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House Passes Audit the Fed Bill

by Bradley Jansen September 17th, 2014 2:49 pm

Today the US House of Representatives passed HR 24, the Audit the Fed bill by a vote of 333-24 under the suspension calendar (requiring a ⅔ majority to pass).

House of the Clerk floor summary here:

1:12:15 P.M. H.R. 24 Considered as unfinished business. H.R. 24 — "To require a full audit of the Board of Governors of the Federal Reserve System and the Federal reserve banks by the Comptroller General of the United States, and for other purposes."
1:44:04 P.M. H.R. 24 On motion to suspend the rules and pass the bill, as amended Agreed to by the Yeas and Nays: (2/3 required): 333 - 92 (Roll no. 504).
1:44:04 P.M. H.R. 24 Motion to reconsider laid on the table Agreed to without objection.

The roll call is here to see how your Representative voted:

http://clerk.house.gov/evs/2014/roll504.xml

All Republicans voted "Aye" except for Rep. Campbell (and four not voting) along with a majority of the Democrats (but well less than ⅔ of their number) with 106 in favor 91 opposed and two not voting.

It would be highly unlikely for the Senate to take up the bill this late in the calendar.

 


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Free banking in Belgium

by Kurt Schuler September 2nd, 2014 9:23 am

That is the new title of a paper I wrote with the Lebanese economist Patrick Mardini. Patrick did the bulk of the work, and he will be presenting the paper at the conference in Lund, Sweden on free banking history later this week (see the previous post). Here is the abstract:

Belgium had a somewhat free banking system from 1835 to 1850. The country had two major banks in Brussels, the Société Générale and the Banque de Belgique; several smaller banks in the provinces; and many private bankers. The system had restrictions on note issue and legal barriers to entry. Belgium suffered from a bank run in 1838 triggered by the threat of war with the Netherlands. The Banque de Belgique had invested its resources in illiquid assets and did not know how or when to reduce its note issue. It was bailed out by the government but knew that another failure would spell its end. This led the bank to reform its activity, deleverage, and hedge the remaining risk. The Société Générale was not seriously threatened in 1838 and continued as before. In 1848, the French revolution of that year and France’s suspension of convertibility induced another crisis. This time it was the turn of the Société Générale to falter, for the same reasons as the Bank de Belgique in 1838. The government intervened through fiat money, suspension of convertibility and permission to monetize liabilities. The free banking system ended with the creation of a central bank on January 2, 1851.


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Schedule of upcoming conference on free banking history

by Kurt Schuler August 28th, 2014 11:43 pm

Free Banking systems: diversity in financial and economic growth

Dates: September 4 – 5, 2014

Venue: Lund University School of Economics and Management, Tycho Brahes väg 1, 22363 Lund, Room EC 1:134

Main organizer: Anders Ögren, Lund University, anders.ogren@ekh.lu.se

Travelling: There are frequent trains from Copenhagen Airport (Kastrup) to the city of Lund.

UPDATE: The conference Web site with links to papers and other features is now available: http://freebankingconference.wordpress.com/

Day 1: Thursday 4 September
10.30 – 10.45 Welcome

10.45 – 12.30 Session1: Empirical Cases of Free Banking I
Chair: Anders Ögren
“Free Banking in Belgium” Patrick Mardini (University of Balamand in Tripoli, Lebanon) & Kurt Schuler (Center for Financial Stability in New York)
“Private notes in the late Tokugawa Japan: the case of the Itami Brewery Guild” Keiichiro Kato (Kobe Ryutsu Kagaku University)
“Metallic Circulation and Fiduciary Circulation during the Free Banking Period in Colombia: 1865-1885” Andrés Álvarez (Universidad de los Andes, Colombia)

12.30 – 14 Lunch
14 – 15.45 Session 2: Free and Central Banking
Chair: Andres Alvarez
“A Tale of Two National Banking Systems: the United States and Japan” Masato Shizume (Waseda University) Co-authors: John A. James (University of Virginia), Masayoshi Tsurumi
(Hosei University) and David Weiman (Barnard College)
“Private bank notes, central banking and monetary policy. The case of Sweden” Anders Ögren (Lund University)
“Why did Italy leave free-banking? The rationale for central banking in the interwar years” Giandomenico Piluso (University of Siena) and Giuseppe Telesca (University of Florence and University of Reading)

15.45 – 16.15 Coffee

16.15 – 17.30 Session 3: Empirical Cases of Free Banking II
Chair: Masato Shizume
“Nature abhors a vacuum: the banking system in the United States from the removal of the Second Bank to the passage of the Legal Tender Act, 1832-1862” Ludovic Desmedt (Université de Bourgogne, LEDi) and Laurent Le Maux (Université de Brest, Economix)
“Integration of regional money markets in England, 18th and 19th centuries” Mina Ishizu (London School of Economics)

