetary policy aimed at keeping the exchange value of money stable. He thought the increase in money supply possible under a gold standard - because the money supply does increase under such a standard, and frequently by large amounts over time - would be about right to keep the exchange value of money stable, and in particular that it would be more restrained than fiat money, with its constant temptation to overexpansion - let alone fiat money in the hands of determined inflationists.
But holding the money supply constant at the level of some covering commodity, thought of as unchanging, would involve a continual and progressive increase in the exchange value of money, not in price stability. The question is not whether money should expand - it should. The question is instead how fast it should expand, and what outside rates or indicators should guide the answer to this question. Notice, as a purely technocratic matter, any rate of expansion in the money supply is possible under a fiat money system, from less than zero to Zimbabwe like hyperinflation.
But not as a political or economic matter - some rates will lead to abandonment of the currency, and others to the employment of money substitutes to increase the growth rate. Those demands are endogenous to the free actors in the market, and cannot be willed away by government edict. Yes, authorities can influence the future exchange value of money. No, they cannot insist that X shall be money and Y shall not be, therefore they cannot alone enforce a desire that X plus all the Ys shall grow only as fast as N.
And no, all prior trade cycles cannot be blamed on government action of this or that sort. Financiers are more inventive than that, and merchants more fallible. There have been trade cycles as long as there has been trade, and there will be in the future. Credit is by its nature a positive feedback and all positive feedbacks destabilize the systems they occur within. Until some other negative feedback grows strong enough to outweigh it in the particular case, and reverses its local effects. This cannot be changed without abolishing the freedom to engage in pure credit transactions. And not just for government-favored entities.
“How can an economic actor behave responsibly if the Central Bank’s actions send false signals”
Easily, by seeing the cycle, forecasting it accurately, and trading it counter-cyclically. This provides a social good by tending to damp the amplitude of the cycle. It is also profitable for those engaged in it, as it leads them to sell high and buy low (note the order). Sound banks can pull in their horns as others are getting frisky. Sound businesses can borrow large amounts at long term when long interest rates are low, but not use such rates in internal hurdle-rate planning, as they decide which businesses to invest in or how much to expand. Sound financiers can build hordes of cash when it is “trash” and buy great blocks of risky stock when the world is about to end tomorrow.
“no one can determine if this is higher, lower or equal to the ‘true’ market rate.”
Of course they can. Everyone can make their own interest rate forecasts, and in practice everyone does so. Anyone who saves a dime does so. An asset whose present value is not sensitive to changes in the level of future interest rates does not exist. The forecast that whatever the rates are today, they will remain that way forever, is known by all concerned to be false, if they aren’t brain dead. And everyone is paid when they are right in their forecasts, and pays when they are wrong. That is economic liberty and capitalism. Do what you will, capital is at hazard.
What may be said fairly is that other things being equal, the extent of forecast errors will be larger, the more interest rates deviate from their long run sustainable average levels and the longer they stay there. And monetary authorities can certainly do a remarkably poor job, and thereby induce greater forecast errors than are necessary. But this passes through the freedom of the economic actors involved. They have the opportunity to do better, “fade” bad policy, and steer the economy better. And they are responsible for their own performances in the matter - no authority can do it for them.
“the right to tamper with the interest rates”
Nobody needs such a right granted to them, it is every economic actor’s by nature. You can stand in the marketplace tomorrow, yourself, and offer to fill all demands for capital at 3% - but it won’t pay you to do so. The market is made by the one most willing to stick his neck out, to buy or to sell in any desired quantity, at prices he states, letting you choose which side is more fair. If the Fed sets rates too low and you know they are too low, there being too low is definitionally equivalent to “borrowing from those so offering is a good deal”. If you are less than sure about that, then you have that much less standing to criticize the rate as being too low. Either way, don’t sit by and carp, step in and act.
Banking is not theft, nor is it counterfeiting. If you think it is, I invite you to buy all the bank shares you can stomach at the next market open. Nobody is stopping you, there is no banking cartel you are being kept out of, the door is wide open and anybody who likes can walk right in. It isn’t half as easy as you pretend, to extend credit sensibly. And extending credit without sense is not a costless or riskless endeavor, for anyone concerned. Yes it can end in bankruptcy, but if you think the government is sure to come save you and make you whole, then jump in with both feet and all the credit you can swing. Put your money where your mouth is - or admit that you are calling a position too lucrative to be born by others, without being willing to take the risks it involves yourself.
Which is clearly unjust, to any libertarian or conservative.
As for your renting out lots of vacant houses, bid on them first and you can. Raise all the capital you like for it, on nothing but your own promises. It is easy as pie, isn’t it? Isn’t that the line you are selling? So get off your backside, promise, redeploy the misallocated capital more usefully, and reap the benefits. That too is credit. Carping about others doing it badly when you won’t lift a finger to risk it yourself, is just jawing.
(sorry about the intervening empty post - first post attempt the font size was wrong, and reposting was the easiest way to correct it)
I thought eGold denominated in metal weight and was solely electronic, yet the US government raided them, confiscated their property, and shut them down.
Can you please explain this again? I understand that the rate of growth is important, but don’t understand why money should remain stable or even contract, so long as the rate at which is changes in comparison to the level of some covering commodity is healthy. Please keep in mind that I’m not an economist, so the more layman terminology, the better! (I’m trying to keep up!) 
Fair enough…
Wait, you post your disagreement in a forum under the URL mises.com and expect nobody is going to disagree with your disagreement?
Nice ad hominem though.
I think you misunderstood my use of ‘take out’. Not literally remove from the market but the slang usage, like a knock out punch…which is basically what you’re saying here.
Still doesn’t disprove that the monetary inflation was the cause of the malinvestment that lead to the widespread failure and the depression that inevitably followed. The real non sequitur is the ability of businesses that perform essential services to recover after the depression is evidence that monetary policy didn’t cause the depression in the first place.
An example of a 100% reserve credit institution is a red herring?
Everybody knows about the classic tulip bubbles or whatever the real name of it is. Mad speculation is distinctly different from systematic inflating of the money supply without real productive wealth to back it up. I would venture to say all your examples are red herrings before I would say my simple example that could be scaled up to encompass the entire banking industry if it were also based on 100% reserve banking is a logical fallacy.
The existence of bubbles not created by monetary policy in no way disproves the Austrian Business Cycle Theory.
Money has historically been commodity backed, it doesn’t seem strange to you that all previous attempts at a pure fiat currency have failed and people reverted back to specie? As soon as money is de-associated from the backing commodity strange things start to happen like debasing currencies and widespread counterfeiting by the political class. This has the effect of redistributing wealth from the actual producers of wealth to those who live off those who produce but don’t actually produce themselves.
But that’s neither here nor there because it has nothing to do with the Austrian Business Cycle Theory.
I guess you missed the point that the alleged gold standard wasn’t really a gold standard and that fractional reserve banking existed under this system which is what created the inflation that set off the business cycles. You think that people might attack the Fed and Keynesian theories because they are the current enablers? It would be pretty counterproductive to complain about the previous failed attempts at establishing a central bank since they don’t effect the here and now.
But alas, doesn’t prove or disprove the Austrian Business Cycle Theory.
I’m not saying that a pure gold standard of a pure commodity backed currency never existed but that it never truly existed in the US because the government would go on and off it at will when it served their needs. You seem to know about monetary history, the Romans left volumes of information behind – was there anything even remotely similar to a business cycle recorded by them? Or did the business cycle exist in the form we know it today before the advent of fractional reserve banking?
You also completely ignore the periods of history where banks functioned as their own enforcers, so to speak, and kept each other in line so they wouldn’t get too crazy with the inflation. These times were very stable and not a single one led to a business cycle…not even close.
Now you’re completely and totally wrong. If I actually cared enough I could give you specific examples but why bother, you seem to have an agenda – just haven’t figured it out yet.
We got there because the government confiscated all the privately held gold and instituted a pure fiat currency. This wasn’t a ‘market decision’ it was forced upon the people under threat of violence.
