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© 2012 Sanjeev Sabhlok's revolutionary blog
Listen to the Bernanke:
Ben Bernanke gave the first lecture of his 4-part lecture series on "The Federal Reserve and the Financial Crisis" at George Washington University. The lecture has been roundly condemned for it exposes Bernanke’s deep ignorance. Not fit to be a minor school teacher of economics, he thinks he is fit to centrally plan and manage America's money and banking system.
Extracts from two comments on this lecture:
The Conceit of Central Bankers (by Greg Canavan)
Bernanke wastes no time in cracking the standard joke favoured by gold ignoramuses. That is, a whole lot of resources are wasted in digging gold up from South Africa or somewhere and putting it into another hole in a New York vault. Boom-tish!
He also says a problem with the gold standard is that when economic activity heats up, the money supply increases and interest rates go down – 'the reverse of what the central bank would normally do today'.
Bernanke needs to read Bastiat's What is Seen and What is Unseen. Bernanke sees the cost of the gold standard, but doesn't see the benefit. In this case, the benefit is having the market set the price of money, NOT central bankers. (So it's hardly surprising he chooses not to see that.)
Under a gold standard, when economic activity heats up, gold migrates to the growing economy. Because gold is money under a gold standard, the money supply increases, which pushes the price of money (the interest rate) down.
Bernanke thinks this is a bad thing. It's the opposite of what he'd do. That's why the world is in such a mess. But his thinking is completely wrong.
You see, Bernanke ignores the other side of the equation. If gold migrates to the growing economy, it is fleeing somewhere else. If gold pushes up the money supply and pushes the market rate of interest down in one country, it is contracting the money supply and forcing interest rates up in another country.
… the gold standard is a natural balancing mechanism imposing constant discipline on countries. It helps establish a market rate of interest, which bestows no favours on any special interest group…be it bankers, farmers, consumers or savers.
Bernanke thinks he can promote constant expansion by fiddling with the money supply. His perpetually low rates discourage saving and investment. They encourage consumption. He's doing precisely the opposite of what the market would do under a gold standard.
Is one person smarter than the collective wisdom of millions?
Anti-Bernanke (by George Selgin)
Source: http://www.freebanking.org/2012/03/21/anti-bernanke/
So like any central banker, and unlike better academic economists, Bernanke consistently portrays inflation, business cycles, financial crises, and asset price "bubbles" as things that happen because…well, the point is that there is generally no "because." These things just happen; central banks, on the other hand, exist to prevent them from happening, or to "mitigate" them once they happen, or perhaps (as in the case of "bubbles") to simply tolerate them, because they can't do any better than that.
In describing the historical origins of central banking, for instance, Bernanke makes no mention at all of the fiscal purpose of all of the earliest central banks–that is, of the fact that they were set up, not to combat inflation or crises or cycles but to provide financial relief to their sponsoring governments in return for monopoly privileges. He is thus able to steer clear of the thorny challenge of explaining just how it was that institutions established for function X happened to prove ideally suited for functions Y and Z, even though the latter functions never even entered the minds of the institutions' sponsors or designers!
Bernanke is able to overlook the important possibility that central banks' monopoly privileges–and their monopoly of paper currency especially–may have been a contributing cause of 19th-century financial instability.
FALSE ATTRIBUTION
Bernanke refers to Bagehot's work, but only to recite Bagehot's rules for last-resort lending. He thus allows all those innocent GWU students to suppose (as was surely his intent) that Bagehot considered central banking a jolly good thing. In fact, as anyone who actually reads Bagehot will see, he emphatically considered central banking–or what he called England's "one-reserve system" of banking–a very bad thing, best avoided in favor of a "natural" system, like Scotland's, in which numerous competing banks of issue are each responsible for maintaining their own cash reserves.
FALSE DATA/ FUDGING
He attributes the greater frequency of banking crisis in the post-Civil War U.S. than in England solely to the lack of a central bank in the former country, making one wish that some clever GWU student had interrupted him to observe that Canada and Scotland, despite also lacking central banks, each had far fewer crises than either the U.S. or England.
Because he entirely overlooks the role played by legal restrictions in destabilizing the pre-1914 U.S. financial system,
FALSE ATTRIBUTION AND EXAGGERATION
Bernanke refers listeners to Frank Capra's movie "It's a Wonderful Life." The impression left is one that ought to make any thinking person wonder how any bank ever managed to last for more than a few hours in those awful pre-deposit insurance days. That quite a few banks, and especially ones that could diversify through branching, did considerably better than that is of course a problem for the theory, though one Bernanke never mentions.
he never mentions the fact that Canada had no bank failures at all during the 1930s, despite having had no central bank until 1935, and no deposit insurance until many decades later.
