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Samizdata quote of the day Given that we think, as most of us seem to do, that the production of such goods as cars, vacuum cleaners, and frozen vegetables should take place in a regime of market competition, why do so many among us nevertheless agree that it makes sense to exclude the production of money from these same forces? Why must the production of money be entrusted to a monopoly called the central bank?
– My thanks to Jerzy Strzelecki for drawing my attention to this mises.org piece by him, written when the recent banking tumult was at its most tumultuous, entitled The School of Salamanca Saw This Coming. Quite brief and well worth a read. You don’t have to believe in God to understand phrases like “usurpations of God’s knowledge”.
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“Why must the production of money be entrusted to a monopoly called the central bank?”
Because if it wasn’t then we wouldn’t be able to:
a. control you more or less completely
or
b. steal all your wealth by continually devaluing the tokens in which you hold your wealth by simply printing more for us.
And that wouldn’t be very good for us because our ultimate goal is . . .
We should bear in mind that previous experience with ‘private’ monies has shown that those who control them are every bit as willing to debase them and defraud their holders as governments are. The fact that one does it for motives of greed and cupidity, while the other does it for motives of political advantage, matters little to the consumer who got screwed.
Whether cowrie shells or bits of paper, and regardless of who ‘makes’ them, tokens of wealth will always be debased, will always be manipulated.
llater,
llamas
It is good to be careful in this area.
For example the free market was discredited in 19th century Chile (and many other places) by the wild “production of money” (or rather bank credit) by supposed “free banking”.
There is nothing wrong with the “private production of money” as long as we are clear what “money” is and what “credit” is.
For example it is a basic rule of logic (in the old sense of logic as “reasoning” – I am not talking about some mathematical exercise) that every bit of money borrowed by someone must first have been saved by someone.
If more money is lent out (borrowed) than has been saved then there is a credit bubble and there will be an artificial “boom” followed by a “bust” (whether one calls this process “fraud”, as the late Murry Rothbard insisted it was, is a debate for another time). And, of course, just PRETENDING that credit expansion is “saving” or “the same as saving” (as Keynes did) is absurd.
So if by “production of money” one means “credit expansion” then NEITHER government or private companies should do it. The question “why should only a government central bank produce money” being similar to “why should only government people rape your children – why should not the employees of private companies rape them as well”.
This is also the case with the production of “bank notes” – it is all very well for anyone to print nice looking bits of paper AS LONG AS no one has to accept them in payment for debts.
This includes (“free banking” supporters please not) in payment of a deposit from a bank.
In short if I deposit gold at a bank and then go to collect it later I should not be forced to take bank notes instead – NOT an artificial example, this was a regular trick of Scottish banks in past centuries. It was easy enough to put gold into them (they were always open for that), but often very difficult to get gold out of them – bits of paper would be offered instead, and if anyone objected too strongly the legal authorities would come down upon them (the depositors – not on the bankers). Popular culture (seeing the Scots as quick to take money – but very slow to pay debts owed, if they pay them at all) has lasted into our own day (although “free banking” writers tend not to talk about it).
Lastly beware of “index money” – no such “price index money” can really be constructed (it is a total botch). But this does not stop scholars talking about it as if it was a real possibility – for example F.A. Hayek did (even though Hayek, in other places in his writings, accepts that no reliable “price level index” can be relied upon).
Anyway for banking and credit expansion de Soto’s “Money, Bank Credit and Economic Cycles” is a good place to start.
All the above being said………………………………
Away from the tricks and snares of credit expansion (of easy prosperty – “castles in the air”) there is nothing wrong with the private production of money in a very different sense.
For example, Birmingham (England) used to be famous for its private coiners.
And in the American West (before the government banned private money production) competition between mints (and fear of losing their REPUTATION) kept the literal “private production of money” honest.
A person would dig up gold (or silver) and take it to a coiner – and in return for a small percentage of the metal the coiner would mint coins.
There is nothing wrong with this “private production of money” at all – indeed it is MUCH BETTER than the government production of money. Much better because a private coiner can not force people to accept his product or demand it in taxes.
However, such “private production of money” is not normally what is meant by these words – normally it is a cover for some form of credit expansion.
