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The euro is not much like the historical gold standard

by Kurt Schuler May 19th, 2013 9:58 pm

From time to time I see comments in the press or on the Internet comparing the euro to the gold standard. In point of fact, they have little in common.

Most obviously, of course, the euro is a fiat currency having a floating exchange rate, while under different forms of the gold standard, national currencies were redeemable in, well, gold at a set rate.

The euro is in several ways more monolithic than the historical gold standard was. Under the gold standard, many countries went off the standard and later returned. The United States, for instance, went off the gold standard near the start of the Civil War and returned to it in 1879. Britain went off it during the Napoleonic Wars. No country has so far left the euro area, so of course no country has returned to the euro area.

The euro is a single currency. A euro note in Finland is accordingly interchangeable with a euro note in France in terms of the ability to spend it readily on local goods without any transaction fees. Under the gold standard there were multiple national currencies, which while exchangeable at set rates were not fully interchangeable. A century ago you would have had a hard time spending a Canadian $50 note in Atlanta even though the Canadian and U.S. dollars were worth the same amount of gold.

In the euro area there is a single central bank practicing a single monetary policy, reflected in a single main policy interest rate. Under the gold standard there were multiple central banks as well as other monetary authorities and free banking systems. The central banks had differing policy interest rates (for some examples see the spreadsheet for “policy interest rates” available in this data set I edit).

National central banks within the euro area do not impose fees or erect other impediments that give rise to fees for exchanging euros across national borders. Under the gold standard central banks sometimes imposed explicit fees or established procedures that imposed implicit costs for transferring gold from one country to another. An example was that central banks would sometimes switch from redeeming their currencies in gold coins to gold bullion, which was harder to subdivide and slightly less desirable than coin for many purposes of international trade. Or, instead of paying out gold coins that had little wear and tear, they would pay out coins that were within the legally established range of tolerance but more worn, hence usually used in domestic rather than international trade.

Finally, the gold standard provided profit and loss signals to guide monetary policy that are absent under fiat currency. Under the gold standard, a bank that held excessive gold reserves forwent profits it could have safely made, while a bank that held not enough gold reserves risked bankruptcy. This discipline was not as strong for central banks as for free banks, especially not on the reserve accumulation side, but it existed. The European Central Bank looks at market indicators--indeed, probably a wider variety than the old gold standard central banks did--but no market signal operates directly on its balance sheet the way that loss or gain of gold reserves did.

The euro has some resemblance to the gold standard in the sense that both are international standards, constraining the exchange rates of the countries that use the euro or gold. That is about the limit of the analogy, though. Economists should cease making it because it says more about their lack of knowledge of the two systems they are trying to compare than it helps to illuminate anything.


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Bitcoin as Money Depends on FinCEN

by Bradley Jansen May 16th, 2013 4:27 pm

Since 1997, I have been an active and vocal critic of the anti-money laundering mission of the US Treasury's Financial Crimes Enforcement Network (FinCEN).  Early that year, then-US Rep Ron Paul tasked me with monitoring FinCEN that monitors many of our financial transactions (I was working for him at the time).  Although I had never heard of FinCEN before that (like most Americans), I immediately started my study of the Treasury bureau (which became an "real" agency under the USA PATRIOT Act), monitored their activities (along with the Federal Reserve, etc.), and even got a personal tour of their Vienna, Virginia headquarters.

Even before the "Know Your Customer" proposed regulatory change that I sunk my teeth into and eventually defeated, I had the privilege of visiting the FinCEN HQ and meeting several of the key staffers. I'll write more about this experience later, but suffice it to say for now that the more they tried to impress me with how much info they had and how capable they were collating and connecting enormous amounts of data the more I realized I was staring in the face of Big Brother.  And of course, Big Brother comes at a price.

One article in PaymentsSource tries to warn people about the need to get up to speed on Big Brother's regulatory compliance:

To many, Bitcoin's appeal has been its unregulated, anonymous, cash-like nature. Adding regulation eliminates many of these traits.

Some companies that handle Bitcoin, such as CoinLab Inc. and BitInstant LLC, are already registered with FinCEN as money services businesses. As a result of the new FinCEN guidance, many more may have to do the same.