And again, nobody is talking about the abolishment of the credit system. Not Mises and not me. Credit != inflation. If you want to loan out your money or the money people entrusted in your care if you’re a bank then what does that have to do with me? But if you want to loan out something you don’t really have by printing up little pieces of paper that does indirectly affect me by devaluing my little pieces pf paper then I have an issue with it.
So the ‘market’ decided that they want to use non-commodity backed money? The government sure as hell can legislate what ‘money’ can and will be. Mises or I will venture to say any Austrian economist could care less what people use as money, the market (as in the people that make up the market) have a very good history of choosing a suitable commodity to serve as money.
Let’s say I have $100 dollars in my possession and I decide to loan $300 by issuing IOUs. The people I give the IOUs to will most likely use them to trade for some other good or service and maybe this goes around for a while and everything’s good. Now let’s say that all three IOUs get presented to me at the same time with a demand for payment. I only have $100 dollars but I have backed $300 so there is no way I can make good on the IOUs which means $200 worth of goods and/or services were fraudulently provided based on my promise.
Or let’s say I have one chicken but sell 10 chickens, on delivery tomorrow, collect the money and then tell everyone I only had one chicken which was dinner last night. How is that not fraud?
How is it even possible for a system for this to work unless people just accept the promise (or the IOU) as money and never demand payment in the backing commodity? As soon as people start to suspect that you have overextended yourself they are going to come demand payment (bank run) and the over issuance of commodity substitutes that lead to a non-supportable boom in the local economy that will bust as soon as it is found out there isn’t enough of the backing commodity to support the level of economic development.
Wait, what were we talking about again, an inflationary induced boom-bust cycle?
If I give a bank a bunch of gold bars to hold and they issue me notes on those bars and when I go pick them up from their warehouse operation and they say “sorry, capital is at hazard, your money’s gone” I think they’re going to be having a talk with Mr. Smith and Mr. Wesson and a ride on my homemade tree swing.
It’s also possible for the mind control rays from mars to cause calculation errors and cause a economic collapse but the evidence is more directly in support of artificial interest rates causing cascading ‘forecast errors’ leading to massive malinvestment which eventually needs to be liquidated and reallocated.
What was that about the market choosing what is money again? Unless it ‘horns in’ on the Fed’s monopoly I suppose…
The legality of the government’s monopoly is also an issue of great contention, which the Liberty Dollars folks just happened to be pursuing a case to determine. No dice there though. Just come in and confiscate all the ‘evidence’ instead of pursue the issue in a legal manner without having people deprived of their private property.
I don’t feel like arguing with your interpretation of the business cycle because I’m tired but I’ll get to it later…
If it were that easy then why are their even business cycles to begin with? Just see the cycle and you can be assured the multi-million dollar condo project you started two years ago is viable at today’s post housing market crash prices. Simple Simon, huh?
Methinks it isn’t so easy as does the majority of people on the planet who get caught up in the boom-bust cycles…
The government does… you know ‘that goddamn piece of paper’ affectionately known as the Constitution.
So I can start up my own printing presses tomorrow and the Secret Service won’t come knocking on my door? It’s my right to produce and loan money without the backing of anything isn’t it? Hell, I’m gonna loan everyone a million dollars based on my promise that it’s good. As long as nobody comes trying to collect it should be OK, right?
So anyway, part two I will give my opinion of your interpretation of the business cycle…
They helped the ‘terrorists’ and ‘pedophiles’ conduct business. Drug traffickers too if I’m not mistaken.
Well, pretty much helped anybody that wanted to conduct business outside of the watchful eyes of the government and we can’t have that, can we.
Won’t somebody please think of the children being hurt by the threat to the Central Banks monopoly status…
Deflation is the opposite of growth because inflation causes growth or something to that effect. Blatant logical fallacy is what it is but people still cling to the idea that growth will cease to exist if the money supply doesn’t expand at a constant rate because … well I haven’t really been able to find out why because all the evidence to the contrary suggests otherwise.
What I have been able to determine is inflation benefits one group at the expense of the rest of the people so they spend an enormous amount of time and effort trying to push the idea that inflation is good. I’ll let you speculate which group directly benefits from inflation, well a few groups really but one has based it’s whole business model around it.
JasonC, if you’re going to throw around claims regarding ‘empirical’ evidence, I would suggest you read the articles dealing with this aspect of the ABCT, and refute them, or acknowledge their validity, either will do. Another thing, we’re quite used to opposition, so you needn’t worry; I take it you are an Austrian anyway? Since you say you understand the ABCT, may I ask whose works on it you’ve read? Mises’? Rothbard’s? Garrison’s? Hullsman’s? I agree with AC’s responses.
BTW, Gresham’s Law applies to legally enforced currencies (sort of like fiat money…), not market-chosen ones.
Wait, you post your disagreement in a forum under the URL mises.com and expect nobody is going to disagree with your disagreement?
Where do you see me expecting no one to disagree with my disagreement? I expect men to acknowledge other views than their own as differences of opinion and to be curious about their reasons. It’d be great if libertarians and economists, in addition, avoided the “everyone who disagrees must just not know my great ideology” schtick that droves the likes of Popper to distraction, when others did it.
“Not literally remove from the market but the slang usage, like a knock out punch”
Remains a non sequitur. The question was whether the instability of the credit mechanism makes market cycles endogenous (an internal part of the inherent functioning of free markets) or whether the cycle can only occur due to government sponsored action on the part of monetary authorities. And the fact that cycles hurt - without destroying - whole industries in no way even addresses the question. The argument was notable for its hyperbole as well as for its lack of aim. It was like saying, “but gee, my allegation is big, so I must be right”.
" monetary inflation was the cause of the malinvestment that lead to the widespread failure"
I believe I said that already. I explained that the cycle is caused by real losses in value of deployed real capital, that misallocation is the cause of those losses being large and concentrated in time, and that a leading cause of such misallocation is interest rates being far from sustainable levels for extended periods, and that one leading cause of such IRs being “off” is monetary inflation. I also pointed out that monetary inflation is endogenous, part of the pure phenomenon of credit. It can be managed by the monetary regime, and has been managed quite badly, but is not removable by government edict. The cycle is therefore not removable by a single institutional arrangement, and on this point Mises is simply wrong.
His policy recommendations might have any number of other merits - might, e.g., be more favorable to long run price stability across multiple cycles, say. Personally I think a commodity money without any 100% cover requirement or any attempt to abolish all forms of fiduciary media is also compatible with such stability. So would fiat money run tight enough, but we can’t expect miracles, and in practice any fiat money regime will do worse than any commodity money regime at long run price stability. But none of them will abolish the cycle. Nothing that leaves men free will do so, and it is a mistake to try. As Hayek repeatedly pointed out, it is a mistake to sacrifice economic freedom for perfect economic security - the latter is impossible, and its excessive pursuit can only erode the former.
At bottom, the cycle is caused by other men’s freedom. Freedom necessarily involves the freedom to err, sometimes seriously and in important matters. That this occasionally inconveniences me is not sufficient reason to try to take such freedom away from them, or indeed to surrender it myself.
“The real non sequitur is the ability of businesses that perform essential services to recover after the depression is evidence that monetary policy didn’t cause the depression in the first place”
Since it was addressed to the hyperbolic claim that entire industries are destroyed by monetary phenonmenon, it was entirely on point. Veering off on wild tangents then blaming the interlocuter for not being on point as he refuted the asides is ridiculous, and just the sort of thing Mises pursued ruthlessly.
“An example of a 100% reserve credit institution is a red herring?”
In this case yes, because the implication was that only banking issuance can cause the cycle. The issue being disputed at this point was whether the pure phenomenon of credit can cause the same imbalance between bona fide long term savings and new investment of capital, equivalent in that respect to the effect of monetary expansion, endogenously, without government sponsored action. But the example given would still lead to such imbalance. The idea that it would not is based on one-transaction thinking, and a fixed idea of where the original sin of finance lies.
To see this, suppose the local mill pays its workers in script during the same depression. The workers are more likely to accept this if they can simply run up their lines of credit at the store to supply their essentials, even if the store owner has 100% capital to back his advances to them. The mill owner need not, and the willingness of the store owner to expand his covered credit, enables the other to expand his uncovered credit. Investment beyond savings is always possible - all that is necessary is for someone, somewhere to accept someone else’s promise as being as good as money. If, in addition, that promise is given any physical form and traded subsequently by third parties, you have the issuance of a new money substitute not covered by new savings.
