Capitalism vs. Central Banking

arnold stein

You can use Google language tools to provide an English translation.

Murali, we agree.

Sorry martin, I meant that there are no moral rights which exist outside of common consent. There are of course no legal rights which exist outside the state

Sorry martin, I meant that there are no moral rights which exist outside of common consent. There are of course no legal rights which exist outside the state

Milton Friedman's Second Thought's on the Costs of Paper Money.

To be fair, there is no such thing as a perfect monetary system

Agreed!

I know of no better monetary arrangement than inflation targeting

What's your basis for that assertion? Why is it that stealing purchasing power at a slow and steady rate morally right? How would you do inflation targeting? Admit for once, that monetary manipulation played a major role in the current crisis.

Should we have a metallic standard? Not unless you want to have extensive short-run volatility in real output and unemployment similar to the recessionary gap we see today.

What kind of metallic standard are you using for this assertion? Didn't Friedman want a 100% reserve paper standard? WHy should government be in the business of money at all?

After all, governments have been known to cheat on it. Even medieval kingdoms would create inflation by shaving the edges off coins to create an increase in the money supply to levy the unexpected price level tax

Sure, which is why government should stay out of the business of money. Seperation of money and state.

The best way to conduct monetary affairs that we know of is to have an instrument independent central bank to avoid the political business cycle.

You mean a group of elites who are answerable to no one.

This central bank should be a devout inflation targeter in order to avoid the time inconsistency problem which is the best way to adhere to a rules-based monetary regime for which Friedman so strongly advocated.

Refer to my first few questions in this particular comment.

Money is the corner stone on which all modern economies are built, if you could not trust the market to provide us with such an important tool, you should not be trusting market for anything else.

but if something like the Libertarian party gained the reigns of power and decided to slash federal employee (including military employee) health and pension benefits

Come on, Martin, the state will collapse before that will happen.

In theory, there are no property rights that exist outside of common consent.

A state requires some measure of consent, but I don't know how common this consent really needs to be. In the U.S., common people imagine the national nuclear arsenal as a defense against foreign invasion, but I imagine it only as instrument of persons controlling the arsenal. For the moment, these people still go through the motions of our nominally "democratic" processes, but if something like the Libertarian party gained the reigns of power and decided to slash federal employee (including military employee) health and pension benefits, including the benefits of existing pensioners, particular benefits of the Generals and other politicians, rather than slashing a state established college tuition trust that has held my money for two decades, how long would these pro forma motions last?

There is no market capitalism without forcible propriety, and there is no forcible propriety without a state.

Agreed, with some minor correction. In theory, there are no property rights that exist outside of common consent. In practice, common consent is managed by the state. (common law is a case in point)

Absent any enforcing authority, any rights as established by consent are meaningless.

Given common consent, the actual property rights people have is (within certian boundary conditions) more are less arbitrary.

How should a modern nation conduct its monetary affairs?

To be fair, there is no such thing as a perfect monetary system, but at the present time I know of no better monetary arrangement than inflation targeting (perhaps price level targeting is equivalent).

Should we just have a fixed growth money rule like Friedman advocated? If velocity gets choppy, like the 1980's, then we can see a breakdown in the rule and consequent return of central bankers targeting the nominal overnight rate.

Should we have a metallic standard? Not unless you want to have extensive short-run volatility in real output and unemployment similar to the recessionary gap we see today.

A gold standard would make countercyclical monetary policy irrelevant to fighting today's financial crisis. And let's be honest about this folks, the private sector also failed, in a massive way to be exact. It turns out that those in high finance were probably high on something other than prudent risk management procedures.

Anyhow, one simple question which the gold fetish people have failed to answer is this:

If you are so distrustful of government (and we all are, including me) to keep price stability, then why would you trust the government to faithfully adhere to a gold standard for decades?

After all, governments have been known to cheat on it. Even medieval kingdoms would create inflation by shaving the edges off coins to create an increase in the money supply to levy the unexpected price level tax (there's no such thing as an inflation tax regarding a redistribution of income - macroeceonomists refer to that as the inflation fallacy).

