I recently finished Murray Rothbard's, "The Mystery of Banking."
That was such an eye-opening and exciting book (if you are the type of person who _can_ derive feelings of excitement from a book on economics)!
The overall aim of the book is to discredit the worth of the US Federal Reserve System, and fractional-reserve banking as facilitated by central banking in general.
In this, Rothbard puts forward some very well-reasoned and common sense practical arguments. I came away from the read with a new appreciation for economics as a field, and recognized now that the subject is perhaps overthought by most modern scholars. Economics isn't any sort of system so much as it's what results when groups of people act when influenced by just a few rather simple rules.
Anyway, Rothbard sets up his critique of the Fed and central banking by offering an easy-to-follow primer on some basic economics and history of money: how it developed, how people use it, how it is both supplied and demanded just like other products in an economy, and how those forces influence prices.
This first section of the book is crucial for non-economist folks to at least review. It assumes zero starting knowledge, and in short order will have you up to speed with a working knowledge of the mechanics of money. It also gives thorough treatment to the concepts it introduces. Once they become clear to you, it may start to feel redundant. I was able to skim over the final pages of this section. It begins historically, and you'll understand how a society gradually comes to the use of a modern coin-commodity money as its culture and technology and sheer size develop.
After the concepts primer, the following sections deal with how an evolved commodity money system is gradually influenced and ultimately usurped by government to transform into a fiat currency. This can only be done in complex societies where trust in institutions has been built up with the people for eons, or the culture will not ascribe value to the currency and merely recognize it for what it intrinsically is: valueless slips of paper (albeit with fun and artful printing).
A scholarly worth with detailed footnotes and citations, the book wonderfully fuses history with the theory to demonstrate and support concepts. The reader learns about the development of paper currency; its backing by hard money in gold and silver coin; and its use in banking to make hard money more convenient and secure.
The reader then is shown how the backing on paper currency, which makes it acceptable as money stand-in, is gradually removed via various mechanisms and interests until one is ultimately left with a money which a value "declared" by government, or fiat, rather than a thing with some intrinsic worth all on its own, the mere stand-in for hard money is declared to itself be the money, by fiat.
We then are shown how, after the conversion over to a fiat currency is complete, how now there exists possibilities for its value to be manipulated, and how these manipulative effects generally tend to harm society by subjecting it to booms of credit expansion, followed by busts as worthless credit is exposed and recessions and depressions result.
We by this point get to a crucial and cynical rub. Who benefits from a fiat currency? No one but government. Its unique properties offer levers of control which power-brokers may use to influence people and business. It also enables government to more readily pay for its operation. If all else fails, it may simply print more paper money and spend it. So long as the population continues to accept it. In this way fiat currency is the true source of inflation (along with fractional-reserve banking) and represents a hidden tax on populations as the purchasing power of their fiat paper slips is eroded.
The book does not necessarily advocate movement away from paper money or checkable deposit accounts, these do provide great security and flexibility benefits. Rothbard's concluding section does, however, advocate replacing the fiat nature of our currency with its former commodity backing in gold, re-imbueing true intrinsic worth to our dollar.
To this end, the book lays out a surprisingly straightforward plan to return our money to a gold-coin and bullion standard (note: not a gold exchange standard, which is very different). If implemented, we would wake up with the ability to go to our bank and redeem our paper dollars and checkable deposit amounts for a share of the real gold held in our treasury. This gold would be distributed to banks to back our deposits and to be offered in exchange for our paper notes.
Once done, our current paper money (in its current Federal Reserve Note form) would be redeemed for the gold and retired. The Federal Reserve System would then be liquidated and done away with. Our money would be gold on deposit with our local banks. Paper money could and probably would still exist, but as a type of gold certificate (like it had been before the Great Depression). Gold would be the real money, on deposit at a bank of our choosing (a competitive process) and used to back any contrived paper or card or electronic system we might develop to serve our desired for flexibility and convenience.
The point is that the heavy hand of government would once more be divorced from the value of money. We would be free to redeem our gold deposits and transfer them to another bank at any time and for any reason. Loan and deposit banking would again be separated. Fractional-reserve banking might not be outlawed (it would be difficult to enforce even if it was), but market competitive forces and depositor faith would keep banks honest about the redeemability of their gold reserves, lest customer fear of the irredeemability of their gold start a run and force a bank to reveal their insolvent standing.
