The World Before Central Banking

In today’s world, there are many who want government to regulate and control everything. The most bizarre instance, though — more bizarre even than banning the sale of large-sized sugary drinks — is surely central banking.

Why? Well, central banking was created to replace something that was already working well. Banking panics and bank runs happen, and they have always happened as long as there has been banking.

But the old system that the Fed displaced wasn’t really malfunctioning — unlike what the defenders of central banking today would have us believe. Following the Panic of 1907, a group of private bankers led by J.P. Morgan successfully bailed out the system by acting as lender of last resort. The amount of new liquidity disbursed into the system was set not by academics like Ben Bernanke, but by experienced market participants. And because the money was directed from private purses, rather than being created out of thin air, only assets and companies with value were bought up.

The rationale of the supporters of the Federal Reserve Act was that a central banking liquidity mechanism would act as a safeguard against such events, to act as a permanent lender-of-last-resort backed by government fiat. They wanted something bigger and better than a private response.

Yet the Banking Panic of 1907 — a comparable market drop to both 1929 or 2008 — didn’t result in a residual depression.

As the WSJ noted:

The largest economic crisis of the 20th century was the Great Depression, but the second most significant economic upheaval was the panic of 1907. It was from beginning to end a banking and financial crisis. With the failure of the Knickerbocker Trust Company, the stock market collapsed, loan supply vanished and a scramble for liquidity ensued. Banks defaulted on their obligations to redeem deposits in currency or gold.

Milton Friedman and Anna Schwartz, in their classic “A Monetary History of the United States,” found “much similarity in its early phases” between the Panic of 1907 and the Great Depression. So traumatic was the crisis that it gave rise to the National Monetary Commission and the recommendations that led to the creation of the Federal Reserve. The May panic triggered a massive recession that saw real gross national product shrink in the second half of 1907 and plummet by an extraordinary 8.2% in 1908. Yet the economy came roaring back and, in two short years, was 7% bigger than when the panic started.

Ben Bernanke, widely seen as the pre-eminent scholar of the Great Depression thought things would be much, much better under his watch. After all, he has claimed that he understood the lessons of Friedman and Schwartz who criticised the 1930s Federal Reserve for continuing to contract the money supply, worsening the Great Depression; M2 in 1933 was just 72% of its 1929 peak.

So a bigger crash and liquidation in 1907 allowed the economy to roar back, and continue growing. Meanwhile, in today’s controlled, planned and dependent world of central liquidity insurance, quantitative easing and TARP, growth remains anaemic four years after the crash. Have the last four years proven conclusively that central banking — even after the lessons of the 1930s — is inferior to the free market?

Certainly, Bernanke’s response to 2008 has been superior to the 1930s Fed — M2 has not dropped by anything like what it did from 1929:


Industrial production has not fallen by as significant an amount as 1929, nor has homebuilding. And there are many other wide-scale economic differences between 1907 and 2008 in terms of the shape of the economy, and the shape of employment, the capital structure, and the wider geopolitical reality. But the bounce-back is still vastly inferior to the free-market reality of 1907. I think there are greater problems to central banking, ones of which Friedman, Schwartz and Bernanke were unaware (but of which Rothbard and von Mises were acutely aware).

Does central banking retard the economy by providing liquidity insurance and a backstop to bad companies that would not otherwise be saved under a free market “bailout” (like that of 1907)? And is it this effect — that I call zombification — that is the force that has prevented Japan from fully recovering from its housing bubble, and that is keeping the West depressed from 2008? Will we only return to growth once the bad assets and bad companies have been liquidated? That conclusion, I think, is becoming inescapable.

About these ads

77 thoughts on “The World Before Central Banking

  1. I have also read the Panic of 1907 be referred to as the Rich Man’s Panic of 1907.

    I believe it started with a couple of banks trying to corner the copper market. Yet another reason to bring back Glass Steagall (Because I’m sure JPM and GS don’t try to move any markets today, ahem, aluminum and silver.)

    And yeah, Bernanke still doesn’t get he and the Fed ARE the problem. And, after hearing Janet Yellen speak a couple of times, I believe she is only at the Fed to make Bernanke look good.

