Free Banking 

Says the NYTs today, "On July 9, 1896, William Jennings Bryan caused a sensation at the Democratic National Convention in Chicago with his "cross of gold" speech denouncing supporters of the gold standard. Bryan went on to win the party's nomination."  We should add that he lost the general election, of course.  In fact, his was a politically losing argument not only in 1896, but 1900 and 1908 for him as well.

I wonder if there are any Gold Democrats left.  They had a great platform at the Convention of the National Democratic Party at Indianapolis, Ind., September 3, 1896.

'This convention was assembled to uphold the principles upon which depends the honor and welfare of the American people in order that Democrats throughout the Union may unite their patriotic efforts to avert disaster from their country and ruin from their party. The Democratic party is pledged to equal justice and exact justice in all men of every creed and condition; to the largest freedom of individual consistent with good government; to the preservation of the Federal Government in its constitutional vigor and support of the maintenance of the public faith and sound money; and it is opposed to paternalism and all class legislation. The declarations of the Chicago Convention attack individual freedom, the right of private contract, the independence of the judiciary, and the authority of the President to enforce Federal laws. They advocate a reckless attempt to increase the price of silver by legislation to the debasement of our monetary standard, and threaten unlimited issues of paper money by Government. They abandon for Republican allies the Democratic cause of tariff reform to court the favor of protectionists to the fiscal heresy. In view of these and other grave departures from Democratic principles, we cannot support the candidates of that convention, nor be bound by its acts. The Democratic party has survived a victory won in behalf of the doctrine and the policy proclaimed in its name at Chicago. The conditions, however, which make possible such utterances from a national convention are a result of class legislation by the Republican party. Is still proclaims, as it has for many years, the power and duty of the Government to raise and maintain prices by law; and it proposes no remedy for existing evils except oppressive and unjust taxation.'

The Independent had a write up of the Gold Democrats not so long ago.

History reminds us that Bryan campaigned not only for monetary debasement but prohibition of alcohol and the teaching of evolution (he wanted it banned in church-related as well as public schools).  In fact, the chief proponent of monetary debasement was also the leading light against the teaching of evolution at the Skopes trial in 1925.

Getting back on point, our friend Dan Mitchell posted this video of the speech of an NPR episode with a clip from Jennings repeating the cross of gold speech in 1923:

I am, generally, a big fan of Robert Higgs, but I have some quibbles with this analysis (though this analysis is common among other people I like).

Higgs outlines his arguments in a blog post here.  His main argument is that

Since late December 2008, the bank prime lending rate — the interest rate banks charge their best corporate customers — has remained steady at 3.25 percent. . . Meanwhile, during the same period, the excess reserves that commercial banks hold at the Fed have increased from $2 billion in August 2008 to $1,513 billion in May 2011.  [He has the quite striking graphs to go with it.]  Ordinarily, one would have expected this development to produce hyperinflation of the general price level. However, the price level has increased quite moderately, and for a while many analysts warned that deflation was the greater risk.

In short, I think Higgs has hyperinflated the hyperinflation concerns on the reserves question.  I think the effect of the allowing the Federal Reserve to pay interest on reserves is overblown and much less of a factor in an alleged increase in (onshore) reserves.

Regarding my first point, for a long time, money center financial institutions (and later smaller ones) used "sweeps" software to "sweep" their deposits overnight from the US (to avoid the reserve requirements which didn't pay interest) to offshore havens where they got a higher rate of return--and back again the next morning (consumers never knew).  Companies followed the capital markets dictum that "money goes where it's welcome and stays where it's well treated."  Our bad policies here forced our money offshore.  By removing some bad laws here (prohibition on paying interest on reserves), some of the reserves that went offshore now stay onshore (Higgs has a dramatic graph of this).  But I question just how great the increase in overall reserves (domestic and what used to get swept offshore overnight) has been and how much of the dramatic graph can be explained by the marginal change from keeping on deposit at the Fed reserves that previously had been swept offshore.

Higgs' second main point with which I question is his contention that there is something fishy about banks not lending to their best corporate customers for a greater return on their money:

Moreover, they are doing so notwithstanding that they appear to have the option of lending at 3.25 percent to their best corporate customers and at higher rates to their less creditworthy customers. Why are they forgoing the opportunity to earn huge sums by switching out of excess reserves at the Fed into commercial loans and investments? The answer would seem to be that that are so frightened of the risk associated even with loans to their best customers that they are loath to lend.

But again I think he fails to put the issue in a greater context: companies are hoarding cash in record numbers.  According to CNBC, the "best corporate customers" for the banks in Higgs' examination are sitting on a record hoard of $800 billion themselves.  Why would they be beating down the doors of the banks to borrow more money?  Explains the CNBC article:

The current members of the S&P 500 are sitting on about $800 billion in cash and cash equivalents, the most ever, according to data by Birinyi Associates, even as the unemployment rate has ticked back above 9 percent. Most of this cash and cash equivalents are likely yielding at or below the current 3.6 percent annual rate of inflation, giving it a negative real return.