The first section of the book shows you why such a state would be a good thing, if you don't see now the advantage. Among the claims by Rothbard is the notion that the business cycle is a side-effect of fiat money and fractional-reserve banking's ability to create new money out of thin air. Without this, all money has real worth, so business cannot be puffed up by "Monopoly" money for the relatively short boom periods when we ascribe this "thin-air" money the same temporary worth as money backed by real reserves. The waking up we do to the true valuelessness of this thin-air credit expansion is what drives the bust which follows.
After reading the book, my cynical nature cannot believe a time where we might ever return to hard money from government fiat money. Nothing short of a revolution and formation of a new nation could achieve this, in my view. Once government aquires the power to print a fiat money from its people, the vast new power this confers makes it a practical impossibility for government to then be asked to give up. It's like the "One Ring to Rule Them All".
To the government it is, "the precious." Even the honest reformers within government would come under grave pressure to keep the scope of their ideal reform strictly limited. What government voluntarily gives up its own power? The best we could hope for would be some sort of "custodial" relationship where government merely pledges not to use the power it will still have. That'd be like letting the alcoholic keep their Scotch bottle if he agrees never to take the cap off again. At some point he'd have himself a three-fingers of the delicious liquid, and he'd have a great excuse why.
"The Mystery of Banking," makes a great, entertaining, and enlightening introductory book to the Austrian School of Economics.
Showing posts with label mises. Show all posts
Showing posts with label mises. Show all posts
Saturday, November 8, 2008
Friday, October 31, 2008
All This Has Happened Before, And Will Happen Again
Reading Murray Rothbard's, "The Mystery of Banking" Originally written in the 80s and updated over a number of editions for the present.
One theme stands out, quoting from Battlestar Galactica's 4th season: "All this has happened before, and will happen again."
Get a load of this passage from the concluding section, p. 247:
After Fed inflation led to the boom of the 1920s and the bust of 1929, well-founded public distrust of all the banks, including the Fed, led to widespread demands for redemption of bank deposits in cash, and even of Federal Reserve notes in gold. The Fed tried frantically to inflate after the 1929 crash, including massive open market purchases and heavy loans to banks. These attempts succeeded in driving interest rates down, but they foundered on the rock of massive distrust of the banks. Furthermore, bank fears of runs as well as bankruptcies by their borrowers led them to pile up excess reserves in a manner not seen before or since the 1930s.
Wow! That's eerily familiar! Greenspan low rates lead to large influx of cheap money, helped along by over-charged lending. Fear of deposit safety and bank solvency leads to some high-profile bank runs. Fed is right now trying to massively inflate by open-market purchases, loans to banks via its discount window, and now the TARP program. While the public at-large may not fear their banks as much, the banks still fear the public's solvency and won't lend (despite Fed encouragements) as they seek to build up reserves (known to us right now by the buzzworthy phrase, "deleveraging").
Watch the M2 figures (or M3, if we had them).
http://en.wikipedia.org/wiki/Money_supply
As we work our way through our present economic challenges, an election draws near. What I've learned so far has shown me that in our Great Depression, we took a bad, but not untenable situation and made it worse through unsound policy decisions and the meddling of two succeeding presidents who saw problems they believed only government could and only government should solve.
Then, as now remarkably, the economies of the world's nations were fairly interdependent. Our problems were not solely of our own making, and world economic circumstances shaped our government's actions. It's interesting to me, however, that while most of the rest of the developed world experienced a shock and a recovery during this time, none were quite as terrible as our own.
What I hope to learn in the reading ahead is whether we made the problem worse through more government intervention. Could the wrath and anguish and hunger of our depression been blunted if our government had done nothing, instead of trying to micromanage the economy?
Back then, after Hoover we elected a socialist in President Franklin D. Roosevelt. Much was accomplished during his tenure as President. Chances are you live in a town with a bridge built through his Civilian Conservation Corps program.
FDR believed in the government as solution for society's ills. Government was going to fix our economic problems, confer upon you the "right" to a well paying job, guarantee your financial security in old-age via Social Security, and hosts of other ideas and programs. The American Dream became under FDR, the American Promise (as in social contract, not as in vision of potential).
Our government as we live under it today, saw its genesis under his administration. FDR is recorded in crackly audio as well as in writings as believing that our Constitution was a stale and outmoded document. He wanted to modernize it, and he saw it as his duty to help spur that change; spur the change in the relationship of government to the governed. For good or ill, our nation would never be quite the same again. And it's not.
It's fascinating to me to see that these things are tending to repeat themselves in my lifetime now. We're in the beginning stages of another major economic crises. We've just experienced the first (and possibly only) major shock to our stock markets (1929's crash was similar, in that it was over rather fast, but the Depression would follow along in its aftermath). We can see the government beginning to inflate its way out and recapitalize major financial instituions with billions of dollars newly printed.