    • There is a lot to be said for Glass Steagall. It is possible that such separation (either by market preference, or by government fiat) is the only thing that can maintain a stable (ish) banking system. I tend to believe that in a zero-bailout market, firms would introduce their own firewall.

  2. Thanks for the history lesson and analysis. This brings up a point that I think is missed by a lot of people, ie Monetarism is no better than Keynesianism.
    Krugman likes to paint monetarists, especially Friedman, as free marketeers and then bemoan the current state of the right for abandoning the sensible right-wing policies of Friedman, eg Quantitative Easing. But as you have pointed out here, Austrian economics is at odds with monetarism and Keynesianism. Austrian economics are actual free market economics and the conservative right is correct to shun monetary activists like Friedman.

  3. what is the difference between monetarists and Austrians? I thought they both agree that money creation = inflation? The monetarists like Keynesians want to manage the economy especially monetarists the money supply and Austrians want a free market banking system?

    • The difference is, in a sentence, that monetarists believe the government should manage the money supply and business cycle, and Austrians believe that the government should do no such thing.

      Many Keynesians are, in fact, monetarists, although some subscribe to MMT which is a stronger form of monetarism.

      • Another way to break it down is monetarists believe that monetary policy is the answer to economic shocks, ie money printing. Keynesians believe that fiscal policy is the answer to economic shocks, ie government spending. The latter of course relies on the former. Monetarists would say the central bank should print money and give it to the banks to distribute (private sector). Keynesians would say the central bank should print money and give it to the government to distribute (public sector).
        The Austrian approach would not have a central bank printing at all. Instead, failures would fail, and success would succeed. The result of the success would be the accumulation of capital that could be deployed into the economy toward other successful endeavors which would in turn grow the economy. I’m basically repeating Aziz’s article now. But it bears repeating since no one reading this has ever lived under any system other than a central bank centrally managing the economy. Austrian economics is other-worldly to most at this point.

        • By the way Doug, hat tip to you: the Larry White audio you sent me inspired me to look into this and to understand what really happened in 07/29.

          Not many people have actually read Schwartz/Friedman (I wonder if Krugman really has?) because they are very specific — using specific comparisons — that the Fed tightening in 29 caused the depression, next to 07 when J.P. Morgan expanding prevented a depression.

          Most people who have read it (Bernanke, etc) have read it as that the money supply (i.e., but not necessarily the Fed) should expand during depressions, which is superficially correct, but what Friedman and Schwartz were missing is that I am not sure the Fed as a non-market participant is really in a position to say what should or shouldn’t be bought, how much to expand, when to stop, etc. The expansion/contraction should be done by the banks, with their own money (or even countries, e.g. China). If they don’t want a depression then let them fix it. Once the moral hazard of bailouts is removed, they will.

          Feels like we’ve made an intellectual breakthrough.

        • Ahh…but the Fed is a market ‘participant’ during it’s ‘interventions’, which are a constant feature of policy. Plunge protect, tighten, loosen, tweak, twist, rinse and repeat. To me, the real crux of the problem is the basic design of the system: the only source of government money is through private banks with debt attached, and the debt can never be paid off or the system collapses. So the interest and debt amount will rise until the debt is unserviceable and then the system collapses anyway. The currency is guaranteed by the country, but the country has no real control over it; instead, the banks control the countries. The question thus becomes, who will be sovereign, the countries or the banks?

        • The Fed is not a market participant because it has no private skin in the game. Its decisions don’t affect its controllers’ personal fortunes.

  4. Pingback: The World Before Central Banking « Silver For The People – The Blog

  5. But didn’t you say that a policy that leads to a drop in GDP of 10-20% over a few years, and unemployment, is idiotic – because of the dreaded debt-deflation and default-cascade which will cause massive bankruptcies for poor hapless and unsuspecting innocent companies? So is there an inconsistency here that can be solved, or have you changed your mind?

    • Two different problems. A financial crash is not the same thing as a government debt problem. I hold by my word that the worst time to deal with excessive government debt is while the economy is still depressed from a crash.

      • But we were talking about Latvia which didn’t have a govt. debt problem, just that it didn’t follow the Krugman/Bernanke path of solving the problems. And not only that: you specifically approved the avoidance of debt-deflation and default-cascades in other articles (through Keynesian or monetarist means). So that’s the inconsistency I’m talking about – or maybe you have changed your mind.