So why would any profit-seeking corporation go to one of Higgs' banks with "excess" reserves and borrow at 3.25% when it is already hoarding record cash?  Is the Fed just "pushing on a string?"  More importantly, the question is not as Higgs alludes ("The answer would seem to be that that are so frightened of the risk associated even with loans to their best customers that they are loath to lend.") but one that needs to go to the unwillingness of creditworthy businesses to invest.

The CNBC article implies that companies are not hiring because there is no demand.  This raises questions about economic theory.  Some Rothbardians might argue that any increase in the money supply (and I'm purposefully trying to generalize on people and terms here) is inflationary while others even in the Austrian school (generally those on the free banking side unconcerned with the full reserve question) have said that under non-governmentally regulated market conditions (certainly not what we have now), money supply increases would (generally) match market demand for new money.  I posit that the question Higgs tries to answer wrestles with this question.

I would welcome comments, insights, corrections and importantly better numbers on aggregate US bank reserves including marginal changes in aggregate sweeps.

US Rep Ron Paul will be holding a long awaited hearing today at 2 pm on his Gold Reserve Transparency Act of 2011 (HR 1495). I'm offering my own little cheat sheet for the hearing here.  Witnesses to include

• The Honorable Eric M. Thorson (testimony in PDF), Inspector General, Department of the Treasury
• Mr. Gary T. Engel (testimony in PDF), Director, Financial Management and Assurance, Government Accountability Office.

The official link is here. Here's the text of the bill. And here is the live webcast link.  Submit questions for the hearing here.

From the GAO's testimony:

H.R. 1495 also provides for GAO to prepare and transmit to the Congress, not later than 9 months after enactment of the act, a report of GAO’s findings from such review together with the results of the assay, inventory, audit, and analysis conducted by the Secretary of the Treasury. According to Treasury officials, because of the enormous quantity of gold that would need to be inventoried and assayed, there is uncertainty regarding the ability of Treasury to complete such actions within the 6-month period provided in H.R. 1495. If Treasury’s efforts are not completed within the 6- month period, there would be limitations on the scope of GAO’s work if GAO were required to report within 9 months after enactment of the act.

The Treasury IG makes clear he sees the requirements of the bill as unnecessary and redundant.  There are a few other observations:

• In all, these compartments hold 699,515 gold bars with fineness, or purity, ranging from 0.4701 to 0.9999 with an average fineness of 0.9006. Fort Knox houses 60 percent of the fine troy ounces of the deep storage gold reserves, Denver 18 percent, and West Point 22 percent. [nb, that seems like a great range for fineness.]
• In 1974, in response to public and Congressional inquiries, the General Accounting Office (GAO), known as the Government Accountability Office since July 2004, in cooperation with the Department of the Treasury, conducted an audit of about 21 percent of the gold bars stored at the United States Bullion Depository, Fort Knox, KY, and concluded that the gold stored at that facility agreed with the records of the depository. [nb, 21% is not really a full audit.]
• In should be noted that the audit by GAO followed a Congressional visit to the Fort Knox facility. [Last one in 1974? Sounds as if it's time for field trip!]
• The testimony includes some interesting graphics at the end of the seals, etc. used.

Auditing the gold reserves has been an important issue in the gold bug community, for example with the GATA folks:

Not only has Dr. Paul has been agitating for an audit of the US gold reserves for a long time, but he's been consistently trying to raise the issue's profile.  Reported Kitco last year:

Now, when I was Dr. Paul's banking and monetary policy staffer a dozen years or so ago, I went on a private tour of the New York Fed's gold vault and can vouch that back then there was an impressive store of what sure looked like gold bars to me.  How much of that belonged to which account, I have no idea.  The NY Fed stores gold for other central banks and the IMF but does not disclose how much is in which account.  (On  side note for those concerned with the logistics of returning to a gold standard and the "shipping" of gold around to clear accounts: gold bars are routinely now simply moved from one storage account in the NY Fed gold vault to another with little difficulty or cost.)

Of course there have long been rumors that "there's no 'there' there" (as Gertrude Stein once quipped about her hometown of Oakland) after President Ford in 1974 issued Executive Order 11826, revoking paragraph (d) of Section 2 from EO 10289, pertaining to gold.  According to one report:

In the internet boom of the 1990s, there was a rush of new alternative payment systems or currencies (Paypal being the most successful).  Forbes even ran a great cover story on this issue Politics for the Really Cool.  For whatever combination of reasons (the tech being too far ahead of the curve, regulators being over-zealous, outdated laws ill-suited for innovation, etc), the movement petered out.  Until recently, that is.

Forbes is back with a story on Bitcoin, the new cause celeb of the digital money movement:

Bitcoin is a grassroots nonprofit project that seeks to fashion a new currency out of little more than cryptography, networking and open-source software, and Andresen is the closest thing the project has to a director. Bitcoin is not, he explains, just a new way to digitally spend dollars, pounds and yen. That's been tried before. Remember Beenz and Flooz?

Bitcoin is different: It wholly replaces state-backed currencies with a digital version that's tougher to forge, cuts across international boundaries, can be stored on your hard drive instead of in a bank, and--perhaps most importantly to many of Bitcoin's users--isn't subject to the inflationary whim of whatever Federal Reserve chief decides to print more money.

