That's the title of a paper I'm writing for this year's Cato Monetary Conference (the subtitle is "How the Federal Reserve Misrepresents Monetary History"). For it, I'd be very grateful to anyone who can point me to examples (the more egregious the better) of untrue or misleading statements regarding U.S. monetary history in general, and the Fed's performance in particular, in official Fed publications or in lectures and speeches by Federal Reserve officials.
Walter E. Grinder turns 75 years old today. He has been an important mentor to several of the contributors to the Free Banking blog and many other people interested in Austrian economics, spontaneous order in human society, classical liberalism, and modern libertarianism. Tributes to Walter are appearing here and on other sites today; send us a link if you see one on another site. Happy birthday, Walter! (Thanks to Chuck Moulton for setting up the pages listed below.)
Ludwig von Mises died 40 years ago today at the age of 92 in a hospital in New York. To me, he was the most important economist of the 20th century because he addressed the most important economic issue of the century: capitalism versus socialism. His essay "Economic Calculation in the Socialist Commonwealth" (1920) and his book Socialism (1922) staked out a controversial position on the feasibility of complete central planning. Mises claimed that it was impossible for any society that wanted more than a primitive standard of living. The centrally planned economies that have existed have proved him right: they have had extensive but not complete central planning. Complete central planning involves the abolition of money. The two countries that have tried it, the Soviet Union from 1920-1921 and Cambodia under the Khmer Rouge, found that the result was a rapid descent towards economic backwardness. Centrally planned economies therefore have grudgingly had to allow a sphere for individual initiative in exchange to correct in part the mistakes of the planners, and so they have had money, though it has been bad money. As the late Don Lavoie stressed in Rivalry and Central Planning (1984), a book that builds on Mises's ideas, "actually existing socialism" after the Soviet Union's attempted abolition of money marked a retreat from complete central planning. (Sorry, no link to Lavoie's book because it's out of print. You can find expensive used copies online, or go to the library.)
At the time of Mises's death, the reputation of capitalism was near its lowest ebb since the Great Depression. Inflation was starting to become a problem in the advanced capitalist countries. In the remainder of the 1970s, central planning spread to South Vietnam, Cambodia, Laos, Ethiopia, Angola, Mozambique, Nicaragua, and Afghanistan. It looked as though the Third World countries were moving closer to the Second World than to the First World.
And yet, cracks were appearing in the socialist façade. The first volume of Aleksandr Solzhenitsyn's The Gulag Archipelago was published in 1973. In 1978, local government officials and 18 Chinese farmers made a secret agreement to spur individual initiative in production through a partial de faco privatization of communal farmland. The success of this and other such arrangements elsewhere became the foundation of China's momentous official turn toward (though not all the way to) capitalism under Deng Xiaoping. Poland's Solidarity movement formed in 1980. By 20 years after Mises's death, socialism had collapsed, retreating to small redoubts in Cuba and North Korea.
The underlying lesson of Mises's thought on socialism has nonetheless failed to penetrate deeply into economic policy making. Few people regard the collapse of extensive central planning as an argument against piecemeal central planning in monetary policy, transportation, education, health care, and other areas (including toilet paper in one country).
Mises did his major work on monetary theory before his work on socialism, and in my view his subsequent writings, especially Human Action, did not meld the two bodies of work as successfully as they might have. If Mises had done everything himself, though, there would be nothing left for us. The body of writing on free banking that has arisen since Mises's death has at its foundation an application of Mises's socialist calculation argument. George Selgin's book The Theory of Free Banking has done the most to make application explicit.
For more on Mises, the place to go is of course the Ludwig von Mises Institute, which has done a great service by putting online the works of the man himself as well as many writings by other members of the Austrian School and thinkers who have influenced the school. ADDENDUM: Liberty Fund also has a lot of Mises's writings.
Previously, I wrote how many Indian nationals were opting out of the national paper currency and voting with their feet as it were in favor of physical gold--even in numbers far greater than usual for wedding gifts, etc.
