Showing posts with label Monetary Systems. Show all posts
Showing posts with label Monetary Systems. Show all posts

Thursday, April 19, 2012

Critical Economic Issues

 

Tomorrow morning my department chair Jeffrey Herbener and I will be presenting the lecture "Conservatives and the Economy: Assessing the Critical Issues," at the annual conference hosted by Grove City College's Center for Vision and Values. This year's conference theme is The Challenge 2012: The Divided Conservative Mind. Herbener will be speaking on the importance of sound money and I will be explaining the negative economic consequences of government spending.

Thursday, November 10, 2011

Joseph Salerno on International Monetary Systems

The Ludwig von Mises Institute has recently posted videos of several lectures from this summer's Mises University. While all appear intriguing, I highly recommend Joseph Salerno's lecture on international monetary systems. He provides a masterful taxonomy of the various monetary systems that nations have used to facilitate exchange. In light of the uncertainty of the future value of the dollar and the viability of the Euro, Salerno's lecture is of more than mere academic interest.

Wednesday, May 4, 2011

High Gas Prices: Another Reason to End the Fed

That's the conviction of Mark Brandly, professor of economics at Ferris State University. In an excellent essay on Mises.org he argues that if the dollar had merely retained its value since 2001 the average price of regular gasoline would be approximately $2.91 a gallon instead of $4.00. "Gasoline prices would be 27 percent lower today if the dollar had held its value relative to the euro over the last decade."

Gas Prices over the Past Year

Brandly is responding to comments Fed Chairman Ben Bernanke made at his recent press conference claiming innocence on higher gas prices and to President Obama's targeting oil speculators as the main villains in the higher gas price story. Brandly rightly pinpoints the culpability of monetary inflation instigated by the Fed.

As Brandly explains:
Bernanke's deceitfulness is appalling, although not unexpected. He knows that Federal Reserve monetary policy plays a significant role in gasoline prices. Expansionary monetary policy leads to more dollars being available in world currency markets and weakens the dollar. The weaker dollar results in higher import prices. More than half of the oil consumed in the United States comes from foreign producers, and because oil is the main input needed to produce gasoline, higher oil prices mean higher gasoline prices.

Thursday, March 3, 2011

Brittany Cobb on Sound Money

Congratulations goes out to Grove City College economics major Brittany Cobb for writing a winning essay in the undergraduate student division of the Sound Money Essay Content sponsored by the Atlas Economic Research Foundation! Her paper is entitled "The Gold or the Green?," which she recently presented at the Austrian Student Scholars Conference here at Grove City College. Her paper is an excellent survey of the relative strengths and weaknesses of various monetary systems including the gold standard, dollarization, and fiat paper currency. This makes the second year in a row that a Grove City College economics major has won a prize in this essay contest.

Wednesday, December 29, 2010

The Trouble with Fractional Reserve Banking

Thorsten Polleit, Honorary Professor at the Frankfurt School of Finance & Management, has an excellent piece on Mises.org briefly explaining "The Faults of Fractional-Reserve Banking." Among the problems of fractional-reserve banking he cites are the following:
  • It violates property rights. It does so because it asserts two people have exclusive ownership rights over the same piece of property.
  • Contrary to popular belief, fractional reserve banking is not the result of the natural workings of a free market.
  • The fact that, in our current system, the central bank can bail out a fractional-reserve bank that is in financial trouble by creating additional fiat money does not make fractional-reserve banking any more legitimate.
  • It generates inflation via credit expansion and, hence, sets in motion the business cycle
Polleit's essay is a response to Martin Wolfe's "Could the World Go Back On a Gold Standard?" Wolfe says that we will not and we should not. (Incidentally Wolfe cites a recent article on privatizing money, by my graduate money and banking professor, Leland Yeager).

One of Wolfe's assertion that Polleit responds to is that 100 percent reserve banking is wasteful, because most of the time depositors do not need the money they have in their deposit accounts. Forcing the bank to hold onto that money would force society to do without the productive forces unleashed by lending out that money to a productive entrepreneur.