Although, lastly, it must always been kept in mind that GOVERNMENT INTERVENTION IN PRIVATE CREDIT EXPANSION JUST MAKES THINGS WORSE.
A classic example is the credit bubble of 1907 in the United States – under the Civil War (early 1860’s) National Banking Acts big New York based banks indulged in credit expansion (i.e. they lent out money that did not exist as real savings – the “private production of money” if one wants to call it that, as most do).
The great bubble of 1907 almost brought down the “financial system” but the House of Morgan managed to hold things together (at a high cost – and it did not avoid a bust, that is not possible, with wide spread economic distress).
The bankers (of both the Morgan and the opposing Rockefeller factions) met in conference at island resort and agreed that the government should underpin the financial system.
The result (after several different efforts) was the Federal Reserve Act of 1913.
However, this meant that the credit expansion (the boom and bust) was much BIGGER than it had been before – it made the situation worse, not better.
It can not be said too many times that “sound business practice” or “being careful” (or whatever) miss the point here.
Credit expansion is not “just another type of business” like making shoes or whatever. One might as well say that a protection racket (“pay up or I will smash your face in”) is just a form of insurance business.
The problem with the early 20th century bankers (whatever one thinks of the modern ones) was NOT that they were foolish or rash.
John D. Rockefeller may have been a Progressive (and, therefore, not high up on my “most liked person” list – although he was more moderate than some people think) but he was a businessman of genius – and a rather careful person as well.
And the Morgans were “good guys” (in so far as anyone was – of course as I am British I am biased, Britain would have lost the First World War had the Morgans not come to our aid) – for example comming to the aid of J.J. Hill when the (Rockefeller backed) Harriamans stopped trying to take over the Great Northern Railroad with bullets and bombs (they did not stop for moral reasons of course – Hill’s men faught back) and turned to legal and financial trickery instead.
It was the SYSTEM of credit expansion (not the abilities or judgments of bankers) that was responsible for the boom/bust of the late 1920’s.
And certainly such moves as “Glass/Stegal” (spelling alert) were nothing to do with the real causes of the Great Depression.
In fact G.S. was simply a “Bill of Attainder” – the largest bank that both took deposites (i.e. retail banking) and engaged in investments on its own account (i.e. merchant banking) was the bank of the Morgans.
G.S. was specificially designed to hit the Morgans by the Rockefeller faction – using the later’s influence in the Democrat controlled Congress in the 1930’s.
It was not just personal spite (although that was involved), the Rockefeller faction stood for transforming the American economy into a series of cartels in the German fashion (this is what the National Recovery Administration of the National Industrial Recovery Act of 1933 was supposed to achieve). And, for all their other faults, the Morgans opposed this transformation.
So the House of Morgan (which had opposed most Progressive pro German moves for the best part of half a century) had to be broken (although, after a fashion, both the family and their company survived – but their story is for another day).
Pinning the Great Depression on a lack of wall dividing retail from investment banking was a lie – but it was a lie that served a useful purpose (from the Progressive point of view).
It distresses me to hear the leadership of the British Conservative party come out with similar words today.
Of course it also distresses me to hear “free market economists” say that credit expansion can work if it is in the hands of experienced bankers.
Whatever faults they had neither the Morgans or the Rockefellers lacked experience, or intelligence, or caution.
It they could not make the idea (the idea of lending out money that does not exist – money that does not come from real savings) work, then no one can.
I don’t see why one has to hedge the freedom to “run a currency” with any conditions.
As long as it is all genuinely free, with no snide privileges being obtained by anyone, what does it matter what I wish to trade in?
Some people may get stung every so often, but no one says the free market will always look after you perfectly.
Presumably for big global deals I will also get some kind of private insurance on the deal, or just trade goods for goods, perhaps gold if nothing else?
Speaking of inventing money from nothing and consequent bubbles, if I may, the following is a little riddle I made for myself when the bailout babble was in full swing about a year and a half ago:
Four bankers had one million dollars on deposit in their respective banks.
One day they decided it would be fun to go into farming and located four good farms at 10 million dollars each.
Applying fractional reserve banking they loaned 10 million dollars to each other and bought the farms where they raised cattle and horses, employed quite a few workers, made substantial return on their investments and enjoyed relaxing weekends.
