Name names, please
From Yahoo.com:
Economists predicted catastrophe: As workers started taking home paychecks in January that were 2 percent lighter – thanks to the expiration of the payroll tax cut – they thought consumer confidence and spending would tank.
So far, it hasn’t.
Retail sales rose more than analysts expected last month, and consumer confidence rebounded.
It would be interesting to see the “economists predicting catastrophe” list—I doubt it would include any market monetarists.
Off Topic, here’s an excellent Paul Krugman post on monetary policy and low interest rates, and another good one on Poland’s mind-bogglingly foolish decision to join the euro.
PS. Say it ain’t so. Is Obama really trying to pressure Japan to adopt the sort of monetary policy that only Ron Paul could love?
According to Ron Napier, head of research company Napier Investment Advisors, one reason for the pause in the rhetoric on the yen could be “an agreement between Abe and [U.S. President Barack] Obama that the Japanese will not undervalue the yen [any further].
Can anyone confirm? That would be worth a post, or fifty.
Tags:
27. March 2013 at 05:58
> “an agreement between Abe and [U.S. President Barack] Obama that the Japanese will not undervalue the yen [any further].
If this is true, it is yet further evidence that the world is run by sado-masochistic morons.
I mean, good god. It’s enough to make one want to unplug the internet and live in peace.
27. March 2013 at 06:02
Alexei, I feel you pain.
27. March 2013 at 06:09
It’s reverse beggar-your-neighbour: I promise to not make people in my country better if you promise to do the same in yours.
27. March 2013 at 06:23
Ron Paul wanted to legalize competing currencies and leave interest rates, credit growth, and regulation of the money supply to the market. His book was titled “End the Fed” not “Tight Money Now.”
http://www.freebanking.org/2011/09/13/the-free-competition-in-currency-act-of-2011/
If you’re going to criticize him, please address Ron Paul’s actual proposal, not a strawman version. Thanks.
27. March 2013 at 06:44
Sadly given Obama’s track record on monetary policy, his being a fool on Japan would not come as a surprise here.
27. March 2013 at 06:56
John S, I feel your pain.
27. March 2013 at 07:01
Re: Krugman column–aren’t interest rates low because foreigners don’t have anywhere else to park their money besides Treasuries? Europe looks shaky, Japanese rates are unattractive.
As for why the economy isn’t overheating despite low interest rates–don’t IOR, continued high levels of household debt, and uncertainty about the global economy explain a lot of that?
27. March 2013 at 07:10
John S,
A characterization of Ron Paul as a hard money advocate is hardly a strawman.
Consider the following from ronpaul.com:
“Once gold and silver are allowed as legal tender and can be sold without sales tax, everyone can use them to store their wealth and to pay for the things they want to buy. The Federal Reserve will finally have a very compelling motivation to stay honest and maintain the value of the dollar because if they don’t, they will simply lose all their customers.”
http://www.ronpaul.com/on-the-issues/fiat-money-inflation-federal-reserve-2/
“Stay honest and maintain the value of the dollar” — sounds almost exactly like the alleged agreement between Abe and Obama to which Scott alluded.
27. March 2013 at 07:13
Brian:
Hard money != Tight money.
“”Stay honest and maintain the value of the dollar” “” sounds almost exactly like the alleged agreement between Abe and Obama to which Scott alluded.”
End the Fed != Honest Fed.
27. March 2013 at 07:23
I think the Paulites are mostly Free Bankers now.
http://en.wikipedia.org/wiki/Free_banking
Paul Ryan, otoh, seems to be the “sound money” guy, and represents most of the GOP in that respect, which mostly wants to avoid the specter of monetizing fiscal spending but also (wrongly) seems to think monetary policy has been too loose lately.
27. March 2013 at 07:26
Brian,
Ron Paul is saying that allowing gold and silver to be used as money (by removing cap gains, sales tax, and legal tender barriers) gives people the option to switch currencies *IF* they feel that the Fed is out of line.
Why is expanding the range of consumer choice in money bad? Economists generally believe competition is a good thing. Should the Fed be exempt?
And what exactly was Bernard Nothaus’s crime is starting he Liberty Dollar? He shouldn’t have used the word “dollar,” but why should starting your own metal backed, redeemable paper currency be illegal? Nobody was forced to take it, and many people were voluntarily using it. http://www.nytimes.com/2012/10/25/us/liberty-dollar-creator-awaits-his-fate-behind-bars.html?pagewanted=all&_r=0
27. March 2013 at 07:44
It appears to be true. Ron Paul has abandoned one terrible theory of monetary policy and picked up a new terrible theory of monetary policy. Markets in currency. Lol. What could possibly go wrong there?
Also, it has seemed likely for some time that Obama has a very poor understanding of monetary policy. It probably comes from his very conservative temperment and the fact that his background is in law. So you have a Democratic president who has the wrong ideas about monetary policy and a Republican opposition who might have the right ideas, but prefers bad policy to discredit the Democratic administration and has been feeding their voter base misinformation to advance that goal. But it could be worse. We could have Europe’s elites.
27. March 2013 at 07:46
“Economists predicted catastrophe” — Political pundits predicted a catastrophe! Nothing that DC and the political press likes more than a crisis. But if the crisis is all in their heads….
On the value of the yen… It was 99 when Obama took office, and probably overvalued then. Did the Japanese critise Obama for devaluing the dollar over his first term?