        • Andrei, the market did its own bailout here to prevent the default cascade/ debt-deflation scenario. Once you’re hooked on government interventionism, it becomes difficult (if not impossible) for the market to bail itself out.

          We could do that in today’s world (the money exists without the Fed having to print any of it) but psychologically it’s not going to happen and I’d say that’s a pretty bad case of moral systemic hazard.

        • I thought that a default cascade and a debt deflation is inevitable if we are to follow the non-interventionist laissez-faire approach. I thought that these concepts got their negative connotations because of the incompetence of the meddlers during the Great Depression which prevented the default cascade and debt deflation to act very fast and clear the system very fast (maybe they wouldn’t even have gotten a name if it were not for the long time – thanks to the Fed – that we got to observe them). What does it mean for a market to bail itself out? Where was “here”? You seem to imply that a depression is avoidable and should be avoided – but it’s not, and shouldn’t be if we follow the laissez-faire principles (only that the depression will be over much faster and will have soon be long forgotten).

        • J.P. Morgan (and others) acted as the Fed does today buying up lots and lots, which put price floors on the market and prevented a full deflationary/cascade depression. Ironically, he did it more efficiently and more effectively, saving the assets he thought most valuable (and the most systemically important) and leaving the obvious useless junk to fail (central banks seem less good at telling what to buy and what not to buy).

          The Fed replaced a market mechanism that actually worked quite well, and in 1929 did the exact opposite to J.P. Morgan in 1907 and drastically tightened. Because the Fed controlled the money supply, and was so intent on tightening (to “restore discipline” after the bubble) it significantly worsened the depression, and the private market (with the Fed tightening) did not have the will to do what Morgan did.

        • I don’t think there’s a full or partial default cascade or debt deflation. If we are to follow the laissez-faire principles the extent of these (default cascade, debt deflation) will only be determined by the amount of previous speculation/capital misallocation. I don’t think there’s anything consistent about what the Fed did around the Great Depression – the only constant seems to have been that they had to do something.

          From Bill Bonner:

          Even as late as the 1930s, Andrew Mellon, then Secretary of the US Treasury, advised president Hoover to “liquidate” everything. His idea was to give the correction a helping hand… Rather than wait for the correction to do its work, he’d swing the wrecking ball himself.

          That is just what he did in the 1920s. He was Treasury Secretary in 1921 too. And instead of trying to fight the slump of ’21-’23, he helped it on its way. Instead of “countercyclical stimulus” measures, he gave the nation “pro-cyclical” measures. That is, he didn’t increase government spending in order to provide the economy with fiscal stimulus. He cut government spending in order to leave more money in the hands of consumers, investors, and business people.

        • I don’t think there’s a full or partial default cascade or debt deflation. If we are to follow the laissez-faire principles the extent of these (default cascade, debt deflation) will only be determined by the amount of previous speculation/capital misallocation.

          Prices are set by whether or not there is a buyer, and at what price. In a system without interest rate planning/central bank lenders of last resort (i.e. a free market), if banks (as well as sovereigns) don’t want to see the system (and their own asset prices) crash, they will stop hoarding and start buying falling masonry as they did in 1907 (and earlier throughout history), as well as lending money to those who need it. It really is as simple as that.

        • It really is as simple as that.

          Of course, that’s what I was saying myself. I just wanted to clarify your position w.r.t. to state and CB interventionism during recessions/depressions.

  6. Pingback: The World Before Central Banking « Financial Survival Network

  7. My knowledge here is patchy, but I don’t think there was a global problem in 1907, just the US, unlike the 30s and today. And the 1870-80s.
    Recovering economically is much easier when everyone else is doing fine.

    • I think the case where this was truest is the Great Depression, where we all agree that the Fed made things worse by tightening. And even in that case Europe, Russia, etc, were industrialising creating demand that (contra to the propaganda) American businesses were fulfilling (look at Henry Ford, etc).

      In 2008 there was massive foreign growth afterwards (BRICs, etc) contributing to global growth. In 1907, there was continued foreign growth (European rivalries, etc).

