avatar

Yet Another (Unconvincing) Argument Against Gold

by George Selgin February 16th, 2012 6:32 pm

It seems that various pro-gold utterances in the course of the Republican primaries have provoked critics of the gold standard to circle their wagons and start shooting. But while the sheer volume of shots fired has been impressive, the shooters' aim has been lousy.

That goes for this recent volley from EconBrowser's James Hamilton, in which Professor Hamilton observes, among other things, that

The pre-Fed era was characterized by frequent episodes such as the Panic of 1857, Panic of 1873, Panic of 1893, Panic of 1896, and Panic of 1907 in which even the safest borrowers would suddenly find themselves needing to pay a very high rate of interest. Those events were associated with significant financial failures and business contraction. After establishment of the Federal Reserve, the U.S. short-term interest rate became much more stable and exhibited none of the sudden spiking behavior that used to be so common.

All of this, according to Professor Hamilton, was the fault of the gold standard.

Herewith my comment, minus the typos sullying the hurriedly-composed original as posted on Professor Hamilton's page:

Though I generally respect Professor Hamilton's opinions, and do not count myself among advocates of a return to the gold standard, I must say I find the argument he offers here quite disappointing, not the least because it manifests an extreme case of small sample bias of the sort that Professor Hamilton, of all people, might be expected to guard against.

To put the matter bluntly, the pre-Fed financial panics to which the U.S. economy was exposed, along with the general (and especially seasonal) volatility of interest rates during the pre-Fed era, had little if anything to do with the gold standard, as might readily be seen by considering gold-standard countries other than the U.S., and especially (because of its proximity) Canada.

It is notorious, to economic historians at any rate, that both the volatility of U.S. interest rates and the crises to which the U.S. economy was periodically exposed were by products of the "inalestic" nature of the currency system put into place during the Civil War, which (owing to wartime fiscal demands) linked the stock of national bank notes to the outstanding nominal stock of U.S. government securities, while depriving state banks altogether of their right to issue notes. After the war the Treasury enjoyed persistent surpluses, which it used to retire its debt. The transactions costs of acquiring national bank notes from the Comptroller in exchange for requisite bond collateral also made short-run adjustments to the currency stock uneconomical.

In consequence of these circumstances, the U.S. currency stock shrank by 50% between 1880 and 1890, while lacking any capacity for seasonal or cyclical adjustment. This "inelastic" quality of the U.S. currency stock was generally understood to be a major cause both of seasonal and cyclical interest rate volatility and of occasional "currency panics." This was, indeed, the understanding of the Fed's founders themselves, who far from claiming that the Fed was needed to defy tendencies stemming from the operation of "the gold standard," regarded its task as one of allowing that standard to work properly despite the deficiencies of national currency system.

If the gold standard, rather than specific U.S. banking and currency regulations, had been the source of trouble, other gold standard countries should have suffered from the same volatility of intertest rates and periodic crises as the U.S. Canada certainly should have, given its high degree of integration with the U.S., which exposed it to similar shocks, including similar gold flows. Instead, Canada was relatively crisis free, and its interest rates were relatively quite "smooth." The difference wasn't gold: it was Canadian currency and banking regulations, which among other things allowed Canada's currency stock to exhibit both secular growth during the last decades of the 19th century, and a lovely "sawtooth" pattern of seasonal adjustment coinciding with harvest-related peaks and troughs in currency demand.

Canada's relative stability was so notorous back then that many attempts were made in the years prior to 1913 to reform our currency and banking system along Canadian lines. Unfortunately they all failed, largely owing to opposition by the combined forces of Wall Street and the unit bankers' lobby. The Fed was the compromise solution adopted instead--and a very defective one, as events were to prove.

I'm tempted to complain as well about Professor Hamilton's failure to distinguish between the unsustainability of that house of cards, the gold exchange standard, and that of a traditional gold standard, and about his failure to note the lengths central banks went to during the 20s to defy the normal workings of the gold standard, by sterilizing gold inflows and so forth, in furthering my claim that he has generally failed properly to identify (I use the word advisedly) the adverse consequences of "the gold standard," as distinct from those of contemporaneous institutions, but I fear that to go on longer would perhaps be to abuse my privilege of commenting at all.

44 Responses to “Yet Another (Unconvincing) Argument Against Gold”

  1. avatar W.E. Heasley says:

    Regarding Dr. Hamilton’s assertion of Fed induced smooth interest rates i.e. the Fed as the white knight charging onto the scene on the proverbial white stallion, delivering the wizards of smart regarding money and banking and the implicit evils of gold backing…..one might want to consider the 2008 edition of the Friedman and Schwartz book The Great Contraction …….specifically the introduction written by Peter L. Bernstein. The following is an excerpt:

    Ten years into the game [1923], reality dawned, and none too soon. When the individual Reserve Banks bought government securities, they issued a check to the seller or transferred the purchase amount to the seller’s bank account. Either way, the transaction resulted in an increase in the reserves of the seller’ bank without any reduction in reserves in any other bank. Thus, the total reserves available in the commercial banking system had increased, which meant a net increase in the banks’ capacity to lend or to reduce any borrowings they may have had at their Reserve Bank’s discount window. And visa versa if the Reserve Banks sold securities. As the other side of the transaction was often located in another Federal Reserve district, the consequences of these trades spread rapidly throughout the country.

    Friedman and Schwartz describe what happened when the authorities finally woke up to what was going on…..

    • avatar George Selgin says:

      I don't think there are any revelations here: Bernstein merely explains how open-market purchases work, and Friedman and Schwartz certainly did not regard such purchases as problematic per se. Nor do I understand what you mean by the authorities' having "woken up": that they first made use of open-market operations in a big way in the 20s is well known, but there was nothing mysterious or secretive about it.

  2. avatar jehoceanwave says:

    I especially liked reading your wonderful of the phrase that sounded like the review of a good vintage year: ".. a lovely "sawtooth" pattern of seasonal asjustment coinciding with harvest-related peaks and troughs in currency demand" Keep up the good work, Dr. Selgin!

  3. avatar W.E. Heasley says:

    Dr. Selgin:

    You are likely correct (above). However here is the ENTIRE excerpt from Peter Bernstein that may make things clearer:

    'Let us turn to an amusing passage first [Boards tenth annual report]. When the System was first organized in 1913, the twelve regional Federal Reserve Banks considered themselves more or less independent entitles, each responsible for its own geographical area but without much interest in the influence of the Federal Reserve System on the economy as a whole. Based on this parochial viewpoint, the regional Reserve Banks proceeded to buy and sell government securities as indicated by their own needs. The objective was to maximize the rate of return to the Bank from this activity. Any secondary effects were ignored. The officers of the Banks apparently paid little attention or no heed to the consequences of their activities in the bond market or on the general economy, even though their sales and purchases of government securities affected the supply of money, the lending and investing capacities of the member banks, and the national level of interest rates.

