Pages

Wednesday, September 9, 2009

Financial history readings

Greetings, Ron Paul fans and others. While you're here, you might want to click through to some of my articles on financial history. For example, here's one on Alexander Hamilton (not the villain you've been taught he was on the LewRockwell blog), another on the Panic of 1907 (some background on why there is a Fed) and one on World War I and the gold standard (note that a great deal of government activism was required to keep the standard in place).

25 comments:

Anonymous said...

Ken,

Naturally you don't see the Federal Reserve and centralized state power as a problem, since you're a (very minor) part of that power structure. It's the 99%+ of us who don't earn our paychecks as leeches who have a problem with it.

As ever, centralized power structures have been able to buy intellectuals to confuse the masses on how necessary that power structure is. You would be one of those.

I assume your article on the 1907 bank panics mentions that JP Morgan started the panic on purpose, with the specific goal of eventually instituting a third CB?

Kenneth Silber said...

Anon, I haven't received that paycheck. Maybe I should call accounting over at the power structure.

Anonymous said...

Ken,

Not sure what you do for a living, but willing to guess that at some point it boils down to the Federal government being your main client. Am I right?

People who favor a big state are almost always either a part of that big state -- or want to be.

Anyway, you're on the wrong side of the Federal Reserve issue. If you had the arguments on your side you wouldn't need to use a silly picture of Ron Paul like your article does.

Do you have any idea how easy it is to find a goofy-looking picture of anyone when you have thousands of frames to choose from? Believe me, Ken, we could do it with you. Why not do without the childish pictures and stick to the arguments? I bet I know why.

Kenneth Silber said...

My work has no connection with the federal government (except that they tax it). A bio is available at New Majority.
As for Paul photos at NM, I didn't choose any, and even if I had it would be a pretty trivial complaint.

Anonymous said...

"Kenneth Silber is a senior editor at Research, a magazine for financial advisors"

So you make your living as a part of the corrupt financial system Ron Paul supporters (and many others) are exposing as, well, corrupt.

You support the corrupt financial system by painting subjects like Ron Paul, the 1907 bank panic, and the Federal Reserve in ways favorable to the corrupt financial system.

Fair statements? Come on Ken, be on my side.

Kenneth Silber said...

By that standard of culpability, Ron Paul should be denounced, because he works for the federal government.

Anonymous said...

Only when he's not delivering babies. You're full-time.

Anyway Ken, I think we've established that:

1) You know your true role in this world (intellectual shill for corrupt financial-political system)

2) I know your true role in this world

3) You know that I know your true role in this world

4) You and others like you are a tiny bit worried about the book that hits stores next week. And with good reason!

5) The only way you can avoid getting 0 comments on your site is by writing about Ron Paul.

So I guess my work is done here. I won't leave without saying two nice things, though, Ken:

1) The name of your site is a cute pun, and 2) it looks like you've written a little sci-fi, which means you can't be all bad.

But Ken: maybe a re-think of your deepest-held values is in order. Not kidding!

Adios,
Anonymous

4)

Anonymous said...

Sorry about that stray 4). I guess if I had to have another 4) it would be:

4) I hope Melanie Oudin wins the US Open.

TAYLOR said...

Ken,

I've got no qualms about denouncing Paul for working for the federal government and existing in part off of the tax-trough. His position on veteran care and additional veteran benefits on his presidential campaign platform was also absolutely abominable. But he's a politician, so it doesn't exactly surprise me.

Can't wait to read the articles and get back to you on them with my thoughts!

(ps, I am not a RP fan)

Kenneth Silber said...

The only way you can avoid getting 0 comments on your site is by writing about Ron Paul.

It does cause an upward blip in traffic, Anon. Welcome back, Taylor.

TAYLOR said...

Ken,

Question: will you be responding to the e-mail I sent you with questions earlier?

I know you think I'm full of piss and vinegar (I am) but I truly am curious to understand your point of view on the stuff I asked about. The only way I believe what I do is because everytime I've brought my criticisms to people like you, you suddenly become to busy to respond. Here's your chance to take my mind, if you're bold enough!

TAYLOR said...

And even change* my mind. There was a too* that belonged in their somewhere as well. Holy crap, do I need some coffee this morning or what? Too bad it's almost lunchtime!

Kenneth Silber said...

Taylor, if I recall your email correctly (yes, the delete button was close at hand), it asked about political control of the Fed.