TOTAL FUDGING OF DATA TO MISLEAD
And although Bernanke shows a chart depicting high U.S. bank failure rates in the years prior to the Fed's establishment, he cuts it off so that no one can observe how those failure rates increased after 1914.
TOTAL IGNORANCE
Bernanke's discussion of the gold standard is perhaps the low point of a generally poor performance.
Do read these articles in full.
A friend recommended a book, The Creature from Jekyll Island by G. Edward Griffin. I didn't remember hearing about this man before, but on checking my website I found that last year I had recommended one of his Youtube videos (an interview with a Soviet spy in India – see this). The spy admitted to extensive ideological subversion in India (as a result of which virtually no one in India is willing to listen to a condemnation of socialism).
Griffin turns out to be both a proponent of liberty and a friend of India. That's a good start, as far as I'm concerned.
Not having the time to read every book I "should" read (I've now got a huge backlog, despite trying my best), I searched the web and found this talk by Griffin about his book. I listened to the talk while taking a break, and it was well worth the time spent.
I thoroughly commend this talk (There a few things at the end which deviate from the key issue of central banking and fiat money, but most of the talk is extremely sensible). And time permitting, will read his book/s.
The basic point Griffin is making is simple: that there is a DELIBERATE attempt by governments everywhere to confiscate citizens' property through central banking. By controlling the "production" of money FROM THIN AIR, governments have mastered the method of divesting you of your wealth – without your knowing it.
Central banking is magical in its power. You feel that you are being "looked after" (after all, a central bank "stabilises" the economy – not!) even as YOU ARE CHLOROFORMED AND MUGGED.
If you were a FOOL to save your "rupees" inside a container in 1950 (or even in 2005), you will know what I mean: your savings have been made ENTIRELY WORTHLESS – BY THE CLEVER TRICK OF CENTRAL BANKING.
Griffin explains the money creation process under this central banking (fractional reserve) system.
Note that money is ALWAYS created by central banks from NOTHING. Yes, ALWAYS. From NOTHING.
This new money then mingles with old money, and STEALS some of its "power".
As Griffin says, new money is like water that dilutes soup. You can't distinguish new "water" from old "soup". The soup is simply more diluted now. You are successfully taxed in this manner without even knowing it! How very clever!
Griffin also shows that this can't happen if money creation is pegged to ANYTHING REAL (not necessarily gold).
For instance, the real value of gold has remained the same for 2,000 years. You can still get virtually the same REAL things today from an ounce of gold (e.g. a good suit and a belt) that you got 2,000 years ago.
But don't rely on your rupees (or your dollars, or euros) 2000 years from now!!
This REDISTRIBUTION, whereby money is STOLEN FROM THE HARD WORKING and TRANSFERRED TO (a) governments and (b) big banks, has been going on since the Federal Reserve was created in USA. Today, the US dollar is worth LESS THAN FIVE CENTS of its 1910 value.
ALL THAT EXTRA 95 CENTS OF YOUR HARD WORK HAS BEEN TRANSFERRED TO THE GOVERNMENT AND TO BIG BANKS. In other words, the average American would have been 20 times wealthier today than he is, without the Federal Reserve "bank". [OK, things might be a bit more complex than this, but the broad point holds.]
As we speak, the value of the Indian rupee is being degraded at an alarming rate by the Indian government (India's central bank is unambiguously a branch of government) (inflation rate in India today is greater than 10 per cent) – and yet, all that the media and people can talk about is Anna Hazare and his irrelevant (ineffective) "movement", which offers, to use Griffin's word, a NON-SOLUTION to the problem of corruption.
FREEDOM FORCE
I explored Griffin's work some more, and came across this website that he runs: Freedom Force. A key document from that is this THE CREED OF FREEDOM that he has authored, and which I'm reproducing below. It is an excellent short document, worth understanding carefully.