27. March 2013 at 07:54
Looks like the Poland situation is not as bad as it might have looked from Krugman’s post. They are going to have a referendum: http://www.ft.com/intl/cms/s/0/d1ea63fc-9636-11e2-9ab2-00144feabdc0.html#axzz2Ojsmo4Rb
Polls show that…Poles are firmly against EMU membership, hard to see how political gimicks could fool the median voter into joining the EMU mess.
27. March 2013 at 07:56
Re: Japan–why is there such a consensus that tight money alone was their problem? Didn’t the propping up of zombie banks (and, in turn, of zombie companies) have something to do with their lackluster performance?
The mega companies (Sharp, Panasonic) in Japan are getting these giant emergency loans, even though their financials don’t warrant it at all. (Btw, why is Japan still domestically producing TVs?)
http://japandailypress.com/panasonic-awarded-7-6-billion-in-loans-from-japans-largest-banks-1716309
Sony, Panasonic, Hitachi, Toshiba, Fujitsu–all of these companies have sprawling, unfocused operations over 1,000s business areas. If more companies were focused instead–like Canon–wouldn’t the economy have done much better? But this realignment isn’t coming about thanks to govt pressure to loan to failing companies.
Business focus matters. Canon is worth more ($42 billion) than Panasonic and Sony combines ($34 billion together), despite having only half the revenue of either. Why isn’t anyone mentioning this?
27. March 2013 at 08:04
Luis, Johnleemk, mPowell, Doug, Good points.
John S. Your sendon comment is reasonable.
Justin. Let’s hope the Polish voters have more sense than their leaders. To compare their economy to Germany Netherlands and Finland is laughable. What’s the unemployment rate in Poland?
27. March 2013 at 08:05
John S, Not only is there no consensus, only a fool would claim tight money alone is their problem.
27. March 2013 at 08:26
John S,
You can purchase gold, silver, or any other commodity or asset you’d like to store value. Taxes would be assessed on just about any of them. Are private parties not currently able to negotiate contracts between themselves denominated in gold or silver? I honestly do not know, but I thought I read at some point that there are no laws forbidding this — it may be worth looking into if you are inclined to enter in such a contract.
As for Bernard Nothaus, that is interesting. I would imagine the crime was in the perceived similarities between the Liberty Dollar and actual U.S. currency — but I guess you’d have to ask the jury that convicted him. People buy and sell gold and silver coins all the time without legal trouble.
27. March 2013 at 08:45
Scott
The yen came from 360 after the end of BW to recent lows of below 80 before rebounding with Abe talk. To americans (and now others too) the yen can never depreciate! In the 80s ‘yen bashing’ and the Japanese concurrance with the wishes of US leaders was an important (if not the most important) factor in bringing about ‘deflationary Japan’.
http://thefaintofheart.wordpress.com/2012/07/08/japan-poster-child-for-ngdp-targeting/
27. March 2013 at 09:25
Markets in currency. Lol. What could possibly go wrong there
Yes, I would actually like to know exactly what could go wrong.
What exactly is so wonderful about having a state monopoly on currency, and what’s so disastrous about privately-issued money ? Other than “it’s ridiculous, lol”, of course.
27. March 2013 at 09:34
mpowell:
“It appears to be true. Ron Paul has abandoned one terrible theory of monetary policy and picked up a new terrible theory of monetary policy. Markets in currency. Lol. What could possibly go wrong there?”
Nothing that a market process in currency itself cannot solve.
Markets in potatoes, computers, cars, LOL, what could possibly go wrong there? Oh that’s right, we’re supposed to hold mutually contradictory positions on things that are produced and exchanged. Everything on one side…except money, because, um, we don’t have a market in currency so obviously it’s because it doesn’t work.
BTW, not that this makes a market in currency any more valid or reasonable, but F.A. Hayek called for a market in currency, as did Milton Friedman during his later life. Idiots, huh?
“Also, it has seemed likely for some time that Obama has a very poor understanding of monetary policy. It probably comes from his very conservative temperment and the fact that his background is in law. So you have a Democratic president who has the wrong ideas about monetary policy and a Republican opposition who might have the right ideas, but prefers bad policy to discredit the Democratic administration and has been feeding their voter base misinformation to advance that goal. But it could be worse. We could have Europe’s elites.”
Not to be an echo, but you have a very poor understanding of money, relative to those who understand how markets work.
27. March 2013 at 10:12
Reg. economists predicting catastrophe, Dean Baker had a post this AM that points to the consumer confidence index actually falling by a few points.
27. March 2013 at 10:26
@Geoff/Daniel: There are lots of reasons why private currencies are a bad idea. Let’s just start with the idea that business will have to operate in multiple mediums of account. Do you understand what was so appealing about countries joining the Euro? One reason was to avoid this. But if many of your local business partners are now working in different currencies, you have to have business deals in multiple currencies and your business’s financial flows will be vulnerable to currency risk, even if you are just running a local landscaping business (or heck, even if you have expenses in a currency other than what your wages are paid in). So you’ll probably pay someone (a bank) to absorb the currency risk for you. That sounds fantastic. Let’s talk about macro-economic management. Oh wait, the whole point of this exercise was to make that impossible. So toss out NGDP level targetting or whatever your preferred macroeconomic stabilization scheme would be. You’ll have a bunch of uncoordinated private actors each running their own approach with the normal obfuscation of accounting that private businesses engage in and probably plenty of self-dealing on top of all that.