My view is that the Fed should be insulated from short-term political pressures (eg Congress pushing it to lower rates), and with better statutory guidance would be more anti-inflation than it is. But there's no prospect--nor would I desire--for it to be totally unconnected to electoral politics.

As a government agency, it has to be under political control (hence its governors are appointed by the president, and btw it gets audited by GAO on a broad range of matters).

Excuse me now while I get back to some of that paycheck-generating work Anon mentioned.

Anonymous said...

"As a government agency"

But the Federal Reserve isn't a government agency, Ken.

TAYLOR said...

Ken,

Okay, let's take this one point at a time to avoid me writing a big comment that won't fit here and you being frustrated by it and deleting it.

I am operating off of two premises here, which I will state explicitly:

1.) There are two kinds of institutions-- market institutions, which operate through voluntary exchange and willful consent of the parties involved, with no force used to settle disagreements; and political institutions, which are essentially the opposite of market institutions in that they operate through threats or use of coercion to settle disagreements about courses of action and deployments of scarce resources.
2.) The Fed is a political institution, not a market institution, as it was legislated into existence by an act of Congress in 1913.

Now, it is my understanding from your previous post that you accept and agree with both of these premises.

Alright, if we are in agreement on those two premises, then the thing I want to consider and explore next is this:

My view is that the Fed should be insulated from short-term political pressures (eg Congress pushing it to lower rates), and with better statutory guidance would be more anti-inflation than it is. But there's no prospect--nor would I desire--for it to be totally unconnected to electoral politics

You seem to desire two things that are mutually exclusive given the premises we agree upon. You want the Fed to be insulated from short-term pressures from Congress (political influence), yet you agree that the Fed is a political institution and therefore it makes it's decisions politically. You call for more 'statutory guidance' for the Fed, which you hope will make the institution less inflationary. Can you explain who you hope will provide this statutory guidance, if not Congress?

Ultimately, your position seems consequential and arbitrary-- your preference is for a particular (and as yet, not specifically defined and delimited) quantity and type of political influence on Fed decision-making. Yours is but one of many preferences of this type on a scale that ranges from zero political influence on monetary policy (Ron Paul) to something like 'full' political influence (people you might term populists, or that I'd call radical socialists, who might hope to use monetary policy to print everyone a million bucks). Do you believe your preference for monetary policy to be the objectively correct one? If yes, can you explain the evidence or logic you used to divine it from the alternatives? If not, can you explain why your book review did not include a sentiment to the effect of, "I disagree with Paul and think political influence on monetary policy at the Fed should be X, but that is just my opinion and I respect Paul for having a differing opinion"?

Thanks for your time and thoughts, Ken.

Kenneth Silber said...

Taylor, I think Paul has a legitimate concern about inflation, as I wrote in my review. But I don't think an audit will make the Fed less inflationary, as it would be a lever for politicians to pressure the Fed. Yes, Congress (and the president) must provide the statutory guidance I want, and that would be an example of policymakers limiting their short-term discretion over monetary policy for a long-term benefit. The kind of thing I'm talking about has been done eg in Germany and New Zealand. The historical record shows more-independent central banks are better at limiting inflation.

A commodity standard is another way of trying to limit discretion in the interests of stability, but it has its own downsides and indeed sometimes requires governmment activism to prop up the standard. You'll note I didn't rule out commodity standards or private currencies as approaches.
But I would've shown more respect for Paul's book if he had shown any grasp of the tradeoffs and uncertainties involved, rather than presenting it all as a good-vs-evil,choice-is-clear type of thing.

TAYLOR said...

Ken,

You raised two points, one about strategies for fighting inflation at the Fed (via maintaining 'independence') and the other about the vices and virtues of a commodity standard. I'd like to address the second point separately and after addressing the first.

I share your concern that a well-intended Fed audit bill by Paul could somehow become hijacked by various interest groups and used as leverage for purposes other than the ones Paul intends. As an Austrian, Paul should realize that all political actions come with unintended consequences. As a politician, of course Paul will blindly ignore this.

Let's ignore the push for the audit, for now, and stick to the bigger question, which is-- is the Fed independent, and can it be? Your latest post seems to concur with my viewpoint that the Fed is NOT independent, and furthermore that it can't be, as you admit it is a political institution and it receives its mandate from Congress (and the president).

So, the Fed is not and can not be independent. Then the question becomes, "If the Fed is not and can not be independent, what is the ideal level of independence for the Fed?" This is an awkwardly worded question because Ron Paul as well as myself would respond, "There is no ideal. The Fed must be ended. No group of bureaucrats should control interest rates (or any other prices), all prices should be determind by the market."