The situation started as a result of economic and monetary mismanagement on the part of the Indian government and central bank (though the US Federal Reserve's pumping money into the global system and "exporting" our inflation for a time certainly played a role). When Indians increasingly abandoned paper money for gold, the government responded by trying to falsify the demand signals by trying to limit gold imports.
Now the people are adapting again not from gold to paper with diminishing value but to silver. HT to GATA for the news. Reuters reports that despite India's raising the import duty three times this year imports from January to August this year India imported 4,073 tons of silver, more then double the total from all of 2012.
Yes, this is how currency competition works. And yes, the people are smarter than central bankers think they are (and most people may be smarter than most central bankers).
Today, the Federal Reserve will start circulating the new $100 Federal Reserve Note.
While this development isn't quite the currency competition we here at freebanking.org promote, it does provide a timely excuse to bring up some of our issues. Because the US currency notes are an internationally-recognized and commonly used currency, it illustrates, in a sense, F. A. Hayek's ideas in his Denationalization of Money concept. As the New York Times explains, "The $100 bill is an especially hot item on the global stage: The Federal Reserve estimates that one-half to two-thirds of $100 notes in circulation are abroad at any given time, making them one of the nation’s largest exports." US notes circulate freely as money around the world in competition with the currency of the domestic ones.
The NYTs article explains how the new bills were due to debut last February, but the government monopoly mint on note production ran into problems. The Treasury's Inspector General report is here (PDF). Since the reason for the redesign of the currency note is deterring counterfeiting, one would think that the incentives would dictate a faster response for serious violations of a federal law. I would argue that under a competitive note issue regime, the evolution of more counterfeit-resistant notes would proceed faster: think of the different phone carriers reacting swiftly to innovate new features, and for the their competitors to copy and adapt with market developments. There is no shortage of private sector analogies we could make here--which is my point.
It's good to remember that the Federal Reserve doesn't actually print the currency notes, the Bureau of Engraving and Printing does. In fact, the BEP used to print not only Federal Reserve Notes but also National Bank notes issued by private commercial banks that circulated
as legal tender before the introduction of FRNs [EDIT: as George Selgin remarks, "National Bank Notes were never legal tender. Federal reserve notes were first made legal tender in 1933."]. No reason they couldn't start doing so again.
The BEP site "www.moneyfactory.gov" (cool name, as government bureaus go) not only explains the new Benjamins but also features a creepy EyeNote mobile app "to identify denominations of Federal Reserve Notes (U.S. currency) as an aid for the blind or visually impaired."
The new Benjamins include not just a colorful new design but added security features explained in a fancy interactive presentation here. These include a new bell in the inkwell that changes colors depending on the vantage point and a 3D security ribbon. The Washington Post has an article going into the new security features even more.
No word on whether the new 3D security ribbon includes the features necessary for the carry tax idea I spoke about at the Mises Institute and have written about. (I wrote several "Dear Colleague" letters for Rep. Ron Paul about the carry carry tax, but one of my floppy disks(!) got corrupted, and I think those were on that one. Though Ron Paul's opening statement on a money production hearing is archived and includes him mentioning his bill against the carry tax.) I'll save my thoughts on this for an upcoming post, but I will say that the incentives do matter. Look at the increase in bank reserves since the Fed policy change to pay interest on them. This concept could literally usher in a monetary surveillance scheme worthy of the creepy EyeNote icon. Should the concern switch to increasing the velocity of money, a carry tax idea could rear its ugly head once again.
Of course, we use the term "Benjamins" for the $100 note because it features a likeness of Benjamin Franklin on it. Last night's Genealogy Roadshow on PBS went to San Francisco where they did a fun biography of Franklin as well as a good short and informative history of the San Francisco Mint's building (and how it survived the earthquake) but also how the mint worked, its importance in our economic history, etc. Incidentally, one of the hosts Josh Taylor used a Benjamin as a prop in one of his stories with one of the guests. He shows how integral money is in our society--and why, I think, it's too important to be a government monopoly.