Hayek had plenty of bad ideas and I doubt Friedman ever actually endorsed free banking in the way imagined by Ron Paul. There is a certain kind of person who is convinced that letting people do whatever they want with nothing more than contract enforcement is always better than government coordination. It sounds like you might be that kind of person. I’m not going to persuade you of anything here. But there are plenty of arenas of social and economic life where I think the benefits of government coordination are abundant and obvious and the vast majority of people happen to agree. Here is just one example: basic regulations regarding accounting and financial reporting of publicly traded LLCs. And currency happens to be another one. I’d rather live in a world where the fed manages the currency (even if they don’t always do so according to the rules that I prefer) than have the freedom to pick and choose currencies because the macro economy impacts everyone and changes in the value of currency tend to have profound implications for the macro economy. If your argument is that because I support a market process for determining the supply and pricing of cars (subject to various environmental and safety regulations of course) that I should by default also support a market for currencies I would suggest that it is you that has a poor understanding of how markets work or what their value is supposed to be.
27. March 2013 at 10:44
@mpowell,
1. Since most nationalised monetary policy has been so bad in the past, what makes you think that free banks would be any less likely to target NGDP than unelected barons at the Fed or Bank of England or ECB?
2. If you think that multiple media of account is such a cost, wouldn’t freedom of choice lead to a single currency equilibrium anyway (your desired solution)?
3. Do you really think that uncoordinated private actors do that badly in most markets? If not, then I don’t think pointing out that they are coordinated only by themselves and not one body is itself an argument, I think you need a separate argument.
4. If there wasn’t one single set of basic regulations of accounting and financial reporting (bear in mind, there isn’t currently – there are currently hundreds of different regulatory regimes) then I still think pretty much every publicly traded firm would have an incentive to prepare accounts in a similar way. People tend to end up in equilibria following similar norms like that.
27. March 2013 at 11:03
Daniel:
“There are lots of reasons why private currencies are a bad idea. Let’s just start with the idea that business will have to operate in multiple mediums of account.”
You mean like the world does with the 200 currencies that now exist?
You honestly believe that with a laissez-faire market in money, that there will be MORE than 200 MOEs?
Let’s say for argument’s sake that there were going to be over 200 MOEs in the world. If people are free to adopt the same MOEs as others, but they find it is in their interests not to, then that is by definition an economically optimal outcome, since individuals are getting what they want.
You are smuggling in the assumption that more than one MOE is inherently a vice, even in the face of people WANTING more than one MOE!
What you are doing is arrogating your own subjective opinion over the heads of everyone else, presenting it as scientific, and then claiming that because states can use force to impose a universal MOE, that this is somehow optimal for people. You are essentially saying that people are better off when they are forced to do what they otherwise do not want to do with their own bodies and property.
Moreoever, if the logic of your position is going to be taken further, which you should have done already, then you would have to conclude that a single MOE for the entire world is most optimal. In other words, you’d have to call for the abolition of all national central banks, and for a world central bank to be imposed. Not even Dr. Sumner is that crazy. He rejects the Euro because it is being imposed on too large and diverse a territory. Well, I do too, but my position is that anything other than these decisions being made by individuals and their property, can truly give us the information on how large any OCA should be.
“Do you understand what was so appealing about countries joining the Euro? One reason was to avoid this.”
Do you understand the utter disaster the Euro has been?
“But if many of your local business partners are now working in different currencies, you have to have business deals in multiple currencies and your business’s financial flows will be vulnerable to currency risk, even if you are just running a local landscaping business (or heck, even if you have expenses in a currency other than what your wages are paid in).”
The same thing is the case in the world today with the 200 or so fiat currencies that exist.
Having more than one currency, if it is sub-optimal, has the self-correcting mechanism that offers the incentive for individuals, not states, to decide whether to “join” others, i.e. adopt their, MOEs.
You are taking the half-truth that fewer MOEs is a good thing, but then you are completely overlooking how to get there, to what extent they should go, and, most importantly, WHO SHOULD DECIDE.
If the argument you are addressing is that currency should be competitive and privately produced like other commodities, and your opinion is that there are gains to be made through adopting the MOEs of others, then you don’t NEED blanket and sloppy acts of law enforcement by ignoramuses. Individuals will freely and without coercion, one by one, adopt the MOEs of others, and over time, the number of MOEs would almost certainly decline. If they don’t, then it’s because there are greater gains to be made by NOT adopting other people’s MOEs.
“So you’ll probably pay someone (a bank) to absorb the currency risk for you. That sounds fantastic. Let’s talk about macro-economic management. Oh wait, the whole point of this exercise was to make that impossible. So toss out NGDP level targetting or whatever your preferred macroeconomic stabilization scheme would be.”
Bingo!
“You’ll have a bunch of uncoordinated private actors each running their own approach with the normal obfuscation of accounting that private businesses engage in and probably plenty of self-dealing on top of all that.”
Oh no! Market activity! We can’t have that! A strong, morally unscrupulous group of people should impose communism. That way, no more “anarchy of production” that Marx feared about capitalism.
“Hayek had plenty of bad ideas and I doubt Friedman ever actually endorsed free banking in the way imagined by Ron Paul.”
Milton Friedman said that money is much too important to be left to central bankers. You do the math.
“There is a certain kind of person who is convinced that letting people do whatever they want with nothing more than contract enforcement is always better than government coordination.”
Yes, intelligent and peaceful people. People who aren’t thugs and thug apologists.
There is a certain kind of person who is convinced that initiating force against people who are not harming others, is better than letting them do what they want with their own bodies and property.