"What they did here is clever," says Charlie Shrem, co-founder and CEO of BitInstant, in an email. "They said, not only is a Bitcoin business an MSB, it is also a MTB (Money Transmitter); 48 states require separate MTB licensing."

The federal government requires only registration, reporting and recordkeeping from MSBs. But as MTBs, Bitcoin companies will also have to comply with the separate licensing practices.

State licensing looks like the biggest hurdle facing most Bitcoin companies now.  Even mainstream payments providers such as Square Inc. have encountered pushback from state regulators over licensing.

The article goes on to explain how burdensome regulations create costs and raise hurdles for (currency) competition, but readers of this blog and our accompanying Facebook page are well-familiar with these arguments.

Separately, Alex Kadochnikov writes up a primer for people to understand the FinCEN guidance here.  While I can't vouch for all of his analysis (and I have seen competing interpretations and others pointing out problems with the guidance), this seems to be a good start for those trying to get a handle on the registering, reporting and record-keeping requirements not just for FinCEN but the state regulators as well.   He also offers one of the better critiques and alternatives for FinCEN:

It is really unfortunate that FinCEN decided to apply Treasury Department regulations to all virtual currency folks through the definition of Money Transmitter. Using the definition of a currency exchanger instead of a money transmitter would have made things so much easier. Here is why.

This regulation makes an exception for currency exchangers who transact currency exchages in the amount greater than $1,000 on any given day. This would have made life a lot easier for some bitcoin miners — most of whom probably make way less than $1,000 a day from their mining activities. The problem is that FinCEN classifies virtual currency exchangers and administrators as money transmitters, and not as currency exchangers.

A person must exchange the currency of two or more countries to be considered a dealer in foreign exchange. Virtual currency does not meet the criteria to be considered “currency” under the BSA, because it is not legal tender. Therefore, a person who accepts real currency in exchange for virtual currency, or vice versa, is not a dealer in foreign exchange under FinCEN’s regulations. (See pages 5 and 6.)

He also explains the consequences of not complying:

U.S. law imposes both civil and criminal penalties for failing to register a business as a money transmitter.

This law specifically imposes criminal penalties on operation of unlicensed money transmitting businesses.

Whoever knowingly conducts, controls, manages, supervises, directs, or owns all or part of an unlicensed money transmitting business, shall be fined in accordance with this title or imprisoned not more than 5 years, or both.

Once the statutory six month period for when virtual currency money transmitters must register is up, the government will be able to start prosecuting people who do not comply. Though most likely the government will not go after a small-time Bitcoin miner, because that will be a tremendous waste of time and resources.

These warnings are not hollow, as The Hill reports:

The DHS seized bank accounts belonging to Mt. Gox, a company which converts government-backed currencies into the untraceable, digital currency called bitcoins. The agency said the company violated U.S. laws which require money exchanges register with the federal government and prohibit commerce that is derived from or could be used to support unlawful activity.

This is a critical time for the Bitcoin community to get its act together and step up to the plate.  Burying your head in the ground is not going to make the problems go away.

 

 


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Bitcoin Prosecutions Threaten Its Survival

by Bradley Jansen May 15th, 2013 7:50 am

One of the most interesting competing currency wannabes is firmly in the crosshairs of law enforcement.  As my friend Declan McCullagh writes for CNET, "Homeland Security cuts off Dwolla bitcoin transfers," Bitcoin's survival may depend on whether it complies with (granted, onerous) government regulations--especially the anti-money laundering laws.  Declan doesn't actually go that far, but he should. 

As my colleague here George Selgin has explained Bitcoin is not (yet) a currency in that it fails the "generally accepted" test.  From its inception until the FinCEN guidance, there has been a remarkable increase in the growth of the Bitcoin market.  The trend line intimated that Bitcoin *might* be on its way to becoming a full-fledged, generally accepted and widely recognized currency.  That path is now at a crossroads.

Explains Declan:

The U.S. Department of Homeland Security confirmed it has initiated legal action that prompted the Dwolla payment service to stop processing bitcoin transactions.

Nicole Navas, a spokesperson for U.S. Immigration and Customs Enforcement, confirmed the legal action to CNET this afternoon.

