John Blundell has died at age 61 of cancer. As an earlier post mentioned, he was one of the attendees of the 1974 South Royalton, Vermont conference that marked the revival of the Austrian School of economics, and he recently wrote a reminiscence of the conference. Here is the Wikipedia article on him. In his roles as President of the Institute for Humane Studies, President of the Atlas Economic Research Foundation, and General Director of the Institute of Economic Affairs (London), he supported funding and publication of free banking ideas. Others who knew him better will have more to say in due course. Here is a tribute from the Atlas Economic Research Foundation.
I was recently asked to submit a "solution proposal" concerning a panel, on "The New Global Financial Architecture," in which I'm to take part at this September's Global Economic Symposium in Kuala Lumpur. The proposal is supposed to summarize my own scheme for reforming the global financial system, showing, in 700-1000 words, that my plan is "feasible," "innovative," and (naturally) of "positive social impact."
A you might well expect, the request posed something of a challenge to this unreconstructed Hayekian. Here, for whatever it may be worth, is what he came up with.
Truth be told, I'm not quite sure that my proposal is consistent with the organizers' assumption, as given in their "challenge" to the panel, that "Different regulators - including the monetary authorities - must cooperate in order to achieve better but not necessarily more regulation." I hope, in any event, that it will help fuel a spirited discussion.
In a column at Vox yesterday morning, Matt Yglesias gave us 7 reasons to think a gold standard is a terrible idea. They are not all completely wrong (a low bar, I suppose), but it’s worth exploring exactly what the problems are.
1) A gold standard wouldn’t stabilize inflation
His evidence for this is the gold-price of oil since the mid-80s. Aside from the fact that looking at one price alone doesn’t tell us much about inflation (especially with a commodity like oil that has its own constant changes in supply and demand, which are part and parcel of a market economy), using fluctuations in the price of gold or the gold-price of other commodities under a fiat money standard as evidence of gold’s volatility misses the whole point. Gold is an inflation hedge, and to the degree that inflation is more likely under fiat money regimes, of course gold will vary in value a great deal (and therefore so will the gold prices of other commodities). But that’s not a problem with gold, that’s a problem with central bank fiat money. Under a proper gold standard, the inflation threat would be much lower, making fluctuations in the price of gold much less than they are right now. The gold standard might have problems, but this is not a good argument against it.
2) A gold standard wouldn’t stabilize exchange rates
Yglesias points out that unless every country goes to a gold standard, you won’t get the benefits of stable exchange rates. And he does have a point here, but that’s all the more reason to convince those other countries to move to some sort of commodity standard as well! Notice too that this is not a way in which gold makes things worse – it just doesn’t make something better. So if gold has other advantages, this point is a wash with the status quo.
3) There’s no inflation problem to cure
Partial credit here. He’s correct that changes in the price level have been minimal in the last few years, but if we look instead at growth rates in the monetary base, there’s much to still be concerned about. Banks are still flush with reserves and how those are going to be removed or neutralized remains unclear. The Fed still does not appear to have credible exit strategy and, without one, inflation remains, if not a current problem, a serious threat.
But the bigger point is that if we think about the gold standard as an economic constraint on a central bank, it can help prevent the sort of expansionary policy and artificially low interest rates that were major contributors to the housing boom , financial crisis, Great Recession, and Abysmal Recovery. There may or may not be an inflation problem now, but expansionary monetary policy is a big part of what got us into this mess (and several others in the post-gold standard era) and one good argument for the gold standard is that it can reduce the likelihood of that happening again.
4) There’s nothing stopping you from writing gold contracts
This is true - it’s no longer illegal. But again, the variation in the price of gold that results from the uncertainty around the value of the fiat dollar reduces the marginal benefit of a contract stipulated in gold. And, again, that is not evidence against the gold standard, but evidence about the problems of fiat money for which investment in gold is a hedge.
5) Gold recessions could last for years
Yglesias points to the length of recessions before the Fed and then, of all things, the length of the Great Depression as evidence against the gold standard and that “the Federal Reserve is a far-from-perfect manager of the economy, but it does a lot better than that.”
Well, where to begin? First, while we did have a gold standard before the Fed, we certainly did not have the kind of gold standard that most folks are arguing for today, particularly not those of us who are arguing for a free banking system based on gold. The various regulations that prevented banks from adjusting their currency supplies to the demand to hold it were the primary reason (along with the lack of interstate banking) for the long and painful recessions before the Fed. Yglesias has to explain why these were absent in Canada which also had a gold standard, and a more “pure” one than the US. Absent such an answer, this is not evidence against the gold standard.
