By Joseph Salerno

In an interview on CNBC’s European Closing Bell show, George Selgin presents an eloquent and compelling defense of deflation that is caused by increasing productivity in the economy. He refers to this as “good deflation.” Indeed, Selgin argues that such deflation is “desirable,” because any attempt by the Fed to offset it by monetary expansion will create asset bubbles.

Unfortunately, in the same interview, Selgin defends the first round of quantitative easing undertaken by the Fed in 2008 on the Keynesian grounds of the necessity of offsetting a fall in total spending or “aggregate demand.” In Selgin’s words:

Back in 2008 a case existed for quantitative easing because there really was a shrinkage of demand and the Fed needed to do something about it. . . . It [quantitative easing] is sometimes flawed and sometimes not depending on whether it is in response to falling demand that needs to be revived, where it can play a role in reviving it under the right circumstances. . . .

Furthermore, Selgin correctly points out that arguments for the Fed targeting a stable price level or an inflation rate of two percent “aren’t founded on anything really sound.” And yet Selgin goes on to call on the Fed to target a constant level of total spending or “nominal GDP” in order to achieve his own preferred rate of price change for the economy. “According to my theory,” says Selgin, “a healthy rate of deflation is one that looks like productivity growth.” But why is this rate of change in overall prices any less arbitrary than, for example, the 2.5 percent increase in prices that Bernanke prefers? Why must changes in overall prices reflecting the public’s changing relative valuations of cash holdings vis-a-vis consumer and producer goods be eternally suppressed by the Fed, particularly falling prices resulting from an increase in the demand for cash?

In fact Selgin expresses a profound solidarity with Keynesian macroeconomists like Bernanke when he states in his interview that a shrinkage in the demand for goods is undesirable and must be avoided, whether by quantitative easing or by mandating that the Fed target a constant level of nominal GDP in the long run. Like Bernanke et al. it seems that Selgin has not learned the first principle of business cycles, which was originally discovered by the classical economists and elaborated into a full theory by Mises, Hayek, and later Austrian economists. The classical economist David Ricardo gave this principle concise and elegant expression:

Men err in their productions, there is no deficiency of demand.

Continue reading the comments, with a reply by Dr. Selgin, at bastiat.mises.org…

Dr. Selgin’s interview:

 

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Given all the attention that the Federal Reserve has garnered for its monetary “stimulus” programs, it’s perplexing to many that the U.S. has been mired in a credit crunch. After all, conventional wisdom tells us that the Fed’s policies, which have lowered interest rates to almost zero, should have stimulated the creation of credit. This has not been the case, and I’m not surprised.

As it turns out, the Fed’s “stimulus” policies are actually exacerbating the credit crunch. Since credit is a source of working capital for businesses, a credit crunch acts like a supply constraint on the economy. This has been the case particularly for smaller firms in the U.S. economy, known as small and medium enterprises (“SMEs”).

To understand the problem, we must delve into the plumbing of the financial system, specifically the loan markets. Retail bank lending involves making risky forward commitments, such as extending a line of credit to a corporate client, for example. The willingness of a bank to make such forward commitments depends, to a large extent, on a well-functioning interbank market – a market operating with positive interest rates and without counterparty risks.

With the availability of such a market, banks can lend to their clients with confidence because they can cover their commitments by bidding for funds in the wholesale interbank market. …

Continue reading at Cato.org…

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Money matters — it’s a maxim of Prof. Milton Friedman that I repeat often in my columns. Since the Northern Rock bank run of 2007 — the “opening shot” of the financial crisis — the money supply, broadly measured, in the United States, Great Britain, and the Eurozone has taken a beating. Recently, in the United States, money supply growth has started to rebound, but only slightly. In the U.K. and the Eurozone, things are much worse. This is cause for concern, because the quantity of money and nominal gross domestic product are closely related.

Not surprisingly, in the U.S., growth has been anemic, at best. In the U.K., the economy has fluctuated between stagnation and recession. And, in Europe, growth has been replaced by the Eurozone’s longest recession ever. Indeed, 9 of 17 E.U. countries that use the euro are in a recession, including France, and Eurozone unemployment sits at a record 12.1%.