Dwolla, a Des Moines, Iowa-based startup, which raised $16.5 million in funding two weeks ago, notified users about the move earlier Tuesday. It blamed the decision on "recent court orders" limiting its ability to send money through Mt. Gox, the largest bitcoin exchange.

 As I have said privately many times and publicly at the Privacy Working Group, the FinCEN guidance on emerging payment systems (e.g. Bitcoin) raises more questions than it answers and the best way to make sense of the guidance is that law enforcement had prosecutions in the works and needed FinCEN to cover their backsides to try to make them stick.  I fear the prosecutions we are seeing now will just be the tip of the iceberg.

Whether Bitcoin can continue on its path towards a full-fledged, generally-accepted currency or not will largely depend on if the Bitcoin community can get its act together and respond appropriately to the FinCEN guidance.


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Keynes and money during wartime

by Kurt Schuler May 13th, 2013 11:28 pm

In my previous post I mentioned that my admiration for Keynes overall is quite strong. It is based on his deeds as a practioner of economic policy as well as his words as a theorist. Among his major writings on monetary economics, Indian Currency and Finance is now very little read because it concerns controversies long past. A Tract on Monetary Reform is, along with Dennis Robertson’s little primer Money, the only book on monetary theory I know of in English that has high merit both as economics and literature. The second volume of the Treatise on Money remains worthwhile for specialists in central banking. The General Theory of Employment, Interest and Money is, as I have previously mentioned, a muddle.

Keynes was deeply involved in running Britain’s war finances during World War I and World War II. Despite great strains, Britain avoided the postwar high inflations, maxi-devaluations, and currency confiscations that the other European belligerents suffered. The wars weakened the pound sterling but did not destroy it and the property relations that rested upon it. Keynes deserves some of the credit, especially as concerns World War II, in which his pamphlet “How to Pay for the War” influenced British policy.

That brings me to my theme. In monetary theory and even in most systematic treatments of monetary policy, the influence of war receives little or no attention. There have been many specialized studies of wartime monetary conditions, but look at a treatise or a textbook on monetary economics and you will not find war and its problems woven into the story even though war has been the source of many major changes to monetary systems.

War is particularly a problem for free banking. Governments’ desire to finance war through inflation and measures of “financial repression” such as exchange controls and forced saving (or confiscation of savings) are fundamentally at odds with the spirit of voluntary cooperation underlying free banking and the market economy more broadly. An important question for research in free banking is whether and how a free banking system that has been in effect nationalized during wartime can be privatized again in peacetime. War has often had a ratchet effect on government involvement in the financial system. In the United States, for instance, the federal government issued notes (paper money) during the Civil War and has continued to do so ever since. It is not enough to say, as Leonard Read did about wage and price controls, that “I’d Push the Button” if there were one to abolish them immediately. Many countries have rapidly decontrolled wages and prices. I am unaware of any country that has switched from government control of the monetary system to free banking with similar speed and energy. Switches have happened, but they have been matters of years rather than days.


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The Keynes kerfuffle (off topic)

by Kurt Schuler May 9th, 2013 11:38 pm

Psst. Keynes was a homosexual. Pass it on.

Late last week Niall Ferguson, professor of history at Harvard, gave a talk at an investment conference. In response to a question from the audience he criticized Keynes's focus on short-term economic policies and hypothesized that it was related to Keynes's homosexuality and childlessness. (When young, Keynes and the painter Duncan Grant were lovers. Later, to the great surprise of his friends, he married the Russian ballerina Lydia Lopokova, and by all accounts they were a devoted couple.) Ferguson's remarks brought down a storm of criticism, and he beat a hasty retreat, retracting his remarks.

The incident piles irony on top of irony in a delicious seven-layer cake of ridiculousness.

1. The quote Ferguson was asked to comment on, Keynes's famous remark that "In the long run we are all dead," from the Tract on Monetary Reform, is not an argument for focusing on the short term in economic policy, but a criticism of economic analysis that concentrates on long-run equilibrium while neglecting what may be extreme, highly disruptive turbulence that occurs in the short term.

2. Keynes is the ultimate privileged dead white male, yet because of his early homosexuality the deacons of political correctness have rallied to him, arguing that it was invidious to criticize him for it.