Everyone who writes a check, uses a credit card, discounts a bill or receivable, is creating new circulating paper that others treat as money. If the lifetimes are low and the volumes small relative to the commodity used as standard money, then the effect is small. But on a sufficient scale it will finance “overtrading”, as it was classically known, and has in the past, without fully developed banking. Banking is better at it, and being better at it is considerably more profitable. But the phenomenon itself is an essential economic liberty, cannot be removed without destroying economic liberty, and should not be removed. And alone is enough to cause a trade cycle. For that matter, one entrepeneur can increase investment without any bona fide savings on a massive scale, if his business projections and plans are trusted enough by creditors (who in turn need only be trusted, themselves). And that too is an essential economic liberty, without which capitalism would not function.
“Mad speculation is distinctly different from systematic inflating of the money supply without real productive wealth”
In practice they are closely linked, with the former usually fed by the latter. The underlying cause is very simple - the collateral is one thing, and the pledge against it is another, and free men can and will separate them and use the separation for speculative purposes. If they materially misrepresent things in doing so, it is fraud an occasion for state intervention. But they need not do so, and the economic effects are the same if they are entirely honest about all of it. They will find takers because it can be done profitably and safely in moderation, particularly when the investments being financed this way are sound. Again it is a phenomenon of the free market that cannot be removed without the destruction of essential economic liberties. But it is already quite sufficient to touch off the imbalances that bothered Mises.
To see also that the effective money supply grows in such cases, notice that the apparent security of collateral in an appreciating asset is high, that it will seem that more can safely be lent against a more expensive asset, that demand for financing to carry assets currently favored by speculators must rise (both to pay inflated prices and to enjoy the benefits of leverage), and that one way of meeting that demand will always be to create new money substitutes, whatever is happening to the legalistic money supply.
Now also note that the present value of all long-dated assets is sensitive to changes in long term interest rate expectations, and that this sensitivity grows as the rate of expected increase in value of the asset approaches the discount rate, and that mathematically speaking any asset growing at the discount rate or higher is worth infinity. The adage runs, “John Bull can stand many things, but he cannot stand 2%”. The reason being, not that the return is too low a portion of his capital, but that when effective discounting rates are too low, and too near the level of growth the economy can truly be expected to deliver in the long run, the fair present value of a long stream of future payments can seem to rise without limit. Now return rates to a more normal level and ask what happens to the discounted present value of an unchanged payment stream - or worse, to one whose growth rate has been subject to a material downward revision.
This is the reason for the connection between speculation, credit expansion, lower than sustainable interest rates, and the cycle. Men are free to avoid such mistakes by simply not believing any rate too low to rationally value future assets. Economically speaking, anyone can know that it is impossible - if rates of return and future growth that high are truly available on any desired amount of capital, then the discount rate cannot remain that low - and in practice, returns on assets to which more than enough capital is flocking will fall to sustainable levels. But they are also free to err in the matter, and project the low discount and high return rates too far into the future.
“The existence of bubbles not created by monetary policy in no way disproves the Austrian Business Cycle Theory.”
There is not much wrong with that theory (a few things - Mises stated the effects of investment beyond available long term savings quite incorrectly for example), other than the claim that gratuitous credit is removable by government edict, and thus that the cycle can be abolished by a single institutional reform.
“Money has historically been commodity backed”
I’m afraid that alone proves remarkably little - economies have historically rested largely on agriculture, power as historically been supplied mostly by animal muscle and indirectly by food calories etc.
“it doesn’t seem strange to you that all previous attempts at a pure fiat currency have failed”
No, it doesn’t seem strange at all. Nor does it seem strange that every commodity money has been superceded by a different one as to issuer and stamping, or that empires come and go, or that commercial centers migrate from country to country following a mix of freedom and political power.
“As soon as money is de-associated from the backing commodity strange things start to happen like debasing currencies”
Actually, debasing currencies is a sport that long antedates non-commodity money. The Romans managed a 1000-fold inflation with a metallic money just fine. “Debasing”, as the term itself implies, is a phenomenon that originally applied to commodity money. Alloying coins with base metals is the origin of the term.
As for what happens when convertibility is suspended, the thing that is notable about it is that it is not uniform. Some countries rapidly progress to hyperinflation as the authorities issue so much currency that the public repudiates that currency as money. Others suspended only during wartime as a war finance measure, developed limited premiums on specie, typically staying within two times, and reverted to convertibility after the war, at the old level sometimes and at the newly reached one on other occasions. There can be little doubt the latter instances proved extremely useful to the governments employing a fiat money that way, to the point of making a material difference in major conflicts. Mises is quite clear about the war finance aspects of inconvertible currencies and well aware of the political force pushing for it. Opposing such tendencies with a strident lecture on long run efficiency is about as effective as trying to cut down a jungle with a plastic spoon.
And there is a third experience with widespread fiat money, besides more or less extreme versions of the two previous ideal types (which we may designated as “assignats-Zimbabwe” on the one hand, and “suspended bank act-Napoleonic Britain” plus “greenbacks-Lincoln”, respectively) - the present world wide monetary regime since the end of Bretton Woods. There can be little question the present episode is still in progress, that it isn’t going as anyone involved thought it would, that the large scale price instability it has occasioned is exactly as the Austrians predicted, but that it has held up far longer than they deemed possible. In fact, if Volcker hadn’t arrived and the system had instead comprehensively crashed around 1980, with interest rates at 15 to 20% and gold soaring, and the US had gone back on gold at that time, it would have fit Austrian predictions.
But instead the monetary authorities moderated the rate of fiat money creation, stopped targeting the unemployment rate in doctrinaire Keynesian fashion, admitted the monetarists were right about all that - but did not go back on gold or any other commodity money. The anomaly is Volcker to now, in other words. (I also note in passing that the German central bank, and the Swiss after leaving gold, gave an impressively tighter performance with their fiat currencies - still depreciating, but consistently at slower rates than the US).
I don’t think any fiat system is compatible with long run price stability. But long run price stability and the cycle are two different things. The cycle we will always have with us, and it is a mistake to promise to abolish it by monetary means. One, because it is not possible and the failure of the promise will be noted. Two, because it is appealing to an interest and desire in the voting public that is inherently dangerous to liberty and unsound - an excessive desire for economic security that is incompatible with economic liberty. Three, because the attempt will trample on essential economic liberties. Four, because it reinforces the already far too strong tendency of all modern economic ideologies to treat every economic phenomenon as at bottom a monetary one and to expect the state to make the economy flawless by tinkering with the monetary system. We should instead be seeking much less from monetary policy, not much more.
The most any monetary policy can ever be expected to deliver is (1) short term flexibility of the money supply in response to shocks (2) long run price stability, very approximately not with any perfection or exactidude (3) some moderation of the amplitude of cycles, without remotely abolishing even quite serious ones and (4) continued economic liberty. If any system delivers all of those, it would be a mistake to scrap it looking for something only allegedly better.
" widespread counterfeiting by the political class. This has the effect of redistributing wealth from the actual producers of wealth to those who live off those who produce but don’t actually produce themselves."
yeah yeah, and property is theft, those who do not work shall not eat, etc - this is all socialist claptrap, hyperbole, and nonsense. Bankers are not counterfeiters, finance is not crime, the virtuous Volk are not being persecuted by bloodsucking usurious leeches, and all political rhetoric pretending otherwise is utterly obscene. And tends toward the destruction of economic liberty, not to sustaining it. Anyone who thinks banking is highway robbery is invited to buy bank shares (or gold, or any mix of them you prefer), and no one who instead voluntarily leaves balances in fiat currencies can claim to be oppressed in the matter.