    Ten years into the game [1923], reality dawned, and none too soon. When the individual Reserve Banks bought government securities, they issued a check to the seller or transferred the purchase amount to the seller’s bank account. Either way, the transaction resulted in an increase in the reserves of the seller’ bank without any reduction in reserves in any other bank. Thus, the total reserves available in the commercial banking system had increased, which meant a net increase in the banks’ capacity to lend or to reduce any borrowings they may have had at their Reserve Bank’s discount window. And visa versa if the Reserve Banks sold securities. As the other side of the transaction was often located in another Federal Reserve district, the consequences of these trades spread rapidly throughout the country.

    Friedman and Schwartz describe what happened when the authorities finally woke up to what was going on. From October 1921 to May 1922, the Reserve Banks individually had bought $400 million in government securities without paying any attention to the influence of these transactions on the money market. In May 1922, the reserve banks finally organized a committee of the five governors (now known as presidents) of the eastern Reserve Banks to execute joint purchases and sales in the open market and to avoid a conflict with Treasury operations in the money market. According to Friedman and Schwartz, “This was the first explicit recognition of the coordinate importance of open market operations and rediscounting for general credit policy….”. In the spring of 1923, this committee was superseded by the Open Market Investment Committee for the Federal Reserve System, appointed by the Board with the same five members. Six months later, the Board established a System account, which allocated transactions pro rata to the individual Banks. Many years passed, however, before he committee was given primary responsibility for all open-market operations by Federal Reserve Banks.

    According to Friedman and Schwartz, the most significant part of the tenth annual report was a section titled “Guide to Credit Policy,” which they describe as “a highly subtle and sophisticated analysis of the problem of devising criteria to replace the gold-reserve ratio… [The section] has indefiniteness befitting its main thesis: that there is no simple test such as the reserve ratio, the exchange rate, or a price-index number that can serve as an adequate guide for policy; that ‘policy is and must be a matter of judgment,’ based on the fullest possible range of evidence about changes in production, trade, employment, prices and commodity stock.”'

  4. avatar Scott Burns says:

    "This was, indeed, the understanding of the Fed's founders themselves, who far from claiming that the Fed was needed to defy tendencies stemming from the operation of "the gold standard," regarded its task as one of allowing that standard to work properly despite the deficiencies of national currency system."

    I find it strange more economists don't recognize this point. One of my professors described the Fed's belated introduction as a critical means of "economizing on ever decreasing gold supplies" to stem sustained deflationary impulses. But if my reading of history is correct, the years leading up to the Fed's establishment were, in fact, marked by a notable surge in gold production that actually led to a fairly significant rise in the price level from the relative lows of the 1890s.

    Considering this, it should be evident that the Panic of 1907-8, which was evidently the final straw that led to the creation of the National Monetary Commision, was seen as a failure of the NBS, and not the gold standard. Arguments about the "inherent flaw of the gold standard" didn't seem to gain much popular academic support until the 1930s, and that's a whole different argument.

    • avatar George Selgin says:

      Scott, your professor (like all too many) appears to have simply "made up" his history instead of learning it. You are precisely correct in noting that the push for the Fed came, not during the long deflation of 1873-1896, but after deflation had given way to (mild) inflation in consequence of the Klondike and Australian finds. That mild inflation drained the last vesitges of life out of the free silver movement, paving the way for passage of the Gold Standard Act of 1900--an Act that hardly seems a likely response to increasing concerns about "ever decreasing gold supplies." As of 1913, there was practically no sentiment at all favoring abandonment of the gold standard; and any suggestion that the Federal Reserve would eventually take part in such an abandonment would certainly have put paid to attempts to establish that institution.

      As you suggest as well, there is much more than can be said concerning the contribution of "the gold standard" to the Great Depression. Hamilton repeats the usual assertions, while ignoring a large amount of evidence contradicting them. For starters, it is easily shown that the U.S. monetary contraction of 1929-February 1933 was not at all due to the operation of the gold standard or to the Fed's having been constrained by its lack of gold reserves.

      • avatar Scott Burns says:

        I know currency and banking reforms that would've taken the USA in a more free banking direction were largely blocked by politically well-connected interest groups (like the "combined forces of Wall Street and the unit bankers' lobby" you mention). But do we have a solid grasp of how similar the anti-free banking forces were in other nations, like Germany, France, the UK, etc? Do we have a a few general bullet points that can apply generally to the failure to embrace free banking reforms in all of these nations, or does each have its own unique story?

        I feel a bit bad asking this question knowing full well that Vera Smith's "The Rationale for CB" pretty much answers these questions (and I have read it, though it was a while back and I probably read it a bit too prematurely in the FB literature and I should probably read it again), but it'd be great if we could have a trimmed down bullet point response to the objections so often raised by mainstream economists. Although Smith's work is excellent and fairly accessible, I think it still reads more like an academic research paper (for good reason) to the average student and might benefit from a more blog-size encapsulation of the events and forces in each country. Perhaps I can take on this task sometime soon (if the freebanking.org admins would permit me), but if any of the bloggers listed on this site with an actual "PhD" listed beside their name would be interested in doing a brief nation-by-nation breakdown I think it'd be beneficial.

        At this point in the game, I think the only real advantage more mainstream forces have in the debate over central banking is their sheer size and numerical superiority--not the strength of their arguments. But after taking numerous classes and getting the perspective of many different economists, I feel most CB advocates make the fatal error of starting with the effect and then wrongly extrapolating what must've been the cause rather than actually investigating the historical circumstances. This post is a great example of how many economists tend to syllogisticly reason: "We have a CB today; before 1913, we didn't have a CB; therefore, we must've needed a CB" while ignoring virtually all other factors.

  5. avatar BillWoolsey says:

    George:

    What I find most striking about Hamilton's argument is the focus on solving the "problem" of sudden increases in short term interest rates.

    Of course, to the degree short term interest rats rise to due a shortage of currency (as you argue,) they are a bad thing, and the source of monetary disequilibrium.

    On the other hand, if short term interest rates had risen because of a sharp increase in investment demand (and so, credit demand) or a reduction in saving supply (and so, credit supply and increase in consumption demand) then these would have been equilibrating. To the degree the Fed prevented those sharp increases in short term interest rates, it would be generating monetary disequilibrium.

    But, stable interest rates are being treated by Hamilton as always being good. And, of course, it seems like the Fed itself is very focused on stabilizing short term interest rates. What special interest group would be especially worried about spikes in short term interest rates? Investment banks?

    If I were to critize the gold standard, it wouldn't be because of instability in short term interest rates. It would rather be due to instablity in the growth path of nominal spending on output. But, of course, for those without a market monetarist framing, fluctuations in the price level and inflation and in output and employment would be closely related concerns.

    But... spikes in interest rates.. interesting.

    • avatar George Selgin says:

      Indeed, the focus on "smooth" interest rates seems strange to us monetarists. But perhaps not so to Keynesians, who (to Scott's dismay) identify interest fluctuations with either tightening or loosening of money. According to this view, stable interest rates are proof that money is neither getting too loose nor getting too tight.

