Senate Committee Passes ECPA Reform

by Bradley Jansen November 29th, 2012 7:29 pm

Today the US Senate Judiciary Committee marked up the Video Protection Privacy Act (VPPA) which included updates to the Electronic Communications Privacy Act (ECPA) passed in 1986 (before the proliferation of email and cloud computing, etc.). The ECPA language, if adopted into law, would require a warrant before the government could snoop on the substance of our emails and information stored in the Internet cloud. Currently, law enforcement can access emails over 180 days old without a proper warrant. My previous writings on ECPA are here.

I applaud the approach from US Sen. Mike Lee who said, “I believe that email is precisely the type of private communication the Fourth Amendment was meant to protect from unjustified government intrusion. Eliminating the ‘180-day rule’ is crucial to establish the privacy protections that Americans rightly expect when it comes to their electronic communications. I am pleased that my colleagues agreed that the government should be required to obtain a warrant to access the content of our emails."

Of course most Americans expect the privacy of their personal financial information to be respected in their emails including electronic bank statements and other sensitive information. I have written previously on the importance of privacy of financial information to protect associations, free speech, etc.

More directly to free banking, it is government regulations that inhibit currency competition more than legal tender laws do anymore. Since the 1970s, Americans can own monetary gold and use gold clause contracts (I have one in my rental agreements). However the anti-money laundering laws ultimately shut down e-gold and other digital currency upstarts just as ECPA threatens the development of BitCoin which relies on the privacy of electronic communications and the storing of information in the cloud.

Since Utah has been at the forefront of state efforts to encourage sound money and currency competition, I guess it shouldn't be surprising that Sen. Lee of the beehive state shows such leadership reforming and updating ECPA in a way that respects privacy and contractual arrangements.


Final words (for now) on The Theory of Money and Credit

by Kurt Schuler November 27th, 2012 11:34 pm

Several writers of comments were in high dudgeon about my view that Ludwig von Mises's Theory of Money and Credit is a good but not a great book. I gave three reasons: (1) I had some criticisms of the book, which I made in my first post on the subject. (2) I do not think it stands out from the large body of important work on monetary economics produced by Mises's contemporaries, whom I listed in my second post on the subject and most of whom I have read. (3) After a century, the book's influence is negligible outside the Austrian School.

Some of the comments proposed that (2) and (3) were a kind of argument from authority. My only partly joking reply was that that I was not making an argument from authority, I was making an argument from thousands of authorities. In a mature discipline such as economics, and for many of its subfields, the amount that any one person can know -- really know, in the sense of having pondered and understood deeply -- is limited. Other than perhaps a few exceptional minds (who are unlikely to be spending their time blogging), we get most of what we know from accepting things on authority. If you have read The Theory of Money and Credit, for instance, but have not read Ricardo, the Currency School and Banking School writers of the 19th century, Wicksell, Knapp, and other writers Mises refers to, and you think Mises is correct about them and their ideas, you are accepting those views on his authority. If you have not read the contemporaries of Mises I listed in my previous post (many of whom Mises cites in The Theory of Money and Credit) you are also accepting on the authority of Mises, or maybe of Murray Rothbard or some later Austrian School writer, that they are not worth your while. You may be correct. I simply wish to point out that your judgement is not based on first-hand acquaintance with the material in question, but on authority.

Over time, a bit of work endures in influence and most does not. The Theory of Money and Credit is not influential today outside the Austrian School. Many thousands of minds, each an authority of greater or lesser degree, have determined the result. After a century during which the book has been widely available and Mises's name has been well known, the presumption is weak that there are ideas in the book that deserve to be part of mainstream discourse but still have not been at least partly absorbed. That the presumption is weak does not mean it is zero, but the attempted counterexamples in the comments did not prove what their writers thought. They asked, What about the wide acceptance of Keynes's General Theory? What about the initial strong rejection of Wegener's theory of continental drift? What about the neglect of Socialism for many years? All of those things changed in well under a century. The General Theory, published in 1936, lost its totemic status in the 1970s, though it remains an influential book; Wegener's theory, first proposed in 1912, the same year as The Theory of Money and Credit, became accepted by the 1960s and by the 1970s was being taught in high schools; and Socialism, published in 1922 (and in English translation in 1936), received its full due by about 1990.

