An excert from:
Nixonomics at the New York Times
by Gary North
The Establishment can no more conceive of money without a central bank than it could conceive of television programming standards without the Federal Communications Commission in 1970 or airline ticket pricing without the Civil Aeronautics Board in 1977.
Established in 1913, the Fed was to be a banker to the nation's banks, controlling the money supply and, thus, the value of the currency. Without a Fed, someone else would have to handle these (and other) tasks of central banking.
Under the FED, there was monetary inflation in the World War I era, then the recession of 1920-21, and then the monetary inflation and bust of 1926-30, followed by the Great Depression. Stability? There was none.
"Money," observes the Fed historian Allan H. Meltzer, "does not take care of itself." But who else could regulate the value of money? And regulate its value in relation to what?
Why doesn't money "take care of itself"? Because governments want to control it. Contract law serves the other markets. Why not money? Why should money be under the control of a system of 12 privately owned banks that are under a government board?
In its founding days, the United States defined the dollar by an explicit weight of gold or silver.
No, it didn't. The dollar was always a silver standard. Then a price control with gold was set by the government, which led to Gresham's law. Sometimes gold would be in short supply, sometimes silver. That is what price controls produce: gluts and shortages.
During the first half of the 19th century, state-chartered banks issued notes, preferably backed by metal, that circulated much as dollar bills do today. But since these banks were private, and differed widely in their standards, their notes were accorded different values. In effect, the country had lots of "monies."
Exchange rates set the value of these notes, just as the free market does in the currency markets today. With computerization in our day, this is no problem. The government can set what currency it requires for tax payments. Gold would be a good choice. The government does not need to set currency ratios. It does not need to monopolize money. But politicians want to.
The United States moved to normalize the situation during the Civil War. It restricted the issuance of notes to more uniform, federally chartered banks, which were required to hold Treasury bonds (as well as gold) in reserve.
The government did this to gain more control over the money supply. It had suspended payment in gold in late 1861 – a violation of contract. Then it created "greenbacks" – unbacked paper money – in a wave of price inflation. The South did the same, only much worse. It was theft: first the suspension of specie payments, then from the people through inflation.
Should the Fed be interred, this abbreviated history provides some clues about alternatives. One solution would be for private banks to issue money – perhaps bearing the likeness of Jamie Dimon and the seal of his bank, JPMorgan Chase. Alternatively, the Treasury could do it.
Private agencies of all kinds could issue money. The market would decide which to use. Money tied to gold or silver would enjoy a great advantage. Banks do this now, but without being tied to gold. Their digits are money.
If the government ever does this, then hyperinflation is a sure thing. This would be greenback economics, which is always political and inflationary in modern times. On greenback economics, click here.
A GOLD STANDARD
As long as contracts are not violated, private money would work far better than the Federal Reserve's legalized counterfeiting does. Any firm could issue an IOU for gold or silver or platinum coins of a specific weight and fineness. Just be sure it has the metals in reserve.
But what will the money represent? Gold is the first obvious answer. James Grant, the newsletter writer, author and gold bug par excellence, asserts that gold money is superior to the "fiat" money of the Fed. By fiat, he means that it has value only because the Fed says it does. (Representative Paul, less diplomatically, refers to Federal Reserve notes as "counterfeits" and to the Fed as a price fixer.)
Grant is correct. Paul is correct. Fiat money is counterfeit money. Let the banks issue warehouse receipts 100% backed by gold. Contract law will take over. There will be a market for gold coins.
Let us interject that in any monetary system, some authority must fix either the price of money or the supply. McDonald's can either set the price of a hamburger and let the market consume the quantity it will – or, it can insist on selling a specified quantity, in which case consumer demand will determine the price.
I will not let "us" interject anything of the kind. There is no logic to it. Gold, silver, and platinum are limited by mining costs, but there is no fixed money supply. There never has been in man's history. The statement is conceptually ludicrous and historically ludicrous. No authority need fix either the supply or the price of anything.
The Fed has a similar choice with money. The Bernanke Fed, which is trying to stimulate the economy, regulates the price of money – the interest rate – presently 0.0 percent. Paul Volcker, who assumed command of the Fed in 1979, when inflation was rampant, chose the opposite tactic. Mr. Volcker provided a specific (and, dare I say, miserly) quantity of liquidity, letting interest rates go where the market directed – ultimately 20 percent. There is an element of arbitrary choice either way.
The element of arbitrary choice is the heart of the problem: it will eventually be misused. Central banking's cheerleaders want us to believe that wise, salaried bureaucrats should control the monetary base. There is a problem here: these bureaucrats then must let commercial bankers, speculators, and governments decide what the money is worth. They cannot determine this on their own authority.
