theory of money

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The theoretical foundation for the book comes from Ludwig von Mises, the great Austrian economist, who pointed out that credit is a claim on resources. Tamny reasons that if credit is a claim on resources, then new credit cannot be created unless new resources are created. This renders the idea of ‘excess credit’ an oxymoron. And if there cannot be more credit than output than there cannot be an excess of credit over output.

Tamny makes the argument that new credit can only be created if there are new resources that are also created. This argument is incorrect.

Credit is a claim on resources and when credit increases and there is no increase in resources, the price paid for those resources also rises. Therefore there is no necessity for an expansion in resources, for there to be an expansion in credit. This is why a credit expansion leads to inflation.

Credit, when newly created, is not distributed evenly. Certain institutions and people receive that credit first and the new credit gradually disperses throughout the economy over time.


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The theoretical foundation for the book comes from Ludwig von Mises, the great Austrian economist, who pointed out that credit is a claim on resources. Tamny reasons that if credit is a claim on resources, then new credit cannot be created unless new resources are created. This renders the idea of ‘excess credit’ an oxymoron. And if there cannot be more credit than output than there cannot be an excess of credit over output.

This line of reasoning causes Tamny to call in to doubt the Austrian Theory of the Business Cycle, at least the popularly understood versions of it. After all, if there can’t be excess credit at all, then there certainly can’t be excess-credit-driven over-production. Yes, some parts of the economy can grow too much, due to credit mis-allocation, but the economy in general cannot be made to grow above capacity due to allege ‘excess credit’. Thus, the Fed doesn’t cause economy-wide bubbles, only sectional distortions. Central bank interventions such as interest rate setting, on balance, actually decrease the expansion of the economy – perhaps even during the ‘bubble’ period.

On the way to this conclusion, Tamny takes aim at the idea that under a fractional reserve banking system, new money is created in the banking system according to a ‘money multiplier’. In doing this, he stays faithful to supply-side thinking, but veers greatly from almost every other camp, including the mainstream.

I welcome Tamny, a former editor of mine at Forbes and a good friend, into this debate. If the ideas he’s attacking can withstand the attack, then they’ll be stronger for having been challenged. If not, then good riddance to them. The theoretical foundations of the money multiplier are in need of a shaking up. So is monetarism. The Fed quadrupled monetary base in response to the Great Recession, and many commentators called for imminent spikes of high, perhaps even hyper, inflation.

Since early 2010 I, myself, have been a short-term inflation dove (but long-term inflation hawk) because I had  concluded that financial over-regulation and the European debt crisis would cause money to be hoarded both domestically and abroad, and that inflation would tarry until those issues had resolved themselves.  This put me at odds with many of the most highly visible Austrians and monetarists, many of who have been veritable Chickens Little clucking about imminent hyper-inflation. This has given ammunition to left-of-center critics such as Paul Krugman.

Tamny’s answer as to why exploding led balance sheets have not led to exploding price inflation is that the Fed cannot create money and therefore quadrupling its balance sheet does not cause inflation.

I think the Austrian answer would be that the Fed cannot create money by itself, but that it needs banks and their money multiplier to do so. For Rothbard and his acolytes, this process is akin to counterfeiting and should be illegal because it is a form of fraud. To tolerate fractional reserve banking is to invite exploding inflation. The milder form of this view comes from monetarists who favor higher capital requirements for banks to reign in the money multiplier.

But what about the natural brakes on the multiplier? Banks don’t just lend ad infinitum: There are many nations in the world which do not place any reserve requirements on their banks. What prevents them from infinite money multiplication? Answer: Incentives. If bankers over-lend, they will end up lending to those who are unlikely to repay. Banks end up eating the loss…or at least suffering the humiliation of bail-out and Federal takeover.

One of the key issues goes back to a debate about what this stuff called M2, quasi-money which results from the money multiplier actually is. For supply-siders, these deposits are called credit. For Austrians, they are called money. But although this argument has a semantic aspect, there are more than semantics at issue: there’s a methodological difference.

Austrians tends to focus on theory: definitions of words, deductive processes of reasoning. Tamny comes at this as a financial journalist first and a theoretician second. He sees a world in which the Fed has exploded its balance sheet without seeming to have made much difference. He sees a world in which most business lending is done outside of the world of banks and their fractional reserve powers of multiplication. He sees a world in which credit seems quite difficult to get, even though the Fed has embarked on ‘easy money’ policies. And if reality doesn’t square with the traditional theories, even of allies, then so much the worse for the theories.