The best way to conduct monetary affairs that we know of is to have an instrument independent central bank to avoid the political business cycle. This central bank should be a devout inflation targeter in order to avoid the time inconsistency problem which is the best way to adhere to a rules-based monetary regime for which Friedman so strongly advocated.

A positive inflation target, assuming a low rate with minimal variability, would keep expectations tethered and avoid the wealth redistribution associated with unexpected price level changes as well as the costs associated with higher expected inflation, namely: shoe leather costs, menu costs, bracket creep, money illusion, resource misallocation from certain relative price distortions, etc.

Ciao

The fact that some alleged capitalists pushed for a central bank does not mean that the definition of capitalism includes central banking.

"Alleged capitalists"? Like there's some official school of Capitalism where the real Capitalists teach the True Religion? What is the definition of "capitalism" anyway? You get to decide that?

"Capitalism" means what real capitalists do, and real capitalists have their hands out to the statesmen continuously. In fact, the statesmen are capitalists, and the capitalists are statesmen. Denying this transparently obvious fact is like denying that Stalin was a "socialist".

Nooo. The real socialists are all sugar, spice and everything nice. Stalin was only an alleged socialist.

Thus the notion that a central bank is part and parcel of laissez-faire capitalism -- in the same way that socialism is an inherent part of communism -- merely because certain capitalists pushed for it, is false.

First, I didn't write "laissez-faire capitalism". That's your addition. Second, you don't define either "socialism" or "communism" precisely enough to make any sense of "socialism is an inherent part of communism". Finally, if the U.S. in the twentieth century didn't epitomize "capitalism", then the word describes nothing but a Rothbardian fairy tale, and the U.S. had a central bank, of, by and for the capitalists, for practically the entire century.

Laissez-faire capitalism (LFC) means a system in which there is a complete separation of economics and state ...

The whole idea is ludicrous on its face. There is no market capitalism without forcible propriety, and there is no forcible propriety without a state. Capitalist economics and state are fundamentally inseparable.

-- in the same way and for the same reasons as a separation of church and state.

The two are not remotely similar, but "church/state separation" is mostly a lot of nonsense too for that matter. Church and state are separate only insofar as "church" is reduced to nonsensical hocus pocus.

Under such a system, the functions of government are limited to a police force to protect the citizens from criminals, ...

Right. And you get to tell me who the "criminals" are, and they happen to be persons violating your claims of propriety, particularly your mastery of means of production that you may exchange in markets, from which follow all sorts of economic consequences.

... a system of courts for resolving contractual and economic disputes and an armed force for national defense against foreign invaders.

So statesmen are settling economic disputes, but economy and state are separate. Now I get it.

Under LFC, neither the government nor anyone else has the power to dictate the use of a fiat money and to regulate the supply of that fiat money.

Courts dictate how economic disputes are settled, like what I owe you when you present me a promissory note for an ounce of gold issued when my vault full of platinum was worth twice its current value relative to gold, i.e. courts dictate legal tender. They tell you what "money" is. You don't tell them.

So any system that features fiat money and a central bank is most definitely NOT laissez-faire capitalism.

You can define "laissez-faire capitalism" however you like, because no one much imagines that the U.S. has a "laissez-faire capitalist" economy these days, but the word "capitalist" still commonly describes the U.S. in the twentieth century, and the U.S. economy most definitely had a central bank, with the enthusiastic support of real capitalists, as opposed to idealistic academics defining "capitalism" within their utopian ivory towers, mostly funded by the state, the whole time.

Several commenters seem to be under the impression that the U.S. Dollar is the only currency that is allowed to be used in the United States. I think that is untrue. For example, from http://www.strike-the-root.com/3/pre/pre2.html :

In "Rethinking Our Centralized Monetary System," law professor Lewis Soloman states, “There is no legal prohibition to local scrip, community currencies or private exchange systems in the United States. The fact that there have been no challenges to the systems already in operation support that finding. Taxation operates under the same fundamental rules of trading with the national currency.”

The only transaction for which you must use U.S. dollars is to pay your taxes.

So you are perfectly free to use alternative methods of exchange with those you trade with. Go for it!