As for the Great Depression…. Really? The Great Depression is evidence of how much better the Fed is than a gold standard? Even if you don’t accept the Austrian argument that Fed expansion during the 20s (made possible by its monopoly status even under a gold standard), certainly the Friedman-Schwartz argument about its role in the early 30s in deflating the money supply demonstrates that the Fed was a huge problem and that “far from perfect” is the understatement of the monetary century.
And if one wants to count “gold recessions,” one should also count the numerous recession generated by post-1933 and post-1971 inflations here, as well as the inflations themselves. Inflation was nearly absent in the 19th century (whatever that system’s flaws) but has become a huge problem only after the gold standard was totally abandoned in 1971.
The history of the last 100 years of central banking is the best argument there is for getting away from central banking. And the Canadian case shows that the gold standard isn’t the cause of the long US recessions before the Fed.
6) The gold standard wouldn’t eliminate political money
Here Yglesias has a point in two possible ways. First, if by the gold standard one means central banking with a gold standard, then yes, by definition we still have political money. If he means a gold standard without central banking, then he still has a point in claiming that Congress could always change its mind and end the gold standard again. No argument here, but there are steps we could take to make that harder by constitutionalizing the gold standard or limits on government involvement in money. It’s no guarantee, but it helps.
7) Gold-backed money reduces the supply of gold
Yglesias writes “That means forcing banks to hold their reserves in terms of giant piles of physical gold would impose a cost on the real economy. Gold held in bank vaults is gold that is not available for industrial or decorative uses.” Several problems here. First, the gold in bank vaults is not, therefore, useless. To the degree that it serves as a check on central bank expansion, it plays a very useful economic role that is no less important than its other uses. Second, historical gold standards under free banking had very low reserve ratios, on the order of less than 3%, and not all of that was gold. In a modern economy, the amount of gold banks would have to have on hand in their vaults in a fractional reserve free banking system would be minimal. So Yglesias underestimates the benefits and overestimates the costs.
And to the degree that gold would gain a monetary use, the incentive for people to dig it up out of the ground would be greater not less and this would increase the supply of gold. It’s not clear that Yglesias understands what economists mean by “supply.”
One final comment: critics of the gold standard need to specify what they mean by “the gold standard.” Do they mean a central bank whose liabilities are redeemable in gold? Do they mean a 100% reserve private system? Do they mean fractional reserve free banking on a gold standard? These differences matter as these systems perform differently and if you want to criticize the gold standard, you need to be clear on what it is you think that means. That aside, Yglesias fails on most of his 7 objections here and the gold standard, at least in the form I’d like to see it as part of a free banking system, remains a very good idea.
Cross posted at Coordination Problem and Bleeding Heart Libertarians
I have only just become aware of the 2013 book Panic Scrip of 1893, 1907 and 1914: An Illustrated Catalog of Emergency Monetary Issues. The title refers to the U.S. financial panics of those years. The book is available in paper from the usual sources, and Google has a considerably cheaper e-book edition. Here is a review of the book.
Scrip is a circulating IOU issued by a person or corporation, often redeemable in kind, typically accepted widely within a limited area, and, in the context of panic issues, tolerated by the authorities although perhaps of dubious legality. During the U.S. panics listed in the title of the book, large local employers such as steel mills, companies that offered widely used goods or services such as tram lines, and in smaller towns well known local merchants such as those who owned general stores issued scrip as a substitute for banknotes that became quite scarce. The issuance of scrip can be seen as a kind of free banking: with the most trusted issuers restricted from further issuance of notes by certain provisions of federal law, other issuers stepped into the gap. The service that issuers of scrip performed was large, the losses from failures by issuers were small, and the episodes illustrated that there was no necessity to limit note issue to banks.
Among the economists to have written about the place of scrip in the U.S monetary system are Richard Timberlake, "The Significance of Unaccounted Currencies" (JSTOR, gated); William Roberds, "Lenders of the Next-to-Last Resort: Scrip Issue in Georgia during the Great Depression" (free, article starts on page 16); and Price Fishback, "Did Coal Miners 'Owe Their Soul to the Company Store'?" (JSTOR, gated; an article about the routine use of scrip in company towns; the title is a reference to this hit song of the 1950s).