      So yes it is easier to continue growing when others are growing, but others ARE growing. I wish Obama’s stimulus had consisted less of handouts to political friends and more public goods that government has a monopoly over and are breaking (e.g. energy infrastructure, road infrastructure). If politics wasn’t so corrupt I’d support some very limited fiscal stimulus (this is a bit of a daydream though, because uncorrupt politics isn’t really on the horizon).

      • where we all agree that the Fed made things worse by tightening

        James Grant says about the 1920-1921 depression:

        And the fledgling Fed, face to face with its first big slump, what did it do? Why, it tightened, pushing up short rates in mid-depression to as high as 8.13% from a business cycle peak of 6%. It was the one and only time in the history of this institution that money rates at the trough of a cycle were higher than rates at the peak, according to Allan Meltzer.

        http://www.zerohedge.com/news/must-read-jim-grant-crucifies-fed-explains-why-gold-standard-best-option

        I don’t know what tightening they did during the Great Depression; maybe they should’ve tightened more, and earlier?

        • The graph in the piece explains how they tightened during the depression vs Bernanke today. Plus, the key thing is America was running massive surpluses with Europe at the time, and so gold was flowing into America naturally, which facilitated the recovery.

    • You have valid points, and thanks for the article Aziz. I agree JP Morgan would be more ruthless and discerning than a Government policy wonk.

      Statism is here to stay until we convince the tired, and poor masses that their problems are related to the Government and their intervention. If we paint a picture of what life could have been like, (Bastiats unseen) they will turn their anger towards the Statist. Stop paying taxes and vote them out or worse.

  8. Pingback: Guest Post: The World Before Central Banking » A Taoistmonk's Life

  9. Pingback: Guest Post: The World Before Central Banking | TheTradersWire.com

  10. Central banking’ sole purpose, everywhere and every time, is nothing but a malinvestment support. I can’t think of any central bank policy, nor any Congressional activity, in my lifetime that has done anything other than support malinvestment and, by logical extension, punish prudent investment.

  11. Your conclusion is a point that I have been making repeatedly over the last year when discussing the Japanese model for handling a bank solvency led financial crisis versus the Swedish model (see http://www.tyillc.blogspot.com).

    The real economy is not capable of carrying the ‘zombie’ companies/excess debt in the financial system. This was recently confirmed by E&Y when talking about the UK economy. Japan has also shown this for the last 2+ decades.

    The solution is to require the banks to absorb the losses now hidden on their balance sheets.

    • Yeah, but the whole game has been about keeping the banks going, so bank bondholders don’t take the hit. Thats what it’s all about.

      • Agreed.

        Who are these “Bondholders”?

        Would our world be different if we withdrew their medicine?

        Is the pain of the masses due to “Bondholders” Pain relief?

        Unfortunately the “Bondholders” are the people who are feeling the pain. Most people’s pension funds are tied up in this.

        Cheap credit has to have it’s negative side.

        Who has won out of this? Who got out at the top, effectively stealing the wealth of everyone who was forced to invest in this retirement ponzi scheme?

        • Finding out who bank bond holders actually are is very difficult. They seem to be mostly other banks and financial institutions, including small, private ( for VERY rich people) banks based in Luxemburg and the like.
          I saw a figure once that 97% of bank bonds were ultimatelly owned by the top 5%.
          Most normal people have savings invested in equities and property, and coprorate bonds.

          I havent heard anyone in the MSM, or even on the orthodox web, suggesting that Bankia be allowed to go bankrupt and its bondholders not bailed out, even if equity holders lose everything. WTF?

        • Yeah, one of the most staggering things is the inability of the media to talk about bondholders taking big haircuts for (how dare I suggest it) investing in shitty products.

          It’s a disgusting, bent, fucked-up dialogue. In my book you make a bad investment, you lose. The only bailouts we should give should be for the very poor, the starving, the homeless, not fucking CEOs and bondholders. People have a right to their life and their liberty. They don’t have a right to be rich or live in a $50m penthouse. Shame governments and the media don’t seem to have any concept of responsibility.

        • Not sure the idea that the bondholders are only the filthy rich is entirely correct. China’s sov. wealth fund (where there are close to a billion poor people), Norway’s, Saudi Arabia’s bought “safe” sovereign bonds. And I’m pretty sure that many pension funds in my own country bought them for safety (after the pension system was recently privatized). More precise info on this would be welcome.