Who actually paid for the farms?
llamas: Your point is true as far as it goes, but misses the fundamental point about competition. When the Central Bank debases a currency there is little anyone can do about it, except try to spend as much of his cash as fast as he can on something more tangible. This of course means that there is much less incentive to save.
If a number of banks each issue their own legal currency there is somewhere for the public to go if one of them fires up the presses. Further protection is afforded to the public if the currency is backed in any meaningful way.
The debasing bank would soon go bust under these circumstances.
To say that we have the same option now to exchange our pounds (or in my case Icelandic Krónur) for some other currency is wrong. When there is but one legal tender in a country you are forced to do your business in that currency, unless you are rich and/or powerful enough.
Money should be left to a free market even if it is subject to debasement. It makes more sense to tie Force to actual cases of fraud and leave it that instead of turning over the coin of realm to the State, who will be equally likely to resort to debasement with its Force not only tied to it full on, but that Force being used to sustain debasement.
To me it is like the Firemen in Fahrenheit 451. The rationale becomes so twisted over time that those who are hired to protect you become the very thugs you are trying to avoid, and they have the veneer of legality on their side. And vast majority follow blindly – a product of the State’s institutions made to just that.
John B.
And when the people the bankers bought the farms off tried to cash the cheques……………….
Do not fear – another bail out is here, as the banks are “too big to fail”.
For example, Citigroup has been bailed out at least four times in the last couple of decades.
Does not sound very free market to me – because it is not free market.
You can not pay for farms with money that does not exist – not without someone else paying in the end.
And “I will expand the money supply – the lender of last resort will come to my aid if [i.e. WHEN] things go wrong” is not free market.
Still I wrote a very long comment already explaining this.
By the way, the lastest scheme – a “levy” on banks and other such to “insure” against bank failures, “thus meaning the taxpayer will not be forced to pay”.
If anyone thinks this idea is either “free market” or will work – you should be hit over the head with a claw hammer.
Sorry if that breaks the non aggression principle.
I think we’re all agreed. Now whatever happened to those lamppost t-shirts someone suggested?
Paul, you say:
“The great bubble of 1907 almost brought down the “financial system” but the House of Morgan managed to hold things together (at a high cost – and it did not avoid a bust, that is not possible, with wide spread economic distress).
The bankers (of both the Morgan and the opposing Rockefeller factions) met in conference at island resort and agreed that the government should underpin the financial system.
The result (after several different efforts) was the Federal Reserve Act of 1913.
However, this meant that the credit expansion (the boom and bust) was much BIGGER than it had been before – it made the situation worse, not better.
and:
Whatever faults they had neither the Morgans or the Rockefellers lacked experience, or intelligence, or caution.
It they could not make the idea (the idea of lending out money that does not exist – money that does not come from real savings) work, then no one can.”
If I may change the emphasis a bit – bring in a touch of the conspiratorial here – Perhaps it all runs deeper and in reality, in establishing the Fed, Rockerfeller and Morgan both actually got what they had wanted – planned ?
Or perhaps it all happened by chance, this great revolution that took away the gold and the wealth?
Perhaps it is just a semantical question, but how is MONEY “produced?”
Accepting that my training dates back to study of Money, Credit and Banking , by Westerfield 1938; rev 1947, the idea of producing for the purpose of serving as money elements or items which meet the definition or functions of money is a weird concept to me.
Of course, things are produced that serve as “store of value;” and perhaps coinage (specie) was one of those, when coinage served most of the other functions as well.
Enlightenment please.
RRS – the production of metals to serve industrial purposes must have been historically prior to their use as a medium for storing value (in jewelry etc), which itself must have been prior to the use of metals in coins as a general medium for trade. In other words, the function of metals (and other goods prior to metals) as money emerged subsequent to the satisfaction of the earlier purposes for their production. The creation of money was a kind of market “accident”. Any help?
I’m a bit of a novice at this, so please bear with me. I’ve always taken money to be a sort of Watt, ie a unit of ‘work done’ so to take John B’s riddle, would the money lent out be ‘work to be done’ and the repayments on those debts be in ‘work done?’
So as the farms produce wealth (horse meat, eggs or whatever) and use the proceeds to pay their debt they are converting ‘potential dollars’ into ‘real dollars.’ The flaw being that the two types of dollar are indistinguishable from each other in practice, and that the production of potential dollars is so high that real dollars will never catch up. Does that make sense?