Brooklyn College of the City University of New York recently refused a $10 million grant offer from the Charles G. Koch Foundation. The grant would have strengthened the college's business program sufficiently to allow it to obtain accreditation from the Association to Advance Collegiate Schools of Business. The dean of the School of Business apparently did not want to accept the money for fear of being contaminated with free-market ideas and inviting the unhinged leftist criticism that Charles and David Koch often attract.
I hereby invite the foundation to contact me for ideas about projects costing considerably less than $10 million that would achieve measurable, worthwhile scholarly results in economics and finance, and whose proposed recipients will assuredly not refuse the money. I won't take a penny for my advice. As you might expect, some of the ideas are related to topics that have been discussed on this site. Readers, as a service to philanthropy, I invite you to propose in the comments how you might spend the money in a vein somewhat related to that proposed for Brooklyn College.
We are just past the 40th anniversary of a conference in South Royalton, Vermont that marked the start of the revival of the Austrian School of economics. John Blundell and Richard Ebeling, who attended, have both offered reminiscences. Almost everyone who would be important in Austrian economics in the United States over the next half generation was there, and Milton Friedman stopped by to boot.
Ebeling notes that in a lecture on the Austrian theory of money, "Professor [Murray] Rothbard suggested three areas for possible future research: (1) how to separate the state from money; (2) the question of free banking vs. 100-percent-gold dollars; and (3) the defining of the supply of money." Rothbard saw the issues clearly; it is unfortunate that he was subsequently so closed to approaches other than his own. Monetary theory was in my view Rothbard's weakest area. His preferred master narrative of good guys versus bad guys is a poor fit for understanding monetary institutions, such as the gold standard, that are to a substantial extent not the result of intentional design.
The conference volume, The Foundations of Modern Austrian Economics, was the book that made me into an Austrian when I read it in 1978. Tom Palmer, who lived down the hall in my college dormitory, already as a sophomore had a large book collection that took up most of the double room he had all to himself. Tom's collection included all the important Austrian works published at the time, including the Foundations, which he lent me. I was so taken with it that I ordered my own copy to mark up. The topics and the analysis impressed me as the kind of thing that I wanted to do. The volume was edited by Edwin Dolan, who was also the conference director. I met Ed about 15 years later and thanked him for his role, the results of which had turned out to be so important to me.
New to me, however.
1. "Adam Smith et la banque libre," by Laurent Le Maux, Brussels Economic Review (Cahiers économiques de Bruxelles), 2002, vol. 45, issue 1, pages 3-36.
English abstract: Smith is the forerunner of the free banking theory. Smith develop the law of reflux which asserts that private banks cannot over-issue because the convertibility rule and the market mechanism induce banks to supply just the amount of money that public want to hold. The real bills doctrine of Adam Smith has been misinterpreted and just propose a solution to the law of reflux. Smith is a forerunner too of information asymmetry theory. He shows that banks are confronted with information asymmetry when they discount doubtful bill, and it is in their interest to control actively the quality of their claims.
2. Economie monetaire by G. Bramoulle and Dominique Augey (book, 1998). The description of the book reads (in loose translation), "This book treats both the theoretical and institutional aspects of money. It is aimed at [French economics students in the equivalent of their junior year in college]. In-depth treatment of monetary theories, integrating the microeconomic foundations of the behavior of the supply and demand for money, along with the arguments of the debate between monopoly central banks and free banking systems, offers readers intending to specialize in monetary analysis a synthesis of recent work in the subject." Would that there were a widely used money and banking textbook in English whose author was astute enough to devote more than a page or two to free banking, because the contrasts between free banking and central banking throw light on a number of issues in monetary economics.
Well, that's that. I've made up my mind to leave Athens. It wasn't that hard, actually: thanks to John Allison and a number of generous contributors, Cato is establishing a new center for monetary studies (the formal name has yet to be determined), and I'm going to direct it. The idea is one that John and I have been talking about since before he came to Cato, so it amounts to having had the opportunity to write my own job description. You can't ask better than that! I'll also be affiliated with GMU and Mercatus, so as to be able to occasionally teach and otherwise get involved with graduate students working on monetary topics, which is something I haven't been able to do at all lately here at UGA. Larry White, on the other hand, has more students up there than he can shake a stick at, and so could use some help!