19.30
Conference Dinner

Day 2: Friday 5 September
9.30 – 11 Session 4: Empirical Cases of Free Banking III
Chair: Keiichiro Kato
“The Mexican Banking System, 1897-1907: A Networked Agent Based Modelling Approach” Fernando Arteaga González (George Mason University) and André L'Huillier Montalba (George Mason University)
“Free Banking and Economic Growth in Lower Canada, 1817–1851” Mathieu Bédard (Aix-Marseille Universite ́ and Tolouse School of Economics) and Vincent Geloso (London School of Economics)
“The Economics of Private Money: Private Bank Notes in Sweden, 1831 – 1906” Lars Jonung (Lund University)

11-11.30 Coffee

11.30 – 12.40 Session 6: Free Banking in Theory
Chair: Lars Jonung
“Free Banking as a Money Demand Gauge” Eric Dennis (AIG)
“What ́s “Free” about Free Banking?” David Howden (St. Louis University – Madrid Campus)

12.40 – 14 Lunch

14 – 15.45 Session 5: Empirical Cases of Free Banking IV
Chair: Ludovic Desmedt
“The Role of the Bangkok agency of the HSBC in Southeast Asia before 1913” Takeshi Nishimura (Kansai University)
“Family Networks and the Emergence of a Financial Capital in Antioquia (Colombia)” Andrés Álvarez (Universidad de los Andes) César Mantilla (Institute for Advanced Study in Toulouse) Javier Mejía-Cubillos (Universidad de los Andes)
“Monthly Estimates of Narrow Money in the United Kingdom, 1841-70” Jason Lennard (Lund University) and Sean Kenny (Lund University)

15.45 – 16.15 Coffee

16.15 – 17.30 Banking, Free Banking and Research in the Future
Chairs: Anders Ögren, Andrés Álvarez and Masato Shizume
Suggested reading: “Establishing an International Data Archive on Free Banking” Kurt Schuler (Center for Financial Stability in New York)
Open discussion


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Radio Interview on Inter-business Barter Exchanges

by Steve Horwitz August 27th, 2014 10:05 am

I did a brief interview with the Seattle NPR station yesterday on the rise of inter-business barter exchanges. Think Bitcoin meets Ithaca Dollars. It can be found here.


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The grumpier economist

by Kurt Schuler August 24th, 2014 3:03 pm

In his generally thought-provoking blog The Grumpy Economist, John Cochrane refers to a recent paper and a paper earlier this year that he wrote. (The title of the blog, by the way, comes from the name his children teasingly gave him after hearing one too many of his dinner-table rants. I suspect it is how most children who have economists as parents think of them.)

In the earlier paper, “Toward a Run-Free Financial System,” Cochrane writes (page 4), “Our government should take over its natural monopoly position in supplying interest-paying money, just as it took over a monopoly position in supplying nineteenth-century bank notes, and for the same reason: to eliminate crises, which have the same fundamental source.”

Cochrane’s specialty is finance, not monetary economics, but I hold the University of Chicago to a higher standard here than such Podunk outfits as Berkeley (where Cochrane earned his Ph.D.) or Harvard. Even a Chicago professor whose specialty is elsewhere within economics should avoid gross errors of historical fact in American monetary history, given the many Chicago professors and students who have done so much to gather and interpret facts ignored by others.

First, government had no natural monopoly position in supplying bank notes. The federal government did not issue notes on a level playing field with privately issued notes and drive the private notes out of circulation. Rather, in 1863 the federal government passed a law requiring federally chartered banks to hold federal bonds as collateral against notes issued, and in 1865 and 1866 it passed acts imposing prohibitively high tax rates on notes issued by state-chartered banks and nonbank issuers. Even after ending the state bank and nonbank notes, federally issued “greenbacks,” gold certificates and silver certificates did not drive the notes of federally chartered banks out of circulation. They remained until finally prohibited by law from circulating further, in 1935.

Second, notes issued by the U.S. government in fact have historically had considerably higher risk of nonpayment than notes issued by U.S. banks. In 1933 the U.S. government defaulted on 100% of its notes with respect to the obligation to redeem them in gold. American citizens were not legally allowed to hold gold again no questions asked until 1975. In the meantime, the dollar had depreciated from $20.67 per troy ounce to nearly $200 per troy ounce.