3. If Keynes's homosexuality is not relevant, can we now get rid of all the university programs of ethnic, gender, postcolonial, and other identity studies erected on the premise that such things are relevant?

4. As Jonah Goldberg noted, Ferguson's criticism linking Keynes's short-termism to his childlessness was not new. Joseph Schumpeter, a contemporary who had the opportunity to observe Keynes and a deeper intellect than anybody who has blogged on the subject, made the criticism in his obituary of Keynes. Others have done likewise since.

5. I assume, however, that Schumpeter and others did not know that Keynes and Lopokova were not childless by choice. We now know that she had a miscarriage.

6. Ferguson's quick cave-in to political correctness must be a record for a tenured professor who is ostensibly not a man of the Left. Larry Summers held out a lot longer. Apparently the thought of living on a professor's salary and book royalties alone, seeing the speaking fees dry up, and getting the cold shoulder in the faculty lounge were too much for him. I expect better from one whose position is so secure. Perhaps it's time for Harvard to replace "Veritas" on its seal with a chicken rampant to represent the ethos of the university more accurately.

7. To top the whole thing off, there was some truth to Ferguson's remarks; it just not as direct as he asserted. As someone who has read a lot by and about Keynes, including bringing to light previously neglected material by him on two occasions, I think Keynes's homosexuality did influence his views. Although by birth an insider in the English intellectual class, Keynes's homosexuality, along with his lack of religion, gave him an outsider's perspective on many issues. One of his common modes of argument was to attempt to skewer conventional opinion, something he drew great pleasure in doing. His essay "My Early Beliefs" discusses where that quality came from and how he came to have some grudging respect for conventional opinion as he grew older. He does not discuss his early homosexuality because at the time it was still, regrettably, "the love that dare not speak its name." Keynes's first biographer, Roy Harrod, likewise omitted mention of it. Knowing about Keynes's homosexuality makes the essay even more revealing. Keynes's sexuality matters no more for the truth or error of his ideas than Plato's sexuality matters for the truth or error of Plato's ideas. It was, however, part of the psychological makeup that made Keynes unconventional and more willing to experiment with ideas than someone of otherwise similar background. There are two control cases for my claim: Keynes's father John Neville and his brother Geoffrey. Both were highly accomplished men, important in their time, but John Maynard Keynes is an immortal, in a wholly different league from them. Keynes's willingness to experiment with ideas, and change them frequently, lays his ideas on economic policy open to what I consider a fair charge that they are too focused on the short term. The experience of his times is some excuse: Keynes faced war, recession, currency crises, depression, and war again, and was always in the thick of things as a policy maker, speculator, or influential outside hectorer.  Still, he had too much confidence in his own ability to influence British economic policy and paid too little attention to the long-term consequences of his quicksilver short-term policy maneuvers.

The larger lesson for me is the continuing malign effect of political correctness. Although Ferguson's remarks were sloppy, the connections between the qualities or behavior of a thinker and his ideas are legitimate subjects of inquiry. We want to know what made significant thinkers tick because there have been so few of them. The climate that stifles such inquiry is also the climate that stifles inquiry into matters less charged by identity politics, such as the gold standard and free banking, by insulting them rather than answering them.

And now for some cherries on the top.

Despite Keynes's not being religious, I read recently that Keynes did a greater service to the Church of England than perhaps anyone else in the 20th century when he advised that after World War II it should shift many of its assets from bonds to stocks. Stocks roughly kept pace with inflation and sometimes more, while bonds did not.

Years ago, Peter Boettke told me a story about a conference where Ludwig von Mises's wife Margit was present. One of the speakers mentioned Keynes and Mises favorably in the same sentence, calling them the two greatest economists of the century. Margit von Mises rose and spluttered, "How can you compare my husband to Keynes? Keynes was a  homosexual, and let me tell you, Ludwig von Mises was no homosexual!"

Finally, for a previous post on Keynes, see here. My admiration for Keynes overall is quite strong, although I think The General Theory was his worst-written book and has many problems. As for his sex life, if he were living it today it would today be fodder for some cult series on HBO, and I don't watch HBO.

Psst. Keynes was a fascinating economist and man. Pass it on.