Yet the occasion isn't without a fair measure of melancholia. Twenty-five years is a long time to get settled into a place--longer by far than I've ever spent elsewhere. When I contemplate the tangle of roots I've put down during that time, it brings to mind the long battle I waged with the paper mulberries in my back yard at 460 Meigs, whose roots (OK, rhizomes) seemed as sturdy, and also as long, as power lines.
I eventually won that battle, more-or-less, and fought and won countless others besides, making my old house and garden conform to my personal (OK, eccentric) idea of what a home should be. Now there's scarcely an inch of the place that I haven't altered according to my whims. And, my friends here will assure you, that's not hyperbole.
Of course those friends also make departing bittersweet, as does the fact that my brother, Peter, now lives less than two hours from Athens, in Milledgeville. (The back route there is, incidentally, just the thing for a 450cc motorcycle, adding to the regret.)* Luckily for me its easy to travel between DC and Atlanta (itself not all that far from Athens), and DC has plenty of attractions, so I can plan on returning often, and also on having my former companions remain just as close, if not quite so constant. It also helps to have many friends, and a half-sister, awaiting me in DC. That gives me plenty to look forward to, even if it can't quite make up for the sadness of having to say adieu to my buddies here.
And I'll miss my UGA colleagues, starting with our little group that's been meeting for lunch every Monday for some years now. Not the same group, mind you: others have left before me, and new ones have taken their place. But it seems there's always been enough to take up a table for four, if not five or six, at the good old Globe--one of several pubs here where the staff and I have long been on a first name basis. I will miss them, too.
One thing I've known all along is that, when you move from one town to another very different one, you mustn't try to recreate the sort of life you've been experiencing--or rather, your favorite bits. The challenge is to figure out the best brand new life to make out of the new materials. Its like a sculptor working first with one, and then with another very different hunk of marble. If of the first he makes a fine bust of Voltaire, it doesn't follow that the second isn't better suited for Pericles. Being happy in Athens has meant taking long bike rides (and, lately, longer motorcycle rides) on quiet back roads, playing interior-decorator with a Victorian house, and taking Penelope for long walks at Lake Herrick. In DC, I'm thinking, it might mean joining the Alliance Française, or visiting museums, or attending some black-tie event. (Perhaps I had better buy a little cocktail dress for Penelope!)
All of this, by the way, may help explain why I've done relatively little blogging here lately. It's not just that I've been busy first negotiating the new job, and then actually preparing to move--though both things are true. There's something else that's kept me from blogging, or for that matter from doing much ordinary work of any sort. It is that I've been "busy" living my usual life--hanging out with friends; spending time at home with Penelope; riding my bike; riding and toying with my Honda; hanging around my favorite bars. Although I've tried, I just can't seem to concentrate on business of any kind. Now and then I feel a twinge of guilt about it. But then, in the back of my mind, I have this voice telling me I'll end up feeling even guiltier if I quit goofing off. Yeah, I know: its dangerous to heed voices in one's head. But I'm doing it anyway. Call me crazy. Call me sentimental, even. I'll get over it.
*What one does with a 450cc motorcycle in the heart of DC is a good question--one of many on my long and ever-lengthening list of "things I'll have to figure out all over again."
There is a new dissertation readers may be interested in, written in the Department of History at Harvard University by Tyler Goodspeed. The title is "Upon Daedalian Wings of Paper Money: Adam Smith, Free Banking, and the Financial Crisis of 1772." (This was the failure of the Ayr Bank.) Here is the abstract:
From 1716 to 1845, the Scottish financial system functioned with no official central bank or lender of last resort, no public (or private) monopoly on currency issuance, no legal reserve requirements, and no formal limits on bank size. In support of previous research on Scottish “free banking,” I find that this absence of legal restrictions on Scottish banking contributed to a proliferation of what Adam Smith derisively referred to as “beggarly bankers” which rendered the Scottish financial system both intensely competitive and remarkably resilient to a series of severe adverse shocks to the small developing economy. In particular, despite large speculative capital flows, a fixed exchange rate, and substantial external debt, Scotland’s highly decentralized banking sector effectively mitigated the effects of two severe balance of payments crises arising from exogenous political shocks during the Seven Years’ War. I further find that the introduction of regulations and legal restrictions into Scottish banking in 1765 was the result of aggressive political lobbying by the largest Scottish banks, and effectively raised barriers to entry and encouraged banking sector consolidation. I argue that while these results did not cause the severe financial crisis of 1772, they amplified the level of systemic risk in Scottish credit markets and increased the likelihood that portfolio losses in the event of an adverse economic shock would be transmitted to depositors and noteholders through disorderly bank runs, suspensions of payment, and institutional liquidation. Finally, I find that unlimited liability on the part of Scottish bank shareholders attenuated the effects of financial instability on the real economy.