“I guess you missed the point that the alleged gold standard wasn’t really a gold standard and that fractional reserve banking existed under this system”
No, I didn’t miss any such point, since I pointed out both that the boom before was in fact caused by monetary expansion and also that imaginary monetary regimes are well imaginary. The claim is that monetary expansion is endogenous and not removable by government edict, and the fact that the gold standard slid of its own accord to the gold exchange standard is in fact a leading piece of evidence that this is the case. You say later that it was all done by force and all gold confiscated, but the gold exchange standard was not established by force or by confiscating anything. It developed from commodity money under conditions of economic freedom. It also crashed, comprehensively, in the 1930s, with plenty of help from overly stringent government regulation on the one hand, and systematically reckless international finance on the other, after effects of WW I, etc.
“people might attack the Fed and Keynesian theories because they are the current enablers?”
Fine, attack them all you like, but don’t pretend they invented the business cycle when it long predates them. Empirically, what happens after these come on the scene is that long term price stability goes away, not that the cycle appears. In fact, the cycle gets more moderate not less, and fewer years are spent in recession and more in moderate growth. Bank failure becomes much less common, as losses have been socialized by insurance schemes and the like. All with the gold exchange standard remaining, for 60 years. But money substitutes outstrip it and the US specifically trades on the international position it had in the gold exchange standard. When that is abandoned as well, we get a particularly rough period with a large inflation immediately, after which price stability is even less achieved than before, but the cycle is the same as it ever was. Perhaps it is managed so much better that it can reach even more impressive scales of capital misallocation, would be a fair way to put it. What hasn’t happened is any repeat of the great depression - and it isn’t going to, either.
Keynesianism was and is stupid policy. It noticed a few errors in classical economics, equilibrium-think oversimplifications, but was fundamentally a tissue of errors, all based on the fallacy of trying to understand intertemporal trade as a simple integral of a momentary static situation, with that static situation understood far too mechanically. Compared to it, Austrian economics (or classical) is real learning next to pseudoscience. But it isn’t itself infallible, and made a couple of errors, one while analyzing the underlying problem (Mises oversimplifying the effect of investment outstripping voluntary long term saving) and at least one ideological and overpromising on policy (pretending the cycle is purely government-finance caused and removable). The Fed is moderately smarter than Keynesianism, having learned institutionally from the monetarists in the 1970s episode. But is presently populated by men who think it is good enough to not make the exact same errors their fathers made in the 60s and 70s, or their grandfathers made in the 1930s. They haven’t yet achieved even the sense shown by Bagehot in the later 19th century. For that matter, they haven’t even matched what the Swiss or Germans accomplished in the later 20th (which was considerably less).
“It would be pretty counterproductive to complain about the previous failed attempts at establishing a central bank”
Um, if you are going to claim that X causes the cycle, then you have to consider every previous period, and must include periods were X did not operate. An explanation cannot explain a phenomenon by tracing it to a variable that never varies. Cease cause, cease effect. Ergo, consideration of earlier economic periods is the only way the Austrian claim can be addressed empirically. And we find, contrary to your claims below, that the cycle is always with us, and that monetary change and instability is the norm throughout history. The time scale on which it moves may vary, that is the most that can be said.
“I’m not saying that a pure gold standard of a pure commodity backed currency never existed”
Leave aside “backed”, you can have a pure commodity currency, and you will still find inflation. See Rome, see debasing.
" it never truly existed in the US because the government would go on and off it at will"
Um, you then have a conceptual problem. If by a “pure” cbc you mean one that authorities can’t sometimes change by legislation, then not only hasn’t it existed but it can’t exist in the material universe. Men are free. If they all decide to legislate a new monetary order, they can and will do so. An institution that would prevent the entire people and legislature at some future time, freely deciding to change their monetary system, does not and cannot exist. Not even a draconian tyranny could ensure it, since draconian tyrants can be overthrown. Every monetary system is a standing arrangement and agreement among the men of the time and country were it operates, and can change as soon as their underlying wills change. It can require majorities, it can require changes to laws are different tiered levels and by different legal processes, if those involved continue to agree to abide by such regulations. But no system can prevent free men from later changing their minds. That is sort of what “free” means. Again we see that at bottom, what is being campaigned against are externalities created by other people’s freedom.
In the time of Andrew Jackson, legislation was passed outlawing any form of government sponsored central bank. Before and after the civil war, but notably not during it, convertibility into specie was standard for all banks, there was no Federal reserve system, and banks were as you put it later, “checking” one another by the force of their competitive business practices. But the result was emphatically not, “no trade cycle”. The result was regular panics and crashes following booms, roughly once per decade. The cycle was alive and well.
What can be claimed for the 19th century compared to the 20th, is long run price stability, through all of the cycles. The price level was higher at the end of the century than at the begining, but within a factor of 2. Wartime inflations in the 19th century could and did double the price level in a few years time. But there were long periods of slow deflation as well, as the two roughly balanced out. In the 20th century in contrast, inflation far outstrips deflation, and it is deflation that is exceptional, with the 30s the only sustained one (90s in Japan the only other case, and minor in comparison). Both have cycles, one has movements of the exchange value of money in both directions with net change limited, the other has movements in only one direction, other than the great depression, and net change large.
" the Romans left volumes of information behind – was there anything even remotely similar to a business cycle"
Sure. They also inflated a commodity currency a thousand fold. A denarius that was nearly pure silver in the time of the early emperors was a token coin with only a tiny fraction of its original value a few hundred years later. It had been alloyed out of existence as a commodity money. Currency debasement is actually even older than that, and alloying gold coin with silver (without revealing it) was widespread in Asia minor in the first millenium BC. The ability to detect this by comparing volume displacement with weight was the origin of the term “Eureka”, legend has it. For that matter, in biblical times we have seven fat year and seven lean years, running back to stories out of Egypt. The cycle was associated with the harvest in primarily agricultural societies, but certainly occurred, and monetary chaos we know is sufficient to cause cycles happened in Roman times etc. In the middle ages, rants against usury are full of allegations of exploitation of temporary economic hardship. Late medieval and early modern finance is full of schemes to insure against temporary or local downturns in trade by diversification and the like. Chains of bills of exchange financed trading bubbles in Amsterdam and the Hanseatic cities - they also had the full range of modern options, forward contracts, and other derivatives. (Portugese Jews were writing manuals about those in the 1400s). Adam Smith devotes a section to check kiting schemes.
“These times were very stable and not a single one led to a business cycle…not even close.”
Sorry, this is just laughably false, as a matter of empirical history. Again see Kindleberger if you need a primer on the actual history of these things.
“We got there because the government confiscated all the privately held gold”
This statement works only by ignoring the actual claim I was making, and your own instance that it is the advent of gold exchange or fractional reserve that supposedly leads to credit-instability. My claim, again, was tbhat “it is impossible to enforce a prohibition on using any money substitutes in place of the favored commodity money”. This is a claim that the move to fractional reserve or gold exchange, from commodity money, is endogenous. You yourself have insisted that this is the fundamental driver, not the change in the 1930s to public held gold being illegal. If public held gold being illegal were the essential change, then it would reverse in the 1970s. It doesn’t. Moreover, the system put in place in the 1930s this way was not fiat money, it was a gold exchange standard in which convertibility into gold was maintained for purposes of foreign trade and settling balances between countries. True fiat money only arises in the 1970s when Bretton Woods is abandoned and the US goes off gold. In between, the money supply expanded by the same fractional reserve system in place since the founding of the Fed.
So no, we didn’t get there by government confiscation. We got there, if there is fractional reserve banking with a central bank running it, in 1913 not 1933. We got there, if there is fiat money, in 1973. From 1913 to 1933 we had fractional reserve banking and publically held gold, and it crashed comprehensively. From 1933 to 1973, we had a gold exchange standard with public holding of gold illegal, and it inflated away but did so gradually. From 1973 to now, we have had fiat money but publically holding gold has been legal. All of it long after the period covered by my claim, which is way back in the 19th century or before (really, the first credit banks as opposed to Giro banks, as early as the 15th century, if not still farther back at the invention of the bill of exchange in medieval China), when free men endogenously began to use uncovered fiduciary media as extensions of fully covered commodity money. If the cycle is caused by any issuance of money substitutes beyond commodity cover, then it was emphatically not instituted by government coercion. Merchants and bankers invented such issuance and free men accepted it, centuries before the United States even existed.
“nobody is talking about the abolishment of the credit system.”
