“It is true that individual financial institutions made bad decisions. In my opinion, they should have been allowed to go out of business—that would have been the proper way for them to be handled. However, their decisions were secondary to government policy. It should be remembered that the Federal Reserve owns the monetary system in the United States; we do not have a private monetary system. In 1913, our monetary system was nationalized. If you’re having problems in the monetary system—which is where the problems in the economy began—they are, by definition, government problems. This is analogous to interstate highway bridges falling down: If interstate highway bridges were falling down, everyone would recognize that the government owns the highways and conclude that this is a government-caused problem. Well, the government owns the monetary system, and the errors by the Federal Reserve are the foundations of the financial problems we’ve experienced.”
John Allison, former CEO of BB&T, who is that rarity in financial services, a genuine free marketer who knows what the prime cause of the credit disaster has been.
(The quote is taken from an interview of Allison by The Objective Standard, a fine magazine. Most of the articles are behind the subscriber firewall.)
Allison is an Objectivist, and a very interesting man. Here’s a pretty good article about him (ignore the long digression into Ayn Rand and Atlas Shrugged in the middle; it does come back to Allison eventually).
“Nationalized” is absurd. What, dollars were printed by anyone who wanted to make money before 1913? Money has always been governmental.
Alsadius,
Technically, the U.S. government does not have a monopoly on the money supply. The banking system can, to a limited extent, expand and contract the supply of money independent of the Federal Reserve, because they can create debit chequing accounts. What the government has a monopoly on is base money; they control the money supply indirectly by altering the supply and demand for base money.
In any case, there was once a time in the U.S. when all money, chequing accounts and hand-to-hand currency, were privately issued. Unfortunately, other regulations made the U.S.’s banking system very unstable, such as branch banking restrictions. Despite these troubles, people still preferred private banknotes to official alternatives, and eventually the government resorted to taxing private banknotes to drive them from the market.
Outside of the U.S., Scotland enjoyed a period of almost pure free market banking in the late 18th and early 19th Centuries. All money was issued privately by competing businesses, and for a short time Scotland had a money and banking system that was the envy of the world (Adam Smith cited it favourably in the Wealth of Nations, I believe). Meanwhile, back in England there was a sever shortage of small change, and many private mints started appearing and provided the world with some of the best coin it has ever known.
Money was not invented by government, it is not at its best when managed by government, and it has not always been monopolised by government.
How can you nationalise a Fractional Reserve Banking system with private banks? The notion is preposterous.
What a silly comment, DBC Reed. “Fractional reserve banking” simply means lending out some of the deposits, not keeping 100% of it in cash in the vault. It’s called “leverage”, and it’s what banks have always done. Go back and read again this quote from “Alchemists of Loss”. It speaks more to the issue of deposit insurance than FRB per se, but it explains how banking used to work. Fractionally.
Your comments are much sillier than mine: at least I am following the argument. Your comment does not address the question I raised:how does a system of private sector banks which increases the supply of credit for its own profit warrant being described as “nationalised”? To be nationalised all the high street/commercial banks would have to be in public ownership (no bad thing IMO).
Please try and keep up.
DBC, writes:
“how does a system of private sector banks which increases the supply of credit for its own profit warrant being described as “nationalised”? To be nationalised all the high street/commercial banks would have to be in public ownership (no bad thing IMO).”
No it doesn’t. Governments of different hues have learned that a bank/company can be in nominally private hands but can be so directed by national rules, taxes and other controls that it to all intents and purposes operates as a conduit for national policy. So, for instance, a central bank sets interest rates across a whole economy, so the actual rates set by private banks are heavily influenced. That is the whole point of central banking, as its advocates would say.
Another good example are those “charities” that are now receiving large sums of taxpayers’ money and hence are increasingly indistinguishable from the state. And if you had been “keeping up”, you would have noticed that this blog’s authors oppose such things for that very reason.
With banking, things such as legal tender laws, capital adequacy rules, money laundering provisions, state licensing, etc, all mean that banking is far from being much of a free market. More’s the pity.
If you will allow me to say (see previous intemperate comment from JP),there is difference between being” nationalised ” or in a state “Where the government owns the monetary system”and “operating as a conduit for national policy”.If the government owns the monetary system why does it have to borrow money off private institutions to finance shortfalls from its revenue sources?Why does n’t it print the money as Lincoln did with Greenbacks ?(Oh I remember you’d never heard of Greenbacks until I explained them.)
As far as I remember Murray Rothbard (aka the Oracle)
waxes more indignant about fractional reserve banking than I do.
I don’t take kindly to being told to fuck off when I pursue a line of argument about public subsidy. Perhaps you feel that greater men than I such as Churchill ,Tolstoy, Einstein etc who saw the merits of taxing land should also fuck off.It is a legitimate and relevant argument and you look small for trying to close down debate.
DBC, it is not about “having a debate”: we have had the debate, you have plainly not convinced anyone here. I should also add that you should know better than to sneer “please keep up” at the writers of this blog, many of whom know as much, if not a great deal more, about economics than you seem to do.
And whatever your views are about private property, remember this blog is the property of the editors.
That’s a hint.
In the US Constitution you will find “coin money” and “emit bills of credit” referred to consecutively under things that (individual) states may not do. “Bills of credit” is fiat money, ie the US dollar. From this it is obvious that the two activities were clearly distinguished in the minds of the authors of the Constitution.