RRS, money is just a way of keeping score of who owes what to whom when the basic barter system is stretched too far. For instance, if I’m a fisherman who’s daughter is getting married and I want to throw a party, I’m gonna need fruit, a pig, some coconut beer etc. etc. but I can’t swap fish for it all since the guys I’m getting the stuff from don’t need that much fish right now.
Now we can scratch marks in the sand as to who owes what, but a high tide could wipe out our database, so some bright spark starts drilling holes in cowrie shells, and we’re off and running.
Next thing that happens is someone offers to look after all the shells to make sure there’s no cheating, (for a small fee of course).
When the hunters from the interior want in on the act, we have to work out how many pebbles are worth a cowrie shell, and when the mountain men appear with their shiny metal and pretty stones, foreign exchange becomes the most important part of banking.
Then a storm comes along and wipes out my house and boat as well as taking out the coconut palms and banana trees but leaving the bank intact. So we’ve got too much money chasing too little wealth and we get out first inflationary cycle.
Life’s a beach as they say.
Sorry, got called away. Where was I.
Oh yes, money is just a way of keeping score in a barter system, so a credit card is money, a mortgage is money, a bundle of mortgages is money even when they’re bundled with a load of loans for new sofas and/or cars. And all these currencies are valued against each other in a wide variety of different currencies.
And then ‘Tishoo, Tishoo, we all fall down.
A storm, eh? Yeah, a beach she is…
Wh00ps: that made perfect sense to me, but I am a novice too.
To cut a long (deliberately created?) confusion short, any “money” (that is: a promise to give some wealth, “to pay”, be it pig, or plasma TV) that is not backed by gold or something of value is a potential con.
If then someone gets the power to force you to use their particular money, then they can force their con onto you by making their money less valuable.
Competing monies would at least give you a choice of who you preferred to trust to redeem your wealth to you.
Garet Garrett had some good comments on the con (or revolution as he preferred to call it) at:
http://mises.org/daily/2726
So far, the responses are about the “functions” of what meets the generally accepted definition of money (which it seems all distinguish from simple “currency” as one of its forms).
It is the PRODUCED attribution that starts the error of discourse.
Take an example popularized (correctly)recently by Niall Ferguson – how did “credit” come to serve most of the functions of “money?” Was it “produced?”
There is the example from the archaeological evidence of the use of ivory “markers” being used as primitive “letters of credit” amongst semetic tribes and families in cross-desert and silk road trading.
But, none of those developments can be classified as “production.”
What may be taken from the original text is the issue of how credit (serving as money) is GENERATED, from what sources and for what purposes.
Perhaps that is what is at the root of the Ron Paul type concerns.
RRS, I think this idea of production of money is getting too complicated. Money is just a way of keeping score, which is why anything from a cowrie shell to a shiny bit of metal to a piece of paper signed by the governor of the BofE to a piece of plastic with a few numbers on it to a few thousand bits winging their way round the world via satellite can be money.
The Paulian thing is about trust. Perhaps I’m reading your question wrong but I reckon what you’re really asking about is what produces trust.
If we’re stuck in a lift for a few hours with a pack of cards and a box of matches then if we all agree what a match is worth then, providing we all trust each other, we can play poker till someone gets us out.
John B.
I do not think that anyone connected with the Morgan’s wanted the Great Depression. Although a pro Morgan man (Milton Friedman’s hero – the head of the New York Fed, Ben Strong) had more to do with the increase in the money supply in the late 1920’s than anyone else.
“Forgive them father, for they do know not what they do” (sorry for that).
As for John D. Rockefeller and his allies – well yes they tick the boxes for everything that our kind (“the right” for want of a better term) get concerned about.
From their links to the Council of Foreign Relations – to that mixture of Fascist and Communist style and signs in Rockefeller Plaza where (logically enough) NBC is based (in a building covered with signs of their collectivist ideology).
HOWEVER – old John D. did not want the Great Depression either.
Sometimes billionaries are not the wonderfully informed people one expects.
For example, I have heard both Warren Buffet and Bill Gates speak on American and world politics – and they are clearly no better informed than ordinary people I meet in the park I work in.