      If I could, I would condemn every book showing a "money supply and demand" diagram with the X axis representing the interest rate rather than 1/P to the flames; what's more, I'd toss in a few economists responsible for those diagrams for good measure. After all, why waste a good pyre?

  6. avatar Paul Marks says:

    The decline in the money supply in the 1880s was NOT the problem - the problem was the vast rise in the money supply before this.

    Lots of new gold mines were not discovered - the rise of the money supply had nothing to do with gold. During the Civil War (which Canada did not have) the United States government issued vast amounts of money that had naught to do with gold. And this money remained in circulation after the war.

    As for the crash of 1857 - it can be traced to Europe (for example to Britain) i.e. to countries that had Central Banks (not did not have them).

    The problem of the "gold standard" was two fold.

    Firstly that nations go "off" it (i.e. issue money), but also that the whole idea of a "standard" is flawed.

    Why did Britain have booms and busts?

    It had "branch banking" (which America lacked), and a Central Bank (the Bank of England) and a gold "standard".

    So what was the problem?

    Credit bubble banking.

    Not the money supply being "inelastic" - but just the opposite,the CREDIT money supply being "elastic".

    Of course banks could only expand credit (the "boom") to a certain extent before the "bust" came - as the monetary base (in this case gold)was not being dramatically increased (as the monetary base has been since the creation of the Federal Reserve in 1913).

    Both the person Dr Selgin is attacking and (if I am mistaken I apoligize in advance) and Dr Selgin himself seem to be making the same mistake.

    Both assume a very "elastic" money is a good thing - it is not, it is a bad thing.

    The problem is not the collapse in the credit money supply after 1929 (or after any other bust) it is the RISE in the credit money supply that is the problem, it is the BOOM that is the problem.

    One can not improve real long term prosperity by increasing the money supply (either the monetary base or the credit money supply) - the "best" one can get is a temporary "boom" that makes an eventual "bust" inevitable.

    Want to prevent such things as the crises of 1873 (which hit Europe as well as the United States) - then do not have the credit money expansion that happened before it.

    Want to prevent the crash of 1929? Then do not have the rise of the credit money supply (the Ben Strong New York Federal Reserve bubble)that came before it.

    Want the present crises not to have occured?

    Then do not have Alan Greenspan "saving the world" by (again and again) dishing out money to prevent the credit bubble collapsing.

    Want the crists of 2013 (yes I did type 2013) not to occur?

    Then prevent the antics that Ben B. has been engaged in since 2008.

    • avatar George Selgin says:

      Paul, "inelasticity" had a very specific meaning in the 19th century context: it meant that, because banks couldn't issue more notes in exchange for deposits, they faced reserve losses when customers needed "cash" for payments. Such those losses in turn forced a general contraction of credit. In other words, the total money stock responded perversely to changes in the form (currency or deposits) in which people wanted their money. Those contractions were avoided in Canada, were banks issued both deposits and notes on equal regulatory terms.

      There is nothing "good" about such perverse behavior of the money supply, which all authorities agree was one reason for the instability of the U.S. economy between the Civil War and 1914.

  7. avatar Paul Marks says:

    George I repeat what I have already said.

    The problem is not the contraction of the (credit) money supply - it is the expansion of it.

    The "boom" causes the "bust".

  8. avatar Paul Marks says:

    On interest rates the theory is straightforward - interest rates should be determined by the interaction of the time preference of savers (real savers) and borrowers and by the calculation of risk (the risk of losing their money) that savers (or their representatives)make.

    However, in no major country (even in the 19th century) were the powerful satisfied with the above. In every major economy there were endless schemes to lower interest rates by expanding credit beyond real savings - hence booms and busts.

    And the 20th and 21st centuries have seen such schemes go from distoring the economy to actually being the economy.

    Yes it is as bad as that - the "finance economy" is too big to be considered just a distortion any more.

    Most of the entire economy is a credit bubble.

    A bubble doomed to burst.

    We live in "interesting times" and they are going to get vastly more "interesting".

  9. avatar Martin Brock says:

    On interest rates the theory is straightforward - interest rates should be determined by the interaction of the time preference of savers (real savers) and borrowers and by the calculation of risk (the risk of losing their money) that savers (or their representatives) make.

    You exchange the title to your house for George's notes promising 100 ounces of gold. George then mortgages the house to me. I will pay George for the house in installments over a period of time, gradually accumulating equity in the house, and I will pay George rent on the portion of the house I do not yet own. You could accept notes promising 100 ounces of gold directly from me, but you accept George's notes instead, because you trust George more. [George is a bank.]

    You then return the notes to George. George records the notes in an account of your notes. While George records a note in this account, you may not exchange the note for anything else, but you receive interest on the account. George obtains this interest from me. It is part of the rent I pay on the portion of the house that I don't yet own.

    You are a saver in this scenario. You save by returning the notes to George. If you do not return a note to George, if you exchange the note for something else, you have not saved this note. Whoever accepts the note from you may save it, or the note may continue to circulate.

    If the house is uninsured and burns down, I have no house. Homeless, I cannot keep a job, so I cannot earn income, so I do not make payments on the house, so George receives no income from me and cannot pay interest to you.

    But the house is insured, because George spreads losses associated with his notes across all of the notes he issues.

    Here's the point. You do not save gold in this scenario. You save a house. You seem to save notes promising gold, but this impression is an illusion. The value of your saving depends upon the market value of the house relative to the value of gold, not upon the value of gold itself.

    ... there were endless schemes to lower interest rates by expanding credit beyond real savings - hence booms and busts.

    This statement is true, but it's not true because George promises gold that he doesn't possess, because real savers do not save gold. Real savers save real means of production.

    And the 20th and 21st centuries have seen such schemes go from distorting the economy to actually being the economy.

    Right.

    A bubble doomed to burst.

    Unfortuantely, the bubble is not doomed to burst. Everyone assumes that Keynesian economics is the solution to everyone's financial woes, so everyone follows Keynesian prescriptions, and the state sector grows by substituting the state's promises of gold, backed by taxpayers, for George's promises backed only by my mortgage and similar holdings.

    As the state sector grows, real wealth grows less than it otherwise could, but a catastrophic collapse occurs only if the state sector grows so much that common people literally starve for want of productively organized resources. We're nowhere near this point in the United States.

    When we continually tell people that the end is nigh, while the end never comes, we only discredit ourselves.

    The state is not a fatal disease that will soon kill us. It is a chronic disease, a parasite that drains our resources as much as it can but stops short of killing us.

  10. avatar Martin Brock says:

    If Paul wants to exchange a good for my promise of a specified quantity of gold, delivered in installments over a period of time, that's fine with me. If Paul wants to promise me gold this way in exchange for my good, that's also fine with me.

    That's free banking with a gold standard. If Paul and I are the only people on Earth accounting for our credit this way, it's still free banking with a gold standard. Any number of people may account for credit this way, from two to two billion or more, in theory.

    If everyone in the United States accounts for credit this way, because the United States government forcibly encourages gold as a standard and discourages other standards, that's not free banking with a gold standard. It's a fiat money system with a gold standard.