Well what do you know, my son sent me this little cartoon from 1948.

http://www.archive.org/details/MakeMine1948

Capitalism Vs ISM.

Stock brokers are worse (or so I’ve heard) and 1) the financial industry is probably the most heavily regulated industry in the world, and 2) there are still (supposedly) major problems.

What does that tell you?

LowCountryJoe - I just know from my own experience lately that mortgage brokers are a slimy lot.

LowcountryJoe - I have a feeling that is Mortgage brokers had to have some skin in the game, they'd not be peddling loans to just anyone.

They DID have skin in the game! And for some of those riskier loans they made, they were under pressure by legislators to make them. They weren't all that dissappointed though, those loans and the programs that they were made under had the full moral hazard backing of the GSEs. And now many of them have the backing of taxpayer bailout money to boot. So skin, no skin, little skin, thin skin, it all makes for a situation where the ugliness of it all runs skin deep.

Oil Shock - it will be a shock to muirduck that the health care & banking sectors are highly regulated!

Bret, competing currencies do exist. loonie, Euro, Real etc... If you do not like dollars you can move your assets to one of those other currencies.

That is like saying there is a choice of hospitals and doctors in a highly regulated health care sector, or like saying there is a choice of banks in a highly regulated banking sector.

LowcountryJoe - I have a feeling that is Mortgage brokers had to have some skin in the game, they'd not be peddling loans to just anyone.

Martin Brock wrote:

We've had no capitalism without central banking for a century, and capitalists like Morgan and Rockefeller essentially established the U.S. central bank, so the idea of some great epic battle between Capitalism and Central Banking seems absurd. The idea certainly persuades no one out outside of a narrow ideological clique. Outside of this clique central banking is part and parcel of "capitalism".

The fact that some alleged capitalists pushed for a central bank does not mean that the definition of capitalism includes central banking. If certain individuals calling themselves doctors began to practice witchcraft and voodoo, that would not mean that the field of medicine would suddenly be defined to include voodoo and witchcraft -- it would simply mean that some doctors have begun practicing something other than medicine.

Thus the notion that a central bank is part and parcel of laissez-faire capitalism -- in the same way that socialism is an inherent part of communism -- merely because certain capitalists pushed for it, is false.

Laissez-faire capitalism (LFC) means a system in which there is a complete separation of economics and state -- in the same way and for the same reasons as a separation of church and state. Under such a system, the functions of government are limited to a police force to protect the citizens from criminals, a system of courts for resolving contractual and economic disputes and an armed force for national defense against foreign invaders.

Under LFC, neither the government nor anyone else has the power to dictate the use of a fiat money and to regulate the supply of that fiat money. So any system that features fiat money and a central bank is most definitely NOT laissez-faire capitalism.

Bret, competing currencies do exist. loonie, Euro, Real etc... If you do not like dollars you can move your assets to one of those other currencies.

With that said, it should not be illegal to have currency competition within our borders.

Sam and others,

A little off topic but interesting. Anyone been following the growing state sovereignty movement?

http://www.tenthamendmentcenter.com/2009/02/23/state-sovereignty-resolutions/

I'm very curious as to Don Boudreaux's preferred monetary structure. Completely private with multiple competing currencies? Government issued currency based on some arbitrary commodity (eg., gold, corn, pop tarts, etc.)?

Our current central bank has its problems, for sure, but most alternatives are not perfect either.

So glad to see Don's letter published.

There is a belief in the religion of socialism that government, like God, is benevolent even though the people running government are exactly the same human beings who engage in private industry.

Those of us who have lived through socialism first hand are no longer religious.

If any of your are interested in a nice conspiracy reading, I suggest that you pick up a copy of Creature from Jekyll Island: A Second Look at the Federal Reserve. It reads like a novel and I think there is a lot of truth to what is written.

I don't see the need for an arbitrary monetary standard, gold or otherwise.

"the economic power of the private sector, especially if unsupervised, is unable to prevent itself from exploiting whatever ways are found"

Let's reword that a bit: "the political power of the government sector, especially when self supervised, is unable to prevent itself from exploiting whatever ways are found"

Yes, I know the government is supposed to be supervised by "the people", but as the people see government as "the supervisor", they have ceded their authority of supervision to the political class, who are like the nobility of old, looking down upon those who gain position by mere commerce, a trait which they share with the "left".