It remains to be seen if our recession will proceed as in the past few, and gradually fade, or if, like the Depression, reaction and changing government policy help to fashion it into something more ominous and lasting.
Then, as now, we're at a Presidential crossroads. We tipped toward government as a safety net and hoped for change in the bold voice of FDR. In fear of our future we accepted his socialist experiment. As we went to war for a second time, the experiment faded, but didn't ever go completely away. A nation united in the ultimate victory over absolutism in WWII repatriated vast swaths of veterans who has just been to hell and survived. They thought they could do anything, and when they came home, they set out to act decisively on their dreams.
They succeeded, transforming America into a premiere economic superpower. FDR's crutches were no longer needed. But the impact has stayed with us. Our society has come to accept and take for granted some of the government programs which were experimental in FDR's time.
Now...we again are afraid and concerned about out economic future. We're tilting in that fear back toward socialism. Once again we "hope for change" in the person of Barack Obama, whose ideas are much the same as FDR's. Government is the answer. Our Constitution is a stale document in need of retooling for a modern world. In "spread(ing) the wealth around," we look to once again subvert the American Dream into an American Promise. I am not sure why we think it will work out any differently this time, than it did in FDR's time. Our choices are shaped by our environment and experiences. Is it simply that most of us just don't know any better; haven't had those experiences which would teach us the lessons of history?
For me, I still have an innate curiosity for discovering how the world works. I desire to try to be less ignorant, even if that means what I learn might weigh heavily on my spirit. I'd rather die in knowledge than live blissfully in ignorance.
I recommend this book to anyone interested in gaining a greater appreciation for how our economy, and our banks, Fed, and monetary policy function. You'll get an education that will illuminate the meaning behind actions the Fed takes and what's really going on behind the headlines and sound bites over major news broadcasts. It's been a real eye-opener for me during our latest banking/lending/stock market crisis.
What's more is that the Ludwig von Mises Institute has a PDF version available on their website, formatted nicely if you're one of those people lucky enough to have an e-paper reader. I've been reading on my laptop, which has been OK.
Nearly finished with "The Mystery of Banking," my next book will be Rothbard's "America's Great Depression." I'm hoping to get a little inside baseball on why our depression happened, why it was so damaging, and why it took so long to recover.
I am already learning that "progressive" policy had become the trend in the beginning of the 20th century. Such policy helped push us to participate in WWI (also helped along by J.P. Morgan & Co, who had its fingers deep into the war machine, and a war would help bail it out of failing railroad interests). Participation with Britain (through the Genoa Convention) in a faux gold bullion standard after the war led to inflationist money supply expansion throughout the 20s. It appears this heavy expansion of the money supply created the ripe conditions for the 1929 crash.
In any case, if you find financial topics interesting, these books are worth your time, as well as some time spent at the Ludwig von Mises Institute website, which represents the Austrian School of economic thought (which has a very different perspective from much of the Friedmanite and Keynesian ideas taught in most of our colleges).
One theme stands out, quoting from Battlestar Galactica's 4th season: "All this has happened before, and will happen again."
Get a load of this passage from the concluding section, p. 247:
After Fed inflation led to the boom of the 1920s and the bust of 1929, well-founded public distrust of all the banks, including the Fed, led to widespread demands for redemption of bank deposits in cash, and even of Federal Reserve notes in gold. The Fed tried frantically to inflate after the 1929 crash, including massive open market purchases and heavy loans to banks. These attempts succeeded in driving interest rates down, but they foundered on the rock of massive distrust of the banks. Furthermore, bank fears of runs as well as bankruptcies by their borrowers led them to pile up excess reserves in a manner not seen before or since the 1930s.
Wow! That's eerily familiar! Greenspan low rates lead to large influx of cheap money, helped along by over-charged lending. Fear of deposit safety and bank solvency leads to some high-profile bank runs. Fed is right now trying to massively inflate by open-market purchases, loans to banks via its discount window, and now the TARP program. While the public at-large may not fear their banks as much, the banks still fear the public's solvency and won't lend (despite Fed encouragements) as they seek to build up reserves (known to us right now by the buzzworthy phrase, "deleveraging").
Watch the M2 figures (or M3, if we had them).
http://en.wikipedia.org/wiki/Money_supply
As we work our way through our present economic challenges, an election draws near. What I've learned so far has shown me that in our Great Depression, we took a bad, but not untenable situation and made it worse through unsound policy decisions and the meddling of two succeeding presidents who saw problems they believed only government could and only government should solve.