Common law in property rights is based on the philosophy that individuals ought to be able to do what they want with their bodies and property, as long as they don’t aggress against others.
“It sounds like you might be that kind of person. I’m not going to persuade you of anything here. But there are plenty of arenas of social and economic life where I think the benefits of government coordination are abundant and obvious and the vast majority of people happen to agree.”
You have an interesting way of describing violent aggression against otherwise peaceful people: “Coordination.”
Who cares if most people agree with you. Most people in WW2 Germany were anti-semites and many more were with Jews being kidnapped and shipped into concentration camps. Most people 100 years ago in this country were OK with racial segregation, and most people were OK with slavery 100 years before that.
The fact that you are relying on ad populum, is due to the fact that you have no rational foundation for justifying a state enforced monopoly in money production.
“Here is just one example: basic regulations regarding accounting and financial reporting of publicly traded LLCs.”
That isn’t an example. One who holds the theory that private, competitive regulation is superior to monopoly regulation can point to the same historical data and conclude that his theory is confirmed, because of how much better things could be if there was no monopoly.
“And currency happens to be another one.”
This is just a bare assertion with no grounding in anything remotely resembling an argument.
“I’d rather live in a world where the fed manages the currency (even if they don’t always do so according to the rules that I prefer) than have the freedom to pick and choose currencies because the macro economy impacts everyone and changes in the value of currency tend to have profound implications for the macro economy.”
Who cares? If someone would rather live in a world where employment is guaranteed, i.e. communism, should I take their opinion any more seriosly than yours?
Everything you do impacts “the macro economy”. To claim that because action X impacts the macro-economy, that it must be monopolized by the state, is in fact an argument that calls for universal communism.
Moreoever, the very fact that money is so important in
the macro economy” is in fact a strong argument to privatize money, not to monopolize it. For the fact that humans are fallible, and can make mistakes, it is far better for such mistakes to be localized, than spread over the entire country.
The fact that humans are fallible is precisely why it is better for medicine, housing, food, and other things, to be produced competitively, in the private market. If a mistake is made, the whole country doesn’t suffer. But if food production were monopolized, and the monopolist made a mistake, can you not imagine the devestation that would be unleashed on society?
“If your argument is that because I support a market process for determining the supply and pricing of cars (subject to various environmental and safety regulations of course) that I should by default also support a market for currencies I would suggest that it is you that has a poor understanding of how markets work or what their value is supposed to be.”
No, it’s the other way around. If your argument is that “money is different and must be monopolized”, then sorry, but is it you who has a poor understanding of how markets work.
It’s always the same thing. Those who are most ignorant of how markets work, are least likely to trust them. Those are who ignorant of the structure and incentives of markets in money production, are least likely to trust a market in money!
Do you think this is just a coincidence? Statism in economic thinking is like crationism in scientific thinking. Ignorance in science leads to believing God is where we must turn. Ignorance in economics leads to believing monopolies are where we must turn.
27. March 2013 at 11:14
Daniel:
“You’ll have a bunch of uncoordinated private actors each running their own approach with the normal obfuscation of accounting that private businesses engage in and probably plenty of self-dealing on top of all that.”
I should have said it before, but I was too busy poking fun…
Market activity is not “uncoordinated.” If you understood how markets work, then you would know that market activity is coordinated through the price system, subject to profit and loss. Profits and losses regulate industries, and is why capitalist markets work. To claim that there is no coordination in market economies is to display a gross ignorance of markets. I mean, you aren’t claiming that the total coordination in command communist economies are superior to the “uncooordinated” production in capitalist economies are you?
It’s interesting how someone predisposed to not knowing how markets work, who is making claims that communists make, would find themselves a follower on this blog. Is that a coincidence?
27. March 2013 at 11:15
@BenS:
1) Frankly, I don’t consider nationalised monetary policy to have been that bad compared to private alternative possibilities. I think if you actually had private currencies you would occasionally see one of them blow up, and during depressions perhaps many of them. You would either be stuck with 100% convertible to gold/silver currency or currencies that lacked credibility to maintain appropriate levels of inflations.
2) Just because settling on one currency is desirable doesn’t mean it will happen without coordination. And if it does, then you have effectively lost your market. So you either have to deal with lots of currencies, or one currency monopolist who doesn’t have to worry about competition and doesn’t answer to the public (which at least the fed does weakly).
3) In many markets uncoordinated action is a feature not a bug. It is what allows price discovery. Regarding multiple currencies in a small region, it’s a bug. This is the part of the market in currency argument that is so weak. There are specific features of certain kinds of markets that lead to economically desirable results. These features and resulting benefits do not simply extend to all elements of economic or social life just because you can plausibly describe something as a market.
4) Pre-SEC self-dealing in corporate managment was rife. It was not unheard of for a corporate manager to short their own stock. The historical example of voluntary accounting is not favorable.
27. March 2013 at 11:34
Yo Geoff – for once, I was on your side 🙂
27. March 2013 at 11:38
mpowell
You are a VERY VERY VERY ignorant man.
Free banking has existed – and it worked remarkably well.
The fact that you cannot understand how private money would work speaks only of your limitations.
27. March 2013 at 11:48
Free banking….I don’t know much about it. Can anyone answer these questions?
If banks issue currency, do we have confidence that the bank has adequate reserves to back the currency it issues?
What is the audit process? How transparent are the banks regaring their ballance sheets?