When I asked Tamny in a recent interview where debasement does come from (if not from the Fed) he acknowledged that he really doesn’t have a firm answer, and called for the thinkers of the various schools to get together and hash that question out. I think that would be a good idea. What I’ve always loved about supply-side thinking is its willingness to look at the world as it is and learn economics from the economy instead of from economists. On the other hand, what I’ve always loved about Austrian economics is that it sees economics as the science of human action, which potentially makes it highly adaptable. If economics is big enough to include all the ways people try to get what they want, then its theoretical limits are as unconstrained as the variety of human wants and means. This makes Austrian theory expandable enough to include anything which we economists can observe.

Tamny has revived moribund monetary theory debates between supply siders and Austrians of yore by once again taking up the supply side arguments against money multipliers. By doing so he has done all the camps a service by shaking things up enough to create an opportunity for all of us to improve our thinking.

I sat down across a Skype line with Tamny recently to talk about Who Needs the Fed?, what supply-siders can learn from the working class revolt which swept Trump into office, and a few other topics. You can listen to the interview here.

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“Money, as money, satisfies no want; it’s worth to any one, consists in its being a convenient shape in which to receive his incomings of all sorts.” – John Stuart Mill, Principles of Political Economy

Daily Telegraph columnist Jeremy Warner has concluded that the euro has “destroyed” Europe. It’s when journalists write about currencies that one wishes Adam Smith, David Ricardo and John Stuart Mill (to name three) were still around to relieve them of their confusion.
Currencies don’t “destroy” a country or continent simply because currencies quite simply are. They’re a measure. Nothing else. As Mill long ago put it, they materialized thanks to “the want of a common measure for values of different sorts.” I’ve got bread, but I want the vintner’s wine. The problem is that the vintner has no interest in my bread, though he lusts for the butcher’s meat. Money is the “common language” that allows those three producers of different goods to trade with one another despite wants that are the opposite of coincident. We produce so that we can get money, but in truth, we produce so that we can get all that we don’t have.

Thinking about so-called “money supply,” it’s logically abundant where there’s lots of production, and scarce where there’s very little economic activity. Money is the proverbial “ticket” that can be exchanged for everything else, so it makes sense that tickets are in copious supply wherever the rich and economically productive are, and then it similarly makes sense that there’s always a “shortage” of tickets wherever the unproductive hang their hats. Applied to Warner’s London, Chelsea, South Kensington and Belgravia rarely have a “Pound supply” problem, but Brixton, Hackney and Peckham nearly always do.

What needs to be stressed here is that “money supply” is merely an effect of productive economic activity, not a driver of it. To see why, Warner need only consider a theoretical attempt by the Bank of England to stimulate lending in Dagenham, a relatively poor (by London standards at least…) part of city. The central bank would buy bonds from banks there, suddenly banks in Dagenham would have lots of Pounds to lend, but they would exit the downtrodden area between breakfast and lunch. Banks don’t long stay in business by making loans to people and business who lack the means to pay them back. In that case, a Pound supply “increase” in Dagenham in the morning would be in Mayfair by the afternoon.

The Dagenham example is a reminder that when central banks naively seek to stimulate economic growth, they do no such thing. Money always and everywhere goes to where it’s treated well. Central banks can’t alter this reality despite the wishes of a discredited economics profession. Attempts to boost money supply in economically weak areas will always fail, while at the same time well-to-areas don’t need central bank “ease” to begin with. Savers are lined up trying to direct their wealth toward those with the means to pay monies borrowed back. The economically productive quite simply don’t need the very central banks that similarly can’t help those who aren’t productive.

That’s what’s so comical about Warner’s assertion that what little European growth there is exists thanks to “the drip feed of central bank money printing.” Really? How? Economic growth springs from talent being matched with capital on the way to production. If we then accept Warner’s gross oversimplification of ECB policy as “money printing,” why on earth would the latter drive economic growth?

Implicit in “money printing” is a devaluation of the euro that would logically slow investment. Investors buy future currency income streams when they invest, which tells us that printing (usually an explicit attempt by monetary authorities to devalue a currency) would be an investment deterrent. Warner might reply that the printing would stimulate buying, but the latter isn’t growth. If buying or consumption were the same as growth, policy for the Pound, dollar and euro would be heavily accented toward constant devaluation to reduce any incentive to save. We would all be very poor since wealth always and everywhere results from saving. Devaluation mocks the saver while rewarding the prodigal at which point growth capital is scarce. Somehow Warner thinks devaluation powers growth.