Your response seems to be, "I prefer the current level of (lack of) independence of the Fed."

Fair enough. We can all have our own opinion. So I return to the question I posed last time, which you did not answer: do you see your opinion as an objective truth of the "best" position to hold? If yes, by what standard do you make such a judgment? If no, why were you so ungracious towards differing viewpoints of your own, rather than adopting the attitude of, "I disagree, but I understand everyone will feel differently and that's fine"?

My understanding right now (and I do hope you'll clear this up for me) is that you believe the current 'balance', if it could be called such a thing, leads the Fed to be more anti-inflationary than it otherwise might be. But if your concern in regards to monetary policy is inflation-fighting, the proper stance to take would be to call for the abolishing of the Fed, as it is the Fed, and the Fed alone, that generates inflation (inflation defined as an increase in the money supply). Maybe you think the Fed does not generate inflation, in which case I ask you to explain who or what does.

Kenneth Silber said...

Taylor, I prefer greater independence for the Fed, meaning in practice insulation from pressures to inflate -- and I think giving it a statutory mandate to focus on inflation (not employment) and a target inflation range are plausible ways to achieve that. But I risk repeating myself--I said much the same in my review and later, maybe not in so many words.

TAYLOR said...

Ken,

You seem to keep ignoring some of my specific questions.

Who creates inflation?

Kenneth Silber said...

Inflation results from too much money chasing too few goods. It's substantially a monetary phenomenon--I think we agree on that.

I guess your goal is to get me to say the Fed causes inflation. Well, it does, but that's a misleading statement. Inflation existed prior to the Fed as well. It's caused by printing too much money in relation to goods. That's something the Treasury and private banks also did, prior to the Fed.

Since I know you read my Hamilton article, I'll mention something I didn't have time to get into there. In the 18th and early 19th centuries, private banks issued currency--and one reason the central bank (Bank of the U.S.) was set up was to put some restraint on that--in other words, the central bank would refrain from accepting the notes of any banks that issued too much paper. The idea that inflation can only occur because of a central bank, and that a central bank can never fight inflation, is wrong.

TAYLOR said...

Ken,

Great, now we are getting somewhere!

First, to clarify some terms: inflation is an increase in the supply of money. It is not a rise in prices or even a general rise in prices. A rise in prices is just a rise in prices. I know in your review you referred to this as a "neologism" but it is not. You have your history backwards on this and as a historical researcher this should be clear to you if you read monetary theory by any well-known economist prior to the Keynesian Revolution, when the word got redefined to hide the culprit.

Consider--
Money supply increases 3%. Supply of goods and services increases 5%. Prices fall 2%. Is that "deflation"?

Money supply remains constant. A war occurs and wipes out 50% of goods and services. Prices rise 50%. Is that "inflation"?

I define inflation/deflation according to changes in money supply, as most economists did prior to Keynes, because this is the most economically relevant definition that can be considered. Yesterday it was kings and princes debasing the currency by clipping coins and debasing the money supply with legal tender laws. Today it is the Federal Reserve that debases the purchasing power of the money supply through constant expansion of it.

If you're wondering if I would consider an increase of the gold-as-money supply under a gold standard to be inflation, even if it is brought about through demand for such an expansion as communicated through the price mechanism on a free market, I'd answer to you YES, this is inflation. But notice that inflation only occurs on a free market under a commodity/gold-standard only this way, whereas under a government fiat standard, inflation only occurs that way (government printing).

Alright, so that is the definition I am working off of here. Now let's get to your point which is that inflation can occur without the Fed being around. Correct! According to the story I just told above, that is totally correct. And I believe you understand how and why this works: fractional reserve banking. Fractional reserve banking allows the money supply to expand (regardless of the 'standard' backing it) beyond actual deposits on hand. This is an increase in the money supply and therefore qualifies as inflation.

(contd)

TAYLOR said...

(contd)

Here's where it gets interesting. Prior to the Fed (and the two US Banks), banks' ability to expand the money supply were limited by solvency. Expand the money supply too much and they risk being unable to redeem withdrawal requests resulting in bank runs and banking collapse. This was a natural, market-mechanism which put bank credit expansion (and thus money supply expansion) in check. Anyone who tried to inflate their way to prosperity beyond what the market deemed acceptable, was quickly gutted and bankrupted by a deflationary bank run collapse.