If multiple banks issue currency, is a JPMorgan dollar worth the same as a BofA dollar, or is there a fluctuating exchange rate?
In which currency will I be paid? If the exchange rate is fixed, then it doesn matter so much. If it floats, it does.
If if it is fixed, but I veiw one currency as more secure than the other, given the choice I will spend the inferior currency and hold the superior currnecy. The inferior currency will crowd out the superior currency. Do we get a race to the bottom?
If the exchange rate floats, will the currency issued by banks with a local geographic footprint decline if I move away from my bank’s operating area?
Which currency will the government use to pay its debts?
In the event of a banking failure, my JPM dollars in my JPM account become devalued. We would have to eliminate deposit insurance. Or private insurance companies could back my JPM account with BoA dollars, which could protect me against a single failure, but not against a systemic failure.
We would have to enter this brave new world under the assumption that there will be banking failure and how does the system recact / accomodate banking failures?
All discussion of monetary supply targets goes out the window. We would be operating under the assumption that the free-market always finds the effecient quantity.
27. March 2013 at 11:52
http://oll.libertyfund.org/index.php?option=com_staticxt&staticfile=show.php%3Ftitle=2307&Itemid=99999999
27. March 2013 at 13:11
“Allowing the extensions to expire would have subtracted about 2.2 percentage points from the average marginal tax rate (see Chapter 5 of my recent book) and left 2013 marginal tax rates almost exactly as they were in 2012 despite a payroll tax increase.
Instead, the average marginal tax rate has increased about 2.2 percentage points, putting the rates about halfway back to their stimulus law highs in 2010. For this reason, the labor market could give back about half of its admittedly small recovery from the recession, measured in terms of hours worked per capita.” – Casey Mulligan
27. March 2013 at 13:27
“Is Obama really trying to pressure Japan to adopt the sort of monetary policy that only Ron Paul could love?”
Since Ron Paul loves fiat money, interest rate setting central banks so much…
27. March 2013 at 15:26
This is an interesting analysis of Polish situation: http://barnejek.wordpress.com/2013/03/27/the-truth-about-e-in-poland-mr-krugman/
27. March 2013 at 15:30
@Geoff/Daniel
I’m not going to get into a point by point refuttal of the case for a night watchman state. It is clear that your preference for free banking stems from your priors about the desirability of limiting government to I guess the enforcement of private contracts and maybe national defense? In which case there’s not much for us to discuss.
27. March 2013 at 16:36
mpowell:
“I’m not going to get into a point by point refuttal of the case for a night watchman state.”
Well, I guess that’s good, because I don’t want to see you look foolish.
“It is clear that your preference for free banking stems from your priors about the desirability of limiting government to I guess the enforcement of private contracts and maybe national defense? In which case there’s not much for us to discuss.”
People who want to introduce violence where none exist, tend not to want to engage in intellectual discussions, because there is nothing rational about introducing violence in the first place. Introducing violence is literally a denial of others using their reason to make their lives better.
It’s not all that surprising that your solution is to cease engaging intellectually. There are lots of people who you want to be deliberately harmed after all, no time to chit chat.
27. March 2013 at 17:08
mpowell,
Your arguments against free banking boil down to “I don’t possibly see how it would work – and if it’s so great, how come we don’t have it already ?”.
Meanwhile, your beloved unelected barons (awesome, Ben Southwood) over at the Fed/ECB/BOE/etc keep millions of people unemployed while patting themselves on the back for doing such an awesome job.
Either you’re intellectually lazy – or you have massive emotional blocks which prevent you from thinking things through.
Indeed, there’s not much for us to discuss.
28. March 2013 at 00:41
mpowell,
You wrote: “private currencies are a bad idea… business will have to operate in multiple mediums of account.”
The historical record shows this not to be the case. In Canada, from 1817 to 1935, banks issued private currencies which were all mutually accepted at par value (see note 1 below). Banks that didn’t accept rival banknotes suffered from excessive drains of specie when presented with demands for note redemption in gold or silver by rivals who accepted their notes.
By 1867, all Canadian private currency was denominated in the Canadian dollar, which was equal to the US gold dollar. (A similar process led to mutual par acceptance and a single unit of account in the Scottish Free Banking period of 1716-1845.)
(1) Small commissions were charged for notes from distant provinces, but improved transportation ended such discounting in the 1840s. (see page 82 http://menghusblog.files.wordpress.com/2012/02/the-experience-of-free-banking.pdf )
28. March 2013 at 01:14
mpowell (cont),
“toss out NGDP level targetting or whatever your preferred macroeconomic stabilization scheme would be.”
Again, historical experience shows that the money supply is self-regulating under a Free Banking system. It doesn’t require any “macroeconomic stabilization scheme.”
http://www.youtube.com/watch?v=JeIljifA8Ls
In this video (from 15:30 to 19:35), George Selgin explains how Canada’s stock of privately issued money steadily rose and fell in accordance with fluctuating seasonal demand for currency in the late 19th century.
Banks will not underissue currency because they want to maximize the amount of their own currency in circulation and thus profit from “float.” Banks will not overissue currency because the interbank clearing system ensures that they will lose base money to more prudent rivals.
28. March 2013 at 01:19
Justin: “Polls show that…Poles are firmly against EMU membership, hard to see how political gimicks could fool the median voter into joining the EMU mess.”