Under Article I, the federal government is granted the power to “To coin Money, regulate the Value thereof”. Also remember that at the time of the Constitution’s ratification, “regulate” did not mean “dictate”, it meant “standardize” or “make regular”; in other words, ounces, grams whatever. The battles over “bi-metalism” were because “coin” was valued by its metal content, not necessarily “face value”. The national government was never extended the authority to “emit bills of credit” as one of its enumerated powers and that power was specifically prohibited to the states.
The Federal Reserve Note (current US $) was never backed by gold, only standardized to it; that made it a faith based “bill of credit”. Therefore, the only way to establish establish the paper money system was to create the fiction that the Federal Reserve System is private. It is not and never was. There is positively no private banking in the US. They are all franchisees of the US$. Every now and then somebody tries to privately create alternative money and the National government’s agents cracks down on them hard. Anyone who conducts any transactions in US$ is already using a nationalized banking system.
FRB, legal tender, fiat money … They are all separate matters and can occur either separately or together. Some colonies and states actually made Spanish dollars legal tender.
When you drive a car, can you do as you please? No. You may own the vehicle but you do not own the road. To get from Southville to Northtown requires you to drive on roads owned by the state, therefor you will drive according to the state’s instructions. Banks using a fiat-legal tender currency are in the same situation. The currency is the ‘road’ on which they drive. Their banking business is only the vehicle they are driving, the state owns the ‘roads’ and dictates how they will drive.
Money is created by banks. When only one bank (be it The Fed or the BoE) is allowed to create money, all of the other banks are merely branch offices. Many people are worried about large corporations gaining a monopoly in their field. A true monopoly is only possible with the muscle of government enforcers preventing competition. The only thing preventing the government from doing a Weimar is stone cold fear. Of lamp posts.
“.If the government owns the monetary system why does it have to borrow money off private institutions to finance shortfalls from its revenue sources?”
It may own the monetary system, but plainly, does not own all the wealth of the system, so it needs to persuade private individuals and various individuals to lend it money, by purchases of T-bills, bonds, gilts, JGBs, and the rest. However, governments, unlike private borrowers, have the power to tax and enforce collection of tax by the threat of jail for non-payers. That is a pretty massive advantage, no?
And the ownership of the monetary system, via such things as central banks, and the legal tender laws, also confers on governments the ability to inflate away their debt burdens, something no private borrower could easily do.
You cannot have a capitalist free market when the currency is socialistic, it’s as simple as that.
(In the US) a monopoly was put on money so as to avoid some of the economic pitfalls of the 19th century. All we got were other pitfalls that, if less frequent, were more severe. Forceful intervention into the economy and the business cycle only creates higher highs and lower lows. The government doesn’t create anything, it merely moves the pieces around differently. They can play with amplitudes and frequencies, but they will net zero at best. The only growth in quality of living is greater productivity per capita and the freedom to enjoy it peacefully. Monetary shenanigans simply puts more power in the hands of the selected few.
(In the US) a monopoly was put on money so as to avoid some of the economic pitfalls of the 19th century.
I disagree. Without a national, single, legal tender currency, the simultaneously enacted 16th amendment would have been so gameable as to be utterly unenforceable. Imagine the possibilities for calculating your income when there are an unlimited number of currencies to move among. Some of those currencies might even exist for the sole purpose of tax avoidance.
These two debutantes (the Fed System and taxes on income) arrived hand in hand because it was the only way income taxes would get to dance.
Fair enough history, Midwesterner, but Brad’s point that nationalized money increases the amplitude and frequency of booms and busts is a good one.
Brad, just to be clear, I am very definitely in full agreement with all of your other points.
Alsadius.
Before 1913 the Feds were not into printing many Dollars at all – sure the Second Greenback Case (after new Judges were added – which meant that Chief Justice Chase’s judgement that government fiat money was unconstitutional) ruled that it was O.K. to do it – but the Feds did not really go for it.
The Federal Reserve System took America away (step by step) from gold and silver coin (really gold – as the exchange rate for silver was rigged, as governments normally do) and F.D.R. in 1933 (with his unconstitutional voiding of private contrats and his armed theft of private property) completed the process – although Nixon gets the blame (all he did was remove the legal fiction that the Dollar was still constitutional gold in 1971 – the only people who could actually claim the gold were other governments and they were claiming all the gold America had, so actually, within the insane context, Nixon was CORRECT to do what he did, the B.W. agreement was just nuts).
“Money has always been governmental” – not so, read Carl Menger “Principles of Economics” (1871) for how money evolves in trading.
As for the history – even if one considers “no State may have anything other than gold or silver coin as legal tender” as government money (because government mints the coins) it is STILL WRONG.
There were many private mints in the American West – people took their gold or silver to them and (in exchange for a small fraction of the gold or silver) the private mint would produce certain weight and fineness of coin. They lived by their reputation – if a private mint cheated people they stopped using its products (it could not put them in prison – as the government can).
Congress banned private mints in the 1850’s – but there is no reason why (if government would just get out of the way) they could not be restored within days.
As for the monetary system before 1913 – hardly perfect, (lots of credit expansion – hence boom/busts under the National Banking Acts), but vastly better than the system after 1913.
“But I want drafts – paper and computer money”.
You can have all that under a fully private system – just as long as there really is the gold (or the silver – or whatever your contract agrees is money) in the bank you say it is in.
“But there is no such commodity in the bank – but we want the loans anyway…..”
Ah, we come to the truth.