Of course, all this speaks to the obvious problem with Warner’s rather confused argument. A currency on its own could never “destroy” anything, and certainly not a continent. At the same time, bad currency policy can weaken a country or a continent. When money floats in value it’s less reliable as a measure meant to foster trade and investment. To blame a currency itself for a country or continent’s problems is the equivalent of a short person blaming a foot ruler for his diminutive stature. Money’s not the problem, but floating money whereby the measure deprives an economy of a common language can surely cause problems. Warner doesn’t touch on this.

Instead, he blames the euro for creating a situation in which “economies were growing apart, not together.” Warner believes the lack of harmonic growth indicts the euro since the European states that utilize the currency have not been growing “richer together.” Yet that was never the purpose of the euro, at least not to the mildly sentient.

England has a common currency in the Pound, but has this equalized growth in England? No, and it’s obvious why it hasn’t. Money is once again an effect of economic growth, not a driver of it. It’s only a measure. Pounds are once again plentiful in England where economic activity is frenzied, and scarce where it isn’t. Implicit in Warner’s argument is that money is wealth. No. Money, per Adam Smith has one purpose only: to help circulate “consumable goods.” Wealth is what we create. Money is what we use to facilitate the exchange of the wealth we create. Nothing more.

Applied to the U.S., we have a common dollar across 50 different states with very different tax and fiscal policies. But has the dollar lifted West Virginia, Mississippi and Louisiana up to the economic level of California, Texas and New York? Obviously not. Money is not magic. Neither is currency union. All a currency can do – and this is a good thing – is facilitate trade and investment among producers, consumers, savers and entrepreneurs.

Warner’s belief that the euro has “destroyed” Europe simply speaks to his confusion about what money is. It’s the equivalent of a basketball coach fingering foot-rulers that unceasingly measure 12 inches as the reason his team of 5’7″ players consistently lose. But the foot ruler is merely a measure confirming reality. So is money. Where production is abundant, so is money, where production is light, money is once again scarce.

If the euro has a weakness, it has to do with the fact that it floats. This deprives it of its sole purpose as a measure. Worse, all global currencies still maintain at least a vague peg to the dollar. Since 2001 the dollar has weakened substantially, and while the euro is up on the dollar since ’01, the latter masks the bigger truth that both currencies have lost a lot of value since in the 21st century. The much higher price of gold measured in both currencies since 2001 represents the clearest evidence of broad currency weakness. This has predictably reduced investment in both the U.S. and Europe with predictably sluggish consequences.

So yes, Europe has a problem, but it’s not the euro itself. The problem is euro policy, along with all manner of government barriers to growth in Europe more broadly. For Warner to blame the euro itself for Europe’s woes is the equivalent of a portly person yelling at the scale.

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CASH is one of mankind’s greatest inventions; a vast improvement, one would imagine, on carting around sheep or bales of hay. Despite the proliferation of other forms of payment, cash retains qualities that alternative methods cannot match, including anonymity, instant clearing, universal acceptance and a relatively tech-free mechanism. It can be used even if the power grid goes down or the banks are all hacked. Yet a growing number of economists are now calling for cash to be phased out. Why?

In “The Curse of Cash”, published on August 16th, Kenneth Rogoff makes the case for gradually getting rid of most paper currency. It certainly has benefits, he admits, but these are outweighed by the costs associated with its murky side. Take anonymity. The same virtue that provides the ability to pay for a self-indulgent treat or a naughty service without its appearing on bank records or credit-card statements also allows criminals to fund their activities and tax-dodgers to avoid levies. The record $1.4 trillion circulating outside of banks in dollars alone, mostly in high-denomination bills, might suggest that every four-person American family has $13,600 in $100 bills stashed in a jam jar. That is unlikely. According to Mr Rogoff, the bulk of the rich world’s currency supply is used to facilitate tax evasion and illegal activities such as human trafficking and financing terrorism. A cashless world would also make monetary policy more effective, argue some, including Mr Rogoff, because savers would no longer be able to stuff cash under mattresses in case of negative rates. And as shopkeepers and businesses in relatively cash-light countries such as Sweden are discovering, there are other real benefits to preferring electronic payments over cash, including security, lower costs, hygiene and convenience, for both business and customer.