Bitcoin values plunged and then mostly recovered today after the U.S. government closed the Silk Road Web site, where Bitcoin had been used for trading in illegal products.
Those who know little about Edwin Walter Kemmerer (1875-1945), in Brad's post below, should be aware that although he left no lasting contribution to economic theory that I can name, he was quite prominent during in the interwar period. He was the most influential "monetary doctor" ever, leading teams to reform the monetary, banking, and fiscal systems of Bolivia, Colombia, Chile, China, Ecuador, Guatemala, Peru, Poland, South Africa, and maybe some other countries besides, as well as being on the Dawes Commission that restructured Germany's post-World War I debt. His typical approach was to bring, or restore, the gold standard by replacing whatever monetary arrangements had previously existed with a central bank of the kind that was considered orthodox at the time. He was critical of the Bretton Woods system because he understood that it was more weakly tied to gold than preceding international gold standards.
There is a good book on Kemmerer's South American work called The Monetary Doctor in the Andes. His son Donald, who was also an economist, wrote a biographical sketch of his father, but the father merits a full-scale biography. The son accompanied the father on some trips, and he relates about a trip to Paraguay that the family was on a steamboat heading upstream from Buenos Aires when the boat struck a rock and sank. The Kemmerers were strong swimmers and survived, while some other passengers did not.
E. W. Kemmerer was a great thinker and writer on monetary policy who taught international finance at Princeton University, but was he in favor of 100% reserves? The Mises Institute has done a great service digitalizing and making available many out of print but otherwise largely inaccessible works. Kudos to them for that. One of those works was Kemmerer's wonderful Gold and the Gold Standard: The Story of Gold Money, Past, Present, and Future. But in advertising the book, they write:
"Kemmerer was a favorite of Murray Rothbard, and Murray loved this particular book. To be sure, Kemmerer doesn’t go as far as Rothbard or Mises in demanding the abolition of the central bank, and his naiveté is on display here in thinking that government could manage a gold standard. Even so, his gold standard plan is just about as pure as anyone’s in his generation, insisting that banks operate as real businesses and calling for 100 percent reserves [emphasis added]."
However, I can't find anything in the book remotely implying that his plan called for 100% reserves--nowhere does Kemmerer even bring up commercial banks holding 100% reserves under any scenario. Kemmerer writes how government demand for specie to pay for wars drains reserves (p. 42), problems associated with the resumption of specie redeemability after the Civil War (p. 87), inadequate gold reserves from some countries returning to the gold exchange standard (along with this wonderful line in a great paragraph: "It was not so much a question of management or no management as one of too much management and too many incompetent managers," p. 119-20), a discussion of bank reserve ratios in the hectic March 1933 period (pp. 124-125), a discussion of Philippine pesos and gold reserves (pp. 160-3), an explanation of the Genoa International Conference and the Gold-exchange Standard and the gold reserves associated with it (pp. 164-6), an explanation of how the gold exchange standard worked in several South American countries (pp. 169-71) including:
On the whole, and allowing for a few important exceptions, the postwar gold-exchange standard functioned successfully for several years, under principles laid down by the Genoa Conference, many of which had been widely adopted. Then, however, as the pressures that led to the world crisis beginning in 1928 to 1929 began to be felt, these principles were increasingly ignored, and gold-exchange standards, like gold-bullion standards and gold-coin standards, broke down in the crisis and depression of the early thirties.
So here he explains that all three systems broke down during the crisis--hardly singling out a ringing endorsement for any particular one including the "gold-coin standard" that I think the Mises Institute misreads. Later on pages 171-2, Kemmerer explains:
Lack of Efficient Checks and Balances. Another claim is that the gold-exchange standard does not automatically function so effectively, i.e., set up as efficient a set of forces of checks and balances as does the gold-coin standard. Under the latter, one country exports gold at its gold-export point and another country receives the gold at its gold-import point. The monetary supply is contracted in the country exporting the gold and is expanded in the country importing it. Under a gold-exchange standard functioning through central banks at both ends of the line, drafts purchased at home, drawn on the reserve deposit abroad, are usually debited to a bank-deposit account at home and credited to one abroad; and the opposite takes place when a draft is sold by the reserve agent abroad on the central bank at home.