The gold standard, in effect, replaces the Fed chief with the collective wisdom (or luck) of the mining industry. Rather than entrust the money supply to a guru or a professor, money is limited by the quantity of bullion.
He's got it! The private property rights system restricts the money supply, so that neither politicians nor central bank committees are in charge of our money. We can trust mining costs with greater confidence than politicians with badges and guns and a printing press.
The law in the early 20th century stipulated that dollars be backed 40 percent in gold. This fixed the dollar in relation to metal but not in relation to things, like shoes or yarn, that dollars could buy. This was because the quantity of bullion that banks had in reserve, relative to the size of the economy, fluctuated. As a historian noted, it was as if "the yardstick of value was 36 inches long in 1879 ... 46 inches in 1896, 13 and a half inches in 1920."
Whoever that unnamed historian was, he was an economic ignoramus. Money is not a measure. It is a social institution based on contract. The government wants to get control over it, so that it can create fiat money and thereby impose an inflation tax rather than tax voters directly.
The gold standard – which John Maynard Keynes termed a "barbarous relic" – led to ruinous deflations.
There have never been any ruinous deflations based on a contracting supply of gold. Gold's supply constantly increases, though slowly. There were many deflations based on fractional reserve banking – fiat money allowed to commercial bankers by the state – when the over-leveraged (over-counterfeited) banks got hit by bank runs.
When gold reserves contracted, so did the money supply. David Moss, a Harvard Business School professor, asserts that the United States experienced more banking panics in the years without a central bank than any other industrial nation, often when people feared for the quality of paper; specifically, it experienced them in 1837, 1839, 1857, 1873 and 1907.
States authorize commercial bank counterfeiting. The Constitution does not authorize the U.S. government to intervene to stop this practice. That is what federalism is all about. That is what the Tenth Amendment used to be about, before it was gutted by the Supreme Court.
THE CREATURE FROM JEKYLL ISLAND
The Establishment occasionally admits that the November 1910 meeting on Jekyll Island was a quiet gathering. But it was not a conspiracy. Not at all. The difference is this. . . There must be a difference. . . Anyway, it was all for the public's good.
The Fed was conceived to alleviate such crises; that is, to be "the lender of last resort." This function was fulfilled, ad hoc, by the financier J. P. Morgan in the panic of 1907. But Morgan was old, destined to die the year the Fed was created; some institution was needed. Hostility toward central banks, an American tradition, was such that in 1910, lawmakers and bankers convened at Jekyll Island, Ga. – under the ruse of going duck hunting – to sketch a blueprint.
The FED was conceived to bail out the big New York banks. It was justified as a tool to alleviate crises. And, yes, it was a conspiracy consummated on Jekyll Island by a group of bankers and Senator Nelson Aldrich, John D. Rockefeller, Jr.'s father-in-law.
Part of the aim of the new central bank was a more flexible money supply – for instance, to lend to farmers in the winter. Another was to lend into the teeth of a panic – though only to solvent institutions and on sound collateral. The insurance giant American International Group – a controversial bailout recipient in 2008 – would not have qualified.
AIG surely qualified in 2008. That is what "flexibility" is for: to bail out insiders.
Farmers in the winter. Right! As if the FED cared a whit about farmers, back then or now. Did the FED save farms in the 1920s? No. Did it save farm area banks, 1930-33? No. In any case, prices for grain adjust in winter. That is what pricing is for. That is also why interest rates change. Conditions change. You don't need counterfeiting to smooth out supply and demand based on seasons.
In its early days, the Fed maintained the gold standard – forcing it to maintain tight money even in 1931, in the midst of the Great Depression. Economists today regard this as a mistake.
This is Milton Friedman's misleading intellectual legacy. The FED did not tighten money, 1930-31. See the chart provided by a vice president of the St. Louis Federal Reserve Bank. The monetary base was flat.
Money shrank because 9,000 banks went under. That ceased in 1934, when the FDIC was set up. The FED had no authority or ability to save 9,000 banks.
The circumstances are relevant to those who envision a Fed-less future. England had departed from the gold standard; worried that the United States would follow suit, people demanded to trade dollars for gold. Professor Meltzer deduces that the gold standard doesn't work for one country alone; the bad paper money corrupts the good.
This is the ill-informed person's view of Gresham's law: that the free market rewards bad money. It doesn't. When there are government-imposed fixed exchange rates – price controls on money – the artificially overvalued money drives out the artificially undervalued money. In other words, price controls create gluts and shortages. Every economist knows this. Any economist who promotes Gresham's law without explaining this price control factor is trying to put the shuck on the rubes. Lowenstein is one of the rubes who got shucked.
Read the whole article:
http://www.lewrockwell.com/north/north979.html
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