And NO Buffet and Gates are not trying to con people – they really are as ignorant as they appear to be.
Just because a man is very good at making money does not mean he knows anything about anything else – “do not take a rich man’s opinions in the way you would take his cheques” as the old saying goes.
Even billionaires in the NEWS business can be wildly off key.
For example Ted Turner does not know “about the same as an ordinary person” – he knows LESS.
Listen to the man speak – he is a MORON (not just ignorant – but also stupid). An ordinary person would not go on about how the KGB was a perfectly honourable occupation in the USSR – an ordinary person would think “KGB – they were a bit dodgy they were” (that is way beyond Mr Turner’s level of thought).
“But he is very rich” – so?
Lastly I just (a week ago) I heard Mort Zuckerman on television – the billionaire owner of the New York Daily News and U.S. News and World Report and ……….
He was talking to Neil Cavuto – and the conversation turned to Barack Obama.
It seems that Mort Z. has been surprised by various things that Barack has done …….
And Mort Z. really was surprised – border line astonished.
These were things that anyone who had spent an hour or so researching Barack Obama would have PREDICTED he would do.
But Mort Zuckerman was too busy making zillions of Dollars to bother reseaching the man all his publications supported for President of the United States.
Mort Z. did not research him – and did not set any of his vast staff to research him either.
If billionaries acted in business with the same casual attitude they act in politics (and it really is a casual attitude – it is not some dark plot) one would step over them on the street.
I have never seen any evidence that billionaries know more about what is going on than people selected at random.
Okay. I am going to post a piece from Garrett if I may. It is in the article mentioned above, at the end of the section: Problem 2: To Seize Economic Power:
All through the commotion of these unnatural events one end was held steadily in view, and that was a modern version of the act for which kings had been hated and sometimes hanged, namely to clip the coin of the realm and take the profit into the king’s revenue.
The ninth and last step was to devalue the dollar. In his message to Congress asking for the law that confiscated the gold, the president said, “I do not believe it desirable in the public interest that an exact value be now fixed.” Nevertheless, on January 31, 1934, the day after the act of confiscation was passed, he did fix the exact value of the dollar at 59 per cent of its former gold content. The difference, which was 41 cents in every dollar of gold that had been confiscated, was counted as government profit and took the form of a free fund of two billions in the Treasury, called a stabilization fund, with which the president could do almost anything he liked. Actually it was used to take control of the foreign exchange market out of the hands of international finance.
Control of money, banking, and credit had passed to Washington. Thus problem number two was solved.
The reason for giving so much attention to it is that it was the New Deal’s most brilliant feat; and certainly not the least remarkable fact about it was the skill with which criticism was played into making its fight on false and baited ground. Each step as it occurred was defended, and therefore attacked, on ground of monetary policy, whereas the ultimate meaning was not there at all.
Consider first the logical sequence of the nine steps; consider secondly that if national recovery had been the end in view many alternative steps were possible, whereas from the point of view of revolutionary technique these nine were the imperative steps and the order in which they were taken was the necessary order. Then ask if it could have happened that way by chance.
Mike & Kevin B.
Mike- You are taking me back almost 65 years ago in study of what you raise. But, certainly you are correct in noting that “markets,” which basically reflect or encapsulate how peoples exchange goods and services (goods are “produced” by serices – Bastiat) gave rise to a principal function of “money.”
That generated the broad categories of barter economies and money economies. The evolution of “mediums of exchange,” which mediums were not always uniform nor commonly accepted, expanded both the kinds and extent of exchanges (onward exchanges), and exposed goods and services to wider distributions.
S0, the scholars would likely quibble that “markets” did not “create” the concept of money, per se: but rather evolved one of the functions that we assign to money today – the medium of exchange.
The evolution and refinement of the other functions we observe today is indeed a correlation of the evolution and refinement of “markets.” Also sprach RRS!
Kevin B. –
If we were to say that money has only one function, I think you pick medium of exchange, the fable might stand.
But, a summary of the functions and kinds of money may trigger some more open thinking.