  11. avatar Martin Brock says:

    I doubt that a fiat money system with a gold standard is an improvement over what we have now, so if we frame the debate this way, as a false dichotomy between what we have now and another fiat money system with a gold standard, we ultimately lose the debate. Of course, this false dichotomy is exactly what advocates of the status quo want, because it's a debate they think they can't lose.

  12. avatar Paul Marks says:

    For the record I do not want to sell you goods in exchance for a promise of gold Martin - I would like the gold when I hand over the goods. No offence meant (I mean that) - it is just that (if I had the choice) I would prefer to deal with people who pay up front (even if I have to charge slightly lower prices).

    "Cash flow" problems destroy a lot business enterprises - because they sold goods (that cost them money to create), but did not get cash for the goods they sold.

    However, if someone else wants to sell you goods which you will pay for in installments - that is indeed fine with me. Of course a standard contract is that if you miss a single payment you have to hand back the goods (and you do not get back the money you have already paid). This can actually be tougher (a lot tougher) on a poor person than saving up for the goods and paying cash on the nail. As the slang had it "never buy stuff on the never-never" (i.e. for payments over time). Still it is a matter of personal choice.

    As for borrowing money from the bank - that is risky enough even if one is borrowing money for investment (to build a factory and so on), but to borrow to finance consumption.....

    Still (again) that is a matter of personal choice - and some people manage to this and avoid serious trouble.

    On the gold "standard" - I am strongly tempted to agree with Martin.

    It does not prevent a massive build up of credit-money (as the late 1920s showed). However, it would still be (techically) better than what we have now.

    My main concern is more that it (a gold "standard" as opposed to gold-as-money) gets my Irish (half Irish) temper up. Because it is telling people one thing "the money is gold" and telling the connected people (bankers and other such) something different.

    As the historian Paul Johnson put it about the 1920s (Britain as well as the United States) this was not really gold-as-money - it was a "not in front of the children" system, in which the saps (the ordinary people) were told the money was gold - but, behind the curtain, a vast credit-money bubble was being created by Ben Strong of the New York Federal Reserve to help his friend M. Norman Governor of the Bank of England (help him maintain the rigged 1925 exchange rate between the Dollar and the Pound - the "return to the gold standard").

    As for banking generally, as I have said so many times (as many other people have for centuries) it is a weird trade.

    No one seems to want to just to take money from investors and lend it out.

    Say gold is the money (it could be silver - it could be milk bottle tops...) no banker seems to be interested in getting in getting in 100 coins of gold and lending out 90 (or even 100) with the consent of his-or-her investors.

    They all what to lend out documents instead - call them "bank notes" or "drafts" or whatever.

    And it all sounds so innocent - "we are just handing out documents (rather than gold coins) to spare wear and tear on your clothing - and to stop you drowning if you fell in the river....".

    But the real reason (right back to the goldsmiths) is that they want to lend out MORE THAN THEY EVER TOOK IN.

    Fraud exists in every trade - but this trade (finance) seems to attract more utter scumbags than any other trade.

    It was ever thus - right back in the days of Senator Benton and David Crockett (of course they had their own way of dealing with fraudsters).

    Perhaps the President who understood the s.bs best was Martin Van Buren - he refused to let either a National Bank or "pet" State Banks have any government money in them, and he would not (I believe - I may need to be corrected onthis) accept their documents ("drafts", "notes" whatever) in payment of debts.

    He knew the game too well for that - because he had been a leading New York Banker himself.

    There is nothing wrong with a banknote if it really is just a certificate of ownership of a certain amount of gold in the vaults (if gold is the money - if it is silver then it is a certificate of ownership, and if the money is milk bottle tops then the document should represent actual milk bottle tops in the vault). Just as their should be no need to pay your taxes in cash - if bankers could be trusted not to play games (which, history shows again and again, they can not). If bankers would stop playing inverted pyramid games (taking cash and building fairy castles of credit in the air) then things would be different - but.....

    But it is never like that - the bankers always want to play a scam, and issue more documents (whatever name is used) than they actually have material in the vault.

    The only way to get real Free Banking is a total seperation from the government.

    No support for bankers (whatever the circumstances), no special "laws" that treat banking differently from other trades - NAUGHT.

    "But then the entire financial system will collapse".

    That is going to happen anyway.

    And people may survive.

    After all - within living memory all Ford Motor Company employees were paid in cash.

    Not because Henry Ford was a gold-as-money man (on the contrary he was a fiat money supporter), but because he just got so sick of banker tricks that he decided he would go over to paying the people who worked for him in cash. The "pay packet" was litterally that for MOST people in Britain within living memory (most people did not even have a bank account).

    What the "cash" of the future will be is an open question.

    If things go well perhaps gold or silver will be the cash.

    If things go badly ammunition is most likely to be the cash.

    It may vary in different parts of the world.

    By the way on history......

    Boom-and-busts are NOT (contrary to the propagnada of the people who created the Federal Reserve) just an American thing.

    Europe had them to - including Britain. And YES they included bank collapses.

    There is nothing wrong with banks going bankrupt - indeed if they play inverted pyramid games, that is what should happen to a bank.

    "But I do not want to be just a glorified money lender - I want to be something special, a MASTER OF THE UNIVERSE".

    The conman always cons HIMSELF as much as others (as Tom W. pointed out).

    No government help.

    No great fairy castles of debt (standing in the air - till one tries to step into them...)

    Just banking as "glorified money lending" (indeed not even glorified - just money lending) - nothing special.

    No great "finance economy".

    Just an ordinary economy that includes some money lenders - who lend out their own money and the money that their investors agree to be lent out (not "money" that only exists in the ledger).

    That would be Free Banking.

    Banking that was free of government - and also free of delusions of grandeur (which is what government support, official and unofficial, gives bankers).

    You are nothing special boys and girls, you are just money lenders and you are not even lending out your own money (you are lending out money that investors have entrusted to you).

    So do not go about thinking you are special, for you are not (see above). And please (pretty please with sugar on top) do not try and lend out "money" that does not really exist.

    • avatar Martin Brock says:

      Paul, You may trade on any terms you like; however, if you never extend credit, you forego many opportunities to trade, so you enjoy fewer benefits of specialization and trade, and you are correspondingly poorer.

      When I buy a house on credit, I accumulate equity. After accumulating much equity, if I am unable to continue payments, I am not obliged to return the house with no accounting for my equity. Instead, I sell the house and receive my equity.

      You may wish to extend me credit on the terms you label "standard", but you wish in vain, because your competitors in the market offer different terms.

      Paying in cash is a perfectly reasonable thing to do, but few people can pay cash for a house. If a common man must save to pay cash for a house, renting a house in the meantime, he is very old before he has saved enough, if he ever saves enough.

      If no one ever buys on credit, you also have fewer opportunities to save.

      No one seems to want to just to take money from investors and lend it out.

      I don't want to pay rent on your gold, because I have no use for it. Is that so hard to understand? I will pay rent for your house though.