After being not so busy, I am now starting to get busier with other things. Accordingly, my replies in the comment section will again become sparse. I do, however, read comments, and appreciate the numerous thoughtful ones.


More on Mises's Theory of Money and Credit

by Kurt Schuler November 24th, 2012 11:09 pm

John Cochran at the Circle Bastiat blog considers The Theory of Money and Credit “foundational.” I do not, and perhaps my explanation will be useful for thinking about the place of the Austrian School within economics more generally. Here is a list, not quite complete, of economists who were doing important work on monetary theory or business cycles within ten or so years on either side of the publication of The Theory of Money and Credit:

Albert Aftalion, Benjamin Anderson, James Angell, Harry Gunnison Brown, Edwin Cannan, Gustav Cassel, Thomas Nixon Carver, Charles Conant, David Davidson, Irving Fisher, Frank Graham, Ralph Hawtrey, Karl Helfferich, Edwin Kemmerer, John Maynard Keynes, David Kinley, Georg Knapp, J. Laurence Laughlin, Frederick Lavington, Alfred Marshall, Arthur Pigou, Dennis Robertson, Joseph Schumpeter, Frank Taussig, Horace White, Knut Wicksell, John H. Williams, and Hartley Withers.

Except to a few people who are interested in both monetary theory and the history of economic thought, most of the names will be meaningless. Fisher and Wicksell were foundational: they are the only ones I consider geniuses, whose contributions were so original that it is hard to imagine monetary theory without their ideas. (Keynes of course also left a lasting impression, but The General Theory of Employment, Interest and Money was published in 1936, well beyond the period I am considering here. Schumpeter was likewise important, but for his concept of the entrepreneur.) Among the others, if any one, two, or three — including Mises, the only full Austrian on the list (Schumpeter being a demi Austrian School member) — had not written on monetary theory, it would have mattered little for the progress of the subject. The cohort was large and talented enough that other members would have filled in most of the gaps.

Compare that to the debate about socialist economic calculation. Mises was not part of a cohort; he created the debate. When Friedrich Hayek later went back to look for antecedents, in the introductory essay to the book Collectivist Economic Planning, he found little, and even less that was widely known to his fellow economists.

Socialism continues to be cited even by those who do not like Mises much. The Theory of Money and Credit has no influence today that I can detect outside of the Austrian School. It is a work of talent but not a work of genius.


Centenary of Mises's Theory of Money and Credit

by Kurt Schuler November 22nd, 2012 1:23 pm

This is the centenary year of Ludwig von Mises’s Theory of Money and Credit. The book was originally published in German, and not translated into English until 1934. That the translation continues to be in print from not one but two publishers is in my view more a testimony to the continuing significance of Mises generally rather than to the book specifically. Important books on money at around the same time by other economists have now been forgotten. (Only a few people interested in the history of monetary thought now know, for instance, of Frederick Lavington’s The English Capital Market.) Mises’s lesser works bask in the reflected glory of his two dazzling achievements, Socialism and Human Action.

My remarks are from a re-skimming of the book and a consultation of my old notes, not from a rereading of it. They accordingly touch on a few key themes rather than offering the lengthier treatment best left to someplace other than a blog.

At the time the book appeared, it made some steps forward in monetary economics. One was its stress on the subjective character of money, monetary exchange, and monetary prices. This is the lesson that has still not been fully enough absorbed into monetary theory; it is acknowledged intellectually but is not “in the bones” of  most monetary economists. Another step forward was the book’s emphasis on injection effects, known to some previous economists but not to enough of Mises’s contemporaries. Yet another was Mises’s understanding that what people often think of as differences in the purchasing power of a currency are really differences in the goods offered in different locations; in truth, the purchasing power of money tends to equalize across locations. Mises’s treatment of interest, though brief, linked Austrian and Wicksellian themes.

I am not as impressed as other Austrians are with Mises’s “regression theorem” to explain the value of money. It answers a puzzle, but one that could have remained unsolved without affecting the progress of other aspects of monetary theory. It also seems to me too backward looking, which was the basis of the criticism of it that according to the Austrians, fiat money was the “ghost of gold.”