The chairman of the dissertation committee was apparently Niall Ferguson, who comes from Scotland.
Ex-Fed chair Ben Bernanke is currently a resident fellow at the Hutchins Center on Fiscal & Monetary Policy at the Brookings Institution. The Center’s director, David Wessel, appeared on NPR’s Morning Edition yesterday to express views on inflation and deflation that are essentially indistinguishable from Bernanke’s.
In particular, like Bernanke, Wessel spoke as though inflation below 2% per annum, and a fortiori deflation, is always bad.
Asked to explain why it should be bad to have less of a bad thing like inflation, Wessel first responded: “I mean it sounds appealing, prices going down, people paying less at the store. But when inflation is low that means wages are going up very slowly too. That's of course not very popular.“ This sort of answer would earn an undergraduate a poor grade from any instructor who emphasizes the distinction between real and nominal variables. Workers should not applaud rising nominal wages per se; what matters for them is their real wages. When inflation is low, so too are nominal wage increases ordinarily. But that says nothing about the path of real wages, which in the long run are not determined by monetary policy.
Wessel continued: "There are a couple of problems with too little inflation. It can be a symptom of a lousy economy, one in which demand for goods and services and workers is anemic."
A key word here is symptom. A condition that can be a symptom of a problem is not the problem itself, and can also appear under healthy conditions. Wessel failed to note that low inflation need not be a symptom of a lousy economy, because he spoke only of variation in the aggregate demand for goods and services. Low inflation (or even deflation) can instead be the benign result of abundant growth in the real supply of goods and services. Under the gold standard, as Atkeson and Kehoe (2004) have reported, periods of lousy economy (recession) were not more common during deflation periods, nor vice-versa.
If the Fed were today targeting the path of nominal income, because the growth rate of nominal income is the sum of the inflation rate and the real income growth rate, low inflation would be a sign of a healthy economy with high real economic growth. Thus Wessel would have provided a more accurate analysis if he had spoken of problems with growth in nominal aggregate demand being weaker than anticipated, not inflation being below its target. (In terms of dynamic AD-SRAS analysis, unexpectedly low growth in AD moves the economy below the natural rate of output.)
Wessel’s second concern is harder to interpret favorably. Low inflation, he said, "can make it hard for the Fed to spur borrowing because it's hard for them to get the interest rate below the inflation rate." Two responses: (a) The Fed should not be trying to “spur borrowing.” Fed efforts to spur borrowing helped to fuel the housing bubble. (b) The Fed is not in fact currently finding it hard to get the interest rate below the inflation rate. The interest rate on 1-year T-bills has been below the CPE inflation rate for more than four years, since 2009’s dip into deflation (in that case due to weak demand for goods following the financial crisis).
Wessel went on the cite the problem of rising real debt burdens in deflation. That can indeed be a problem in an unanticipated deflation (Wessel never distinguished anticipated from unanticipated), but again, only to the extent that the deflation is driven by unexpectedly weak aggregate demand growth and not by robust aggregate supply growth. In the latter case, borrowers have more real income with which to repay.
In his answer to the interviewer’s last question, Wessel declared: “So it used to be that economists believed that a central bank can always create inflation by printing more money. But lately it's been -seems harder to do that than the textbooks had told us.” But what is the evidence that expanding the stock of money does not still generate inflation the way the old textbooks tell us? Surely not the experience of the Fed undershooting its target of 2.0% growth in the PCE by 0.4%, which only implies that the broad money growth rate was 0.4% lower than the rate that would have hit the target. Fortunately or unfortunately, it remains the case that the Fed can always raise the PCE inflation rate by engineering a higher rate of broad money growth, just as the textbooks explain.
By the way, today’s announced number for the May CPI raises year-over-year CPI inflation to 2.1%. The increase of 0.4% over April’s CPI, compounded twelve-fold, implies an annual rate of 4.9%. At this rate the “problem” of an undershooting PCE-deflator inflation rate will be “solved” before long.
(HT to David Boaz)
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