But you are refusing to understand the economic equivalence between all forms of credit beyond prior savings or without commodity cover. All money substitutes issued as pure credit operate in the same way, whether the entity doing it is a bank or not, whether any government is involved in any way or not. I understand that you want credit to mean loans of commodities fully saved out of prior income, or substitutes fully covered by such prior savings, but that is not the pure phenomenon of credit under discussion. Only the word is the same. A rediscounted bill is already a money substitute without commodity cover. They were the preferred medium of exchange for free international merchants for centuries. Entire bubbles were financed by chains of them, with or without banks of any kind supporting it, and certainly without government sanction of any kind. You can’t abolish all issuance of money substitutes without commodity cover, without fundamentally attacking essentially economic liberties.
You can attack one form of issuance you are most worried about now, but you can’t claim it will dispense with the possibility of the cycle, when it won’t stop men from issuing pure promises and other men from treating them as being as good as money. Men are simply free to do this, unless you go coerce all of them not to. If you try the latter, you will destroy not the trade cycle but trade, and liberty. The game isn’t worth the candle. The cycle also isn’t that awful. And long run price stability is both more important and more achievable by monetary policy, than any mythical perfect stability.
“if you want to loan out something you don’t really have”
I do. So do lots of people. Stock issuers, bond issuers, credit card users, check writers, and yes even those horrible bloodsucking bankers. Who are in fact fine upstanding honest men and pillars of capitalism. Most of them, that is - there are also rogues among them, as with all human groups.
“by printing up little pieces of paper”
I’ll use all sorts of ways of recording my promises, and so will lots of other people. I won’t mix them with FRNs, but I will regard their acceptance by the accepter, and not their acceptance by you, as the only legitimate test on their issuance.
“that does indirectly affect me by devaluing my little pieces pf paper”
Everything I do indirectly effects you. If I buy a peppermint latte instead of the stock you bought yesterday, it effects you. If I buy a Subaru instead of a Ford and you live within a hundred miles of a Ford dealership, it effects you. If I save rather than spend, it effects you. If I pay for Christmas with a credit card aka my sheer promises to pay later, and actually earn the value of what I give my family for Christmas by the end of January instead of December 25th, it effects you. If it isn’t until 2009, it effects you more. My economic actions indirectly affecting the value of the commodities you freely choose to hold, is not a reason to limit my economic freedom. If you don’t like the effects of other people’s actions on your holdings of dollar denominated assets, don’t hold dollar denominated assets - or hold as little of them you please. If you nevertheless find in more convenient to hold some dollar denominated assets, because so many other people accept them readily, then you are benefitted by holding them, not harmed. You might want to be benefitted more, but your desired “more” does not trump my economic freedom.
“So the ‘market’ decided that they want to use non-commodity backed money?”
First the market decided they wanted to accept media issued above commodity cover. They decided they wanted to patronize banks that were regulated by fractional reserve banking. And we got a gold exchange standard. You decide to hold dollar denominated assets - there is no gun to your head and you could instead decide to hold your entire net worth in small glass beads. You’d find it remarkably inconvenient and I don’t recommend it. Ergo, you are benefitted by instead having even the lousy fiat money we have today. If you have half a brain, you do not use said lousy fiat money as a store of value, and instead use portfolio or commodity investment to transmit purchasing power through time. But if you have any practicality at all, you recognize that others accept the fiat currency as money and it therefore functions as money, and hold modest transactions balances in money to deal with this. If you are like me, you also use open lines of credit denominated in fiat money and thereby issue fiat promises to pay routine transactions, instead of physical currency or cumbersome checks, and thereby minimize the low-earning transactions balances you carry. To me, my immediate medium of payment is a bank credit card and my store of value is diversified portfolio investment. And I am not oppressed in the matter by anyone.
I still think as a matter of public policy it would be better to have greater long term price stability, and I think even fiat money can get closer to that than we are (by reading their Bagehot and emulating the Swiss or later 20th century Germans), and I am entirely open to the idea of a commodity backed currency to fufill that goal still further - though dubious that you will get any of it to fly. But I am not willing to give up the right to emit media beyond commodity cover if both parties freely agree to said issuance and its acceptance, nor to see it attacked by others pretending to be libertarians. Nor am I willing to see so fundamental an institution of free market capitalism as banking finance, slandered and traduced by ignorant ranting, equiting it with counterfeiting and other notorious crimes, or pretending economic cycles would disappear and for all I know lions lie down with lambs if only bankers could all be rounded up and marched off to concentration camps. I deliberately exaggerate for the purpose of clarity - such rhetoric was directed at free capitalist actors before, and the consequences were anything but just.
" any Austrian economist could care less what people use as money"
Um OK, then riddle me this - how are you going to enforce the requirement that no substitutes without commodity cover be accepted by anyone as money? You can’t determine what commodity is so accepted, right? Men are to be left free to settle that themselves. But whatever commodity it happens to be, no one shall accept a written promise in lieu of it, ever. No one shall issue any written promises unless they can prove to a government goon’s satisfaction that they have the exact item mentioned in their left pocket at all times - even if the promise itself explicitly states otherwise, or promises nothing of the kind.
Sorry, the only way you can even begin to enforce a 100% commodity cover requirement, in practice, is first to legislate what the monetary commodity shall be, and then to closely regulate all dealing in that commodity, and then specifically to chase down, harass, and imprison anyone issuing promises different from those the government has approved, about the commodity in question. You will find it remarkably hard to do this if you want to apply it to every commodity in existence, and precious little economic liberty would remain to anyone if you did. As soon as you decide, however, that it shall be gold and harass the heck out of the gold dealers, everybody and their brother will be found on the corner dealing in glass beads, or whatever. A money too tight for any financing to be done in it in an accomodating fashion will not outlaw accomodating finance, it will simply move such finance to another commodity. You can’t abolish the pure phenomenon of gratuitous credit without abolishing the economic liberty on which is rests.
Yes the people have good sense in picking a commodity to use as money. No they do not of themselves refrain from gratuitous credit. Left free they will employ gratuitous credit in a money of their choosing, sometimes they will do it well and sometimes they will do it badly, and we will get cycles as a result. Which is fine. Cycles are fine - inconvenient yes, worth moderating yes, worth my liberty or anyone else’s, no not remotely. Stop trying to abolish them, it can’t be done and is not worth it.
“let’s say that all three IOUs get presented to me at the same time with a demand for payment.”
One, you don’t have to issue sight notes. The phenomenon of more investment occurring than there were bona fide prior savings out of income, which is driving the cycle, would still occur if you issued term notes only, and met their stated requirements to the letter.
“there is no way I can make good on the IOUs”
Doesn’t follow - might, if you have no credit at that point, but if you do then you might meet the obligations by borrowing elsewhere. If you have other assets besides money, you might meet the obligation by borrowing against them as collateral, or by selling some of them to third parties. There is absolutely no economic or physical requirement, that to meet a simultaneous demand for $300 dollars in currency, I must have $300 dollars in currency in my possession. It can happen that these other means of meeting the demand fail, yes, but not because they do not exist or do not usually work or must necessarily fail.
“$200 worth of goods and/or services were fraudulently provided”
First, you don’t know the amount of goods or services that were provided. Nor do you know their worth. There could be a chain of transactions of any length and involving any degree of further use of gratuitous credit, beyond the first. The value of the items traded for may have been materially difference from the transaction price agreed by the parties, even at the time of their transaction. It could also have changed by any amount in either direction by the time a demand for repayment is presented to you.
Nor need any of it have anything to do with fraud, if you promised only what you actually intended to perform and reasonably believed you could perform. Non performance of a contract is default, but default is not fraud. There can be fraud without any default, and their can be default without any fraud. If someone lends to another, they are trusting that other to fufill his stated contracts, but they are also freely accepting the risk that he might not be able to do so. No economic scheme or regulation of any kind, can legally ensure the fufillment of all contracts by all parties.