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Privacy May Be an Important Reason for Currency Competition

by Bradley Jansen May 9th, 2013 9:41 pm

Having long been an advocate for financial privacy (my main think tank URL is financialprivacy.org), perhaps I'm a little biased, but I think that the privacy issue could be a huge rallying cry for currency competition.

Many years ago, I organized and led opposition to the "Know Your Customer" proposal for greatly expanding the scope of bank spying on their customers (including source of funds for deposits) for the government and later raised awareness of the idea of the "carry tax" on cash that was being promoted by Marvin Goodfriend of the Richmond Fed at the time. Similarly, I've been sounding the alarm against international versions of the Know Your Customer proposal from the Financial Action Task Force.

Technological developments might make the implementation of a carry tax possible now. This article explains

A simple act of cash changing hands could become a lot less private. U.S. researchers have developed a new way of embedding traceable chips within "smart" paper—raising the possibility of banks and governments guarding against counterfeiting and even tracking the usage of paper money.

The new method of embedding radio frequency identification chips (RFID) in paper came from North Dakota State University in Fargo. Researchers used a patent-pending technology—called Laser Enabled Advanced Packaging (LEAP)—to transfer and assemble the traceable RFID chips on paper. Such "smart" paper could lead to new types of banknotes, legal documents, tickets and smart labels.

Now there are a new host of challenges to financial privacy--and I think they could help the cause of currency competition. Or, maybe, they'll be the demise of the current opportunity if we're not careful.

MasterCard in Nigeria where the National ID will be a credit card:

As part of the program, in its first phase, Nigerians 16 years and older, and all residents in the country for more than two years, will get the new multipurpose identity card which has 13 applications including MasterCard’s prepaid payment technology that will provide cardholders with the safety, convenience and reliability of electronic payments. This will have a significant and positive impact on the lives of these Nigerians who have not previously had access to financial services.
The Project will have Access Bank Plc as the pilot issuer bank for the cards and Unified Payment Services Limited (Unified Payments) as the payment processor. Other issuing banks will include United Bank for Africa, Union Bank, Zenith, Skye Bank, Unity Bank, Stanbic, and First Bank...
“Today’s announcement is the first phase of an unprecedented project in terms of scale and scope for Nigeria,” said Michael Miebach, President, Middle East and Africa, MasterCard. “MasterCard has been a firm supporter of the Central Bank of Nigeria’s (CBN) Cashless Policy as we share a vision of a world beyond cash. From the program’s inception, we have provided the Federal Government of Nigeria with global insights and best practices on how electronic payments can enable economic growth and create a more financially inclusive economy”.

More on the Nigerian developments here.

Not a fan of linking all of your financial records with the government's National ID card? Maybe you're interested in an alternative...

If using a National ID credit card doesn't appeal to you, be glad that you don't have to integrate biometrics into a "cashless" system. Explains "Cashless Society Leap Forward with Biometrics,"

Already, emerging economies in Africa and parts of Asia are utilizing mobile as the principal method of payment, and India is linking welfare payments to biometric signatures -- using fingerprint, eye, face, or voice scans to verify identity and allow access to money.
Although cash hasn’t yet completely disappeared from our business dealings, the world’s most powerful tech and finance organizations are working to replace it with digital payments to be made via wireless devices and biometric scanning. This Orwellian move is a step in the direction of jeopardizing any hope of a future a free and open society.

As they say on late night television, but wait, there's more!

In the United States, the Internal Revenue Service had been claiming the right to snoop on our records without a warrant. I won't go into details here, but it brings us to my previous warnings on the importance of updating the Electronic Communications Privacy Act (ECPA) for currency competition. My think tank is a part of the Digital Due Process coalition to update ECPA in privacy-respecting ways.

While I have been posting a lot about both ECPA and the how the Financial Crimes Enforcement Network (FinCEN) affect Bitcoin and other alternative currencies, I should make more clear that while the FinCEN guidance on emerging payment systems is the most important and pressing threat to Bitcoin (and similar currencies), the way ECPA works its way through Congress and becomes law might be the most important way for the government to enforce FinCEN-led investigations and prosecutions.

How many people in the Bitcoin community are active in the fight to update ECPA in a privacy-respecting way?