Polleit does a good job responding to Wolf's assertions, however, I would like to add one more bone of contention. People do not hold money in demand deposits because they don't "need it." People purposely choose to hold a specific quantity of money in their cash balance. Demand deposits make up part of that cash balance. People hold money because the future is uncertain and it is impossible to know exactly how much money will be needed when to fulfill all of the various transactions that will be undertaken. People purposely decide to hold a specific amount of currency and money in their checking accounts as they deal with uncertainty. It is simply wrong to assert that people hold money in a checking account because they do not need it.

Monday, December 20, 2010

When the Hyperinflation Crack-Up Boom Comes, It's Often Back to Barter

Ludwig von Mises in his essay on monetary economics, "Stabilization of the Monetary Unit--From the Point of View of Theory" posited one possible terminal point following a monetary authority's attempt to prolong a boom with ever increasing inflation to be the crack up boom.  That is the boom to end all booms in that it is the result of hyperinflation where the monetary system cracks up and breaks down. The necessary end result is hyper inflation. Hyper inflation destroys the purchasing power of money, becomes worthless in exchange. and, hence, ceases to be used. Society then either must adopt another currency or devolve back to barter, in which producer or consumer goods are exchanged directly for other producer or consumer goods.

The New York Times reports that this has happened in Zimbabwe. The story focuses on a hospital that is now accepting payment in peanuts which its grinds into peanut butter that it feeds to its patients. As the story reports
The hospital, along with countless Zimbabweans, turned to barter in earnest in 2008 when inflation peaked at what the International Monetary Fund estimates was an astonishing 500 billion percent, wiping out life savings, making even trillion-dollar notes worthless and propelling the health and education systems into a vertiginous collapse.

Below is a barter exchange rate list for different goods.


The exchange rates are denominated in dollars, because last year Zimbabwe did away with its currency and replaced it with the U. S. Dollar. You know things are bad for your currency when you want to adopt the U.S. Dollar in its place!

As the report indicates, thoroughly debasing the general medium of exchange can have grave consequences.
For most of the past year, the hospital did not have enough money to stock blood. Ms. McCarty said women who hemorrhaged after giving birth or experiencing ruptured ectopic pregnancies were referred to bigger hospitals, but often they had no blood either. Eight women died, she said. Just recently, the United Nations has begun paying for blood at the hospital to improve women’s odds of surviving.

Thursday, December 9, 2010

What We Need Now Is Sound Money

That is the opinion of John Cochran and I could not agree more. The Great Recession is the logical consequence of a decades long process departing from sound money. The reason we are still muddling through with very high unemployment is we have refused to move back toward sound money.

Joseph T. Salerno's work on monetary economics is what one could call the gold standard of monetary theory (if people would recognize the metaphor anymore). Cochran justifiably calls Salerno, "today's leading monetary scholar in the tradition of Mises and Rothbard." The collection of his essays on monetary theory and policy, Money, Sound and Unsound is a intellectual tour de force. I received my own copy a few weeks ago and could not be more pleased. I had read a number of the essays before in their original format, but some were in relatively hard-to-obtain journals and it is wonderful to have them all in one place.

Salerno understands the nature of money as a medium of exchange. His analysis of the gold standard from the perspective of both theory and history demands careful attention. This book also includes an excellent essay documenting the link between war finance and monetary inflation. He explains the economics of international monetary systems, and is masterful explaining the nature and consequences of inflation as well as the various forms and consequences of deflation. He especially notes that we have no need to fear deflation resulting from the liquidation of unsound investments. Would that Ben Bernanke would understand this.

Tuesday, November 16, 2010

James Grant on How to Make the Dollar Sound Again

Saturday's New York Times featured James Grant's excellent op-ed explaining what he would do to to recovering a sound dollar. (Hint: it does not include quantitative easing). He calls for a return to the gold standard. Notwithstanding official unpopularity of the idea, Grant makes a lot of sense and his analysis is well worth reading.