It is also a distraction and misunderstanding of the Austrian theory. According to that theory, the misallocation effects of investment beyond available savings occurs as soon as the gratuitous credit is used to purchase anything, and in no way depends on any future non performance of stated contracts, by any of the parties. The issuance might work out just fine for the lender and borrower. The goods invested in might fully cover the cost, enabling repayment in full at the stated times. It will still remain the case that capital assets have been shifted to this employment from others, and the demand for capital goods taken together has risen, without any prior voluntary savings out of income. Austrians trace the virtual savings so created to price changes induced by the shift in demand - some other consumer will see the real cost of some goods he wanted rise and his real consumption of them will thereby be restricted, to fund the successful investment. No social lost need be caused by this. Some redistribution will be - as is the case with every successful entrepeneurial action, without restriction.
The Austrian theory is that the voluntary level of savings reflects the true free market preference for present vs future goods, and that gratuitous credit employed for capital purposes will shift the mix of present vs. future goods away from this market preference. In the case of Mises, he assumes without actually proving that the prior “natural” preference will eventually reassert itself, and thereby change the values of the different categories of goods (“back”), and that this will occasion loss of value in the capital employed beyond the “level wanted”. There are two difficulties with this position. First, the redistribution occasioned by the successful investment shifts demand itself, away from any prior level wanted - different people are voting on the “wanted” and with different buying powers, after that redistribution. Second, nowhere is it written in stone that gratuitous credit shall always be employed to finance long-dated capital assets. Nothing in the nature of gratuitous credit requires it. It could just as easily finance immediate consumption and direct the schedule of goods to a shorter term rather than longer one. Mises missed this because he continued to subscribe to the untenable “wage fund” theory of capital, effectively, in this specific instance.
A better explanation of how the cycle occasions real loss is that the demand for savings will fall, and the effective supply of them for investment will seem to rise, when gratuitous credit is used in place of long term savings. This will induce a temporary reduction in the interest rates loans can command, and if this is expected to continue it will raise the present value of long dated assets disproportionately. As such assets rise in price, entrepeneurs will seek to trade the inputs that can create them for their new, higher prices. They increase the suppy of such assets and direct a greater portion of the society’s whole ongoing efforts into them. If these interest rate changes later reverse, the present value of long dated assets will fail in consequence. Thus a fluctuation in value of long dated assets is a secondary effect of gratuitous credit funding loans. From the standpoint of the long run average prices prevailing after the fluctuation has passed, every allocation decision made during the fluctuation and based on departures of any price from its long run average, will be a less efficient allocation that was possible. Real value that the society might have been able to realize with perfect foresight, will thereby have been lost.
This is in principle true of every failure of forecasting by entrepeneurs, without restriction. But it remains true that large scale use of gratuitous credit to fund loans, by monkeying with interest rates and thereby with the present value of deferred claims, can and in practice does induce additional forecast errors by entrepeneurs, and with it additional misallocations that might have been avoided with a smoother trade cycle.
Not because of any fraud. Nor because of any impending disaster in which the society is supposedly going to just run out of circulating capital and thereby “emperil physical existence”, in Mises revealing passing phrase. It is simply harder to businessmen to plan successfully in a violently rocking boat than in a calm one. That is quite completely all, on the subject of the real causes of loss excessively loose finance can and does occasion.
“let’s say I have one chicken but sell 10 chickens, on delivery tomorrow, collect the money and then tell everyone I only had one chicken which was dinner last night. How is that not fraud?”
If you promise what you never had any intention or ability to perform, to take other men’s assets, then yes that is fraud. But it is also not banking. Banks have assets for every liability, and a portion of their liabilities as the investor’s own risked capital (which you may freely participate in by simply buying their freely traded shares). They hope, expect, and in practice usually do, earn enough on their assets to cover all of their liabilities, with significant ongoing profits to spare. When people want to reduce their loans to a given bank, it realizes some of its assets by letting them run off as collected, by selling them to third parties, or by borrowing against them temporarily before doing either. And normally this works fine. How can it fail? It fails if the assets cannot be realized in time to meet an urgent and large demand, and others cannot accomodate the bank through it because they are in the same straights. That is illiquidity. And it can fail because the assets decline in value, wiping out the share capital of the bankers themselves, and afterward exposing their creditors to loss. That is insolvency.
“As soon as people start to suspect that you have overextended yourself”
What is overextended, if I don’t promise to repay in a commodity, but in debts of another bank? Only an inability to give you debts of another bank. But there is no such inability. Banks these days are not in the condition of banks under a commodity money system - they are obligated to pay out FRNs, not gold. And they can indeed pay out all the FRNs anyone will ever demand from them. Whether anyone wants FRNs is a different matter.
“as soon as it is found out there isn’t enough of the backing commodity”
There isn’t any amount of any backing commodity that is sufficient for some level of economic development.
If gold were our currency, it could be 100 times as valuable while there was 100 times less of it, and the amount would be just as sufficient economically. It is the value, not the quantity, that counts for economic purposes. It is the relationship between past promises about value, and future realities about value, not any mechanical relation to an amount of a commodity, that is at stake in the cycle. If businessmen invest in the wrong things, all the gold in the universe sitting in bank vaults won’t make their investments come right. If the banks had 10 times as much gold in their bank vaults, it wouldn’t make businessmen’s investments any shrewder, it would probably just make gold less valuable in nearly direct proportion. (A very slight net benefit from non-monetary uses of gold being easier to fufill). It wouldn’t allow the community to reach a higher level of economic development - unless you assume the value of gold remains largely unchanged as its quantity increased, say by allowing more resources to be drawn from other countries where gold remained scarcer. Then it would function as any other addition to the net capital of the country, whether monetary or industrial etc.
" I think they’re going to be having a talk with Mr. Smith and Mr. Wesson and a ride on my homemade tree swing."
You will be the one riding from the tree if you resort to violence simply because a counterparty fails to perform on its side a good faith contract you freely entered. Of course you should have process against whatever assets the defaulting institution has, and do. But no, you may not kill people whom you freely chose to trust, when or if that trust proves misplaced. I further note the violent rhetoric and the pretence that bankers are thieves who deserve to be executed. It is all utter slander and should be anathema to any liberal.
“What was that about the market choosing what is money again?”
It can, nowhere is it written that any market shall choose to use banknotes of any kind. Personally I prefer credit cards, much more efficient.
As for the businesslike way to go about offering a commodity money, you’d get serious financial backing from any one of the large number of libertarian financiers or entrepenurial fortunes, open offices right beside the London Metal Exchange and Chicago Board of Trade, probably also Nymex, you’d buy seats on both exchanges, regularly make markets in gold futures, trade existing exchange traded funds in the metals and create new ones, buy and sell gold coin down to small denominations (not $20000 bars, by 1/4 oz Kruggerands and all the others), and then also offer electronic accounts as a “giro” bank, buying or selling the underlying metal or futures on it in real time as transactions require. None of it would be aimed at irreversible transactions, anonymity, avoiding onshore presence, or otherwise deliberately tweaking authority’s tails (not that there is anything the matter with those noble pursuits - they just aren’t part of the right model). Be a useful and fully involved part of the existing commodity trading community, fully connected to the existing banking system, all dues paid memberships and seats held, every regulatory i and t dotted and crossed. There is undoubtedly a niche for it, though not a huge one and it would not replace out fiat currencies any time soon.
“If it were that easy then why are their even business cycles to begin with?”
“So I can start up my own printing presses tomorrow”
Straw man. The fact and it is a fact, that banking is not counterfeiting does not mean that counterfeiting is not counterfeiting. If you print FRNs you are counterfeiting, because you are passing the debt of somebody else without their authority to do so. Your own debts, on the other hand, knock yourself out. If you write on a bank’s check with its routing number, then you are trying to pass a debt it has underwritten. But if you just get yourself a promissary note form so it is all in your own name, you can write promises to pay any amount you like, at any terms, with any ongoing interest or other incentives. If you can honestly say the proceeds have been used in a way any prudent man would agree, gave you a reasonable expectation of being able to fufill them, then there is no fraud in it. You have to find someone willing to lend to you. You will probably find them pretty inquisitive about how you intend to use it and whether than use it likely to result in your being able to pay them back. That’s banking too. And it is hard work, but it is not theft.