When it comes to measuring the money supply, we must heed the words of Sir John Hicks, a Nobelist and high priest of economic theory: There is nothing more important than a balance sheet. These sentiments were recently echoed by my Parisian friend, former Governor of the Banque de France Jacques de Larosière, in his 17 April 2013 lecture at Sciences Po.

Components of the money supply appear on a bank’s balance sheet as liabilities. The money supply is simply the sum all of the deposits and various other short-term liabilities of the financial sector. On every balance sheet, the sum total of assets must equal total liabilities. In consequence, the money supply (short-term) liabilities) must have either an asset or longer-term liability counterpart on the balance sheet (see the accompanying chart).

One of these counterparts is known as credit, and it includes various financial instruments, such as private loans, mortgages, etc. Money and credit are often confused as synonyms, but they are not the same thing — credit is a counterpart to money. Any economist worth his salt should have the money supply on his dashboard. But, it is also important to look at what the financial sector is doing with these deposits — are they lending this money back out to the economy, and if so, to whom? There is one very important counterpart of the money supply that is particularly worth looking at — loans to private individuals and businesses, known as “private credit.” …

Continue reading at Cato.org…

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For more than 100 years, from roughly 1800 to 1912, the purchasing power value of the dollar under the gold-and-silver standard was essentially constant. With the creation of the Federal Reserve and its discretionary policies of the last century, however, the dollar’s value has declined by more than 95 percent.

“That comparison is difficult to ignore,” leading economic historian Richard H. Timberlake writes. In fact, “it amounts to a 50 percent decline in the value of the moneyunit every generation.” In his new book, Constitutional Money: A Review of the Supreme Court’s Monetary Decisions (Cambridge University Press, 2013), Timberlake, emeritus professor of economics at the University of Georgia and an adjunct scholar of the Cato Institute, delves into the legal and historical events that underpin today’s monetary framework.

Timberlake organizes his analysis around the nine Supreme Court cases that markedly affected the U.S. monetary system, focusing not only on the Court’s evolving interpretations of the Constitution, but also on the operations of both the gold standard and the Fed. By grounding these court cases within the context of the government’s monetary policies over time, he is able to explain how the Federal Reserve System “has interacted with the later Court decisions to undermine the Framer’s monetary constitution.” In doing so, he illustrates why this system has promoted continuous inflation and ongoing public uncertainty about the future value of money.

“Prior to the Civil War,” Timberlake writes, “no one ever imagined that anything other than gold or silver could be constitutional money. The precious metals were the limited dietary nutrients of the monetary system.” Through a series of misguided decisions, the Supreme Court paved the way for fiat money to displace gold — and for central banks to undermine marketbased monetary arrangements. The rest, as they say, is history. …

Continue reading at Cato.org…

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Before jumps in inflation I used to see articles like this in Argentina.  This piece by Steve Conover appearing in the AEI magazine argues that the “[l]ack of sufficient economic growth is behind most if not all of our fiscal and monetary problems,”  and so printing money is not so bad. The current manipulation of money and credit is very dangerous.  No doubt that an increase in the demand for cash holdings (what some call “velocity of circulation,” as if money would have an engine. . .) can off-set the printing of money, but there is a limit.

Read the article at the American.com…

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“The gold standard, in a new incarnation, quite obviously no longer is a fringe issue.  It has entered the mainstream.  The conservative, libertarian, and Tea Party Republican voter base, and the ethnic and union members of the Democratic voter base, are receptive.  Interestingly, blacks and union members, when polled, appear even more enthusiastic for gold than libertarians and conservatives….

Now the gold standard now is beginning to move beyond the op-ed pages, pages which often serve as, as Clausewitz said of war, “politics by other means.”  The gold standard proposition is dignified by invitation of its proponents to dignified forums.  These are worthy of a closer look.  ProCon.orgis a nonprofit forum with the mission of “Promoting critical thinking, education, and informed citizenship by presenting controversial issues in a straightforward, nonpartisan, primarily pro-con format.”  Last year it informed over 15 million unique visitors and served up almost 60 million pageviews on a variety of interesting controversies.”