Moving away from cash would not be without complications. Some objections can be easily dismissed, such as a claim expressed by a fifth of a sample of Germans, who said in a recent survey that they like the feel of carrying cash. But other problems are harder to pooh-pooh. The most intractable are the loss of anonymity and the risk that parts of society will be left out of the financial system, in a world where smartphones and plastic become the only ways to pay. The anonymity problem can in part be solved by retaining smaller notes and coins; enough for punters to keep buying porn, weed and birthday presents, but not so much as to buy property. The point about financial exclusion is trickier. In a near-cashless world vulnerable groups, such as the poor, the elderly and migrants, could become further marginalised, and those who are especially cash-dependent for income, such as churches, charities and the homeless, could expect to see a drop in their incomes. But changes can be made gradually and intelligently, for example by paying benefits on prepaid debit cards and supplying charities with contactless card machines. The switch could in fact increase financial inclusion, by ensuring that the unbanked become banked.

The debate elicits strong reactions; Bild, a German newspaper, recently organised a reader protest against a €5,000 ($5,633) limit on cash transactions. And German academics have argued that banning cash won’t magically end crime and black-market dealings: electronic fraud, cyber-crime and anonymous payments online are easy enough for those with skill and determination. Yet as countries in the rich world grow increasingly detached from cash, with some shops and cafes flat-out refusing to accept the stuff, economists can already see early evidence of the benefits of going cashless—as well as the relatively painless nature of the transition.

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Harry Dexter White was one of the chief architects of the Bretton Woods system, indeed the person most responsible for the conference itself. All throughout World War II, it was White working at Treasury directly under Secretary Morgenthau who set up all the predicate conditions for the dollar achieving global currency status. He argued that American servicemen should use the dollar and only the dollar as they spread across the globe, overvaluing each local currency so that local populations might find nothing but tradition to block acceptance of the US dollar upon its arrival. For the Axis countries, there was to be only a dollar until such time as they had been politically transformed likely long after the war was over.

White had completed a draft plan for the postwar monetary world in March 1942. It was revised and “polished” before being presented to Secretary Morgenthau on May 8 of that year. In his letter to the Secretary, he gave equal treatment to the specifics of his intended arrangements but was careful to note that none of it would do any good if it were to languish within politics. In other words, what he wanted done would have to be subordinated for a time to how it could get done. To White, the only way forward was an international monetary conference.
To even get that far, however, Treasury had domestic American politics to overcome. There was some debate as to protocol: should Morgenthau go directly to President Roosevelt with the idea, or approach Secretary of State Cordell Hull first. Having sat in that office for almost a decade by then, Secretary Hull was not accustomed to being circumvented. When asked his thoughts on how to proceed, White apparently said, “hit them both at the same time”, meaning to inform FDR and Secretary Hull simultaneously.

Morgenthau ultimately decided to deliver his policy draft to the President first, to which FDR responded (as Morgenthau predicted) in seeking Hull’s input. From the President’s perspective, this could not be only a Treasury idea as it would have to have significant development and ownership among State, the Federal Reserve, and even the Board of Economic Warfare.

According to the book, The Battle of Bretton Woods by Benn Steil, the first meeting to address the postwar monetary paradigm was held on May 25, 1942, and it did not go well from the start. State’s representatives at the meeting Leo Pasvolsky and Herbert Feis argued matters of protocol and turf, forcing Morgenthau to the position that rivalry was the chief danger. He responded by holding another meeting only with more friendly faces (to Treasury’s side). Among them was a White House economist, indeed the first ever White House economist, Lauchlin Currie.

Morgenthau’s invitation to Currie was particularly blunt, asking him directly, “want to get in a fight?” The Treasury Secretary told the economist that he was convinced the State Department was already against the conference because, “we’ve got an idea and State hasn’t, and they don’t want anybody else to have any ideas.”

Lauchlin Currie had ended up at the White House via Harvard and a series of policy papers and a book all published in the first half of the 1930’s. His ideas were set widely against prevailing opinion, even at such a “conservative” institution as Harvard was in those days. In a January 1932 memo, Currie, along with co-authors Paul Theodore Ellsworth (who was best known for pioneering what would become the IS-LM framework of understanding Keynes’ General Theory concepts) and, who else, Harry Dexter White, advocated “vigorous” open market operations at the Federal Reserve to expand the level of bank reserves. Even that was deemed by the authors likely insufficient to get the US out of the depression, so in addition Currie, White, and Ellsworth advocated aggressive fiscal action to go with it.

Beginning in 1933, Currie wrote several articles and in several publications that further clarified his expansionary positions, including the great monetary distinction between money and credit. He wrote in 1934, “The merit of the proposal here set forth lies, in the writer’s view, in the fact that it divorces the supply of money from the loaning of money.” From that he accused the modern (as separate from the classical) version of economics at that time for confusing money and credit via what he called “an historical accident.”