        • Yes,but I’m specifically talking about BANK bondholders,rather than soveriegn bonds.
          Who are they? Who are the ultimate beneficiaries of these endless bailouts?

          There was apost on GOlem XIV quite a while back on the bonbdholders of Anglo-irish, which he got, i think, from Guido Fawkes’ blog. I scanned the list breifly, and they llooked for the main part like private banks, but they weren’t broken down into who owned what.
          I read about an American hedgie who had a billion or two, and was expecting at least a 50% haircut, and was astonished, and delighted, to get paid off in full.

  12. Your timeline is not long enough. What is your opinion in regards to the Long Depression 1873-1896?

    This timeline did not have the Federal Reserve, was on the Gold Standard, and yet the Depression lasted 20 years. The initial bust was due to speculative financing of the railroads. The subsequent reason, as agreed by economists:

    “The primary cause of the price depression in the United States was the tight monetary policy that the U.S. followed to get back to the gold standard after the Civil War. The U.S. was taking money out of circulation to achieve this goal, therefore there was less available money to facilitate trade. Because of the monetary policy the price of silver started to fall causing considerable losses of asset values; by most accounts, after 1879 production was growing, thus further putting downward pressure on prices due to increased industrial productivity, trade and competition.”

    This essentially is counter to your argument that a financial world without a lender of last resort would have a non-dysfunctional economy.

    In the case of the Long Depression, the deflationary spiral caused the Long Depression to be prolonged. In effect the Gold Standard made the Long Depression worse off. This is similar to what has happened during FDR’s time of utilizing the greenback pegged to the Gold Standard (which he subsequently devalued), and the current farce by the Euro as the peg from all european currencies

    • But if you actually look at this Long Depression, you realize it wasn’t much of a depression at all. And throughout this so called depression, unemployment in the US was below the current one – when computed properly (such as using the formulas previously used by the US govt., still available at ShadowStats). And to claim that “economists agree” is a veritable sleight of hand. You first have to pick your economists carefully and then decree that what they say is of any value at all.

    • I’m not really advocating the gold coin standard (although the period up ’til 71 with the gold exchange standard and Glass Steagall was probably the best period of growth and prosperity we ever had). I think it’s too easy to manipulate. I think that the money supply needs to be scaled to the productive capacity of the economy (and believe that if left up to the people, i.e. the market, this would work out reasonably well) but gold is at best a very bastardised proxy for this. I don’t really think central bankers are capable of this, though if we have to have a Fed and a “managed” money supply I think Scott Sumner’s idea of NGDP targeting is vastly better than the old monetarisms, mainly because it would have been vastly more hawkish than the Fed was in the fat years, and vastly less likely to create bubbles.

      The primary cause of the price depression in the United States was the tight monetary policy that the U.S. followed to get back to the gold standard after the Civil War. The U.S. was taking money out of circulation to achieve this goal, therefore there was less available money to facilitate trade. Because of the monetary policy the price of silver started to fall causing considerable losses of asset values; by most accounts, after 1879 production was growing, thus further putting downward pressure on prices due to increased industrial productivity, trade and competition.

      I think this actually agrees with my argument. Who decided to put the US back on the gold standard? Well, the Public Credit Act of 1869 sure contributed a lot. It was government fiat (The Coinage Act of 1873) that refused to recognise silver as money, too, that caused all the problems in the West.

      And as Andrei notes, the Long Depression wasn’t much of a Depression at all by most metrics (employment, length of unemployment, industrial production, GDP, DJIA) in comparison to what we face today or what they faced in the 30s.

      • Thank you for your response, I didn’t actually think that I would have an answer. Your post was directly linked from ZH, which is a predominantly Gold Bug forum. That was a test question really, and I wasn’t sure how you responded. Now that you have, I am actually pretty happy to engage in a philosophical conversation.

        Currently I am debating (internally) with the merit of a monetary system that is “scalable” to labor. I don’t know how this works obviously, and without another mind to rub against I am kind of stuck,. First off, a bit of a philosophical viewpoint, which of course starts with a story

        During the past 120 years, mankind’s productivity has increased leap and bounds. Compared to our current standards, our ancestors 3 generations ago had to take 1 day what we currently can accomplish in perhaps minutes. Of course that is a generality, that may not apply to certain industries, but overall our Computer Age can mass produce many things at a lower overall cost than before, and our communications system allow for transmission of critical data in seconds compared to days on Horseback or even Railroads.