Continue reading at Forbes.com…

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As trust in the Federal Reserve System and its fiat dollar continues to plummet worldwide, legislation making gold and silver into legal tender was given final approval by Arizona lawmakers on Monday when the Republican-led state House of Representatives voted overwhelmingly in favor of the bill. With tremendous grassroots support, an earlier version of the precious-metals measure sailed through the GOP-controlled Arizona Senate in late February.

If the legislation is signed by Gov. Jan Brewer, a Republican, Arizona would become the second state to officially define gold and silver as legal tender. Utah adopted a similar law two years ago, garnering widespread praise among free market-oriented economists and sending shockwaves through the financial community. Since then, as the privately owned Federal Reserve and its wild policies have come under increasingly fierce criticism, the movement to restore sound money has been spreading across America like wildfire. Over a dozen states already have similar efforts underway.

Under the Arizona SB 1439 legislation, precious metals would be treated just like debt-based fiat dollars for taxation and regulation purposes. However, unlike fiat dollars, nobody would be forced to accept gold or silver currency. While the original Senate bill would have allowed citizens to pay state taxes in any form of money, including precious metals, the House added an amendment striking that provision in an effort to ease opposition from the state Department of Revenue.

Republican State Rep. David Livingston, who added the amendment exempting tax authorities from having to accept gold and silver, told reporters that the Department of Revenue had requested the change. “They just didn’t want to have to deal with it right now,” the key lawmaker involved in getting the measure approved told the Associated Press, adding that the amendment was not indicative of problems with the bill. “They wanted to make sure they wouldn’t be required to take gold and silver.” …

Continue reading at thenewamerican.com…

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Mr. Vieira is an attorney specializing in constitutional law. He is the author of numerous publications on monetary law.

This is a condensed version of the monograph “What Is a Dollar?,” distributed by the National Alliance for Constitutional Money. All rights to this condensed version are reserved by the National Alliance for Constitutional Money, Inc.

The question “What is a ‘dollar’?” seems trivial. Very few people, however, can correctly define a “dollar,” even though a correct definition is vital to their economic and political well-being.

1. Why is a correct definition of the term “dollar” important?

In America’s free-market economy, prices are expressed in units of money. Under present law, “United States money is expressed in dollars . . .”1Moreover, all “United States coins and currency (including Federal Reserve Notes . . . ) are legal tender for all debts, public charges, taxes and dues.”2Thus, defining the noun “dollar” is necessary in order to know what is the “money” of the United States and what constitutes “legal tender.”

2. Do the present monetary statutes intelligibly define the “dollar”?

The present monetary statutes do not define the “dollar” intelligibly.

a. Federal Reserve Notes. Most people mistake the Federal Reserve Note (FRN) “dollar bill” for a “dollar.” But no statute defines or ever defined the “one dollar” FRN as the “dollar” or even a “dollar.” Moreover, the United States Code provides that FRNs “shall be redeemed in lawful money on demand at the Treasury Department of the United States . . . or at any Federal Reserve bank.”3Thus, if FRNs are not themselves “lawful money,” they cannot be “dollars,” the units in which all “United States money is expressed.”

b. United States coins. The situation with coinage is equally confusing. The United States Code provides for base-metallic coinage, gold coinage, and silver coinage, all denominated in “dollars.” The base-metallic coinage includes “a dollar coin,” weighing “8.1 grams,” and composed of copper and nickel.4The gold coinage includes a “fifty dollar gold coin” that “weighs 33.931 grams, and contains one troy ounce of fine gold.”5Finally, the silver coinage consists of a coin that is inscribed “One Dollar,” weighs “31.103 grams,” and contains one ounce of “.999 fine silver.”6What is the rational relationship between this “dollar” of 31.103 grams of silver, a “fifty- dollar” coin containing 33.931 grams of gold alloy, and a “dollar” containing “8.1 grams” of base metals? Obviously, these are not the amounts of the metals that exchange against each other in the free market—that is, the different weights of different metals do not reflect equivalent purchasing powers. So, on what theory are each of these disparate weights, and purchasing powers, equally “dollars”?

c. Currency of “equal purchasing power.” The United States Code mandates that the latter question should not even be capable of being asked. For the Code commands that “the Secretary [of the Treasury] shall redeem gold certificates owned by the Federal reserve banks at times and in amounts the Secretary decides are necessary to maintain the equal purchasing power of each kind of United States currency.”7Obviously, the Secretary has defaulted on this obligation to keep all forms of “United States currency” at parity with one other—that is, to maintain a “dollar” of constant purchasing-power, whether it be composed of gold, silver, or base metals.