      ... no banker seems to be interested in getting in getting in 100 coins of gold and lending out 90 (or even 100) with the consent of his-or-her investors.

      Right. There's a reason for that. People don't want this service, because they have no use for it.

      They all what to lend out documents instead - call them "bank notes" or "drafts" or whatever.

      Banks don't lend out documents. They lend out houses and cars and many other things. They hold the title to these things while other people use them, so they must be lending them out. Right?

      There is nothing wrong with a banknote if it really is just a certificate of ownership of a certain amount of gold in the vaults ...

      A banknote is not a certificate of ownership of a certain amount of gold in a vault. If you want this sort of certificate, you can have it, but you then don't have a banknote.

  13. avatar Paul Marks says:

    By the way - on interest rates I repeat what I have already said.

    No one "saves a house" (well a fireman does - but I do not mean "save from a fire", I mean save as it save some of your income), they save (some) of their income.

    If you buy a house for cash on the nail - fine it is yours.

    If you buy a house saying you will pay in installments and you miss an installment......

    Then you get kicked out of the house and you do not get back the money you have already paid.

    Sorry - but you should have read the contract before you signed it. It is the same if you were renting the house (which is what someone with a mortgage is really doing, till they have made the last payment, although they may not understand that).

    The above would be true even if you bought the house direct - without going to a bank.

    What the bank does is lend you MONEY (not a house), you use the money to pay the house owner for the house.

    Then you have to pay the bank (not the exowner)- and if you miss an installment the house belongs to the bank.

    Again - if you do not like this, you should not have signed the contract.

    Of course the problem (in the sense of a credit bubble) is if the bank lends out "money" that does not really exist. "Savings" that no one really saved.

    • avatar Martin Brock says:

      Then you get kicked out of the house and you do not get back the money you have already paid.

      You describe a lease here, not a mortgage.

      What the bank does is lend you MONEY (not a house), you use the money to pay the house owner for the house.

      No. A bank holds the title to a house, and it issues banknotes to the seller and a mortgage to the buyer. If you don't like this business model, you aren't obliged to participate. You need not accept the banknotes in trade. You may accept only gold coins. That's entirely up to you.

      If you want only gold coins, you don't need receipts for gold in safe deposit boxes. You can easily carry thousands of dollars in gold on your person. Why would you bother with gold receipts? You can lose the receipts as easily as you can lose the gold.

  14. avatar Paul Marks says:

    "The bank issues banknotes to the seller".

    The bank pays for the house.

    The money either comes from the government (i.e. is fiat money) or is some form of commodity (such as gold).

    As for situtations where banks pay with money that is a credit expansion (although a credit expansion backed by government) see Thomas Woods "Meltdown" and for other aspects of the housing situation see Thomas Sowell's "Housing: Boom and Bust".

    However, I like your point about gold coins.

    There is no strong reason why banks can not just make loans of gold coins (IF gold is being used as money).

    The 19th century "arguments" ("oh the coins will damage your clothing, or you will fall in a river and drown, these paper documents are much better......") were normally an excuse for banks to lend out "money" that did not really exist.

    Hence the boom-bust events of the 19th century.

    • avatar Martin Brock says:

      The bank pays for the house.

      No. The buyer buys the house on credit. The seller receives IOUs for gold, because the buyer doesn't have the gold yet.

      The money either comes from the government (i.e. is fiat money) or is some form of commodity (such as gold).

      The IOUs are money if someone else then accepts them in trade. Individuals decide what they'll accept in trade. Individuals may accept only gold in trade, or individuals may accept notes promising gold, backed by the value of a house or other collateral, even if you don't like it.

      There is no strong reason why banks can not just make loans of gold coins (IF gold is being used as money).

      Banks don't lend gold coins, because no one wants to borrow gold coins. When I go to a bank for mortgage, I want a house, not gold coins.

      As a creditor holding the title to the house, the bank gets gold coins gradually as I pay for the house on the terms of the mortgage. I may acquire gold coins from you when I need them to make a payment. Meanwhile, I don't need your coins, so you can bury them in your back yard or wear them to parties do whatever else you please with them.

      In fact, I don't need gold coins for any reason. Without a gun to my head, I'll promise a creditor something other than gold coins, and I'll find creditors willing to accept other things, things that the creditors consume themselves as I provide them.

      But even if a bank follows your curious model and lends me a stack of gold coins to buy a house, what I do with the coins? I immediately hand them to the seller of a house in exchange for the title. Then I don't have the coins anymore. Then I hold the title to the house rather than the bank, and I pay rent on the gold that I gave to the seller.

      Each month, I repay a bit of the gold that I borrowed, while paying rent on any gold I haven't yet repaid, until I repay all of the gold. If I ultimately can't obtain enough gold to repay what I borrowed, I don't repay it, because I don't have it, but I still have the house.

      If the banker gets this gold from you, he doesn't have it after he lends it to me and I give to the seller of the house. Right? If you want the gold back from the banker, you must wait for me to sell the house. Right? If the sale doesn't yield all of the gold I borrowed, you don't get it, because I don't have it. Right?

      If that's what you want, lend your gold this way. Then a home seller will have your gold, and you'll have the buyer's promise to repay your gold, but this buyer won't have the gold.

      Meanwhile, I'll do things my way. I'll accept notes promising gold for my house, and whoever owes me the gold won't have it either.

    • avatar Martin Brock says:

      And the seller of a house receiving your gold from the buyer who then owes you the gold can then deposit the gold in a bank to be lent again and so on.

  15. avatar Paul Marks says:

    Martin - I AGREE that once the gold (your example)is paid to the seller of a house he can invest this money to be lent out.

    Of course as I no longer have the gold (because I paid it to the seller) then I can NOT lend out the gold I no longer have.

    Ditto if I borrow gold from a bank to pay the seller.

    The gold has LEFT the bank - the seller may put it back again (i.e. invest it there himself), but other accounts now have less gold in them (unless fraud has taken place).

    As normal the word "deposit" is deeply unhelpful - as it implies the gold is "deposited" in the bank (rather than lent out). 19th century court judgements indicate held that this was not so (see de Soto - Money, Bank Credit, And Economic Cycles, on this point).

    Banks are not safe deposit enterprises - they are money lenders.

    Any one who invests money with a bank (to be lent out - in the hope of profit) must understand that he or she does not (in normal language) have a "deposit". He or she has made an INVESTMENT (a very different thing).

    "The gold can be lent out again" - YES and again and again.

    But it must go back into the bank, before it can be lent out again.

    Of course it does not have to be gold.

    All of the above applies to fiat money notes - just as much.

    Sadly bankers do not like to run an honest business.

    They prefer (in various complex ways) to lend out more money than really exists (book-keeping-tricks-r-us).

    Back in the days of J.P. Morgan the scam (the shell-game) was about one Dollar for every three Dollars of loans (a credit bubble that was always on the verge of busting - and one that gave him endless stress and distress, although of his own choosing).