Mike,
On e-gold, my admittedly limited understanding is that they are still open and operating, as are a dozen others like them. The April affair, which I agree seems excessive, apparently only affected a modest portion of their assets. I think it is the irreverisible transactions aspect of their set up that has law enforcement types in a tizzy, and fear that it is useful to money launderers (can’t see that a suitcase full of 100s is any less useful, but whatever). There have apparently been some frauds run in these things, ponzi scheme stuff, but then ponzi doesn’t mean the post office is crooked just because he used stamps etc. My take on a businesslike way to go about providing a gold-based store of value is in my larger post above.
As for why the money supply should expand with time, see the early portions of Mises Theory of Money and Credit. The demand for money balances rises as an economy matures and as the total volume of goods and services traded within it does. When the money supply expands faster than demand to hold money balances rises, the exchange value of money falls, and prices denominated in that money will rise. When the money supply expands slower than this, or if it contracts, then typically the exchange value of money will rise, or prices denominated in money will fall. The money supply expands under a gold standard as more gold is mined, at rates running 1 to 3% per year typically. (In the 19th century, it was appreciable faster before WW I from South African gold, and earlier at mid century from US gold especially in California (“49 ners” etc).
Mises argues, persuasively, that it is better for the efficiency of economic calculation if the exchange value of money is broadly stable over time. He argues that both excessive inflation and excessive deflation are damaging to the real economy, and specifically argues against e.g. deflating currencies after a war to return to a prewar par, for example. Since the damage done in the inflation was due to the transactions it made nonsense of (in the sense that those contracting them did not forsee what actually happened to the exchange value of money), it would not be helpful to falsify another set of them in a different direction. It can’ t be argued that the two will balance out because the counterparties have changed etc.
Well, the level of money growth consistent with the price level remaining broadly unchanged is an empirical matter. It is clearly positive - ongoing productivity increases would lead to the continual drop in average prices and a consequence increase in the value of money if the quantity were literally unchanged. It is also clearly less than the level of money creation we have seen under fiat money, since prices have risen about 3-4% per year, with money supply growing 6% to 7%. There is no necessary mechanical relation between the rates, since it depends on free decisions as to the desired money balances people want to hold, as Mises argues. And no perfection is possible in the matter, due to the difficulty of meaningfully measuring prices across differing baskets of goods at different times etc.
But broadly, the best monetary policy would let the money supply grow at some modest but positive rate, keeping the price level roughly stable. That positive rate is probably between the 1-2% or so seen under a gold standard and the 6-7% or so seen under US fiat money - but probably closer to the former. Some monetarists (e.g. Friedman) have in the past advocated a mechanical money supply rule, allowing it to increase 3-4% per year continually, without active policy intervening to change this. Some older classical banking theorists, notable Bagehot, believe instead that a central bank should actively manage bank rate but do so counter-cyclically. In modern practice, if the central bank is aggressive enough it winds up acting pro-cyclically, since the cycle follows its policy switches.
How do you moderate cycles without infringing on liberty? Do you mean by pro-cyclical planning? If so, do you mean that individuals can do this in varying magnitudes, or do you mean a central financial planner should do this?
Also, you say there will always be a boom/bust cycle. Do you mean that, in a free society, there will always be a periodic tsunami, or more like more frequent but less harmful waves on a beach (or ripples on a pond)?
So that’s the basis of this entire exchange?
That and Hayek’s views on the matter which differ from the Austrian school when it comes to monetary policy.
Jason,
Risk arbitrarge is the legitimate source of banks’ income as they serve the function of evaluating the credit worthiness of borrowers. As we can plainly see during the current mortgage financing fiasco, in a fiat money system, the big well-connected banks do not suffer the consequences of betting wrong. It becomes a loaded dice roll: head they win (during the expansion) and tail we taxpayers (and especially savers) lose (during the contraction). Your argument that why don’t I open a bank holds no water because the FED only bails out the big well-connected banks. Buying stocks in those banks does not give you level playing field either: the pay packages that executives of those big well-connected banks fully reflect the value of the well-connectness of these executives . . . i.e. their prowess in being able to tell the FED to open the spigot when they go long or need a bail out. Unfortunately, we small time individuals can not buy shares in the CEO of Goldman Sachs, CEO of Citigroup or CEO of Merill Lynch; instead of partaking in the hundreds of millions of pay-offs like they do, we are stuck with common share that drop in price. Fiat money gives the well-connected the power to expropriate from the economy at large through inflation and deflation.
The problem with Gold Standard is the “standard” part: instead of accounting in ounces, the government is able to suspend or redefine the link between “ounces” and “dollar”/ “pound” at any moment, and governments do that often ever since the beginning of the modern Gold Standard of 18th century. When a bank run took place in renaissance Italian city states, bullion bars were taken out of the bank; after the final bar is carried out, the next thing to come out was the banker, followed by his head being chopped off. That was a very powerful deterrent to not risk over-leveraging. Renaissance Italy enjoyed rapid economic growth even with a credit system that was very tight compared to modern standards. With the founding of corporate charters, chopping heads became unfashionable. However, when a typical corporation fails, all its assets are to be liquidated for the benefit of its creditors; owners and shareholders of a typical corporation get next to nothing. Major banks however enjoy a very special treatment: when suspension of specie payment is declared, banks don’t have to be liquidated! And they continue to operate! That is unilateral breech of contract brought on by a special privilege granted by the government. From there on, major bankers don’t have to worry about runs on their banks. The result is huge swings of over-expansion followed gut-wrenching contraction.
BTW, when money substitutes were introduced in the 18th century (Continental) and 19th century (Greenback), they were severely discounted to their face value, so Gresham’s law did not apply unless the particular location really got on the ball about enforcing “patriotism.” The 20th century episode apparently found a much more docile population, which not only took all FRN at face value but also lined up to hand in their gold in 1933, which the FDR regime promptly robbed them 40% within 10 months. That’s what a few decades of public education accomplished, just like the late 19th century public education advocates hoped: following in the foot steps of the glorious Germans/Prussians . . . for a nation of zombie soldiers.
“big well-connected banks do not suffer the consequences of betting wrong.”
Of course they do, as anyone who actually owns bank shares knows. Once again, we see the condemnation of a side of a trade the condemner is not willing to take himself, the sure sign of conscious dishonesty. Honest disagreements about the value of anything are expressed as “you cut I choose”. Dishonest ones choose first and then try to jawbone in favor of the side already selected, and are the constant mark of ideological tendentiousness and conscious dishonesty.
“head they win (during the expansion)”
Or you win, if you see said expansion happening and choose to participate. If instead you prefer to hold FRNs or low yield bank balances - debts of the banks - instead of bank stock - equity of the debts you say are stacked - then you have only yourself to blame for their relative value performance.
“and tail we taxpayers (and especially savers) lose”
In the S&L crisis there was indeed some taxpayer money used, though remarkably little considering its scale. None for the biggest banks however, it all went to liquidate assets of the small fry - which were indeed closed in fire sales, contrary to your banks aren’t liquidate argument. In the present mess, to date none has been used. In the third world debt crisis, none was used - there were centally negotiated write offs and such, with regulatory easements, but not direct taxpayer funding. As for the size and failure issue, I think the names Chrylser corporation or Penn Central are enough to show it is hardly a preserve of banks. Doesn’t mean I advise it, but it is not directly related to fiat money or to banking.
“why don’t I open a bank”
Actually I recommended that you buy bank shares.
“the FED only bails out the big well-connected banks.”
Ah, the others never appear at the discount window and are not helped by managed short term interest rates, right? At least we have you on record, thereby, acknowledging that merely setting rates by open market ops is not a bail out of banks - since it can’t discriminate between the big well connected ones and everyone else.
“Buying stocks in those banks does not give you level playing field”
Straw man. You can enjoy the supposed heads I win, tails others bail me out relationship that you argue exists for the largest banks. Over the long run, bank stock has trounced bank deposit savings - but not because banks dramatically otuperform other forms of equity, again contra your claim that they have a special can’t miss deal. Instead, over the long run bank stock performs about like other equity, and all forms of stock equity trounce owning the debt of banks. But have to take significant risk to do so, and experience significant declines in value at times of financial turmoil. None of the bailout claims you allege prevent bank stock from falling dramatically when bankers make poor lending decisions.