        And yet for Labor’s productivity, the Gold Standard provided a true straightjacket. How can you pay someone the same wage in Gold when the efficiency has been improved drastically? Each labor unit has been more productive, which is of course through industrialization, but Labor’s participation is just as important. Marx observed this. Capital, however, can pay Labor a set wage whereas each Labor efficieny that is responsible for the accumulation of Capital is now going towards Capital. If we utilize the Gold Stadard as reference to Labor unit efficiency, each unit of gold is actually purchasing higher and higher Labor unit efficiency, in essence “robbing” the purchasing power of Labor. Capital, with more and more “purchasing power” (unit produced [increase] x price [static] – workers wages [static]), skews the balance. Again, Marx.

        A Fiat currency slightly solves the above, by allowing a free-floating mechanism for labor and capital price discovery, so long as Capital and Labor can work out a floating mechanism to which a relative Entente can be established through a political process. Unfortunately, Capital also corrupted that fascet as well. Let us compare 1960s to 2005, pre-computer vs post-computer age. Computer age and the Internet has created an explosion of productivity increases – data analysis, telecom, electronic transactions, etc. If we were during the 1960s and we described 2005, we wouid have thought that a more equitable system exists. Excess Labor and Capital can be utilized for further productive uses such as research and design of maximum efficiency mechanisms (solar/oceanic wave electricity gengeration/turbines, permaculture, greenhouse energy maximization, etc). What we currently have, however, is wasted Labor (unemployment) and wasted Capital (Wall street speculation)

        Why? How did this happen? We can trace some of the factors to a lot of bad apples, but I believe it is also the system to which we live in, the Fractional Reserve System. Money created by the Federal Reserve is not distributed to the people, but instead through banking institutions that make up the Federal Reserve Board. Fractional Reserve System allows for the spread of credit, but this credit would be destroyed in a deleveraging cycle. Credit in it of itself acts like currency and can be exchanged for one, but it is not currency: it is debt. Debt deleveraging then exacerbates the situation and creates a Deflationary environment. In fact deleveraging is been pronounced even without the Federal Reserve. The banking system during the Gold Standard and the current Fiat system relies on fractional reserve mechanisms, which is inherently unstable and prone to booms (credit creation) and busts (credit destruction). During periods of credit destruction Cash Is King, Gold Standard (Gold) or Fiat (Cash), preferably on hand and physical. Only once Deleveraging is complete can a new cycle of credit creation restart based on “virgin collateral” IE all collateral are now purchased and no longer tainted by credit.

        In the above system money is therefore not dispensed for industry’s sake per se, but relegated to the Priests of Finance to dispense per whatever created the most “wealth” through debt financing and utilizing the credit creation mechanism to extract interest. In the above, Industries MUST grow larger than the extended credit + interest, creating an ever evolving monster. Without the interest monster, Industry can actually maintain its initial size so long as the industry can repay the initial loan. How can one create a system without the Loan + Interest?

        Under MMT the people can decide money creation in the formation of industries, and create taxation mechanisms that will withdraw the loaned money and “return” the money to its initial state. This would theoretically solve the credit creation and deflation mechanism.

        The above is an extremely long text, and I currently am trying to learn MMT. Of course, MMT seems counter to the ZH issue of Sound Money, although I am currently still confused about the idea of “sound money”. Do Libertarians wish to see a system where those who have gold have a higher quality of money? If that is the case, then the Gold Bugs are begging for a Feudal Caste system

        • I think that most goldbugs just want a stable currency, a stable global economic environment and a stable global monetary system. The gold standard isn’t perfect, but it has worked better than any alternative imagined so far. The gold standard might be worse than a potential new system imagined by a PhD mind bent on world improving, but I’d place my bet on the gold standard. The PhD economist should mind his own business instead of trying to figure out the potential capacity of the world economy. I, personally, don’t know the potential capacity of my own self much less that of the world economy.

        • I am currently still confused about the idea of “sound money”. Do Libertarians wish to see a system where those who have gold have a higher quality of money?