In his 1933 article Money, Gold, and Incomes in the United States, Currie, a devoted follower of quantity theory, computed the first velocity variable not of transactions or money, but rather from national income. He argued that monetary control should be literal, and that only credit is left to banking. That led to his 1934 book The Supply and Control of Money in the United States where Currie theorized an ideal, as he saw it, monetary regime for the American system. Because the government was, in his view, responsible for the depression due to “almost complete passivity and quiescence” that somehow led him to believe the monetary answer lay in total government control. It wasn’t the government so much he objected to, rather the impeded and constrained government.

Shared in conjunction with Harry White, both of them at the time working at the US Treasury, Currie demanded that only government should control the quantity of all money and close money substitutes including demand deposits. He envisioned a government agency or several agencies that would all across the land buy and sell government securities in order to “precisely” expand and contract the level of deposits. Currie believed this was nothing like nationalizing the banking system because, again, money and credit were and are separate; only the functioning money supply within banking would be nationalized leaving banking otherwise undisturbed.

He correctly envisioned that most objections to his ideal system would be political, a fact that was realized in the New Deal era more than anyone might have imagined. But it also opened tremendous opportunity for those who saw the chaos as an opportunity not to be wasted. Currie would get his chance in 1934 after catching the attention of Marriner Eccles. When Eccles ascended to the Chair of the Federal Reserve Board, he brought Currie with him as his private secretary. That position at exactly that time in history allowed him to essentially draft the Banking Act of 1935 that set out the modern Federal Reserve System; which is why you can see Ben Bernanke/Janet Yellen in the positions he advocated seven decades before they did.

In a speech given by then-Chairman Bernanke to the Fourth ECB Central Banking Conference in November 2006, the Fed Chair noted the durability of a good part of Currie’s emphasis in modern monetary policy:

“In any case, the Federal Reserve began to pay more attention to money in the latter part of the 1930s. Central to these efforts was the Harvard economist Lauchlin Currie, whose 1934 treatise, The Supply and Control of Money in the United States, was among the first to provide a practical empirical definition of money. His definition, which included currency and demand deposits, corresponded closely to what we now call M1. Currie argued that collection of monetary data was necessary for the Federal Reserve to control the money supply, which in turn would facilitate the stabilization of the price level and of the economy more generally.”

With Currie’s contributions, as Bernanke credited, the Federal Reserve began in 1939 its first serious project on quantifying money and monetary statistics. By 1943, around the time White and Currie were reuniting to plan out what would become Bretton Woods (actually what would become the political battle over the plan deciding how the conference for the planning for Bretton Woods would go), the Federal Reserve published its first catalog on money and banking statistics.

Though measurement was a primary issue in the “ideal” monetary policy, there was just as much emphasis on politics. Currie often asked some variation of the question, “what good is precision if there is no legal authority or political will to use it?”

A good part of the Banking Act was devoted to politics by necessity. The Federal Reserve is solely an institution of Congress; it is not in the Constitution. By definition, the Fed is political. One of the causes he identified of the Great Depression was that, “America possesses one of the poorest, if not the poorest, monetary system of any great country.” It did not act as a “maladjustment-compensating factor” but rather a “maladjustment-intensifying factor” because of its contradictions. Currie identified, correctly, the hybrid system of, “the compromise of private creation of money with government control.” In his view, this vital and basic power must not be shared; therefore he had it destined to the enlightened few of “independent” government rather than the “imprecision” of the marketplace.

Up until that time, the Federal Reserve Act had given the Federal Reserve the mission to “accommodate the monetary and credit needs of commerce, agriculture, and industry.” Rather than a powerful institution of control and prestige, the central bank was a backwater instrument of the 19th century mechanics. Currie, along with Eccles, felt it necessary to deliver a broader mandate that would be specific enough to leave out political influence. Eccles wanted the Fed’s mandate changed to, “promote business stability and moderate fluctuations in production, employment, and prices.” In other words, he, like Currie, wanted the Fed out of the business of running nothing more than the seasonal flow of money from NYC to the interior and back again and into the business of running the whole economy (and doing so from only DC rather than in 12 districts).