“the pay packages that executives of those big well-connected banks”
Red herring. Pay packages of executives are high at all large corporations. It is not exclusive to banks and does not start with fiat money. Bankers routinely lose their jobs when they make poor lending decisions - the CEOs of Merrill and Citi are gone. Goldman didn’t experience that because its bankers were smart and played the present crisis well, and went short beyond their own limited exposure to the distressed loan sectors. The stock was volatile anyway, because of significant uncertainty about all this - and is still well off its highs. But has outperformed e.g. Citi, which lost 40% of its value in less than 6 months.
If you instead invest in Apple, Steve Jobs will have a very rich pay package indeed, without having any special fiat money treatment.
Moreover, while the pay of financial executives is high and may in the case of poor performance be too high, it is much higher for good performance. Keeping your job and making 3 to 5 times as much is certainly an incentive. If you disagree with the level of incentives used at leading financial institutions, you are free to vote your shares to reduce pay packages for executives, and to lobby other major shareholders (and shareholder institutions, like mutual and pension funds etc) to do the same. If you haven’t convinced these people to do so, it isn’t because the Fed secretly conspired to pay off its friends, but because the leading investors in major corporations freely disagree with you.
Socialists deploy class envy rhetoric, libertarians respect the free choices of others in capitalism.
“their prowess in being able to tell the FED to open the spigot when they go long”
I can assure you the major shareholders of Citi were and are “long”, that they would dearly like the Fed to open “spigots” as you put it, but they are still down 40% in 6 months. Said major holders lost $100 billion, approximately, in that one bank alone - the total draw down in the financial sector is more like $1 trillion. They might get it back. You might join them, if you think they will. That is capitalism. If you think they won’t, you can hold gold instead of their debts. If you think they will, you can hold their stock. Instead holding no commodity or equity position, and only holding bank debts instead, you are lending to people and slandering them at the same time, without being willing to step into their shoes. Which is unjust, any way it is sliced.
“Fiat money gives the well-connected the power to expropriate from the economy at large”
Fiat money can only give such power through banks and bank common shares are the only vehicle that can deliver it, and anyone can own them, and lots do (mostly without knowing it very much, through their index funds and what have you). Fiat money gives no special power to inside executives to negotiate higher pay packages for poor performance, which you will find just as common at big car companies or big tech companies or big phone companies, as at banks. The bit you can’t participate in (except by voting yours shares) is not specific to banks nor in any way tied to fiat money. The part that is tied to fiat money, acceptance of the debts of large banks as money by the public, without commodity cover - you can participate in fully by owning bank shares. That just isn’t riskless - no equity holding is. Your pretending they have a stacked favorable deal without being willing to take that deal yourself, proves to a demonstration that you are consciously slandering them to maintain an ideological line. If you subjectively believed what you are saying, your own capital would be fully invested in bank stock.
“instead of accounting in ounces, the government is able to suspend”
Depositers and bankers can agree to any form of debt contract they like. If they wish to contract bank debts in ounces of gold, not dollars, they can do so - though they will find the CBOT or London gold market more equipped to handle such contracts than banks. When a man instead freely chooses to enter trades demoninated in dollars, not gold ounces, it is not a trick or a government conspiracy, it is simply other people using their freedom differently than you would have them using it. But telling others what use they must make of their freedom, is not libertarian principle. If free men choose to enter contracts in dollars, who are you to tell them not to?
“governments do that often ever since the beginning of the modern Gold Standard”
You need to go back rather farther in history. You will find that before modern banking of any kind, governments were quite able and willing to simply default on their debt obligations, or to forcefully convert unpayable loans to longer maturities, sometimes to arrest their own financiers and occasionally to execute them simply to avoid repaying legitimate debts to them; that they were also quite ready and able to inflate metallic currencies by debasing them, etc. Governments can and do use their power in financial matters under any monetary system, sometimes recklessly and irresponsibly and unjustly. None of that is specific to modern paper currencies, convertible or not.
“When a bank run took place in renaissance Italian city states, bullion bars were taken out of the bank; after the final bar is carried out, the next thing to come out was the banker, followed by his head being chopped off.”
Again we see the hyperbolic claim that bankers are criminal and should be executed. Why? What is at stake in this vitriol? From Hayek any libertarians may learn that dividing the people over redistributive claims and inciting class hatreds among them, is the typical socialist measure. That the worst thing about consciously manipulating government set power policies for political redistribution is that it makes every man’s position dependent on government action and simultaneously transforms their attitude toward their fellows, from voluntary mutual cooperators in exchange and division of labor, into mutual enemies and predators, who see their own good in the destruction of those around them. You and others here posting is a similar vein are clearly deep into this disease, and have been led by political rhetoric to regard whole classes of men, engaged in entirely legal, voluntary, risk-taking and socially useful enterprise, as your mortal enemies and justly deserving of violence. This is precisely the problem. Such wild, irresponsible allegations against banking, modern or any other kind, deserve to be repudiated by every man of the slightest liberal principle. Regardless of what monetary system we all decide is expedient, through free market action or through legislation or both in combination.
I am not a banker. But I am enough of a liberal and schooled enough by Hayek not to sit still when men engage in such blood libel, because that is what it is.
“when a typical corporation fails, all its assets are to be liquidated for the benefit of its creditors”
As we haev seen already in the present mortgage mess. Tell the bankers of New Century Financial they will be bailed out whenever they lend recklessly. The same has happened with the CDOs and other trusts involved in repackaging mortgage securities - indeed, it was the bankruptcy of several such, with the realization that not only would the junior debtors be wiped out, but that many who thought themselves senior would get only 30 cents on the dollar - that touched off the present turmoil back in August.
“Major banks however enjoy a very special treatment: when suspension of specie payment…”
Earth to Jim, we aren’t still under a commodity money conversion standard, banks have not contracted to repay their sight obligations in specie. Major banks still have to be able to repay their debts. They can still fail to do so, if the value of their loans is exceeded by the value of their debts, because the value of the loans has fallen. That is what causes bank difficulties, and it can and does wipe out bankers. It can also harm bank creditors, though usually to a far lesser degree and subordinated ones first, depositers last.
If you lend to a man or to an institution, you are accepting his debt in lieu of whatever you give him, voluntarily. If that trust was misplaced, you may lose value. That is free capitalism and nothing can change it. There is no such thing as a riskless debt. The desire for assets that are perfectly riskless but also have returns as high as risky ones (otherwise we would be regaled with stories of the parasites earning higher returns than they pay out etc etc) is the hardy unjust perennial behind the whole thing. And the just solution is one every fair minded child knows, the principle of “you cut, I choose”. If you are free to take either side of a transaction, you cannot complain that its terms are unfair to you. This is too simple and obvious to be spun away. And it utterly destroys all this foderal.
“when money substitutes were introduced in the 18th century (Continental) and 19th century (Greenback), they were severely discounted”
You are free to do this now. You can raise any price you ask for anything if you are paid in FRNs or other bank debt you distrust. You can have lower prices if paid in Euros, or in gold, or whatever you please. If others don’t much care about your payment preferences, they will probably just pay your higher dollar prices, and not bother trading their dollars for gold elsewhere, to have gold to pay to you. But again we see that it is not what you are free to do or not, that bothers you, but the use others are making of their freedom. You want others to contemn FRNs and repudiate them - perhaps to goose demand for a commodity you are already long, instead. But it is their freedom, not yours. They are the judges of whether or not they are benefitted by voluntarily holding bank debts and using them for transactions. You are not.
So you slander them, too. From libeling the bankers, you are drawn inexorably to slandering and besmirching their voluntary customers and creditors. Which were the constituency you claimed to be speaking of behalf of, but who you are driven to denounce as “zombies” because they do not react to your wild charges by, perhaps, lynching those benefitting them by voluntary exchange and services, or at least refusing to patronize them. All without being willing to do better, or at all, what you say the zombies are fools to stand because it is such a great deal for the banker.
Which is exactly, I mean every tactic, the socialist nonsense Mises spent his life denouncing. All you have done is change “capitalist” to “banker”, and replaced “profit” with “debt issuance”. But there isn’t a scrap of libertarian principle in the whole of it.