    With the introduction of the Federal Reserve the number went up to (by 1929) one real Dollar to twelve Dollars of loans - an insane level of scam (the bankers had been led by Ben Strong of the New York Federal Reserve to be drunk on the strong waters of "confidence", when financial people start to use the magic word "confidence" RUN).

    Of course the modern reaction to the threat of the sacred holy-of-holies credit bubble bursting is to pump up the monetary base (this is not recent - the Fed has been doing if for ages, they just do it more now).

    As for modern statistics......

    Who knows what they really are?

    After all even the figures for price rises in the shops (how establishment people, falsely, define the word "inflation") are totally rigged.

    Yes I mean "rigged" - fake, phony, use what word you will.

    Think about it.....

    The establishment types invent a new meaning of the word "inflation" (traditionally it had meant a rise in the money supply) - inflation (they now tell us) is a rise in a "price index" of a basket of goods.

    This is the sort of thinking that led to the great inflation of the late 1920s being ignored - prices not going up in the shops, so there is "no inflation" and, therefore, no problem (I am not making this up - the leading economist Fisher of Yale, really thought like this).

    But we are BEYOND EVEN THIS now.

    Now prices ARE going up in the shops (go to the shops - look for yourself).

    And the government says (and the media report) that there is virtually "no inflation".

    They sit there and they lie - about the most basic and obvious things.

    Things that anyone can go and check for themselves.

    Not money supply figures (some of which they, following the Chinese example, as if they were a state secret - "money supply figures do not help with monetary policy" say the Fed people, with a straight face, or "we no longer publish this measure of the money supply in order to save money" - as if the government could give a tinker's curse about saving money).

    No - they even lie about prices in the shops.

    They lie (blatently) about stuff that they know that anyone (in a couple of minutes looking round a shop and comparing the prices to what they were in their last visit) can check.

    In short they have such contempt for people that they lie and do not care that everyone knows they are lying. And the media play along (which says all one needs to know about them).

    And these are the authorities who are going to respect "fixed rules"?

    Not a chance.

    No more than ECB does - and the European Central Bank has violated every "fixed rule" it was founded with.

  16. avatar Paul Marks says:

    Martin "the seller...."

    If I sell a house for gold I want the gold.

    Not the promise of gold - the actual gold.

    Otherwise there would be no point in the buyer going to a bank to borrow money.

    He could simply say....

    "Paul I can not pay you in full yet - here have some money, and I will pay you the same amount every month till I have paid for the house, do we have a deal?"

    No need to bring a bank into the game at all.

    The bank is only brought in because they claim to have money (NOT "I.O.U.s" - I can get an I.O.U. from you, I do not need a bank for freaking I.O.U.s, - they are needed for actual money).

    Now the money can be gold (if we are using gold as money), or it can be Federal Reserve Notes (if that is what is being used as money), but it is NOT "I.O.U.s".

    I repeat - if the bank just has I.O.U.s (i.e. words in ledgers) then there is no point in bringing them it. I can just deal with you, and you with me (no need for the money lender - money lenders who do not have actual money are, at best, a waste of time).

    Of course if the bank does not really have the money it says it has...... then there will be trouble (a boom-bust).

    But if the bank is honest (actually has the money it claims it has - and lends out this money to you - so you can pay me for the house) then there will NOT be a boom-bust.

    "But we do not want to be just money lenders - we want to be special, we want to CREATE money (from thin air)".

    Well I would like to be imortal, and have a full head of hair, and to be six feet tall (and so on) - but we can not have everything we want.

    "But the government led us into this - every bank was pushed the same way, we would not be in business if we had said no".

    A better defence - but then the bankers should have got out of banking (if government policy meant it COULD NOT be an honest trade) and gone and done something else in life.

    Still at least we have not had the without-credit-bubble-finance-we-would-be-at-the-productivity-levels-of-the-middle-ages, line.

    I see - so credit bubble finance created such things as the British agricultural revolution of the 1700s, and the industrial revolution that came after it.

    Yes - and my name is Alexander the Great.

    Cicero was right - there is nothing so absurd that a philosopher (read academic) has not believed it. Indeed many things are so absurd that ONLY "philosophers" can believe them.

    And credit bubble finance (fraud) is needed for long term economic development, is one of those things.

    Borrowing IS needed for factories and so on (not every factory owner can just fund every development from his own profits - profits made from selling stuff he has made in his own house, or a shed).

    But the borrowing should be from REAL SAVINGS (not book keeping tricks).

    Banking can only be FREE and STAY FREE - if it is straight (honest). I.E. if bankers accept that they are only money lenders (nothing more) lending out their own money (the money of the shareholders of the bank) and the money entrusted to them to be lent out, by people who choose to invest their savings in the bank.

    Otherwise (to use a 19th century saying - "free trade in banking" becomes "free trade in swindleing".

    And it does not have to be that way - banking can be free (if it is straight). Of course the PROFITS are likely to be lower if it is straight - but that is a general problem.

    If theft and fraud were made "legal" (by court judgements and statutes), then the profits from theft and fraud would likely be much higher than the profits to be made by going straight.

    That does not mean that theft and fraud would no longer have negative consequences for civil society if they were made "legal", still less that theft and fraud are a good basis for long term economic development, and we would "still be in the Middle Ages" without them.

    Still "bottom line".

    What I say (and what everyone else says here) is not the point.

    The present financial system is comming to an end (it will, most likely, collapse as early as 2013), but this will be nothing to do with anything I (or anyone else) has said.

    It will be because the system has destroyed itself - by taking its own credit bubble insanity to its "logical" conclusion.

    The basic truth that if you have X amount of real savings you can only have X amount of lending (not X plus....) was ignored (indeed denied and mocked). And the dream of "lower interest rates" via the "expansion of credit" has been taken to its end point.

  17. avatar Martin Brock says:

    If I sell a house for gold I want the gold.

    If you don't want to extend credit, that's up to you. If you wan't to participate in the business of extending credit through a financial intermediary, that's also up to you. The downside is that you find fewer opportunities to trade.

    Otherwise there would be no point in the buyer going to a bank to borrow money.

    "Borrow money" is only another way of saying "receive credit". In a free market, promissory notes accounting for credit become money because free people choose to use them as money, even if don't use them as money. Free people do all sorts of things that you don't choose to do.

    The bank is only brought in because they claim to have money (NOT "I.O.U.s" - I can get an I.O.U. from you, I do not need a bank for freaking I.O.U.s, - they are needed for actual money).

    No. You simply misunderstand the banking business, Paul.

    By extending credit, a bank issues promissory notes that can become money if people choose to use them as money. In a free market, these bills of credit (like dollar bills) are money only because people use them as money. If people don't use them as money, they don't circulate, so they aren't money. In this way, the market determines the supply of money.

    No one here wants to force you to use promissory notes as money. I certainly don't. I don't want to force you to use gold or silver or anything else as money either. I would only force you not to use entitlements to tax revenue as money.

    A bank is not your rich uncle graciously bearing all of the risk of extending credit for you. State money dominates largely because people think this way, because statesmen promise them "security". Free people do not use banks because banks "have money". They use banks for other reasons.