I can see several ways how Poland can end up being in EMU
1. “Firmly against” seems to be 62% to 38%. I would not see it as very “firm” especially because
2. … As it happens voters in national countries do not care about some policies that much. It matters more who organized the referendum, not what the referendum actually is about. So if a politician supporting some question to be put to referendum experiences changes in popularity, so can the electorate.
3. Then there are some legal “issues”. For referendum to be valid in Poland at least 50% of people have to vote in it. This fact alone can mean substantial changes in voter dynamics. The circumstances for referendum can make-or-break it. The first and obvious thing is the character of referendum. Should it be understood that if referendum is invalid politicians cannot move their agenda forward, or maybe it means that people do not care that much about the topic meaning they automatically agree with whatever politicians happen to put together? And this interpretation is up to politicians.
So once you as politician know what you want to achieve (should referendum be sucesfull or not) you have a lot of options. For instance if you organize referendum as part of general elections – just another sheet to fill for a voter, chances are that the referendum will have over 50% voters and will be valid.
Additionally, the dynamics is different. With general elections all parties do capaigns because once the election days comes even if one voter votes he will shape the future parliament. But with referendum it is different. Some parties can choose a strategy to completely ignore referendum campaign hoping that it will generate so little buzz that it will not be valid.
I will not continue, I hope that the message got through. Politicians have power to make changes in spite of voter preferences. If it would not be so, they would not be able to do “unpopular” decisions – but sometimes internal political dynamics makes them do just that. So the fact that there is an influential political party that made their agenda to adopt Euro is enough to start worrying.
28. March 2013 at 01:37
Doug M,
Good questions. I’m no expert, but I’ll try my best to answer them. (If I’m wrong, any correction would be welcomed).
“do we have confidence that the bank has adequate reserves to back the currency it issues?”
The interbank clearing system ensures that banks have adequate reserves. Any bank that overissued currency would quickly find itself losing base money to its more restrained rivals. Banks would accept rival banknotes (the same way they cash checks from rival banks today), but they would also quickly send them back to the original issuer (since they have no desire to increase the circulation, and profit from float, of competitor notes).
“is a JPMorgan dollar worth the same as a BofA dollar, or is there a fluctuating exchange rate?”
Historically (e.g. Canada, Scotland), Free Banking systems resulted in mutual par acceptance of rival banknotes. It is in the interest of all banks to simplify check cashing, deposit transfers, and other interbank transactions for both themselves and their customers. Any bank that issued currency denominated in a unique unit of account would have difficulty attracting customers (though perhaps specially denominated currencies might arise for special purposes, such as int’l trade).
More here (paragraph 8): http://www.econlib.org/library/Enc/CompetingMoneySupplies.html
28. March 2013 at 02:20
Doug M (2),
“What is the audit process? How transparent are the banks regaring their ballance sheets?”
There would be two incentives for banks to maximize transparency: (1) to reassure current and potential customers of solvency (to prevent runs); and (2) to maintain membership in interbank clearinghouse associations.
(1) I haven’t verified this with a source, but according to the Congressional testimony of Lawrence White, before deposit insurance banks would paint in their windows, or otherwise publicly announce, their amount of capital they held (see this video from 25:00 to 25:45 http://www.youtube.com/watch?v=jVm3Yzjq8zE ). While banks did not have minimum reserve ratios, they did have very thick capital cushions (20% was typical). Today, due to deposit insurance, banks hold as little capital as necessary to comply with regulations.
(2) In mature Free Banking systems, specialized bank clearninghouses tended to arise to simplify business such as check clearing and note redepmtion. Eventually, they began to assume other functions, such as the sharing of information on untrustworthy borrowers and counterfeiters. The clearinghouses also took on some of the functions of central banks such as the lender of last resort to solvent banks suffering from a temporary liquidity shortage.
However, since they were using their own money, clearinghouses didn’t provide this last service without thorough vetting. Member bank had to submit to regular audits to stay in the association. A bank that lost its membership would forgo the previously mentioned benefits as well as suffer a huge blow to their reputation.
Thus, to stay in good standing with both their customers and other clearinghouse members, laissez-faire banks would have powerful incentives to open up their books and operate in an honest manner.
28. March 2013 at 02:59
“Which currency will the government use to pay its debts?”
Good question, I’m not sure. I guess bonds would still be auctioned electronically (like in Treasury Direct), and payments would be made in the currency of the winning bank. There wouldn’t be a primary dealer system; auctions would be open to any bank.
Perhaps a central bank could still exist purely to handle the fiscal needs of the government (like the First Bank of the United States). Or maybe private banks could submit bids to hold govt bank accounts. Help, anyone?
“In the event of a banking failure, my JPM dollars in my JPM account become devalued.”
Here it seems worthwhile to look at the failure of the Ayr Bank in Scotland (mentioned in the Wealth of Nations). According to White:
“On the day before the Ayr Bank went into liquidation the two banks [Bank of Scotland and Royal Bank of Scotland] advertised that they would accept the notes of the defunct bank.
The potential benefits of this action to the two banks are clear: it would bolster public confidence, attract depositors, and help put their own notes into wider circulation. The potential cost was surprisingly low because of one of the most remarkable features of Scottish free banking: the unlimited liability of a bank’s shareholders. Despite their magnitude the Ayr Bank’s losses were borne entirely by its 241 shareholders. The claims of its creditors, including noteholders, were paid in full.”