CREED OF FREEDOMINTRINSIC NATURE OF RIGHTSI believe that only individuals have rights, not the collective group; that these rights are intrinsic to each individual, not granted by the state; for if the state has the power to grant them, it also has the power to deny them, and that is incompatible with personal liberty.I believe that a just state derives its power solely from its citizens. Therefore, the state must never presume to do anything beyond what individual citizens also have the right to do. Otherwise, the state is a power unto itself and becomes the master instead of the servant of society.SUPREMACY OF THE INDIVIDUAL
I believe that one of the greatest threats to freedom is to allow any group, no matter its numeric superiority, to deny the rights of the minority; and that one of the primary functions of a just state is to protect each individual from the greed and passion of the majority.FREEDOM OF CHOICE
I believe that desirable social and economic objectives are better achieved by voluntary action than by coercion of law. I believe that social tranquility and brotherhood are better achieved by tolerance, persuasion, and the power of good example than by coercion of law. I believe that those in need are better served by charity, which is the giving of one's own money, than by welfare, which is the giving of other people's money through coercion of law.EQUALITY UNDER LAW
I believe that all citizens should be equal under law, regardless of their national origin, race, religion, gender, education, economic status, life style, or political opinion. Likewise, no class should be given preferential treatment, regardless of the merit or popularity of its cause. To favor one class over another is not equality under law.PROPER ROLE OF THE STATE
I believe that the proper role of the state is negative, not positive; defensive, not aggressive. It is to protect, not to provide; for if the state is granted the power to provide for some, it must also be able to take from others, and that always leads to legalized plunder and loss of freedom. If the state is powerful enough to give us everything we want, it also will be powerful enough to take from us everything we have. Therefore, the proper function of the state is to protect the lives, liberty, and property of its citizens, nothing more. That state is best which governs least.THE THREE COMMANDMENTS OF FREEDOM
The Creed of Freedom is based on five principles. However, in day-to-day application, they can be reduced to just three codes of conduct. These are The Three Commandments of Freedom:ADDENDUM INDIVIDUAL RIGHTS
Only individuals have rights, not groups. Therefore, do not sacrifice the rights of any individual or minority for the alleged rights of groups.EQUALITY UNDER LAW
To favor one class of citizens over others is not equality under law. Therefore, do not endorse any law that does not apply to all citizens equally.FREEDOM OF CHOICE
The proper function of the state is to protect, not to provide. Therefore, do not approve coercion for any purpose except to protect human life, liberty, or property.THE THREE PILLARS OF FREEDOM
Another way of viewing these principles is to consider them as the three pillars of freedom. They are concepts that underlie the ideology of individualism, and individualism is the indispensable foundation of freedom.
Addendum
The claim that average Americans would become 20 times wealthier should read the median American, not average. How does this happen?
A) Transfer of existing wealth from the middle class to the rich and to the poor
The middle class is most affected by inflation, since it keeps most of its savings in banks. Its savings loses value close to the rate of devaluation of the dollar through inflation (a tiny bit of value is chipped off each dollar saved, each year). Where does this stolen value go to?
i) The rich get most of it. They pay out low-value dollars to their creditors (as business owners). Alternatively, they own shares, which benefit likewise from inflation.
ii) The poor initially lose from inflation but earned income tax credit and other welfare programs return all of this back, plus more. Therefore they gain the rest of the value stolen from the middle class.
The hard working middle class is therefore the clear loser.
B) Reduction in the total wealth of America
But not just this impoverishment, there is also another impoverishment taking place – due to the misallocation of resources arising from system of administering interest rates. The interest rate manipulation compels the middle class to invest in real estate as protection against inflation. But, as Griffin pointed out, it is the middle class whose houses or cars are “stolen” by banks when their value falls due to inevitable recessions. Middle class savings are also lost as cheap interest rates attract low cost foreign producers and importers, displacing American jobs.
This process of misallocation of resources impoverishes America, and adds to the loss of wealth experienced by the median American.
C) The surreptitious way of stealing creates incentives to steal
You might argue that in the absence of inflation, the middle class would have paid the same amount of tax in some other way. That’s not true. The middle class would have rebelled openly if the amount by which they are (surreptitiously) being looted each year by government were openly taxed. The theft would then become more obvious, the redistribution would become more blatant, and so the thief would be shot (i.e. the median voter would boot out the party that taxes them so heavily).
In sum, it is reasonable to argue that the middle class's (or median voter's) impoverishment AT THE EXPENSE OF the rich and the poor – AND at at the expense of a bloated bureaucracy funded by these taxes which would not have otherwise existed – has been very significant, if not 20 times, over the course of the last century.
I won't hold on to the 20 times figure as a sacrament, but the concept is right.
Money should not play a REAL role in the economy. It is merely a medium of exchange and no more.
The optimal supply of money is, in my view, that level which is just enough to ensure that the price level remains unchanged. That way, the value of currency remains UNCHANGED. Money therefore does not distort incentives.
This is a very important point.
On the other hand, the first thing we notice is that while price levels remained largely unchanged for hundreds of years (being chained to gold) prior to the growth of central banking, since then the value of money has been TOTALLY DESTROYED.