Ironically, Currie and Eccles believed that this new mandate would, “resist political pressure for the use of its [the Fed’s] authority for purposes inconsistent with the maintenance of stability.” Currie expressly explained that such a mandate would actually strengthen the Fed since every Board action would be evaluated and judged by this objective; any attempt to interject partisanship into the monetary and economic affairs of the Fed would lead to impeachment of any Board member attempting it.

The new mandate did not, however, make it into the 1935 Act because of the strong objections from Senator Glass (despite, ironically, the heavy backing from Congressman Steagall). Senator Glass charged the mandate, “did violence to Jefferson democracy, since the effect of the change would be to give the central government too much power.” Senator Glass was right but also wrong, however, as Currie and Eccles were correct in that “too much power” would not be vested in the “central government” but in the independent body of the Federal Reserve Board – just as they wanted it. Glass was right only about what would be given not where it would be given.

None of Currie, White, nor Eccles were thinking about any of this in terms of power, specifically, but rather precision. They believed total government control over the money supply would lead to stability of credit and banking in the marketplace. That would further deliver stability in prices and overall economy. And to do it, they would in parallel design the new “science” of monetarism and quantity theory.

As anyone with any basic, common sense engineering knows, any system so deliberate with such raw inflexibility is destined to operate successfully only within the narrowest of tolerances. Deviate just that much and there is no incorporated ability to adapt. The whole arrangement would follow upon only one factor; that by politics and by economic “science”, the economy would only be stable if economists were right in both economics and now “their” money. It was a possibility none of them ever contemplated, enshrined in the basis for the Banking Act of 1935, further augmented in the Treasury-Fed pact of 1951, that shifted the Fed permanently toward economic management. As Eccles wrote in 1937,

“The economics of the system as a whole differ profoundly from the economics of the individual; that what is economically wise behavior on part of a single individual may on occasion be suicidal if engaged in by all individuals collectively; that the income of the nation is but the counterpart of the expenditures of the nation. If we all restrict our expenditures, this means restricting our incomes, which in turn is followed by further restrictions in expenditures.”

The Fed would be thus ever forward devoted to socialism (small “s”). Further, the Fed would also be not merely Platonic in its aims for the perfect economic republic, stripped by legal right of politics so that it could be empowered into perfect science and precision, it would be god-like in its execution and delivery; it would have to be. The one thing missing from all of this is anyone, other than Senator Glass, asking, “what if we are wrong?”

The system they envisioned did not permit such flexibility, a fact that Bretton Woods was forced to confront from its earliest days. Convention assigns 1971 as the end of it, but in reality the US defaulted on its gold obligations eleven years before in the creation of the London Gold Pool. The origins of the eurodollar itself around 1955 was due almost entirely to the cracks in the global reserve system that neither Currie nor White ever foresaw. Theirs was a static system of perfect knowledge somehow supposed to be applicable through all time despite the constant change and innovation all around everywhere.

Furthermore, these enlightened few never seem to grasp that inflexible systems only become more inflexible as they are challenged; and they are always challenged. It seems a blindspot always attached to centralized socialism that human nature can be perfectly expressed as if these great scientists will respond in purely scientific fashion and correctly to each trial; it is more than the pretense of knowledge, it is the pretense that socialists actually seek only knowledge rather than power.

Indeed, as Ben Bernanke himself noted in that same 2006 speech, though Currie and White were long gone (both accused of being Communists, though it isn’t clear whether either ever was) M1 was too well before Nixon slammed the gold window shut:

“However, during the 1960s and 1970s, as researchers and policymakers struggled to understand the sharp increase in inflation, the view that nominal aggregates (including credit as well as monetary aggregates) are closely linked to spending growth and inflation gained ground. In 1966, the Federal Open Market Committee (FOMC) began to add a proviso to its policy directives that bank credit growth should not deviate significantly from projections; a similar proviso about money growth was added in 1970. In 1974, the FOMC began to specify “ranges of tolerance” for the growth of M1 and for the broader M2 monetary aggregate over the period that extended to the next meeting of the Committee.”

So much for precision. Congress responded in 1977 by amending the Federal Reserve Act to direct the Federal Reserve to “maintain long run growth of monetary and credit aggregates…so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” Though it echoes Currie’s Depression-era recommendations as far as the socialism of the Fed, it defiles the manner in which he suggested it be done. Credit and money were now lumped together in, as Bernanke and modern economists call them, “aggregates”; thus stripping modern monetarism from its necessary nuance, the only matter that actually explained both the rise and fall of the economy before and after the Great Crash. Currie in the 1930’s foresaw a permanent institution dedicated to precise handling; the Fed by the 1960’s and the 1970’s rather didn’t care anymore about such exactitude, operating more so on a standard of “good enough.”