And he elaborates on his next point immediately after about how holding gold reserves at the home country facilitates war (p. 173). The book gives a short history of the gold bullion standard (p. 174):
Although gold in such unspecialized forms as dust, nuggets, bars, and the like, has been used as standard money for thousands of years, and although under the gold standard itself gold bars have been extensively employed in bank reserves and in making international payments, a formally and legally organized gold-bullion standard is an institution of comparatively recent development. After the First World War, most countries returning to the gold standard adopted a gold-exchange standard, a gold-bullion standard, or a combination of the two. Under a gold-bullion standard no national gold coins are minted or circulated. The monetary unit consists of a fixed weight of gold, as in the gold-coin and the gold-exchange standards, but it is not coined. Gold reserves are held in the form of standard gold bars, mostly of large denominations, and the national currency is usually convertible into these bars on demand. The hoarding of gold is kept at a minimum, because the value of a gold bar is too great to make it easily available to the masses of the people.
When talking about the US gold standard (1918-1933), Kemmerer contrasts the US strength of its gold standard with other countries, "the postwar gold standards established in most countries were weak types of the gold standard and were put into operation under very unfavorable financial conditions. These facts are everywhere recognized. Practically, all these standards were gold-bullion and gold-exchange standards, as contrasted with the stronger gold-coin standard of prewar days." And here I suspect is where we get to the crux of the issue. Since Rothbard was a vocal proponent of a 100% reserve "gold coin" monetary system (without a central bank--a point of which we are all here in agreement), is it possible that the nameless Mises Institute reviewer got confused? Of course, Kemmerer here simply refers to the "stronger gold-coin standard of prewar days" when we had no central bank, monetary gold coins circulated commonly--and banks took deposits and lent out under a working fractional reserve system. So let's be clear that here, at least, Kemmerer is not even discussing Rothbard's pet theory. When Kemmerer uses the term "gold-coin standard" he means the fractional reserve system under the classical gold standard prior to World War I.
The gold-bullion standard provides no gold for internal circulation and makes it difficult to obtain gold for hoarding. Its reserves, however, are held in the form of gold bullion. Therefore, although requiring less gold than the gold-coin standard, the gold-bullion standard requires much more than does the gold-exchange standard. Consequently, it takes an intermediate position. In general, the richest nations would probably choose the gold-coin standard, while the poorest nations, as well as colonies and other dependencies, would prefer the gold-exchange standard. Countries in an intermediate position would prefer the gold-bullion standard.
The shifting from one type of gold standard to another might be used as an instrument of international monetary policy directed toward the stabilizing of the value of gold.
Here on page 220, Kemmerer ignores his contemporaries Ludwig von Mises and F. A. Hayek (among others) who opposed central planning through central banking:
While no one [sic] denies that a nation's central bank should be administered with primary regard to the public welfare and with very little effort to earn profits above a modest return on capital, it is not so well recognized that, in the great majority of cases where central banks have suspended gold payments, this has been done under the political pressure of governments to meet fiscal needs.
Funny how some Rothbardians claim Kemmerer was a favorite of Rothbard and simultaneously attack the dean of the denationalization of money movement Hayek! Was Kemmerer's flexible gold standard(s) with a central bank plan "just about as pure as anyone’s in his generation" compared with, say, Mises himself or his protege F. A. Hayek? No, not even close. How about Vera Smith? Nope. How about picking from the list of authors from the LvMI site? Problem there is that one would be hard pressed to find any of Kemmerer's generation better than Mises-Hayek who didn't subscribe to Rothbard's diversion from Austrian and Classical thought on banking regarding fractional reserve lending. Of course, all of us mere mortals have our faults, just as Rothbard, Kemmerer and Hayek all did. Kemmerer continues on pages 220-1:
The trouble has been caused much oftener by governmental exploitation than by exploitation for profit by private interests. Gold reserves have been unduly depleted, not so much through being drawn out of the country by foreign countries as through being flooded out by fiscal inflation at home. The nation's monetary authority, which should be the board of directors of the central bank, should have a substantial government representation but should not be under government domination. This is the very realistic lesson of monetary history.