(p. 166-67 http://menghusblog.files.wordpress.com/2012/02/the-experience-of-free-banking.pdf )
Today, JPM’s shareholders would have limited liability, but their positions would still be wiped out. Noteholders and depositors, as creditors of the bank, would have priority in claiming JPM’s assets. The bank that took over JPM post-bankruptcy (presumably a healthy one) would probably find it more beneficial to take on the remaining liabilities of JPM’s depositors in full rather than insist that they accept a haircut.
28. March 2013 at 05:14
I didn’t read all the comments, but it is laughable to believe that Japan is anything but totally screwed. Their demographics are horrible. Old people don’t produce anything. It doesn’t matter if they have paper savings demoninated in Yen. If Japan is effectively producing less and less as older people work less and less, the Yen, (even if it isn’t devalued by Abe & Co) will be worth less and less in the future. Flooding the market with more Yen might make goods slosh around at a faster rate, but ultimately they will not become a more wealthy country.
28. March 2013 at 05:53
Marcus, Good point.
Thanks Dilip.
Bren, Thanks for the link.
28. March 2013 at 05:56
123, Thanks, I’m in no position the judge the accuracy of that view.
28. March 2013 at 06:52
In a free banking model what do I pay taxes in?
28. March 2013 at 06:55
The thing that won me over to an NGDP target was that it has a passive mechanism to punish bad government policies. I’m still a liberal in temperment but any government policies that reduce productivity or population growth will cause inflation.
28. March 2013 at 10:10
As to competing currencies yet again, as I’ve pointed out before…
Creating your own private money to compete with the dollar and the Fed is perfectly legal. The Fed even has a free publication about it telling you how to do it, that I linked to before, “Private Money: Everything Old Is New Again”.
There’ve been *hundreds* of private money systems that have operated and competed perfectly legally right here in the USA. Some are operating right now.
My favorite was the Constant, which circulated in New England during the inflationary 1970s. It was based on a bundle of commodities, and its appreciation in value made it so popular that local banks offered savings and checking accounts in it. It closed down when its operator reached retirement age, couldn’t raise the funds to expand backing of it and couldn’t find a successor to operate it.
There was no legal problem at all for anybody. Nothing illegal to it. It rose in popularity by supply-and-demand for it, and it fell by the same.
The problem that “competing currency” people have is that the masses *don’t want* to use a different currency than the dollar. The medium of exchange/unit of account is a natural monopoly, network effects assure that the market, by voluntary choice, will give *one* a dominating usage position. Thus alternate currencies like Constants, Ithaca Hours, Bitcoin (perfectly legal!) and others (including for that matter alternates like euros, pounds, and rubles, all also perfectly to legal to use in the USA) never “take off” into more than local or niche use.
The competing currency-ologues believe by assumption that alternative currencies are desired by the general populace and thus, since they never arise on large scale, they must be illegal and be being suppressed by force. Wrong on both counts. The fact is that when a populace wants to shift to using an alternative currency it starts using it, even if it is illegal. Even if the govt mandates tax collection in the old one! See the historical example of nations ranging from A to Z, literally (Argentina to Zimbabwe).
And what exactly was Bernard Nothaus’s crime is starting he Liberty Dollar?
What *is* explicitly illegal is calling your own money “dollars”, as if they are US dollars. You know, like it’s illegal to create your own soft drink and sell it as “Coke”.
Here is video of von Nothaus doing just that. He offers to pay for purchases with his own money, the vendors ask, “What’s that? We don’t take that”, and he answers “It’s ten dollars. The new dollar silver piece”. Then he walks away with the goods “”- leaving the vendors stuck with the cost as their suppliers won’t accept non-dollars, non-money in payment. And he brags about how easy it is.
That’s *fraud*, f-r-a-u-d, and von Nothaus well belongs in jail for it.
Here’s a tip: If you are honestly interested in going into *competition* the first thing you do is **differentiate** your product from the others. You give your product a new unique name, and highlight its differences that make it better. You don’t call your new soft drink “Coke”, and you don’t call your new money “dollars”.
If you do call your new soft drink “Coke” and your new money “dollars” then you aren’t trying to compete “” you are trying to pass off your product as the other to deceive unwitting. Which is fraud. And you belong in jail.
How many libertarians endorse fraud and deceit?
29. March 2013 at 03:44
Jim Glass, Excellent post–all free banking advocates should read that.
29. March 2013 at 03:53
Jim Glass,
I support Free Banking. Privately issued currency is but one of many aspects of such a system. The immediate, more important goals are 1) ending too big to fail; and 2) eliminating deposit insurance. Do you oppose these goals?
Sumner has a good post on the evolution from NGDP targeting to free banking here: http://www.themoneyillusion.com/?p=10503
“alternate currencies like Bitcoin never “take off” into more than local or niche use.”
Are you sure about this? The market value of total bitcoins has more than quintupled in the last 3 months. It’s now over $1 billion. Demand is certainly not local (Spain, Cyprus); is a billion still niche?
http://blockchain.info/charts/market-cap
Re: Nothaus–in my post, I specifically said, “he should not have used the word dollar.” But let me ask you this–if he had called his silver pieces and notes “Liberty coins” and “Liberty bills,” do you:
1) Believe that creating his own private currency was a crime? (btw, the vendor was completely free to reject his coin and not give him a turkey sandwich)
2) Believe the federal govt would not have arrested him if he had used a different name instead of “Liberty dollars”?
29. March 2013 at 04:27
Scott Sumner,
Your post “An Idealistic Defense of Pragmatism” was a very good one; I wish I had seen it sooner. I just have one quick comment.