"The U.S. dollar, for instance, is now worth only 1/22 of what is was worth when the Fed was formed in 1913". The Indian rupee is now perhaps worth 0.000001 of its original value (someone help me on this with the facts).
What happens when money deflates like a shrinking balloon (as money supply inflates)? Those who save money are RUINED.
In 1947, the average ANNUAL salary of a head clerk was around Rs.500. To save Rs.500 took 10 years of HARD LABOUR.
Had someone put this Rs. 500 in savings below his mattress in 1947 with the hope of living off that saving in old age, he would have been bitterly disappointed.
Today, that Rs.500 won't buy you a SINGLE MEAL (in any ordinary restaurant).
Why?
Who is responsible for looting the VALUE that was supposed to be present in that Rs.500?
Who is responsible for LOOTING the hard working poor people of this world?
None other than Karl Marx (and his Keynesian/ Fabian socialist cronies).
Central banking was one of the ten pillars of the communist economy. Read the Communist Manifesto if you don't believe me on this.
Of course, central banking has a longer history. A lot of so-called capitalist countries adopted it because it was a very convenient way of printing money for war. The only good thing was that at one time people would NOT TOUCH A PAPER NOTE that was not backed by gold.
So the initial central banks had no choice but to link their fiat money (in an imperfect way) to gold.
But as we know that was abandoned as being too constraining. The desire to PRINT MONEY become irresistible.
Today money operates PURELY as fiat money, its value being degraded EACH DAY, EACH SECOND OF THE DAY.
Central banks have been taking money from the poor and handing it over to the rich (who invest in stocks and property, and take all kinds of tax breaks that the poor man can't even imagine). And people complain that inequalities are increasing! What else would you expect when you LOOT THE POOR?
If the OWS movement wants to get to the bottom of this problem it should demand the abolition of central banking, privatisation of money, and linking ALL currency to gold. That is the ONLY way to stop this loot of the poor (of ordinary people like you and me).
Here are extracts from an excellent article by Richard W. Rahn:
Abolish Central Banks
This article appeared in The Washington Times on October 25, 2011.
It is clear to many of us that the current Fed policy of ultralow interest rates of less than 1 percent for banks and money-market funds, combined with high inflation rates of 3.9 percent for the past year, is a formula for a new disaster.
If a saver can only obtain 1 percent or so on cash savings but inflation is running at almost 4 percent, then the saver is losing 3 percent of his money each year in an inflation tax. Interest rates below the rate of inflation undermine financial institutions, distort business capital-allocation decisions and will reduce future economic growth rates and job creation.
In sum, the Fed and the other major central banks are making those least able to protect themselves from inflation and job loss poorer, and sending all of the wrong price signals to business people, which, in turn, is negatively affecting the world economy.
They also been saddled with correcting a problem brought on by politicians of governments that are accumulating debt far faster than their respective economies are able to finance them. The central banks can get rid of the debt problem by inflating the currency (i.e., reducing its value by printing too much money) to the point where the debts are almost meaningless but, as we learned in the 1970s, inflation only serves to make almost everyone poorer.
The basic problem is that governments have insisted upon having a monopoly in money, an idea that has been supported by most economists.
The Austrian school economists, most notably the late Nobel Laureate F.A. Hayek, were skeptics of this view. In 1976, Hayek wrote one of his classic books, Denationalization of Money, in which he argued that money is no different from other commodities and that it would be better supplied by competition between private issuers than by a government monopoly.
Hayek wrote in the conclusion of his book, "The abolition of the government monopoly of money was conceived to prevent the bouts of acute inflation and deflation which have plagued the world for the past 60 years. It proves on examination to be also the much needed cure for a more deep-seated disease: the recurrent waves of depression and unemployment that have been represented as an inherent and deadly defect of capitalism.
"I still believe that, so long as the management of money is in the hands of government, the gold standard with all its imperfections is the only tolerably safe system. But we can certainly do better than that, though not through government."
And finally: "If we want free enterprise and a market economy to survive … we have no choice but to replace the government currency monopoly and national currency systems by free competition between private banks of issue. … We have always had bad money because private enterprise was not permitted to give us a better one."
Hayek's critique of central banks and the government money monopoly is totally supported by the empirical evidence. The U.S. dollar, for instance, is now worth only 1/22 of what is was worth when the Fed was formed in 1913, and most other central banks have even a worse track record.
There are many groups that have experimented — and still are experimenting — with private currencies, but as soon as they begin to get some traction to see if their currencies will really work, the jackboots from Treasury and the Internal Revenue Service shut them down. It is going to be difficult to abolish the government monopoly over money because it is so profitable for politicians. Seigniorage, interest-free monetary float and inflation provide huge revenues to government, which politicians love, without appearing to be explicit taxes.