Mises’s terminology is confusing. He should have called “fiduciary media” and “money substitutes” by the simpler term “credit.” They are IOUs having varying degrees of perceived trustworthiness and general acceptance. Unlike, say, gold in a gold standard system, they do not constitute final payment in transaction; that is, they are not used to settle clearing balances among financial institutions. They are a form of credit, backed (or not) by assets having various degrees of liquidity. The idea that “money substitutes” are money rather than credit seems to be at the origin of the misconceptions about the nature of banking that Austrian advocates of 100% reserve banking have.

It is highly misleading to say that any quantity of money can satisfy human needs as well as any other. Here Mises succumbs to what Schumpeter called the Ricardian Vice of  excessive abstraction. Once a particular quantity of money is in existence, it matters a great deal whether the quantity changes and how it changes.

Even granted that it is a theoretical work, The Theory of Money and Credit has too little to say about how different kinds of monetary institutions might influence monetary equilibrium. To the extent that Mises discusses institutions, it is those that were familiar a German-speaking reader of his time. He does not attempt a broader view across time or even across space. At the time he wrote, monetary systems ranged from “primitive money” in remote parts of Africa and the Pacific to the highly sophisticated arrangements of the major financial centers, and from free banking to currency boards to treasury issue of currency to central banking. There are only fleeting references to free banking (for instance, near the end of chapter 17, section 4).

And brother, is it long-winded. There have been many writers more lumbering than Mises, but the book is squarely in the German-language tradition of the big fat academic book. Mises, and we, are lucky that after he came to America he had Henry Hazlitt as an informal editor. Hazlitt was as pointed as Mises was ponderous.

If it seems that I judge The Theory of Money and Credit harshly, it is only because Mises did some work that was truly great, and The Theory of Money and Credit was merely good. "Good" is a status still sufficiently rare that the number of books on monetary theory that are its equal in terms of their contribution to the subject would not fill a bookcase.


Addressing Mortgage Malinvestment (Part III)

by Vern McKinley November 20th, 2012 9:25 am

Fannie Mae and Freddie Mac continue to distort the mortgage markets and are nowhere near a proper wind down after four years in government conservatorship. I reviewed the SEC reporting for each of them over the past few years and found that they still have total assets in the range of $5 trillion, which has stayed steady for the past three years. I summarize my findings in an editorial in the Wall Street Journal today……

“At the height of the presidential election campaign, the Treasury Department issued a press release called "Further Steps to Expedite Wind Down of Fannie Mae and Freddie Mac” highlighted a new policy to scale back the pair's mortgage-investment portfolio at a rate of 15% per year, as opposed to their stated 10% rate. Reports from the Securities and Exchange Commission, however, suggest that these two government-sponsored enterprises—currently under federal conservatorship—may not be shrinking much at all. The Treasury announcement, coming near the fourth anniversary of the September 2008 government takeover of the mortgage behemoths, was made during an election campaign with a heavy focus on the health of the economy. The impression it left was that the most expensive of the 2008 bailouts was not much of an issue, as the transition back to stability in the mortgage market is well under way.”

For the full article.

I have also been busy with Freedom of Information Act requests to see if the government is considering placing Fannie and Freddie in receivership. There has been some movement on this front, but only some work being done by PricewaterhouseCoopers to lay out some options as reported by Bloomberg which included reference to a contract I dug up from the Federal Housing Finance Agency, the pair’s conservator.


Roads to Sound Money

by Kurt Schuler November 17th, 2012 12:28 am

The Atlas Economic Research Foundation has released a new book, Roads to Sound Money. It has essays by some of the other contributors to this blog. You can find the book description and other information on the Atlas Foundation Sound Money Project Web site. (And thank you Alex Chafuen for the mention of my recent book The Bretton Woods Transcripts on the site.)

At the book launch I was griping to an acquaintance, José Joaquín Fernández, about another subject, education. A newspaper article offering President Obama advice on his second term claimed that "we need the federal government to support public education, rather than encouraging schools to privatize or become charters." And what was the educational background of the writer? Private elementary school, private high school, Yale University, Harvard Law School, currently a professor at Princeton. That is quite similar to the educational background of President Obama  himself, and of President George W. Bush (except that Bush will never be a professor of law). In addition, up through high school Bush's daughters attended private schools, and Obama is doing likewise with his daughters. Commenting on the difference between what our "education presidents" and their supporters say and what they actually do, José said, "Education is too important to be left to the public sector." Precisely, and true of other activities as well.