I read your proposal “The Case for NGDP Targeting” submitted to the Bank of England. It is a great paper, and I hope your plan will be implemented. However, to get more libertarians and Austrians on your side, I think perhaps you should more explicitly state your view that NGDP level targeting is merely the first step in aligning the financial system with free market principles.
The following tripartite plan would resonate very strongly with Austro-libertarians:
1) End discretionary monetary policy; institute a 4% NGDP level targeting rule.
2) End too big to fail.
3) End deposit insurance.
As a reader, it seems the thrust of nearly all of your posts is behind 1, with little or no mention of 2 and 3 (perhaps I’m wrong). But if 1 were presented as a necessary step to achieve 2 and 3, you would get much more support from readers like me.
I know that Austrians are seen as part of the “fringe.” But look at the Alexa rankings for various hard money sites:
Zerohedge: 2,200
Lewrockwell.com: 9,000
Mises.org: 27,000
By comparison, Marginal Revolution is only at 45,000; this blog, unfortunately, is stuck at 450,000. So there is considerable “man in the street” support for “hard money” as the policy opposite to the current discretionary regime. Railing enthusiastically against TBTF and FDIC (in addition to promoting NGDP level targeting) would do a lot to get these hard money types on your side.
NGDP targeting is still a (literally) unpopular view. It could use all the allies it can get.
29. March 2013 at 06:13
Jim Glass,
It may be legal to transact in gold or silver coins. But who would want to since they would be subject to cap gains tax?
The IRS treats gold/silver coins as “collectibles”–ie capital assets.
http://www.nuwireinvestor.com/articles/how-the-irs-taxes-gold-investments-56249.aspx
Via inflation alone, gold/silver coins will increase in fair market value over their original cost in nominal terms. If the price of the metals increased over the year, that’s a further taxable gain.
From the IRS http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Bartering-Income :
“BARTERING APPRECIATED ASSETS
Examples of appreciated assets often include art, antiques and COLLECTIBLES. If you have barter transactions of property where the fair market value is more than your cost or other basis, you usually will have a reportable gain. These gains may be business income or capital gains.”
Not only will businesses and individuals have to pay cap gains tax; they will also have to keep track of how much they paid for the coins, and how much the market value was at the time of transaction. Who would go to such trouble?
That’s why Ron Paul introduced the Freedom in Currency Competition Act. Why else would he go to the trouble of doing so if there weren’t real barriers to using gold/silver as money?
http://legiscan.com/US/bill/HB1098/2011
Re: Coke–yes, “Coke” is a trademark. But “cola” is not. By your logic, Pepsi-Cola and RC Cola are also engaging in fraud and deceit. If the public is smart enough to distinguish between colas, they can do the same for dollars.
Btw, the Fed hardly deserves a monopoly over the use of the word “dollar”–the term has existed since the 16th century, and the modern pronunciation at least since the 17th century. Should the US go after HK, Australia, and Canada for using the term “dollar” as well?
29. March 2013 at 13:27
Jim Glass:
Dollars were not, and are not, chosen as the medium of exchange because people have “voluntarily come to accept it”. They are using dollars because they have to pay taxes in dollars. For those people using “Constants” and “Ithaca Hours” paper notes, which are in fact barter notes, not money notes, even if a person earned their income entirely in those notes, they would still owe taxes…in dollars, not those notes. That forces those people to go out into the market and find dollars, which of course is why dollars are universally accepted.
You have it backwards. You are starting from the fact that dollars are the universally accepted money, and then you are falsely inferring from this that it just has to have a free market explanation, that it is “natural” in some way, thus making it appear as though the government’s publication on how to “compete” is something other than propaganda designed to fool the naive. They know they don’t have real competition because they are forcing everyone to pay taxes in dollars, regardless of what people earn. You earn gold? You pay taxes in dollars, not gold. You earn Ithaca Hours? You pay taxes in dollars, not Ithaca Hours. They are laughing at you for falling hook line and sinker for the myth that competition exists.
The only way to have true competition against the dollar is for the state to stop forcing people into paying taxes in dollars. If the state stops taxing people in dollars, and starts taxing people in gold, then if the state’s coercion is successful, then gold would become the generally accepted medium of exchange, i.e. money. If the fiat notes the Fed currently prints remain unbacked in gold, then eventually nobody would accept those fiat notes anymore. The Fed’s monopoly would be done.
For free banking, this requires an abolition in all state enforced legal tender laws and abolition of special privilege taxation laws. At some point, people will come to realize that the best store of value, the best commodity for medium of exchange use, isn’t paper notes issued by a state agency. Fiat notes would eventually be abandoned once people realized that their interests are better served with more valuable commodities.
29. March 2013 at 13:36
The dollar system is based on fraud, deceit, and violence. It’s fraudulent because the state is presenting the dollars to be safe, when they are not safe. They are subject to arbitrary devaluation. It’s deceit because people are foisted into a “price system” whereby they cannot distinguish between true demand, and inflation manipulated demand that can evaporate by arbitrary whim of the central bank. It’s violence because the state threatens people with jail, and if they resist that, death, to coerce them into paying taxes in dollars only, which prevents people from competing with the dollar using other currencies.
It wasn’t the general public that spent a week on Jekyll Island and conjured up a monopoly fiat system under which everyone is to be foisted into. No, it was bankers. Inflation is a system that benefits bankers (and their friends in the state, who enforce the bank’s monopoly through taxing in dollars), not the general public.