Also, take a look again at how the LvMI sells Kemmerer, "Kemmerer doesn’t go as far as Rothbard or Mises in demanding the abolition of the central bank" which is pretty comical because not only does Kemmerer not go as far as demanding the abolition of the central bank, he not only supports them (with different versions of gold standards) but he explicitly calls for an international central bank! And not just a central bank for central banks, but one that lends out in a fractional reserve system! He explains (p. 221) that "An efficient international gold standard will call for an international bank, with which the central banks of all gold standard countries should be affiliated and to which they should contribute the necessary capital. The functions of this bank should be exclusively of a monetary and banking character" and that "The principal functions of the bank should be (1) to serve as an international clearinghouse for the member central banks; (2) to hold part of the reserves of the member central banks [emphasis added]. . ."
The percentage of a reserve which a bank needs to hold against its deposits varies with the bank's location, character and the sizes of its individual deposits, its reputation, and the general financial condition of the community it serves, the state of business confidence at the time and the reserve requirements, if any, imposed by law. It also varies from season to season according to the seasonal fluctuations in the production and trade of the community it serves. But a bank must at all times maintain a sufficient reserve to meet all probable demands. A considerable margin of safety, moreover, is desirable [emphasis added]; for failure promptly to meet its obligations means either a damaged reputation or bankruptcy. The result is that banks find it to their advantage to maintain reserves well in excess of the net amounts they are actually likely to pay out.
I am at a complete loss as to how anyone familiar with Kemmerer's views could read his explanation of how fractional reserve lending works and how he himself states explicitly that this is "desirable" (both for commercial banks and an international central bank!) and then characterize it as "insisting that banks operate as real businesses and calling for 100 percent reserves" as the Ludwig von Mises Institute does.
Kemmerer expounds on p. 58 that " there is a high correlation between movements in business confidence and movements in the ratio of bank reserves" and cites his Money and Prices (pp. 121-126) published in 1918 and a 1908 Quarterly Journal of Economics article of his. So here we have four decades of E. W. Kemmerer's own writing explicitly and consistently on fractional bank reserve lending saying the exact opposite of the characterization of his views presented by the LvMI. I have come across none of his writings that deviate from what I have presented here. In Part II, Chapter V The Monometallic Standard in a section called "The Gold Coin Standard" (pp. 70-2), this favorite economist of Rothbard gives a traditional rendering of what nearly all of us would call a gold coin standard that the price of an ounce is always an identical proposition--complete with the line, "It is like saying a food is always twelve inches long."
All the news in DC right now is focused on whether there will be a (partial) Federal government shutdown. (In the spirit of full disclosure, I live here, and many of my neighbors are the ones that would potentially be affected so there's no escaping it.) Should the political impasse continue, all "non-essential" Federal employees stay home tomorrow.
So my question is: are Federal Reserve Board employees "essential" government workers? First of all, let's clarify that they are, in fact, federal government employees. But are they "essential" ones?
Despite lots of baseless perceptions among some of our fellow anti-Fed rabble rousers, no, the Fed is not a private bank. The Federal Reserve Board is a Federal government agency. The regional Reserve Banks are private. The Federal Reserve System is a hybrid. One popular page circulating around "10 Things That Every American Should Know About The Federal Reserve" says:
#1 The Federal Reserve System Is A Privately Owned Banking Cartel
The Federal Reserve is not a government agency.