Local currencies in Baltimore and Washington, DC

by Kurt Schuler November 13th, 2012 10:24 pm

The Washington Post has an article on local currencies in use in Baltimore and Washington, DC. Local currencies are a form of free banking on a very limited scale. Use of the currency is voluntary; there is no element of forced tender, or even legal tender (that is, local currencies are not the default means of settlement for any obligation, in the eyes of the law). Local currencies tap local willingness to grant credit, through holding currency, that might not be tapped through big financial institutions. I view them as miniature models of certain aspects of free banking, from which some lessons might be cautiously drawn, but not as the basis for any future free banking system precisely because they are so small and determinedly local. A modern financial system implies large financial institutions, though not necessarily not gigantic ones and certainly not ones that are too big to fail. Small institutions can exist as well, but their influence in the system is no more than proportional to their size.


Medium of exchange versus unit of account

by Kurt Schuler November 8th, 2012 11:23 pm

Scott Sumner and Nick Rowe have been having a friendly debate about which is the more essential function of money: medium of exchange (Rowe) or unit of account (Sumner). I think they are missing an important point: the combination of the three textbook functions of money — medium of exchange, unit of account, and store of value — in one good makes it far more powerful and significant than if the functions are separated.

When the functions are separated, attempts to influence the economy through monetary policy can lose much of their effect. Here’s an example. When I visited Peru in 1999, I noticed an advertising circular in a local newspaper for Ace Hardware. The prices were in U.S. dollars, not Peruvian soles. I asked my hosts about it and they said that at the cash register, customers paid in soles at the exchange rate of the day against the dollar. And this was after Peru had enjoyed five years of inflation at 15 percent or lower. People were still cautious because in the 1980s inflation been very high, peaking at above 7,000 percent in 1990. Even goods priced in soles might in practice be closely indexed to the dollar.

Where the local currency is not the dominant unit of account, changes in the local central bank’s policy will have much weaker effects on the economy than if people are using the local currency both as a medium of exchange and unit of account (which they are only likely to do if it is also a reasonably good store of value). It’s also true that in such a case, changes in the Federal Reserve’s monetary policy that are significant in the United States, such as a 0.25 percentage point change in the target interest rate, are not so significant in the partly dollarized country. The partly dollarized country has looser transmission of monetary policy--both for its own central bank and the Fed--to prices and incomes because of the separation of the textbook functions of money.

If I recall correctly, Larry White stressed the power of the combination of the textbook functions of money in an article quite a few years ago.

As some of you will know, inflation has remained low in Peru for many years now and, from what I understand, local-currency pricing predominates.


From literature to central banking

by Kurt Schuler November 8th, 2012 8:33 pm

He had been the star of the Department of Literature at the Catholic University [of Lima], which had never seen a more admired student, nor a more lucid reader of poetry, nor a keener commentator on difficult texts. All indications were that he would graduate having written a brilliant thesis, that he would be a brilliant professor and an equally brilliant poet or critic. But one day, without explanation, he disappointed everyone, cast aside the thesis he was working on, walked away from literature and the Catholic University, and enrolled at the [far less prestigious] University of San Marcos as a student of economics…. Javier worked at the central bank….
-- Mario Vargas Llosa, La tía Julia y el escribidor (Aunt Julia and the Scriptwriter), middle of chapter 1, my translation


Words for the losers

by Kurt Schuler November 5th, 2012 10:59 pm

"The people have spoken, the bastards." -- Dick Tuck, in his concession speech in a race for the California State Senate in 1966

"Imagine if all of life were determined by majority rule. Every meal would be a pizza. Every pair of pants, even those in a Brooks Brothers suit, would be stone-washed denim. Celebrity diet and exercise books would be the only thing on the shelves at the library. And -- since women are a majority of the population -- we'd all be married to Mel Gibson." -- P. J. O'Rourke, 1991

(Sorry, off topic, but irresistible given that the occasion to bring these quotes up only occurs once every four years.)

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