    If you accept notes directly from me, you bear all of the default risk yourself, and you bear all of the cost of researching my creditworthiness, collecting payments and so on. If you accept notes from a bank, you share default risk with other lenders, and you outsource the business of extending credit.

    Free people use banks for this reason, not because a bank stores gold in its vault reflecting every bit of credit it extends. The banking business you seem to imagine does not exist in a free market, because the market has no use for it, not because some nefarious mob of banksters wants to swindle you.

    Nefarious swindlers exist, but this fact is irrelevant. Nefarious swindlers exist in every business. They don't make the credit business fundamentally dishonest any more than they make other businesses fundamentally dishonest. The problem with state money is the state, not nefarious swindlers, except insofar as swindlers dominate the state and encourage other swindlers in the banking business.

    I don't repeat myself here to educate you, Paul. That's a lost cause. I counter the hysteria that your way of thinking foments. The economy won't collapse because people extend credit and use promissory notes as a medium of indirect exchange. Free banking avoids excessive credit by requiring the excessive creditors (free associations like banks as well as individuals) to bear their default risk, not by forbidding people to use promissory notes as money. People use promissory notes, backed by sufficient collateral, as money, because the notes are valuable and convenient for this purpose.

  18. avatar Martin Brock says:

    And people will use electronic notes as money more and more, not because anyone forces them to do it but because electronic money is more convenient and less costly than other methods.

  19. avatar Paul Marks says:

    Martin there is no such thng as "electronic money" - there are electronic transfers of the ownership of money.

    Just as I do not have to physically pick up bits of gold and take them one from one vault to another to transfer ownership, so I (or anyone else) can do the same thing with fiat notes.

    In the United States Federal Reserve notes are money - that is not what the Constitution says should be money, but there we go. They are not "promissory notes" as they do not promise any commodity..

    In Britain Bank of England notes are the money - they (since 1931) do not really promise any commodity either.

    Nor do I "misunderstand the banking business" - I said it would be better if bankers were straight, I did not say they were straight (or even that government and Fed policy would ALLOW them to be straight - even if they wanted to be).

    Of course bankers lend out "money" that does not really exist - that is at the heart of the boom-bust mess.

    Martin are not the first person to notice that (Richard Cantillion was writing about it in the 1700s), your fault is that you think it is a GOOD THING (it is not).

    Government interventionism (for example the establishment of Central Banks) makes the problem much worse (much larger in scale) than it otherwise would be.

    "hysteria".

    I simply tell the truth about the present and past, and warn of what is very likely to occur in future.

    The former (telling the truth about the present and the past) can hardly be attacked (at least not by an nonscumbag), as for the future - I may be right and I may be wrong. Let us hope that I am WRONG.

  20. avatar Paul Marks says:

    By the way on "educating people".

    If you want to be educated about the past I advise reading "Money, Bank Credit, And Economic Cycles" (by de Soto).

    And if you want to be educated about the present and likely future.

    I advise reading "Paper Money Collapse" by Detlev Schlichter.

    On your interest in housing and monetary policy you should read.

    "Housing: Boom and Bust" by Thomas Sowell (for specific government housing policy).

    And (for the more general monetary background) "Meltdown" by Thomas Woods.

    And for the theory of money and banking - "Where Keynes Went Wrong" (by Hunter Lewis) is also well worth reading.

    However, Martin, I suspect you will continue with your policy of reading no works at all - and assuming you know it all.

    No human being really knows it all (I do not - and neither do any of the writers above).

    We all make mistakes and misjugements.

    But by reading the works of others we help see our own errors (just as we are helped to see the errors in their own writing).

    I would yet again urge you to leave your closed (and false) mental universe.

    Where fiat notes are "promissory notes" (which they are not).

    Where it is a good thing for banks to lend out fantasy (rather than real money - from real savings) - and it is not a good thing.

    And where people do weird things like "save houses" - rather than save part of their income.

    Could you at least CONSIDER visiting the real world by reading the works of other people? Imperfect as all such works, doubtless, are.

  21. avatar George Selgin says:

    Martin and Paul: Once again, I must ask you to kindly stop treating this forum as a place at which to hold your own private debates. For that purpose you should exchange emails!

  22. avatar Paul Marks says:

    George it is not a matter of "debate" (private or otherwise) what legal tender (money) is in the United States - presently it is Federal Reserve notes and government coins.

    Actually I do NOT "like" that system - I would prefer commodity money, but money is presently NOT a commodity. It is Federal Reserve notes and government (token)coins.

    Of course (and I have never denied this) ownership of these Federal Reserve notes and government coins can be transfered by electronic means.

    If an individual or an enterprise (whether the word "bank" is used or not should not be relevant) have this money they can lend out this money - if they do not have the money they can not (without book keeping tricks) "lend it out".

    The fact (and I AGREE, so again no "debate", that it is a fact) that "broad money" (bank credit) is vastly larger than the "monetary base" (the actual money - the legal tender) is not my fault.

    Nor is it my fault that such a credit bubble inevitably leads to a boom-bust.

    How one reacts to the bust is the only matter than can actually be debated.

    The Federal Resever (like the Bank of England, and the European Central Bank, and the Bank of Japan, and the other Central Banks)believe that if a bust puts very important banks (and other such enterprises - even if they are not formally called "banks") then the monetary base should be increased (in various ways - they do not tend to favour open use of the printing press) in order to save them.

    The free market position is (of course) that these banks (and other such) should be allowed to collapse - and if this leads to the collapse of the "finance economy" then this is unfortunate but NOT a cause for government (or Central Banks) to move in with sweetheart loans and other forms of corporate welfare.

    My own belief is that even with all the corporate welfare (in its various different forms) the present banking and financial system will collapse anyway - most likely as early as 2013, but (of course) I could be wrong.

    I have certainly never denied (so again no "debate") that the collapse of the financial system will lead to massive human suffering in the "real economy".

    However, given the actions that have already been taken over the years, this collapse can no longer be avoided.

    The only question is "when" not "if".

  23. avatar Paul Marks says:

    The words "at risk" were missed out above (my apologies).

    I meant to write (but stupidly did not) that the Central Banks people (and so on) believe that if the collapse of a credit bubble (and the collapse of a credit bubble, i.e. loans that are not of actual money from real savings, is inevitable) puts very important financial enterprises at risk (to such an extent that the whole "financial system" might be threatened)then they should act to save them.

    The free market position is (of course) that no such interventions should take place.

    Those are indeed the two sides of the present debate.

    However, I repeat my own belief (and again I could be WRONG) that the present financial system will soon collapse anyway - in spite of all the sweetheart loans (and other forms of corporate welfare) that the international authorities have pumped in.

  24. avatar Martin Brock says:

    I was losing interest anyway.

  25. avatar michaelsuede says:

    Allow me to make some convincing arguments against the gold standard.