ADDITIONALLY, the money at the time was backed by silver and gold. This is basically what set limits in place naturally. Can't redeem enough checks deposit certificates for gold and silver, insolvency, bankruptcy, collapse.

Now, with the Fed, this can't (or rather doesn't) happen. Why? Because as you know, the Fed is the "lender of last resort." Now when there is a 'liquidity crisis', the Fed stands ready to print money to prop the entire banking industry up. Additionally, since the dollar is backed by absolutely nothing, there is no limit to how much money the Fed could print. There is no limit by some finite, definite supply of a commodity such as gold or silver which the currency can be redeemed into. Dollars can only be redeemed into other dollars, which the Fed can always supply more of if it wants or needs to.

This is why the dollar has lost 95, 96, 97% (depending on what statistic you use) of it's value since 1913, whereas before the value of the dollar varied, but just as often as not appreciated in value. The Fed simply constantly inflates. And inflation of a fiat currency is a tax and a form of quiet theft (it is not so under a market-driven commodity-standard money because the money demanded by the market is paid for and there are ultimately costs of production involved, unlike a fiat system where the printing of money is essentially costless).

If you look a bit more critically at the history of the first two US Banks, as well as the Fed, than you currently do, you will see that although they were established in order to "stabilize" the monetary system, in reality the 'stabilization' that was sought was the cartelization of banks which would allow for them to all inflate together without worrying about depositors rushing from weak/over-inflationary banks to strong, more conservative banks. That is the legacy of the "Wild Cat Banking" period, for instance and was the strongest motivation for the push for one central banking authority... it would allow the wild inflaters (the Wild Cats) to inflate with abandon without fear of depositors withdrawing and collapsing their ponzi schemes in order to bank with more conservative, trustworthy banks that were not pyramiding money and credit so wildly.

Your response?

Kenneth Silber said...

Taylor, you've complained that you tried discussing this with other people and they didn't have time. I'm beginning to see how that might occur. I'll respond but life isn't slowing down while I do this:

1. On the semantics of inflation: yes, 19th century economists had a monetary definition of inflation, but not as any and all increase in the money supply. Rather, they thought it of as paper money increasing beyond the amount backed by coin, or as money supply increase exceeding real economic growth.. Some more on that subject is at http://www.clevelandfed.org/research/Commentary/1997/1015.pdf

2. I'm aware that the Fed's ability to bail out banks creates moral hazard. That, however, must be weighed against any alternative arrangement's downsides. How exactly do you eliminate this moral hazard? Get rid of the Fed and you make it more likely that the Treasury Dept would take up the slack (while being much more subject to political pressure). Put Treasury on a gold standard and, leaving aside any other problems, what exactly stops policymakers from ditching the standard when they see fit?

Private currencies, free banking --any arrangement you mention will have pros and cons. You've asked repeatedly if I think my opinion on monetary policy is objective truth. The answer is no -- I think we all have a lot to learn on the subject -- and one thing I objected to in Ron Paul's book was its certitude and dogmatism.

Now, feel free to respond, of course, but I may have to take a work-related vacation from this for a while.

Kenneth Silber said...

Since the link might be garbled it's here.

TAYLOR said...

Ken,

You talking about weighing pros and cons reminds of an economic concept called "cost." Cost is something socialists (government functionaries at the Fed, for instance) are incapable of calculating. It's why centralized production and control of any industry or economy won't and can't work. Your argument might be that you just need the "right people" in charge of the Fed, but I can assure you that the USSR's economy did not collapse because of a lack of the "right people" being in charge of it.

My solution for weighing pros and cons? Let "the market" decide, via the voluntary interactions and peaceful weighing of costs and benefits of market participants communicated through the price mechanism (of which interest rates are a part).

Your solution for weighing pros and cons? Take a vote and force the losers to accept the winning 'solution' at threat of violence.

Your system is not economic, it is political. It will always be inefficient at best, completely injust and economically destructive at worst.

There is no way to try to shimmy around these simple facts without re-writing the entire 'science' of economics, and something tells me you're neither inclined nor enabled enough to do so. Your continual cries of "it's complicated" belie your confusion over fundamental economic principles, they're not reflective of some cosmically incalculable state of events that my small, childish mind is unable to comprehend.

Maybe you'd respond, "Well, some people value a particular social context to your economic fundamentalism," and if that's the case, all I can say is that they should be free to do so, just so long as I am free to opt out and be left alone. I don't do relativism, not in economics, not in politics, not in life.