That was once again the standard by which these economists in the 1930’s were initially seeking to overcome. Currie has observed that one of the most pernicious feedbacks of the Great Depression collapse was in the quest for liquidity itself. Writing, “One of the most disastrous developments in the whole depression was the scramble for liquidity on the part of thousands of individual banks and by their very scramble effectively precluding the possibility of liquidity”, he correctly observed the modern notion of liquidity; it isn’t contained in the monetary “aggregates” of money stock but in the action of individual financial actors to either supply it or deny it. Liquidity is an action that lies beyond any of the M’s.

This process does not just apply in the simple monetary factors of the Depression era; in fact, this was again observed in 2007 and 2008 in many other places that the inflexible, independent Fed never bothered to look. From credit default swaps to repo collateral, liquidity was impaired in such a way that no matter what mainstream or “extraordinary” policy the Federal Reserve undertook it made no difference whatsoever. The Fed failed on every count because it was institutionally incapable of success in any world except one that remains static for all history; “good enough” wasn’t even close.

Princeton economist Stephen Goldfeld deemed the monetary mystery of the Great Inflation the case of the “missing money.” As noted above, the Congressional power under the 1977 amendment to the Federal Reserve Act amounted to nothing because the adoption of targeting “aggregates” was not in any way an actual constraint, mostly because the economy is not obliged by monetary policy targets in the way that monetary theory believed. That statutory regime change was not imposed upon the monetary scientists at the Fed; far from it, the political influence was originated by them to tie more into their control. They never bothered to ask, “what if we are wrong?”

The stagflation of that period left no mistake about that question. In a way, that shows just how much better the 1970’s were than the 2010’s (actually the whole of the 21st century). It is often said and written that though we might experience stagnation now, it is at least absent the huge consumer price increases of the “missing money” age. This is false; the declaration simply assumes that the stagnation portion is equal between now and then, leaving the lack of “inflation” now the deciding factor. The stagnation we currently experience is far more nefarious and challenging, leaving the economy far worse off not just in outlook but more so in how to get out of it.

In the 1970’s, there was no argument as to what was wrong; that much was clear. Debate centered on how to stop inflation, not whether there was inflation in the first place. In the 2010’s, economists won’t even admit there is a problem, and spend all their time and effort trying to convince everyone that there isn’t. By every economic measure, the economy now is far, far worse than even the worst of the Great Inflation in the late 1970’s. From GDP to individual economic accounts, including the labor statistics, there is every reason to want to go back to the 1970’s than stay here. From cyclical peak to cyclical peak, 1973 to 1980, the BLS’ index of total hours worked increased by 12.1%, or 1.93% annualized. From 2007 to the latest update for Q1 2016, total hours worked barely increased at all, up just 1.31% total, or 0.15% annualized.

There may have been inflation at that time to erode wages and wreak downstream economic havoc, but at least the economy was producing at its most basic level. In this economy, the lack of basic production is taken for success by economists that are so inflexible that they force themselves to see the world entirely upside down. Monetary independence was never a virtue, it was the removal of all accountability as is the common theme of all socialism. When a small group of people are handed the unshakable ability to determine what is “good for you” it isn’t long before they determine everything they do is “good for you” even if they have to alter the standards for judgment. They couldn’t do it in the 1970’s, but now they can because the depth of disorder is more opaque and complex, reflective of the evolution of money itself.

Lauchlin Currie and Harry Dexter White saw the inherent flaw in a hybrid monetary system, part government control, part marketplace genesis, and determined to resolve it by imposing total government. What they actually did was foist a narrowed gaze upon the government agencies that believed in the socialist principle. All monetary policy from that time until now has been spent on “proving” its preconceptions about what it could do rather than asking the only relevant question, “what if we are wrong?”

Only once in recent history did the Fed actually confront such doubt, in June 2003, but only for the briefest of moments. As Bernanke’s speech just three years later showed, such doubt never lingered; his major theme was to suggest that monetary policy had learned from all its mistakes and the constant change. That obviously wasn’t true, proved beyond all doubt just nine months later, and still isn’t to this day; all the FOMC learned was that no matter how much it fails time and again, and how much words are warped beyond all actual meaning (recovery, money, stimulus), political independence is all that ever mattered or ever will. Not for the economy, of course, but the socialist principle that people can’t ever be trusted with it even if the central bank regularly removes a decade or two of healthy progress. And it didn’t even prevent another crash.