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A Gold-Price Rule as a Middle-Ground Path to a Genuine Gold Standard (guest post by Richard M. Salsman)

by Kurt Schuler May 7th, 2013 10:35 pm

(Richard M. Salsman wrote this e-mail to me in response to my previous post and gave me permission to share it with readers of the blog.)

Prompted by Glasner’s recent critique of claims about the “golden constant” (Jastram’s finding of long-term relative stability in gold’s real purchasing power), Kurt Schuler recently wished to locate a “middle ground” between our current (post-1971) monetary system of central banking and fiat money (hereafter, “CB&FM”) and a system of free banking on the gold-coin standard (hereafter, “FB&GS”).

Why a middle ground, or at least something of a transition period?

Kurt is right, I believe, in arguing that central banking and gold-based money are incompatible; in logic and history alike they don’t go together, at least not for long. “If you want the gold standard in durable form,” he writes, “you can’t have central banking,” and “if you want central banking, you should not mix it with the gold standard.” This means a “Bretton-Woods II,” while tempting (compared to our current system), would likely prove futile; before long, its golden element would be manipulated or sabotaged, as happened under B-W (1945-1971), and the financial fallout will be blamed on gold, yet again, not on a deficit-spending Treasury or a debt-monetizing Fed. As I showed in Gold & Liberty (1995), the gold standard wasn’t the cause of the Great Depression, nor of the breakdown of B-W I; see also Chapter VII, and the section titled “The Incompatibility of Central Banking and the Gold Standard.” And in a recent article, “The End of Central Banking,” I expand on the Selgin-White thesis that the purpose (“end”) of central banking is largely fiscal – and not a “fix” of supposed “market failures” (“A Fiscal Theory of Government’s Role in Money,” 1999), and their thesis that private financial institutions have far greater credibility than central banks in maintaining gold-convertibility or even fixed exchange rates (“Credible Currency: A Constitutional Perspective,” 2005). In short, the reason central banking is incompatible with the gold standard is that it exists mainly to help finance the fiscally-profligate state – a state that requires limitless fiat money.

Yet immediate adoption of a system of free banking and gold-based money is a remote possibility – as remote as immediate repeal of the fiscally-overextended welfare-warfare state – despite welcome optimism from certain gold-money advocates. How then might a “middle ground” be established, without sacrificing principles in support of liberty and the rule of law for government generally and money and banking particularly? The only plausible version I’ve ever found to be defensible – and even then, only as a transition to a pure system of FB&GS – is the supply-side case for a “gold price rule” (hereafter, a “GPR”).

Under a GPR, the Fed would only buy and sell gold at a fixed price; there’s no currency convertibility, and no actual gold coinage in circulation, nor even any minimum required gold reserves at the Fed (and none at the banks, either, although they’d be free to buy and hold gold).  A GPR could be advocated as a worthy competitor to today’s two dominant rules – the monetarist rule (money supply targeting; in extremis, QE – “quantitative easing”) and the Keynesian rule (interest-rate targeting; in extremis, the ZIRP – “zero interest-rate policy”). But a GPR also could be our middle-ground path to a purer (free-market) monetary system, when (and if) the ideological climate changed sufficiently to restrain or reduce the size, scope, and cost of government (hence, its fiscal neediness).

A GPR was first comprehensively advocated by Art Laffer in 1980 (“Reinstatement of the Dollar: A Blueprint”), and was the basis for the “Gold Reserve Act of 1980” (GRA), introduced by then-Sen. Jesse Helms. The GRA died with the Gold Commission (1982). Not many supply-siders, of course, would go so far as to advise the eventual phasing-out of central banking. At best, their version of GPR was to morph into central-bank managed currency convertibility. According to Laffer and Kadlec, “the purpose of a gold standard is not to turn every dollar bill into a warehouse receipt for an equivalent amount of gold, but to provide the central bank with an operating rule that will facilitate the maintenance of a stable price level” (“The Point of Linking the Dollar to Gold,” Wall Street Journal, October 13, 1981). To this day, most supply-siders place undue trust in central banks’ willingness to establish or preserve gold-based money. Yet free bankers, in rejecting this premise, need not also reject the positive aspects of a GPR – its superiority to Keynesian and Monetarist rules, and its role as a path to purity. For an analogous precedent in political theory-history, see the shift from absolute monarchies – to constitutional monarchies – to constitutional republics.