Grant makes one great point after another with his snappy prose. He notes that the classical golds standard was one of the most stable monetary systems we've had in history. He notes how simple it is to maintain. He notes that the pure paper money era is relatively recent, beginning in 1971. He notes that even the Fed was originally on an international gold standard. He even identifies some of the titles of irrelevant research pursued by Federal Reserve economists. Finally, and most importantly, he explains that under an honest gold standard, government bankers do not need to be clairvoyant, which is a good thing, because they can't be.

As Grant explains,

The intended consequences of this intervention include lower interest rates, higher stock prices, a perkier Consumer Price Index and more hiring. The unintended consequences remain to be seen. A partial list of unwanted possibilities includes an overvalued stock market (followed by a crash), a collapsing dollar, an unscripted surge in consumer prices (followed by higher interest rates), a populist revolt against zero-percent savings rates and wall-to-wall European tourists on the sidewalks of Manhattan.

As for interest rates, they are already low enough to coax another cycle of imprudent lending and borrowing. It gives one pause that the Fed, with all its massed brain power, failed to anticipate even a little of the troubles of 2007-09.
A government managed gold standard would certainly not be perfect and would only be as good as the vigilance of the powers that be to maintain it. We did, after all, once have a gold standard and the state walked away from it. An even better alternative would be a free market in money production in which no single entity, such as the Federal Reserve, has the official monopoly in printing money, and in which banks are not allowed to create checkbook money out of thin air via fractional reserve banking. Still, a gold standard would be much better than we have now and might be a tremendous step in the right direction.

Nota Bene: Lew Rockwell who made me aware of Grant's op-ed on his blog, will have Grant as a guest on The Lew Rockwell Show tomorrow. The program will be available as a podcast.

Wednesday, August 18, 2010

A Picture May Be Worth a Thousand Words, but a Dollar is Worth Less and Less

Monday's Chart of the Day from Business Insider communicates a remarkable amount of 20th Century American monetary history in one graph. It quite ably shows three major monetary turning points last century, all of which encouraged increases in the rate of money creation and resulted in large increases in prices.




Notice first, however, that from the end of the Civil War in 1865 through about 1910 prices gradually fell, meaning that we experienced deflation (the horror...the horror!) during one of the most prosperous times in the history of our country. It is simply not true that deflation necessarily hurls us into a financial black hole sucking us further and further down a depressionary death-spiral.

Alas, deflation was the last thing we needed to worry about during the 20th Century. The first crucial turning point toward inflation illustrated by the graph was the creation of the Federal Reserve in 1913. Initially sold as a way to assist the commercial banking system to provide an "elastic" currency to mitigate financial crisis, the Fed merely made it easier to inflate the money supply, which banks did quite willingly. This led to an inflationary boom during the 1920s that culminated in a serious bust in 1929 that turned into the Great Depression.

The next turning point came after World War II with the establishment of the Bretton Woods system. The chart bears out the truth of the title of Henry Hazlitt's book, From Bretton Woods to World Inflation. Far from stabilizing the world's monetary system, Bretton Woods put us back on the inflation trail, leading to the final turning point. 

That would be Nixon taking the United States off of the international gold standard. Nixon felt compelled to do that because of the severe drain of our gold reserves do to the massive inflation of dollars during the Bretton Woods era. With no more international gold anchor, the Federal Reserve was free to inflate and inflate it did. You can see what has happened to prices and the value of the dollar since then.  It is estimated that consumer prices have increased by at least 538 percent since 1960.

The story told by monetary history is that fractional reserve banking made easier by a central bank opens the door to massive monetary inflation which causes higher prices and a decreased purchasing power of money. It also opens to door to the boom/bust business cycle. There is nothing like bringing stability to our monetary system, and this is nothing like bringing stability to our monetary system.