Bitcoin will change a lot more than finance. It could also change how software is built and upend a bunch of today’s biggest web companies, argues Joel Monegro of Union Square Ventures.

His argument starts with the block chain, the shared ledger where every Bitcoin transaction is recorded. Validating these transactions requires computing power. When each transaction is validated, a new block is added to the chain, which makes future transactions even harder to compute.

Bitcoin was designed this way to make sure that the same Bitcoin, which has no physical form, isn’t spent twice by the same person. This also gives Bitcoin some inherent value — people or organisations have to spend a lot of money to run the computers that validate transactions, and the complexity of those computations is always increasing as the chain gets longer.

But Monegro argues that these technical underpinnings of the Bitcoin system may have more long-term potential than the currency itself.

That’s because the block chain is not controlled by any one person or entity, and information in it is freely available to other software programs. So programmers are starting to build things on top of the block chain that have nothing to do with digital currency.

For instance, some programmers have developed a protocol called La’Zooz for real-time ride sharing. That could eventually disrupt Uber. Others have created OpenBazaar, a protocol for a a peer-to-peer trading network that could disrupt eBay. Both use the block chain for some basic computing tasks.

Here’s a simple way of thinking about it. The block chain itself is immutable, like bedrock. Bitcoin is like a building on top of that bedrock — it’s got a foundation where programmers have defined some of the basics of how it works, then a bunch of stories on top of that where people interact with it.

But it’s now possible for other folks to build their own buildings on top of the same bedrock.

“The block chain is great at two fundamental things,” explains Monegro. “Distributed consensus, which is basically having a large network of computers agree on a value of something….that’s a key component for any decentralized system. The other thing is time-stamping, holding a chronological order of things happening.”

As new businesses crop up that depend on these functions, they will benefit from turning to the Bitcoin block chain, rather than having to build a similar system from scratch.

This concept isn’t new. Many tech companies have technology platforms that others can build on, from Microsoft to Google to Facebook.

The Bitcoin block chain is different because everything underlying it is published, and there’s no central controlling entity. The whole system works only because all the participants abide by the same set of rules, and any changes are dictated by hard maths rather than a CEO or board of directors.

“Facebook wants to own and store the data that is relevant to their operation,” says Monegro. “So does Google, so does everyone else. The data they store, they control it. The algorithms they run, they control it to serve their own purposes. A system like this, the protocols you build are open, not controlled by anybody. They work like a machine. They don’t discriminate.”

There’s still reason to be sceptical. Bitcoin itself is still in a very early and tumultuous stage, as the collapse of the Mt. Gox exchange earlier this year showed. Speculation has caused some pretty wild price fluctuations — one Bitcoin is worth about $US375 today, down from a peak of $US1,242 in March 2013. That makes it an unreliable store of value, which could eventually drive people away.

Plus, the organisations building on top of the block chain tend to speak in utopian terms that could be a turn-off for outsiders. For instance, La’Zooz describes itself as “a completely decentralized and autonomous organisation. That means that anyone can contribute towards the establishment of its goals in whatever way he or she believes would be the best. Tasks are carried out within autonomous, self-defined circles or teams.”

But that kind of utopian vision is how a lot of open-source projects started, and many of them have grown into essential technology. Take the Linux operating system, which runs most of the computers in the biggest data centres in the world, like your bank. Or Apache, which runs the majority of web servers. Or the protocols that formed the basis of the Internet itself.

Monegro and USV’s Fred Wilson think that Bitcoin could become the same kind of foundational building block within the next 5 to 10 years.

Monegro’s entire post is worth reading if you’re interested in the technical vision. Here’s a graphic showing the different layers of the platform he believes will built on the block chain, which he’s going to detail in a set of follow-up posts:


In fractionally reserved economies however, when interest rates are manipulated lower artificially and money & credit creation is continuous, lower interest rates benefit those entities that are closest to the central bank first.


This results in high barriers to entry in business and industry, industrial overcapacity thus the misallocation of resources and, eventually, the unnecessary depletion of natural resources. All through this process, the cost of living rises paving the way for gradually more onerous fiscality.

I would argue that because debt is nominally lower, the barriers to entry are lower. Because there are many new entrants, resources are increasingly used. However, because demand has not driven the creation of the business profit margins are low.

These profit margins will be higher than the low cost of capital [nominal cost of debt] but should the nominal rate rise, the business will be required to liquidate, unless demand for their product rises. A liquidation releases factors of production back to businesses that have higher profit margins – demand.

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