In sum, the monetary statutes do not define the noun “dollar” in a unique way. Instead, completely different things have the same name, things unequal to each other are treated as equivalent, and things that should have the same characteristics (i.e., “equal purchasing power[s]”) are quite different.

3. What does American history and the Constitution identify as the “dollar”?

History shows that the real “dollar” is a coin containing 371.25 grains (troy) of fine silver.

a. The “dollar” in the Constitution. Both Article I, Section 9, Clause 1 of the Constitution and the Seventh Amendment use the noun “dollar.” The Constitution does not define the “dollar,” though, because in the late 1700s everyone knew that the word meant the silver Spanish milled dollar.

b. Adoption of the “dollar” as the “Money-Unit” prior to ratification of the Constitution. The Founding Fathers did not need explicitly to adopt the “dollar” as the national unit of money or to define the “dollar” in the Constitution, because the Continental Congress had already done so.

The American Colonies did not originally adopt the dollar from England, but from Spain. Under that country’s monetary reforms of 1497, the silver real became the Spanish money of account. A new coin consisting of eight reales also appeared. Known as pesos, duros, piezas de a ocho (“pieces of eight”), or Spanish dollars, the coins achieved predominance in the New World because of Spain’s then-important commercial and political position.8Indeed, by 1704, the “pieces of eight” had in fact become a unit of account of the Colonies, as Queen Anne’s Proclamation of 1704 recognized, when it decreed that all other current foreign silver coins “stand regulated, according to their weight and fineness, according and in proportion to the rate . . . limited and set for the pieces of eight of Sevil, Pillar, and Mexico” (forms of Spanish dollars).9 …

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I have a column in the Times on bitcoins and their implications for private money

Bitcoins — a form of digital private money — shot up in value from $90 to $260 each after Cypriot bank accounts were raided by the State, then plunged last week before recovering some of their value. These gyrations are symptoms of a bubble. Just as with tulip bulbs or dotcom shares, there will probably be a bursting. All markets in assets that can be hoarded and resold — as opposed to those in goods for consumption — suffer from bubbles. Money is no different; and a new currency is rather like a new tulip breed.

Yet it would be a mistake to write off Bitcoins as just another bubble. People are clearly keen on new forms of money safe from the confiscation and inflation that looks increasingly inevitable as governments try to escape their debts. Bitcoins pose a fundamental question: will some form of private money replace the kind minted and printed by governments?

It has happened before. Pennies and halfpennies were effectively privatised by industrialists in Birmingham in the 1790s. New industrial employers had to pay workers in cash rather than kind, as farmers had done. But there was a chronic shortage of small coins. The Royal Mint had given up making silver coins because people melted them down when their value as metal exceeded their face value and had stopped striking copper halfpennies, which were too easily counterfeited.

So Thomas Williams, the owner of an Anglesey copper mine, and Matthew Boulton, keen to put steam engines to work, offered to make pennies for the government. Rebuffed, Williams made coins anyway. Called druids, they were harder to fake or clip (because they had raised rims) and cheaper to strike than state coins. Being convertible into guineas and pounds at a fixed price of one penny, they were soon accepted all over Birmingham and even in London.

By 1797 there were 600 tons of such tokens in circulation and the counterfeiters were put out of business. The coiners started making silver tokens too but a jealous Royal Mint lobbied Parliament to outlaw the competition. It succeeded in 1818, three years before it could produce new copper coins to match the high standards of the private ones, so the coin famine resumed. …

Continue reading at rationaloptimist.com…

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