Slate is there now talking about Bitcoin with an article My Money Is Cooler Than Yours.

The currency has a few advantages. For criminals, libertarians, and privacy freaks, the Bitcoin system allows for complete anonymity and privacy. Once a transaction is completed, there is no central server with information for the government to subpoena. (If you buy Bitcoins on an exchange, of course, that transaction would have a record.)

Even the Washington Post has gotten into the act with its write-up by Stan Stalnaker who is behind another virtual currency called Ven:

Virtual currencies are in the news again with all the discussion around Bitcoins, which is limited in supply and can be exchanged anonymously.

The New York Times has even chimed in on the general debate with a story on Square, a mobile payment startup.

The start-up faces formidable competition. Square’s goal is to replace cash registers and point-of-sale terminals and the companies that make them, like Verifone. Square is also taking on the many start-ups that offer cellphone loyalty cards, like Foursquare, and competing with Google, Apple, PayPal and major credit card companies and banks to provide mobile payments.

Jerry Brito adds that Bitcoin or other digital currencies could fill a void for politicized institutions that interfere with payment systems (and infringe on human rights) such as donating to Wikileaks or paying for your online gambling.

The Washington Post followed up with a story the next day that began:

Bitcoin. Oh, man, where to begin. Its Hype-O-Meter got cranked to 11 this week, and breathless histrionics are everywhere. Death and Taxes called this new currency “a seismic event“; Adam Cohen says it’s nothing but a giant scam; Jason Calacanis calls it “the most dangerous project we’ve ever seen“; and they’re all completely wrong. It’s interesting, and innovative, and down the line it might even be important … but in many crucial ways, Bitcoin is nothing new.

I think that this story got it right.  The real opportunity for alternative monies will come where the demand is greatest.  One of those places is the developing world with central banks that are often more politicized than in developed countries.  Zimbabwe, which has been flirting with a return to a gold standard since 2009 and is revisiting the idea of a gold-backed Zim dollar, would be a prime example.  Explains the Washington Post story:

Meanwhile, mobile electronic payments are taking off in a big way all over sub-Saharan Africa. It isn’t much of a stretch to imagine Zimbabwe in ten years’ time—or a whole group of developing nations with a history of crippling inflation—adopting a new currency that is independent, incorruptible, and anti-inflationary by design. In short, something a whole lot like Bitcoin. No, it isn’t the future, but it just may point the way.

Of course I pointed this all out in my talk at the Mises Institute's Austrian Scholars Conference panel on how to transition to sound money.  There I highlighted the observation of Randy Kroszner's paper on the Scottish free banking experience as a model for developing countries.  I think his analogy is a sound one that the conditions in many developing countries today are similar to those in Scotland during its free banking experience.

With the Federal Reserve monetizing our budget deficits, there is already increasing talk of the dollar losing its global reserve currency status.  Some speculated the euro might challenge it, but those economies face their own problems.  Others envision a basket of currencies or commodities.  The most likely threat there was from the International Monetary Fund's Special Drawing Rights, but the SDRs have lost their sex appeal with the disgraced IMF leader in the tabloids.

The real challenge to the hegemony of the US dollar might just come from the likes of a Bitcoin.

Happy days are, make that, stagflation is here again.  So says Ronald McKinnon in a Wall Street Journal column.  Stagflation was memorialized by the 1970s experience of high inflation and economic stagnation.  The Stanford professor says it's rearing its ugly head again.

He lays out the cause:

Although many forces buffet the U.S. economy, the near-zero interest rate policy of the Federal Reserve is the prime contributor to the current bout with stagflation.

But Fed officials claim that higher commodity prices don't presage a return of inflation.  McKinnon disagrees:

For more than two years, the Fed has chosen to keep short-term interest rates on dollar assets close to zero and—over the past year—applied downward pressure on long rates through the so-called quantitative easing measures to increase purchases of Treasury bonds. The result has been a flood of hot money (i.e., volatile financial flows that are subject to reversals) from the New York financial markets into emerging markets on the dollar's periphery—particularly in Asia and Latin America, where natural rates of interest are much higher.

He continues to put the blame at the Fed's feet:

So the proximate cause of the rise in U.S. prices is inflation in emerging markets, but its true origin is in Washington. . . Since July 2008, the stock of so-called base money in the U.S. banking system has virtually tripled.

Shadowstats has a hyperinflation report out (pdf) with more facts and figures.  Judge for yourself.  McKinnon concludes:

The stagflation of the 1970s was brought on by unduly easy U.S. monetary policy in conjunction with attempts to "talk" the dollar down, leading to massive outflows of hot money that destabilized the monetary systems of America's trading partners. Although today's stagflation is not identical, the similarities are striking.

Welcome everyone to the free banking blog.  I'm very excited about the stellar cast we have, and I hope this space will become a clearing house for information from different scholars and groups.  In addition, as it grows, this page should become a great resource of information.  With that in mind, I'm looking for suggestions for a reading list on the subject.

Similarly, what are links to other groups that should be added to page?

Thanks!