1. The Money Commodity (that is, what is used for its functions)
2. Medium of Exchange (markets)
3. Standard of Value and Unit of Account (people usually forget the first)
4. Store of Value (more later)
5. Bearer of Options (provides choices)
MORE: the best I learnt was: “Money is a power for demand on future goods and services, inclusive of the discharge of past incurred obligations.” The future beginning in the next instant, and like the past, infinite.
And, as noted in a Tawain house of pleasure:
“A Man is never old until he runs out of money.”
RRS, I had a post smitten earlier in which I felt you over-complicated the function of money and it was trust that needed to be produced.
I’ll think about what you say above, but for the moment I’m sticking with money as the medium of exchange and trust as all the rest of it.
I have been away from Samizdata for a while, and thus apologize if this has already been linked… If not, enjoy – and you will, even if you, as I, detest rap. Pure, unadulterated genius.
“…money as the medium of exchange and trust as all the rest of it.”
Agreed. “Trust” has got to be crucially important for the functions of money to work on any scale.
RRS – I’d obviously misunderstood what you were up to in asking how money is produced!
“The evolution and refinement of the other functions we observe today is indeed a correlation of the evolution and refinement of “markets.” Also sprach RRS!”
“Money is a power for demand on future goods and services, inclusive of the discharge of past incurred obligations.”
“A Man is never old until he runs out of money.”
Oh “store of value” indeed! Unfortunately, I don’t think aphorisms could serve the general medium of trade function – although I might accept them as advanced payment on alcohol, I don’t think they’d get me very far in any Taipei house of fun and frolics!
CREDO – I believe (trust) – See (hear), Iago.
That is the root of CREDIT which is the principal form of money for exchanges, and for storing value (other than hard assets).
However, on the basis of recent experience, we might ask are credits really based on “trust” or SWAGS (sophisticated wild-ass guess), Or, to go further, what establishes trust – that sure ain’t “produced.”
I think it may be even more fundamental that money *is* credit. As such, the two may be inseparable.
Mike, unfortunately, I don’t think it’s so much trust as “Willing suspension of disbelief” or even “Hobson’s choice”. We all know that the government and its crony organizations are slowly bleeding us dry by manipulating the money supply, there’s simply no trust to be had.
It’s no wonder the communists and socialists gain ground like they do. Libertarianism may find its greatest gain in condemning these manipulations. Though it is perhaps too nuanced an argument.
Richard, yes, it is a powerful, and thus educational, example of the thievery of the powers-that-be. And it is very simple, not nuanced: They force you to use a currency, and then devalue it, as an on-going process.
It seems most people think inflation is just one of those things that happen.
They need to be shown that it is very deliberately made to happen in order to steal wealth.
“Mike, unfortunately, I don’t think it’s so much trust as “Willing suspension of disbelief” or even “Hobson’s choice”. We all know that the government and its crony organizations are slowly bleeding us dry by manipulating the money supply, there’s simply no trust to be had.”
Of course; I had in mind the concrete trust of knowing your little coins and bits of paper will be accepted for the vast majority of common exchanges. That particular abstraction doesn’t filter into most folks’ perception of everyday trade until it is too late.
John B.
You have correctly described what F.D.R. (a shit of the first order – treated as a little plaster saint in the school textbooks of course) did.
However, to prove your case you have to now prove that the Morgans and the Rockefellers supported it.
Remember the first Morgan died in 1913 (some 20 years before), did the surviving members of the family (who still controlled the House of Morgan) support what F.D.R. did?
The effort that went into breaking the House of Morgan (the real objective of insisting that retail and investment banking be made seperate – Glass S.) would suggest they did not.
Even Rockefeller is not so easy to put into a box as many people think.
Certainly he was a Progressive (and I detest such folk) – but he was not an extreme one (in spite of all that weird mixture of Fascist and Communist stuff that makes up Rockefeller Plaza where NBC is based).
Also he was very old man in 1933 (he finally died in 1938) and the younger members of the family (a family of shits I agree) were not really in their prime yet.
So I doubt that F.D.R. was really a tool of the Rockefellers – although, yes that faction supported him (partly as a way to break the House of Morgan of course).
Bad error by me.
Rockefeller junior was very much in his prime in the 1930’s (as was his weird wife) – he was in de facto control of the company long before his father died in 1937 (not 1938 as I typed).
I know this stuff – why did I forget it?
Senility possibly.