The truth is that it is a privately owned central bank. It is owned by the banks that are members of the Federal Reserve system. We do not know how much of the system each bank owns, because that has never been disclosed to the American people.
The Federal Reserve openly admits that it is privately owned. When it was defending itself against a Bloomberg request for information under the Freedom of Information Act, the Federal Reserve stated unequivocally in court that it was "not an agency" of the federal government and therefore not subject to the Freedom of Information Act.
To back up his claim, Michael Snyder cites a link to a reputable source. His source says:
"The Federal Reserve System serves as the Central Bank of the United States, and is comprised of the Federal Reserve Board — a federal agency located in Washington, D.C — and 12 regional Federal Reserve Banks. Congress has oversight over the entire system."
So, um, well, if you make a claim that the Fed is not a federal government agency you probably shouldn't cite a reputable source disproving your point. The Federal Reserve Board is a federal agency. The Federal Reserve Board website itself explains the same thing:
The Board of Governors of the Federal Reserve System is a federal government agency. The Board is composed of seven members, who are appointed by the President of the United States and confirmed by the U.S. Senate. The full term of a Board member is fourteen years, and the appointments are staggered so that one term expires on January 31 of each even-numbered year. After serving a full term, a Board member may not be reappointed. If a member leaves the Board before his or her term expires, however, the person appointed and confirmed to serve the remainder of the term may later be reappointed to a full term.
[One Facebook poster in an anti-Fed group argued that the Fed is a private banking cartel as she understood it from G. Edward Griffin's Creature from Jekyll Island. So, I pulled my copy off of my shelf (May 1988 edition), but I couldn't find anything backing up her baseless assertion: p. 69 says Federal Reserve Board required banks to offer loans at less than S&Ls (private banks can't require other banks to change their rates); p. 71 Gov Celeste flew to DC to request Federal assistance from the Fed Board; etc. Nothing saying that the Federal Reserve Board is not a federal government agency.]
Which brings me back to my original thought: since the employees of the Federal Reserve Board are federal government employees, are they "essential" ones? Obviously, all of us here at freebanking.org don't think the Federal Reserve Board employees are essential which is, I guess, honestly, subjective. But does the government itself consider them essential?
Today I went straight to the source and called the Federal Reserve Board itself and posed the question to them: Would a partial federal government shutdown affecting "non-essential" federal government employees apply to Federal Reserve Board employees. The poor guy who answered the phone wasn't prepared for my question (and I suspect alarmed that he might be laid off without pay the next day for an indeterminate amount of time) so he put me on hold.
When he returned, he explained that since the Federal Reserve Board employees are not paid from the Congressional appropriations process that they are immune from the effects of a potential government shutdown. Of course I knew this as I explained in a Daily Caller column:
The Federal Reserve’s funding process is little understood, and therefore little scrutinized. That needs to end. Here’s how it works: The Fed buys Treasury securities with money it creates out of thin air. The major source of the Fed’s revenue is taxpayer-funded interest on those bonds. The Fed spends however much it wants and rebates the remainder to the Treasury. This end-run around the Congressional budget process violates the spirit of the Constitution, which grants all budget power to Congress.
Hopefully the talk of a shutdown and its potential effects on the economy will focus minds on the real culprit causing havoc on the economy: the Federal Reserve. (Not that I don't think that we're lacking requisite leadership from all of the responsible players: the President, Senate Majority and Minority Leaders, House Speaker and Minority Leader.) I stand now by my call then:
The Federal Reserve, which has the power to print money, also sets its own operating budget. That’s the wrong kind of independence. Unfortunately, recent proposals to audit the Fed do not address this issue.
Putting the Federal Reserve on a Congressional budget would bring much-needed accountability and fairness, instill a culture of efficiency, and increase effectiveness. An annual Congressional appropriation process would do more to bring long-term accountability to the Fed than the popular audit proposal.
Let's use this government budgeting failure as an opportunity to make needed systemic changes and put the Fed on a budget.
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