A major objection to the GPR would be that it merely gives a central planner (Fed) advice – purportedly, “a better rule.” But a GPR advocate can simultaneously stress opposition to central planning (central banking), and present a GPR as the means to an even better system. A GPR would help markets and banks become comfortable again with gold-based monetary stability. Also, free bankers could stipulate, as part of a GPR, that the Fed can’t own government securities and must divest those it now holds, and that it no longer regulate banks. Additionally, we must phase out the array of subsidies now made to banks: the discount window, the FDIC, and the TBTF policy. We start with GPR, but seek gradually to reduce and withdraw the moral hazard aspects of CB&FM.

We must also insist that the Fed no longer manipulate or gyrate interest rates (the Keynesian rule), but leave their determination to markets. Oddly, some supply-siders (Wayne Angell, others) believe a GPR is best attained by a central bank altering interest rates: raising them when the gold price moves above the target, and lowering them when gold declines below it. At any rate, under a GPR that has the central bank dealing only in gold, not government securities, interest rates nevertheless should be more stable, since the dollar itself would be more stable (fixed to gold). But if the Fed is to be stripped of such powers, why not just have the Treasury conduct the GPR, directly?  As long as government exists, even its legitimate fiscal needs require a Treasury, which surely can borrow, to handle uneven revenues and spending. Treasury itself could buy and sell gold at a fixed price, with dollar-denominated Treasury notes (TNs). Retire Federal Reserve Notes (FRNs) and replace them with TNs. Banks today already hold liquid T-Bills and thus can easily handle TNs. In time private banks could issue currency, in dollars, with “dollar” defined as a fixed weight of gold (say 1/1500ths an ounce of gold – today’s rate), with full convertibility under fractional reserves.

In short, a GPR could be a helpful “middle ground” that’s both achievable in our time and yet a viable path to FB&GS, should the reigning political ideology ever permit it. Advocates of FB&GS can remain “policy relevant,” in a world that still heavily favors CB&FM, without sacrificing their deeper, libertarian principles.

Comments and criticisms are most welcomed.


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The middle ground

by Kurt Schuler May 3rd, 2013 6:54 am

(Prompted by a recent post by David Glasner.)

A number of advocates of the gold standard claim they want to return to a "real," pre-World War I style gold standard rather than the interwar or Bretton Woods versions, which proved not to be durable. Unlike the pre-World War I gold standard, though, where countries representing only about half of the world's economic output had central banks--and the biggest economy, the United States, was not among them--they propose to leave central banks in place.

Critics of the gold standard point to the disastrous experience of the interwar gold standard as an argument against returning to gold. What only a few acknowledge is that the interwar gold standard worked much differently from the prewar gold standard. In particular, research into the behavior of the Federal Reserve and the Bank of France has shown that, because they were central banks with discretionary monopoly powers rather than competitive commercial banks, they made decisions to accumulate and sit on large stocks of gold that competitive banks would not have done. Dick Timberlake returns to this point regarding the Federal Reserve in his new book Constitutional Money. He points out that when Franklin Roosevelt took the United States off the gold standard in 1933, the Federal Reserve held about substantially more gold than the minimum required by law; moreover, it had the power under the law to go below the minimum if it declared that emergency circumstances required doing so. The Fed could have followed a much more expansionary policy in the years after the stock market crash of 1929. Dick reiterates the theme of an important article he wrote several years ago, that the reason it did not do so was that it was guiding its policy by a version of the "real bills doctrine."  While benign for competitive commercial banks, the real bills doctrine has what Dick terms a "dark side" if implemented by a central bank as the Fed did.

Here's what I propose as the middle ground for the advocates and critics of the gold standard: central banking and a pre-World War I-style gold standard are incompatible. If you want the gold standard in durable form, you can't have central banking. If you want central banking, you should not mix it with the gold standard.