          This is reality, not something I would wish for. Gold will always be a vastly superior [edit: long-term] store of value to a piece of fiat paper, and in many ways (at least in this period of history) superior to bonds and equities which although they offer a return are subject to huge amounts of counter-party risk. I don’t want to see people becoming more unequal, but it’s less a matter of what I want, and more a matter of reality.

          And yet for Labor’s productivity, the Gold Standard provided a true straightjacket. How can you pay someone the same wage in Gold when the efficiency has been improved drastically? Each labor unit has been more productive, which is of course through industrialization, but Labor’s participation is just as important.

          If we utilize the Gold Standard as reference to Labor unit efficiency, each unit of gold is actually purchasing higher and higher Labor unit efficiency, in essence “robbing” the purchasing power of Labor.

          Yes, true. I note that gold is not ideal and that at best it is a bastardised way of scaling productivity to the money supply.

          A Fiat currency slightly solves the above, by allowing a free-floating mechanism for labor and capital price discovery, so long as Capital and Labor can work out a floating mechanism to which a relative Entente can be established through a political process. Unfortunately, Capital also corrupted that fascet as well.

          Yeah. It’s turned into “print as much money as you want and give it to your friends. This article I wrote is relevant:

          http://www.zerohedge.com/news/guest-post-why-left-misunderstands-income-inequality

          Why? How did this happen? We can trace some of the factors to a lot of bad apples, but I believe it is also the system to which we live in, the Fractional Reserve System. Money created by the Federal Reserve is not distributed to the people, but instead through banking institutions that make up the Federal Reserve Board.

          That’s right.

          In the above system money is therefore not dispensed for industry’s sake per se, but relegated to the Priests of Finance to dispense per whatever created the most “wealth” through debt financing and utilizing the credit creation mechanism to extract interest.

          That’s right.

          Under MMT the people can decide money creation in the formation of industries, and create taxation mechanisms that will withdraw the loaned money and “return” the money to its initial state. This would theoretically solve the credit creation and deflation mechanism.

          Let’s not be utopian. Let’s legalise all money, yen, yuan, euros, pounds, gold and silver and let the people decide.

        • Gold will always be a vastly superior store of value to a piece of fiat paper, and in many ways

          Oh, except that it hasn’t been between 1980 and 2001 – and mortal people don’t have decades to wait. And you said that gold is useful only in the next 5-10 years, until we get plentiful gold from asteroids to adorn our rooftops.

          Yes, true. I note that gold is not ideal and that at best it is a bastardised way of scaling productivity to the money supply.

          Of course, we don’t have rely on gold mining for the expansion of money supply. James Rickards proposed a system where the actual unit of account is scaled around gold using some formula. And other commentators here explained that this has been done even in the past.

        • Oh, except that it hasn’t been between 1980 and 2001 – and mortal people don’t have decades to wait. And you said that gold is useful only in the next 5-10 years, until we get plentiful gold from asteroids to adorn our rooftops.

          Yes, fair enough, I should have used the phrase “long term store of value”.

          Of course, we don’t have rely on gold mining for the expansion of money supply. James Rickards proposed a system where the actual unit of account is scaled around gold using some formula. And other commentators here explained that this has been done even in the past.

          While I prefer scaling to gold rather than fixing to gold, it is still a bastardised connection. It is very similar to the status quo, actually.

        • I don’t think that’s the status quo. For the status quo gold doesn’t exist. A gold standard will not prevent overindebtedness and a subsequent drop of the standard. But a gold anchoring with a formula will at least be another element in the system that would serve as some sort of alarm when politicians start to do dumb things like trying to conquer remote lands to defend the homeland. And it works better if it is adopted in a global context, serving again as an anchor of stability, raising alarms before various imbalances become too great so as to endanger the whole system (the alarms could be ignored and the standard dropped, but that’s another thing: at least the signal of alarm will be there).

        • For the status quo gold doesn’t exist.

          Come on Andrei how many tonnes are there in the basement of the NY Fed? Gold matters, they just don’t want to be able to run massive trade deficits without anyone to be able to lay claim to it.