    1. When gold is represented by some "thing" (bank receipts), what prevents arbitrary replication of that “thing”?

    2. It is a waste of resources to have men digging for gold, just to have it sit in a bank vault, when those same men could be making something useful for humanity instead.

    I would argue that gold itself is unnecessary, the only thing that matters are bank ledgers.

    Consider that if we were to start out with digital gold accounts, whereby a weight of gold was represented by a digital bank ledger, and then at some point in the future after the economy is in motion and that digital money is circulating, the physical gold itself is hauled off and used for jewelry or what have you, what difference would it make as long as the ledger itself were to remain intact?

    All the physical gold is doing at this point is sitting in bank vaults collecting dust. People can't even appreciate it for its aesthetic beauty.

    Now let us stipulate that once the gold is removed, the ledger may never be added or subtracted from. So the total money supply remains constant forever, but since it is represented in digital form, each weight of gold is infinitely divisible as a unit of currency. Thereby, no new money is necessary since existing money can be divided infinity to account for the deflationary effects of a growing economy.

    At this point gold could be completely removed from the equation and it would make no difference what-so-ever.

    Of course, this is exactly what Bitcoin represents as a currency.

    Bitcoin is superior to gold in all aspects.

    Further, because Bitcoins can not be inflated, it is impossible to fractionally reserve them. The network completely prevents fractional reserves of Bitcoins because the digital currency itself is transacted with. It doesn't need to be represented by anything. Therefore, since it is not represented by receipts - no fractional reserve is possible.

    Chew on that.

    • avatar George Selgin says:

      There's not much to "chew on" here, Michael. That you don't seem to have any grasp of how convertibility on demand limits the supply of bank "receipts" in a gold-standard system, and in a competitive note issue system especially, convinces me only that you need to study some basic monetary economics. As for the resource cost argument against gold, it is also easily refuted, e.g., by pointing out that the real price of gold, and hence the overall devotion of resources to its production, has been markedly higher since the gold standard was abandoned than it was while that standard was in place, the reason being that, when bank money consisted of reliably close substitutes for gold, people were less inclined to stock-up on gold itself.

      As for BitCoin, I have myself written that it suggests a potential (so far far from realized) alternative base regime. But I confess that pedantic, petulant, and half-baked screeds by BitCoin evangelists like yourself (what is it with people who can't settle for liking something, but have to make a frigging creed out of it?) do not encourage me to take the idea more seriously than I do.

      • avatar michaelsuede says:

        I understand how convertibility limits the supply of receipts. What convertibility doesn't do though is PREVENT the fraud of fractional reserve banking.

        I also take issue with your explanation for pointing out why the gold price is higher, at least as it relates to my stance on Bitcoin. While I agree the gold price is higher, in relative terms how much higher is it? Further, people rightly fear inflation under a fiat system which is the motivation that causes people to stock up on gold as a store of value. This fear would be removed under a Bitcoin system.

      • avatar michaelsuede says:

        0h yes, one more thing.

        I've watched every lecture you've ever given that has been published to the web, and I've read most of your articles as well. So if there is a failure of understanding on my behalf, it must be because you didn't explain the information well enough ;)

        I personally think you are one of the greatest monetary economists around, which is why I came here to poke you in the eye. And while many people would be offended by your insults, I find them endearing.

  26. avatar Paul Marks says:

    michaelsuede when you started to attack fractional reserve banking (in the sense of banks lending out a "fraction" of one hundred tenths - or whatever) I assumed that your attack was based on the lack of actual gold (if gold has been voluntarily chosen by the buyers and sellers as the money) covering the supposed lending out of gold.

    However, you then say gold could be taken out of the equation totally and "it would make no difference what so ever". So your opposition to the gold "standard" would seem to be not that it is a fraud (because lending is made without their being enough real gold that the lending is presented as representing) - but that there is any gold at all present.

    On the BritCoin - my question would be "what is the BritCoin made of" and "when did buyers and sellers agree to use this material as money?"

    I certainly have no fetish for gold - but I am interested in people actually having the material (whatever it is) that they say they have. So was the late M.N. Rothbard - and you do have his image as your icon here.

    I am no expect on the Britcoin - but my impression is that it is made of nothing whatever. No offense meant, but the whole thing appears to be rather odd.

    On the pre 1913 system in the United States - clearly George Selgin is correct, the gold standard (no matter how much people like me might grind our teeth over its imperfections) did limit the size of credit expansion ("broad money" the credit bubble - whatever one wants to call it). Such things as the 1907 mess (especially the suspension of cash payments - with government support for this violations of contracts) might enrage me - but it was a much less terrible situation than 1929 (when the Federal Reserve had encouraged a credit expansion of much larger size).

  27. avatar michaelsuede says:

    "So your opposition to the gold "standard" would seem to be not that it is a fraud (because lending is made without their being enough real gold that the lending is presented as representing) - but that there is any gold at all present."

    Well, not quite.

    I'm opposed to fractional reserve banking because I consider it to be flat out fraud. I'm not opposed to a 100% reserve gold standard per-say, I simply feel that Bitcoin is superior to a gold standard because it prohibits fractional reserve banking completely. The gold standard was the best thing available prior to the creation of crypto-currencies. However, it is clear that the gold standard has room for improvement.

    I am always against any kind of imposed monetary order. So I would not be opposed to the gold standard competing with Bitcoin in a free market. I just think gold would get pushed out of the money market by Bitcoin in a free market because Bitcoin has so many obvious advantages over gold.

    "On the BritCoin - my question would be "what is the BritCoin made of" and "when did buyers and sellers agree to use this material as money?"

    BITcoin is an encrypted peer-to-peer accounting ledger that acts as a currency. So it is a decentralized unit of exchange. The market values Bitcoins for the reasons I mentioned earlier. They are fungible, infinitely divisible, limited in supply, easily identifiable, and unable to be counterfeited.

  28. avatar Paul Marks says:

    michaelsuede - I am not sure I share your point of view (as I do not know enough to have a clear opinion on some of these matters).

    But at least I understand your point of view better now.

  29. avatar Vince says:

    According to Friedman and Schwartz, the most significant part of the tenth annual report was a section titled “Guide to Credit Policy,” which they describe as “a highly subtle and sophisticated analysis of the problem of devising criteria to replace the gold-reserve ratio…
    That's free banking with a gold standard. If Paul and someone else are the only people on Earth accounting for our credit this way, it's still free banking with a gold standard. Any number of people may account for credit this way, from two to two billion or more, in theory.
    In my point of view, if everyone in the United States accounts for credit this way, because the United States government forcibly encourages gold as a standard and discourages other standards, that's not free banking with a gold standard. It's a fiat money system with a gold standard.

  30. avatar Paul Marks says:

    I think the term gold STANDARD is unhelpful - because it begs the question over whether gold is the money, or is a "standard" for something else which is the money.

    For example, the vast credit-money bubble of the late 1920s was created under a gold "Standard".

    As for people wanting to use something else (not gold) as money - that is up to them (to buyers and sellers) as far as I am concerned.

Leave a Reply

You must be logged in to post a comment. Login now.