Obama has been granted savior status because his election is proof that "democracy" ... "works".

Muirgeo's visitations have value by revealing the general cluelessness of progressives and similar "democracy" worshipers.

Apparently, a slave is free if he can vote for a new taskmaster.

lets substitute some words to see if it still makes sense:

"The economic power of the government, especially if unsupervised, is unable to prevent itself from exploiting whatever ways are found to take lots of easy money out of our economy in the short term, especially if the private sector allows it. And that is happening"

whoops

Should read "we got into a bit of a row over the ideal or correct monetary system in the last post"

Ha... we got into a bit of a row over the ideal or correct monetary system...

I have a question of my own... Do people consider commodity/gold based considered the ideal? Or is it simply better than the others?

Personally, I have a vision for a system of international clearing houses with a single non-expandable credit system... But I can even foresee issues with that...

Don, I think there was a fundamental piece of Gallington's premise that deserves a more direct rebuke:

"the economic power of the private sector, especially if unsupervised, is unable to prevent itself from exploiting whatever ways are found"

Who is it, exactly, that creates these loopholes for exploiting? It's a hyperactive federal organism.

Gallington wants us to presume that the organism of the State must take full control because people take advantage of loopholes, when it's the very size and power of the organism that makes it a target for special interests seeking loopholes.

Gallington also wants to make it a crime for mice to nibble cheese that's been left on the floor. It requires an understanding of human nature that doesn't exist anywhere in reality, but rather on the pages of a Marxian Utopia. (Might be closer to Oceana, but I'm a little rusty on the classics.)

The Fed is certainly a quasi government agency, ...

I agree, but at the same time, I hear the most vociferous opponents of the Fed complain that it's a "privately owned". In reality, the divide between "public" and "private" is incredibly blurry. The idea that the economic "good guys" are in the "private" sector while the "bad guys" are in the "public" sector is simple nonsense. Practically everyone has a foot in both camps these days, and the big economic players, particularly in the finance business, are every bit as "public" as they are "private", and the Fed specifically is always on whichever side the ideologues are opposing on a given day.

We've had no capitalism without central banking for a century, and capitalists like Morgan and Rockefeller essentially established the U.S. central bank, so the idea of some great epic battle between Capitalism and Central Banking seems absurd. The idea certainly persuades no one out outside of a narrow ideological clique. Outside of this clique central banking is part and parcel of "capitalism". Denying this usage is like denying that the Soviet Union under Stalin was "socialism".

Muirgeo here is the struture:

The Federal Reserve System is not "owned" by anyone and is not a private, profit-making institution. Instead, it is an independent entity within the government, having both public purposes and private aspects.

As the nation's central bank, the Federal Reserve derives its authority from the U.S. Congress. It is considered an independent central bank because its decisions do not have to be ratified by the President or anyone else in the executive or legislative branch of government, it does not receive funding appropriated by Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms. However, the Federal Reserve is subject to oversight by Congress, which periodically reviews its activities and can alter its responsibilities by statute. Also, the Federal Reserve must work within the framework of the overall objectives of economic and financial policy established by the government. Therefore, the Federal Reserve can be more accurately described as "independent within the government."

The twelve regional Federal Reserve Banks, which were established by Congress as the operating arms of the nation's central banking system, are organized much like private corporations--possibly leading to some confusion about "ownership." For example, the Reserve Banks issue shares of stock to member banks. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold, traded, or pledged as security for a loan; dividends are, by law, 6 percent per year.

The Fed is certainly a quasi government agency, that has policies heavily influenced by government. After all the president appoints the chairman, and congress approves.

Bravo. I think this is the first time I've seen Dr. Boudreaux mention central banking as a cause of our problems. That of course immediately raises another question - what is a better alternative? Gold standard? Commodity index standard? Something else?

L. V. Mises:

"In a mixed economy, market distortions caused by intervention lead to calls for further intervention...."

Plank 5 of The Communist Manifesto


"Centralisation of credit in the hands of the State, by means of a national bank with State capital and an exclusive monopoly."