          So I mostly endorse this:

          A gold anchoring with a formula will at least be another element in the system that would serve as some sort of alarm when politicians start to do dumb things like trying to conquer remote lands to defend the homeland. And it works better if it is adopted in a global context, serving again as an anchor of stability, raising alarms before various imbalances become too great so as to endanger the whole system

          One problem might be that the alarm might ring and everyone will ignore it. Which, essentially, is what has happened since 2000 where gold’s price has gone up x5.

    • …something I never see talked about when discussing the Gold Standard (Constitutionally bimetal), is that as originally designed, the value of the metals was supposed to fluctuate to accommodate government policy,it was not supposed to be a fixed rate, and this is one of the actual sources of the dysfunction on metal standards. In the late 1800s private banks took metals out of circulation causing depression (there should have been gov’t policy prohibiting this action); after WWI Britain repegged to gold at the wrong price, not accommodating all the money they had created for the war, causing a 50% drop in currency value and resultant depression. If Nixon had revalued gold instead of keeping it at $35 and instead de-pegging the dollar, we would not be at this crisis point. But of course, the bankers and the Fed and Treasury administrative policy had the locus of control, not Nixon.

  13. Pingback: Guest Post: The World Before Central Banking | CurrencyCore.com

  14. Pingback: Guest Post: The World Before Central Banking » Since 1998 Hitrust.net = Privacy and Protection

  15. Great Post. I too am opposed to a central banking system. It baffles me, to this day, that repeated boom and busts caused by debt bubbles has not asked individuals to question the nature of an institution that effectively fixes the price of debt through interest rates!

    Regarding the depression, Murray Rothbard’s “America’s Great Depression” examines, in excruciating detail, how monetary policy during the 1920s and 30s, contrary to conventional belief, highly expansionary. The book is available for free at http://mises.org/rothbard/agd.pdf Conclusions that a lack of liquidity and strict free market policies prolonged the great depression are patently false. No one’s heard of the depression of 1921!

    Check out my post on how monetary policy has affected investor behavior http://intelligentriskblog.com/2012/06/07/liquid-investors/

  16. Pingback: The World Before Central Banking [Azizonomics] « Mktgeist blog

  17. If Zimbabwe is printing money, why hasn’t it worked for Central Bank of Zimbabwe?

    If it is because the USA is a reserve currency, what happens when China, flexes it’s muscles and becomes the world reserve nation?

    China potentially, could request payment for its goods in gold or commodities. What then?

    I think that when someone is paid for their efforts and they bank it, they need to be assured that the money will buy them the same goods today as tomorrow. Negative savings rates are a reality for many people now.

    Money must be a store of REAL value. Otherwise we’ll end up in a soviet situation where people are paid in the product they produce (Shoes, food, clothes etc) and told to barter it at the local market.

  18. Pingback: Why we don’t actually need the Federal Reserve « InvestmentWatch

  19. China could demand gold in payment for its products, however it would be shooting itself in the foot by destroying the dollar economy because it owns 1 trillion dollars. On the other hand if it continues to play the game as now…it could be digging itself more into trouble by allowing the dollar to continue. Tough move.

  20. Pingback: Liquidation is Vital « azizonomics

  21. Pingback: Guest Post: Liquidation Is Vital » A Taoistmonk's Life

  22. Pingback: Guest Post: Liquidation Is Vital » Since 1998 Hitrust.net = Privacy and Protection

  23. Pingback: Liquidation is Vital |

  24. Pingback: Golden Cognitive Dissonance « azizonomics

  25. Pingback: Golden Cognitive Dissonance |

  26. Pingback: Guest Post: Golden Cognitive Dissonance » A Taoistmonk's Life

  27. Pingback: The Deleveraging Trap « azizonomics

  28. Pingback: Guest Post: The Deleveraging Trap » A Taoistmonk's Life

  29. Pingback: The Deleveraging Trap » Bullion Insiders

  30. Pingback: Why I Still Fear Inflation « azizonomics

  31. Pingback: Guest Post: Why I Still Fear Inflation » A Taoistmonk's Life

  32. Pingback: Why I Still Fear Inflation |

  33. Pingback: Why I Still Fear Inflation » Bullion Insiders

  34. Pingback: Are We In A Depression? « OVER LEVERED

  35. Pingback: The Cantillon Effect « azizonomics

  36. Pingback: Atlas Sound Money Project » Blog Archive » The Cantillon Effect

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s