Then, as now remarkably, the economies of the world's nations were fairly interdependent. Our problems were not solely of our own making, and world economic circumstances shaped our government's actions. It's interesting to me, however, that while most of the rest of the developed world experienced a shock and a recovery during this time, none were quite as terrible as our own.
What I hope to learn in the reading ahead is whether we made the problem worse through more government intervention. Could the wrath and anguish and hunger of our depression been blunted if our government had done nothing, instead of trying to micromanage the economy?
Back then, after Hoover we elected a socialist in President Franklin D. Roosevelt. Much was accomplished during his tenure as President. Chances are you live in a town with a bridge built through his Civilian Conservation Corps program.
FDR believed in the government as solution for society's ills. Government was going to fix our economic problems, confer upon you the "right" to a well paying job, guarantee your financial security in old-age via Social Security, and hosts of other ideas and programs. The American Dream became under FDR, the American Promise (as in social contract, not as in vision of potential).
Our government as we live under it today, saw its genesis under his administration. FDR is recorded in crackly audio as well as in writings as believing that our Constitution was a stale and outmoded document. He wanted to modernize it, and he saw it as his duty to help spur that change; spur the change in the relationship of government to the governed. For good or ill, our nation would never be quite the same again. And it's not.
It's fascinating to me to see that these things are tending to repeat themselves in my lifetime now. We're in the beginning stages of another major economic crises. We've just experienced the first (and possibly only) major shock to our stock markets (1929's crash was similar, in that it was over rather fast, but the Depression would follow along in its aftermath). We can see the government beginning to inflate its way out and recapitalize major financial instituions with billions of dollars newly printed.
It remains to be seen if our recession will proceed as in the past few, and gradually fade, or if, like the Depression, reaction and changing government policy help to fashion it into something more ominous and lasting.
Then, as now, we're at a Presidential crossroads. We tipped toward government as a safety net and hoped for change in the bold voice of FDR. In fear of our future we accepted his socialist experiment. As we went to war for a second time, the experiment faded, but didn't ever go completely away. A nation united in the ultimate victory over absolutism in WWII repatriated vast swaths of veterans who has just been to hell and survived. They thought they could do anything, and when they came home, they set out to act decisively on their dreams.
They succeeded, transforming America into a premiere economic superpower. FDR's crutches were no longer needed. But the impact has stayed with us. Our society has come to accept and take for granted some of the government programs which were experimental in FDR's time.
Now...we again are afraid and concerned about out economic future. We're tilting in that fear back toward socialism. Once again we "hope for change" in the person of Barack Obama, whose ideas are much the same as FDR's. Government is the answer. Our Constitution is a stale document in need of retooling for a modern world. In "spread(ing) the wealth around," we look to once again subvert the American Dream into an American Promise. I am not sure why we think it will work out any differently this time, than it did in FDR's time. Our choices are shaped by our environment and experiences. Is it simply that most of us just don't know any better; haven't had those experiences which would teach us the lessons of history?
For me, I still have an innate curiosity for discovering how the world works. I desire to try to be less ignorant, even if that means what I learn might weigh heavily on my spirit. I'd rather die in knowledge than live blissfully in ignorance.
I recommend this book to anyone interested in gaining a greater appreciation for how our economy, and our banks, Fed, and monetary policy function. You'll get an education that will illuminate the meaning behind actions the Fed takes and what's really going on behind the headlines and sound bites over major news broadcasts. It's been a real eye-opener for me during our latest banking/lending/stock market crisis.
What's more is that the Ludwig von Mises Institute has a PDF version available on their website, formatted nicely if you're one of those people lucky enough to have an e-paper reader. I've been reading on my laptop, which has been OK.
Nearly finished with "The Mystery of Banking," my next book will be Rothbard's "America's Great Depression." I'm hoping to get a little inside baseball on why our depression happened, why it was so damaging, and why it took so long to recover.
I am already learning that "progressive" policy had become the trend in the beginning of the 20th century. Such policy helped push us to participate in WWI (also helped along by J.P. Morgan & Co, who had its fingers deep into the war machine, and a war would help bail it out of failing railroad interests). Participation with Britain (through the Genoa Convention) in a faux gold bullion standard after the war led to inflationist money supply expansion throughout the 20s. It appears this heavy expansion of the money supply created the ripe conditions for the 1929 crash.
In any case, if you find financial topics interesting, these books are worth your time, as well as some time spent at the Ludwig von Mises Institute website, which represents the Austrian School of economic thought (which has a very different perspective from much of the Friedmanite and Keynesian ideas taught in most of our colleges).
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