As I have written before, it will not do to use the experience of the interwar period as an argument against the gold standard simply. It is an argument against the gold standard under central banking. The Great Depression was Great precisely because it was uncommon. During all the previous centuries of experience with gold and silver standards there was nothing to compare to it. It is sobering in that context to observe that at present, most of  Europe (Germany, a few of its neighbors, and Russia being exceptions) and Japan are still below their pre-recession peaks of output, and that in some cases they have been below their pre-recession peaks longer than they were during the Great Depression. Prolonged economic sluggishness is just as possible without a gold standard as with it.


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A Challenge to the Bitcoin Community

by George Selgin May 2nd, 2013 3:13 pm

Well, it seems that Freebanking.org may be having its own little Bitcoin bubble, what with all the recent posting on the topic by Brad, Kurt, and myself. Still I can't help adding one more, having planned to do so since my last post on the topic, and having as well a selfish motive in mind, to wit, that of supplying myself with some materials with which to revise and expand my paper on "Synthetic Commodity Money."

I wish to accomplish that end by challenging Bitcoin fans to propose means by which one might combine the same advantages as Bitcoin presently offers with a mining or production protocol that, instead of adjusting mining rewards so as to achieve some predetermined output rate and limit, adjusts them so as to automatically alter the rate of coin production as needed to achieve some other objective. For example, the objectives might be that of achieving a steady rate of cybercurrency appreciation (as measured by the cybercurrency-equivalent CPI), or a steady level or growth rate for the total value of cybercurrency payments. But there are many others also worth contemplating. The general question is whether it is possible to have a more "elastic" or otherwise macroeconomically friendly alternative to Bitcoin. (Even the output of gold, after all, tended in the long run to respond to changes in that metal's relative price, thereby ruling-out both persistent inflation and persistent (or sharp) deflation.)

In putting forward this challenge I don't mean to endorse any particular monetary or macroeconomic policy ideal. I'm only interested in exploring the extent to which it may be possible to have mining protocols other than those calling for a steady (or steadily declining) rate of coin output. If there are, then the question whether any of them would in fact supply the basis for a "better" cybercurrency is one that would then be worth taking up.

As food for thought to those pondering the challenge, here are a few of the very interesting suggestions I received concerning it in the comments to my original Bitcoin post:

(Peter Surda): you cannot design a synthetic commodity whose supply mirrors macroeconomic aggregates, because these aggregate variables are exogenous to the network (whereas the hashing parameter of networks like Bitcoin only depends on time and the number of blocks in the blockchain, which from a perspective of the network are endogenous), so they cannot be unambigiously measured.

(Derka): Yes you can certainly base altcoin production (supply inflation) on any parameter (nominal or real GDP, employment, etc.), the tricky part is doing it without centralizing trust. For the sake of demonstration, call the parameter of interest X.

Option 1) Centralize authority. Give the WSJ authority (via public/private key encryption) to report the value of X to the altcoin network. The altcoin network responds algorithmically to this news. Perhaps if X is NGDP and is down, increase production!

Option 2) Give the authority to the miners. Every miner could record the current value of X in the blocks they produce. Problematically, the miners will collude and devalue the currency to reap the hyperinflated rewards.

(Koen): but would it not be possible for the network to respond to patterns that occur in the network but that are reliably associated with (e.g. being the effect of or having the same cause as) certain (macro-)economic phenomena? I mean, for example, contractions in the money supply seem to have both a (macro-)economic reality outside of the network and specific effects within the network

(Justin Reitz): Off the cuff, it might be possible to use the Federal Reserve's FRED API to automatically pull data on a chosen economic aggregate. Of course there are all sort of issues: timeliness of Fed data, data updates, security of the the FRED API, how to reduce the virtual currency in circulation, etc.

(tdbtdb): Perhaps this is what you mean when you mention the security of FRED, but clearly having such a system depend on FRED would put it under the control of whoever controls FRED, nagating the whole point. So there are 2 risks, one that unauthorized hackers could compromise FRED, the other that the people feeding data to FRED might feel tempted to lie.

I wish I could offer some real prize for more thoughts like those above, let alone for any more substantial answer to my challenge. But as I am no fatcat but only a humble college professor, I can offer nothing save my gratitude, and the modest reward of doing whatever I can to credit those responsible for their contributions to one component of what H. G. Wells (himself no mean futurist) considered the "permanently effective task before Mankind," namely, that of "working out and applying...a Science of Currency."