Third, government control of the note supply was a cause of crisis in the United States, not a path to eliminating them. The “inelasticity” of the note supply in the late 19th century United States contributed to periodic financial crisis from 1873 to 1914. People wanted to convert deposits into notes, but government-imposed restrictions on note issue prevented them from doing so. The result, in those days when deposit accounts were much less widespread among the public, was a shortage of currency that prevented people from making payments and undertaking transactions they wanted to make, which were made by their counterparts in Canada and other countries that had looser restrictions on the ability of banks to convert deposits into notes. Even after the Federal Reserve began operations in November 1914, there was a note shortage during the Great Depression, as seen by the temporary increase, before further issues were outlawed, of notes issued by federally chartered banks. (Details about the regulations I have referred to are available in this old article I wrote.)

Enough of my own grumpiness for now. In a later post I will have some more general, ungrumpy comments on whether risk-free banking is really possible.


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Free Banking and Economic Growth in Lower Canada, 1817-1851

by Bradley Jansen August 19th, 2014 3:20 pm

Mathieu Bédard and Vincent Geloso have a paper out on SSRN here, "Free Banking and Economic Growth in Lower Canada, 1817-1851":

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2482313#.U_HwDx1w4a0.facebook

Says the abstract:

Generally, the historical literature presents the period from 1817 to 1851 in Lower Canada (modern day Québec) as one of negative economic growth. This period also coincides with the rise of free banking in the colony. In this paper we propose to study the effects of free banking on economic growth using theoretical and empirical validations to study the issue of whether or not economic growth was negative. First of all, using monetary identities, we propose that given the increase in the stock of money and the reduction in the general price level, there must have been a positive rate of economic growth during the period. We also provide complementary evidence drawn from wages that living standards were increasing. It was hence impossible for growth to have been negative. Secondly, we propose that the rise of privately issued paper money under free banking in the colony had the effect of mitigating the problem of the abundance of poor quality coins in circulation which resulted from legal tender legislation. It also had the effect of facilitating credit networks and exchange. We link this conclusion to the emergence of free banking which must have been an important contributing factor. Although we cannot perfectly quantity the effect of free banking on economic growth in Lower Canada, we can be certain that its effect on growth was clearly positive.


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Proposal for a data archive on free banking

by Kurt Schuler August 14th, 2014 9:10 pm

For the upcoming conference “Free Banking systems: diversity in financial and economic growth” at Lund University School of Economics and Management (Sweden), September 4–5, 2014 I have written a paper titled "Establishing an International Data Archive on Free Banking."  The idea came from a post I wrote several months ago. Here is the abstract:

In the past 40 years, enough work has been done on historical cases of free banking to show that it was a widespread phenomenon. There has been no concerted effort, however, to draw all this material together. The Internet, which did not exist when the revival of interest in free banking began, offers the chance to create an open international research hub to bring together a mass of statistical, legal, and other material on the various cases of free banking. I describe the advantages of a research hub, what components it should include, and an existing research hub that provides a model.

Click here for the paper. Unfortunately I have a prior commitment to another conference, but my coauthor on another paper, Patrick Mardini, will be presenting the paper if the organizers wish to keep it on the schedule and he will relay comments from the conference to me. I welcome your reactions to the paper in the comment section below.

If any readers are interested in attending the conference (on which I have previously posted), please contact the main organizer, Anders Ögren (anders.ogren@ekh.lu.se) to see if there is room.


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Krugman: Irresponsible money-printing and the meaning of the word "is"

by Larry White August 10th, 2014 2:58 pm

Paul Krugman has noticed the sound money movement. In yesterday's NYT blog post he writes:

In other words, libertarianism is a crusade against problems we don’t have, or at least not to the extent the libertarians want to imagine. Nowhere is this better illustrated than in the case of monetary policy, where many libertarians are determined to stop the Fed from irresponsible money-printing — which is not, in fact, something it’s doing.

This is a very artful choice of verb tense. Notice what he doesn't say: that irresponsible money-printing is "not, in fact, something it has done."

I'm reminded of Bill Clinton's famous response when asked whether his lawyer had spoken a falsehood when he said that "there is" no sexual relationship of any kind between the President and Monica Lewinsky: "it depends on what the meaning of the word "is" is." It would be another matter, Clinton allowed, if the lawyer had said "is and never has been." Similarly, the problem of the Fed engaging in irresponsible money-printing has not disappeared even if, by Krugman's (unspecified) criteria, this month's monetary policy is okay. Because irresponsible money-printing is a recurrent problem that we do have, it makes perfect sense to be determined to stop it even if (for the sake of argument) it were the case that it isn't happening this month.

Gandhi is supposed to have said: "First they ignore you. Then they laugh at you. Then they fight you." Krugman seems to be somewhere between the 2nd the 3rd steps.