Isn't the Federal Reserve pretty much owned/run by it's private membership banks? I like to get to root causes and I think this is a post that does so. The nature of money has to be the most basic subject of all economics. So what is the Libertarian consensus on how best to set up the money system? I get the idea no one has a simple solution... well a simple solution that works.

“I believe that banking institutions are more dangerous than standing armies… If the American People ever allow private banks to control the issue of currency… the banks and corporations that will grow up around them will deprive the people of their property until their children wake up homeless on the continent their fathers conquered.”

Thomas Jefferson

Thank you, Professor, for the excellent letter.

Whenever I hear someone refer to "the economic power of the private sector to exploit ways to take money" -- as Gallington did -- I want to remind them that the only legal "power" the private sector possesses is the power to offer a value in exchange for another value.

For instance, the private sector can offer a wage in exchange for one's labor -- or offer a product or a service in exchange for one's money -- or offer a loan in exchange for repayment plus interest -- etc.

But in no case does the private sector have the power to force anyone to accept these offers -- and in no case does the private sector have the legal power to take money from anyone by force.

It is only government that has the legal power to use force to take money out of the economy -- or to put it in.

Quote from John V: "Excellent point...but it's a point that falls on deaf ears."

You're exactly correct. We might as well be talking about paganism to the Pope.

MichaelG - mortgage brokers are like used car salesmen. They are trying by hook or crook to sell their shady products. Remember that.

It's exactly like that only entirely different. Look at it this way, while home prices continued to appreciate, there was seemingly no risk for the mortgage broker; after all, who in their right mind whould default on their mortgage and have their house foreclosed on if there was equity in it? Why do that when one could always just refinance. The mortgage broker, in good times, had his/her six covered as well as the bank s/he worked for because the house itself remained good collateral even if it got to the point where the borrower went into foreclosure.

So, a used car salesman will try to unload a depreciating asset on you and take the largest downpayment you have -- especially if your credit is bad. As VP Biden might say, "This ensures the buyer has some skin in the game." A broker really doesn't want you to default on the loan because the riskier loans typically didn't have enough skin in the game. But for a long while it really didn't matter: with the asset (the home) appreciating like it had been, soon the borrower did have enough skin in the game. Mortage brokers, and the banks they represented, would compete vigorously for borrowers because of this difference whereas a used car salesman will send you away in a heartbeat if you have bad credit and not enough cash to put down (or have no dupe willing to co-sign the loan).

While many of the responses to Prof Boudreaux's comments are very intelligent, there seems so little appreciation of them.

So, once in a while we ought to express our appreciation for his remarkable insight and unprofessorial simplicity and clarity.

I know, Professor, that I speak for the most intelligent people here when I say, thank you very much.

MichaelG - mortgage brokers are like used car salesmen. They are trying by hook or crook to sell their shady products. Remember that.

So so true. I wonder how many fewer or shorter wars there would've been without central banks to finance them.

Watching people buy overpriced real estate in California, I'm convinced that no complete explanation can leave out the psychology of the situation. People here only had to look at the tech stock crash, or the early 90's real estate crash (some areas in Silicon Valley dropped 25% back then.) That we assumed "it's different this time" yet again proves that it was more than just interest rates, money supply, or trade surpluses recycled into the U.S. by China. There was also insanity.

It's not just loony homeowners. I'm struck by the fact that many mortgage brokers, who should have known how bad the subprime mortgages were, still got involved in house flipping. And I've read that banks would not be in nearly as much trouble if they had really securitized all their mortgages and sold them. Instead, they bought or kept the stuff themselves (knowing how bad some of it must be) and are suffering as a result.

Of course, thinking that government will really act to pop bubbles or lower spending during bubbles is a fantasy. They tend to do just the opposite.

Excellent point...but it's a point that falls on deaf ears.

The most dismissive rebuttal I've seen to such points is that the Fed isn't going anywhere so blaming something so ubiquitous and omnipresent is a waste of time.

IOW, we must judge free markets with this fundamental distortion because we're not getting rid of it anytime soon.

I say that that is true but it still doesn't change the point.