But there is some reason to be hopeful because very bright and creative folks are experimenting with private monies on the Internet. Advances in computing power and encryption technologies are increasingly making it possible for people to get around the destructive government money monopoly. With some luck and some support from countries that are not part of the U.S. dollar, euro and Japanese yen blocs, free money might yet succeed. If not, we will continue to be doomed to a life of boom and bust, and inflation and deflation, as the central banks continue to nail all of us on the cross of government monopoly money.
Richard W. Rahn is a senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth.
The reason why we prefer an independent central bank to a politicised one is because we assume that it will ensure orderly growth of money supply without political interference.
But after observing the actions of Alan Greenspan I've realised that the concept of an independent central bank is a simply one more myth. It is a myth because the personal preferences of the central banker get in the way, even assuming the central banker is shielded from political interference.
Alan Greenspan had a personal preference for greater house ownership in America. That preference distorted what should have otherwise have been purely technical decisions.
Of course, even such technical management of money is a myth because the relevant knowledge is simply not available to the central bank.
Even if it were, the "model" the central bank would need to use does not and cannot exist, particularly with an open economy with fluctuating exchange rates, and lagged data. The central bank simply can't get it "right".
The idea of central banking is therefore impossible.
A classic example of this impossibility is the Australian situation today.
Had there been a multiplicity of well-regulated note issuing banks in Australia, its multiple currencies would all have had different exchange rates, each based on local circumstance, automatically self-adjusting. This would have eliminated the "two-speed" economy which is caused, today, almost entirely by the single, uniform dollar that operates across Australia, and the inevitably ham-handed interest rate polices of the central bank.
Over the past few years I've come to the view that central banking is untenable, as untenable as the concept of socialist central planning.
Here are a few short and punchy extracts from today's freebanking.org blog post by Kart Schuler to clarify this further.
Central planning need not extend to every economic activity. It is enough for the government to control key institutions. Centrally planned economies have monobank systems, in which commercial banking is a government monopoly, whereas in more market-oriented economies, commercial banking is competitive.
Even if a monetary system has competitive commercial banking, it remains true that central banking injects substantial elements of central planning.
The whole point of central banking in the form in which it has existed since about World War I is to monopolize the monetary base; consciously use the monopoly to affect conditions throughout the economy; do so through a centralized, government institution; and prevent challenges to the monopoly that might end its power. None of these elements are present in a free banking system.
The monetary system Hayek discussed Denationalisation of Money was one of competing, bank-issued fiat currencies, but Hayek was also aware of the existence of competitive banking systems based on gold. Much earlier in his career he supervised Vera Smith’s dissertation, The Rationale of Central Banking, which discussed some historical episodes fitting that description. Hayek, like his teacher Ludwig von Mises, had an extraordinarily wide range of intellectual interests, of which monetary theory was only one. They did much, but left much still to be done by successors who were willing to focus on monetary theory alone.
That helps explain why the building blocks of the idea that central banking is a form of central planning are present in Mises and Hayek, but not until Lawrence H. White and George Selgin in the 1980s did Austrian economists use the building blocks to construct a detailed argument.
Addendum
http://www.coordinationproblem.org/2012/01/central-banking-and-knowledge-problems.html
From Steve Horwitz's paper released today by Cato Institute;
Politicians and pundits portray Herbert Hoover as a defender of laissez faire governance whose dogmatic commitment to small government led him to stand by and do nothing while the economy collapsed in the wake of the stock market crash in 1929. In fact, Hoover had long been a critic of laissez faire. As president, he doubled federal spending in real terms in four years. He also used government to prop up wages, restricted immigration, signed the Smoot-Hawley tariff, raised taxes, and created the Reconstruction Finance Corporation—all interventionist measures and not laissez faire. Unlike many Democrats today, President Franklin D. Roosevelt's advisers knew that Hoover had started the New Deal. One of them wrote, "When we all burst into Washington … we found every essential idea [of the New Deal] enacted in the 100-day Congress in the Hoover administration itself."
Hoover's big-spending, interventionist policies prolonged the Great Depression, and similar policies today could do similar damage. Dismantling the mythical presentation of Hoover as a "do-nothing" president is crucial if we wish to have a proper understanding of what did and did not work in the Great Depression so that we do not repeat Hoover's mistakes today.
Btw, I commend the following talk by Steve, entitled, "Do We Really Need a Central Bank?". Steve's depth of knowledge is outstanding.
Economic Liberty Lecture Series: Steve Horwitz from The Future of Freedom Foundation on Vimeo.
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