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World War I and free banking

by Kurt Schuler July 30th, 2014 10:38 pm

The 100th anniversary of the start of World War I was two days ago. Earlier this year I skimmed through a number of New York newspapers from just before the war and during its first few months. It is apparent how great a shock it was. The Christian great powers of Europe had been mostly at peace for nearly a century (though they had been gnawing at the Ottoman Empire), and suddenly they were embroiled in a vast continental war over a matter that from their perspective should have had little importance.

World War I began a rapid decline in free banking. None of the belligerents had free banking in 1914. In the United States, which did not become a belligerent until 1917, 1914 saw the Federal Reserve replace the previous system of government issue of currency alongside heavily regulated issue of notes by banks. The war and its aftereffects also disrupted the monetary systems of countries with free banking such that most adopted arrangements that gave governments a good deal more discretionary control over the monetary system.

There is a hole in free banking theory with respect to war. Free banking, like free trade more generally, is inherently a peacetime system. The question for its political durability is whether, like trade, it can be bent during wartime but prove sufficiently elastic to return to something like its old shape afterwards. If free banking is a peacetime-only system, politically it cannot persist, because war is an unfortunate reality of human existence.


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House Committee Passes Audit the Fed Bill

by Bradley Jansen July 24th, 2014 5:34 pm

The House of Representatives Committee on Oversight & Government Reform today passed by voice vote HR 24, the "Federal Reserve Transparence Act of 2014".  More background and video of the hearing available here.

 

Text as passed here:

H.R.-24-Issa-ANS

 

Federal Reserve Transparence Act original text

 

 

EDIT:  The text of the substitute bill considered and passed includes some formatting and technical changes as well as some substantive ones:

 

H.R.-24-Fed.-Reserve-Transparency-Act-original-text

 

 

The substitute passed includes some substantive changes.

In the original text, Section 2 (b) (c) is changed from

"REPEAL OF CERTAIN LIMITATIONS.—Subsection 20  (b) of section 714 of title 31, United States Code, is 21  amended by striking the second sentence.

To this:

(c) REPEAL OF CERTAIN LIMITATIONS.—Subsection (b) of section 714 of title 31, United States Code, is amended by striking all after ‘‘in writing.’’.

I don't know offhand the significance of this change.  Also from this:

(d) TECHNICAL AND CONFORMING AMENDMENT.— Section 714 of title 31, United States Code, is amended by striking subsection (f).

to this:

1. (d) TECHNICAL AND CONFORMING AMENDMENTS.—
2. 23  Section 714 of title 31, United States Code, is amended— (1) in subsection (d)(3)—
(A) in subparagraph (A)—

(i) by striking ‘‘or (f)’’;

(ii) in clause (i), by striking ‘‘or (f)’’; and

(iii) in clause (ii), by striking ‘‘or (f)’’; and

(B) in subparagraph (C), by striking ‘‘or (f)’’; and

(2) by striking subsection (f)

Also, the  "SEC. 3. AUDIT OF LOAN FILE REVIEWS REQUIRED BY ENFORCEMENT ACTIONS" has been struck from the original text:

SEC. 3. AUDIT OF LOAN FILE REVIEWS REQUIRED BY EN- FORCEMENT ACTIONS. (a) IN GENERAL.—The Comptroller General of the United States shall conduct an audit of the review of loan files of homeowners in foreclosure in 2009 or 2010, re- quired as part of the enforcement actions taken by the Board of Governors of the Federal Reserve System against supervised financial institutions. (b) CONTENT OF AUDIT.—The audit carried out pur- suant to subsection (a) shall consider, at a minimum— (1) the guidance given by the Board of Gov- ernors of the Federal Reserve System to inde- pendent consultants retained by the supervised fi- nancial institutions regarding the procedures to be followed in conducting the file reviews;

(2) the factors considered by independent con- 2 sultants when evaluating loan files; 3 (3) the results obtained by the independent con- 4 sultants pursuant to those reviews; 5 (4) the determinations made by the independent 6 consultants regarding the nature and extent of fi- 7 nancial injury sustained by each homeowner as well 8 as the level and type of remediation offered to each 9 homeowner; and 10 (5) the specific measures taken by the inde- 11 pendent consultants to verify, confirm, or rebut the 12 assertions and representations made by supervised 13 financial institutions regarding the contents of loan 14 files and the extent of financial injury to home- 15 owners. 16 (c) REPORT.—Not later than the end of the 6-month 17 period beginning on the date of the enactment of this Act, 18 the Comptroller General shall issue a report to the Con- 19 gress containing all findings and determinations made in 20 carrying out the audit required under subsection (a).

 

 Again, I'm not sure offhand what, if any, are the significance of these changes, but I do know the devil is in the details! 

Audit the Fed bill

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