This was just lovably cruel:
Good News/Bad News from the Daily Show.
In the last few days, the results of a research made the news: 9 out of 10 dollar banknotes are tainted with cocaine.(source)
And then it is all summarized in this sentence, for all fans of gold:
"We're not on the Gold Standard, people, we're on the Columbian Gold Standard!"
Saturday, August 22, 2009
Saturday, August 15, 2009
The Ethics of Money Production, Conclusion
1. If capitalism is to be judged, then it should be pointed out, that there are two conceptions to consider. One is the free market model of respect to private property rights. Here, says Hülsmann, is the Catholic church positively inclined to capitalism. And here is also a link to Austrian economists, that have for long held, that as an economical system it provides the best chances for the full development of man and society.
Then there is the other, 'actual' capitalism of the West, that markedly differs from the ideal. Both groups are again in accord, that many of its aspects are worthy of critique - not the least in the production of money. There is no justification for the current system of paper money and fractional reserve banking, be it economical, legal, moral, or spiritual. They affect the lives of millions, and cause excesses for which is capitalism too often blamed.
These institutions were made not out of necessity, but because they gave politicians and bankers an easy income source, tapping the wealth of others. This is not a matter of conspiracy, but of a relentless drive to gain more money for the states - and paper money with fractional reserve banking merely turned out to be very efficient ways to do so.
2. A reform of our monetary institutions is badly needed and this book tried to present one alternative. Despite all the possible objections, the return of sound money is in the end a matter of will. It has been done before and can be achieved again.
Let us hope we won't have to wait too long.
Then there is the other, 'actual' capitalism of the West, that markedly differs from the ideal. Both groups are again in accord, that many of its aspects are worthy of critique - not the least in the production of money. There is no justification for the current system of paper money and fractional reserve banking, be it economical, legal, moral, or spiritual. They affect the lives of millions, and cause excesses for which is capitalism too often blamed.
These institutions were made not out of necessity, but because they gave politicians and bankers an easy income source, tapping the wealth of others. This is not a matter of conspiracy, but of a relentless drive to gain more money for the states - and paper money with fractional reserve banking merely turned out to be very efficient ways to do so.
2. A reform of our monetary institutions is badly needed and this book tried to present one alternative. Despite all the possible objections, the return of sound money is in the end a matter of will. It has been done before and can be achieved again.
Let us hope we won't have to wait too long.
Wednesday, August 12, 2009
The Ethics of Money Production, Chapter 17
17. International paper money systems 1971-?
1. With the Fed's suspension of payments was created a large number of paper currencies, their exchange rates fluctuated wildly and every country could set its monetary policies as it desired. But very soon, international paper currencies have dominated the scene.
International businesses can of course profit from using a widespread currency, but how does a currency become widespread and how can it avoid overt fluctuations?
The reason is not hard to find. States have always need for more income. But for most states is living off their citizens insufficient. They can try to attract investments from foreigners, or try to make their own citizenry wealthier. But to accumulate wealth takes a lot of time and little interference, and few governments are willing to wait, denying themselves tax income. It is better for if foreign capital comes in. Since investors don't like to throw away their money, they must be persuaded, that the money won't be simply printed, letting the exchange rates fall and ruin their investments. There are several institutional precautions.
First, the states can produce bonds in a different currency than their own; many float bonds in Euro or the U.S. dollar.
Second, they can give public or implicit guarantees that the exchange rate will be maintained. They can inflate at will and dispossess their own people as well as the foreigners. It is assumed, says Hülsmann, that the Fed gave such guarantees to several countries in the 90s. When it was finally abolished, financial crises in the debtor countries followed (Mexico 1994, Asia 1997). This tactic was not attempted again.
Third, the debtor states have created currency boards, issuing notes backed by foreign paper money. Their own currency becomes a mere substitute for another paper money. It is used by e.g. Hong Kong, Bulgaria, Estonia, Lithuania, Bosnia and Brunei.
Fourth, they can abandon their national currency completely and use the currency of their lenders. This is called "dollarization" (does not have to be U.S. dollars). Recent examples include Ecuador, El Salvador, Kosovo and Montenegro.
International paper money is brought about by governments seeking more income sources. Preferred will be the currencies, that are legal tender in the largest capital markets. Thus have the Yen, Dollar and newly the Euro risen to the top.
2. After the fall of the Bretton Woods system began the governments of Western Europe to amass public debt to grow their welfare states. But it was soon recognized their wildly fluctuating currencies hindered international trade and could so undermine their income.
The first attempt to stabilize their currencies was the European Monetary System (EMS, founded 1978). It was a cartel of paper money producers, who agreed to stabilize the exchange rates between their currencies at certain levels, or parities. In practice, those inflating the least would determine the inflation rates of all others. If someone were to inflate more, they would have to persuade others to do the same, or risk a change of parity.
As it happened, the German Bundesbank was the most conservative of the central banks, so the pressing issue for other governments was to push the German Mark towards more inflation, to keep up with their own financial demands. It was only the rejoining of East and West Germany, that changed this. The price for the agreement of other western states, says Hülsmann, was the German Mark.
Within a few years were the paper money producers united in the European Central Bank (ECB, started operation in 1999). The Euro, lauded as a great boon for the citizens of European states, was just another means to control the money supply and secure the unlimited source of income, that paper money represents.
3. The current international monetary order is shaped by several competing currency systems, each based on a standard paper currency and a number of secondary and tertiary currencies. The most important are the U.S. dollar, euro and yen.
The relationship between these currencies are similar to those between a central bank and commercial banks. But there is no commodity money, that would limit inflation, and more importantly, there are no legal means to force them to cooperation. National sovereignty rules and the secondary and tertiary producers can inflate at will. This is compounded by the fact, that the primary producers will likely bail them out, in yet another manifestation of moral hazard.
Bailing out others by printing money means of course the all of rates and rising prices, and both currencies will be less attractive for investors.
But not bailing out is risky too: a country in a crisis could threaten to switch to another standard, which could damage the standing of the primary currency. If countries started to avoid it, it would eventually travel back to where it has legal tender privileges, raising prices and potentially even create a hyperinflation. Since all countries are free to switch to a different currency, the more money is in foreign countries, the more likely is the primary producer to accept this blackmail.
The American central bank is aware of the risk and pays some of the foreign countries for their cooperation. But that is not enough. Cooperation between the producers of standard money may be required to stabilize currencies in times of crisis.
Why would the competitors help each other out? For once, those, who would blackmail their peers, could also blackmail them. And second, profiting from a currency crisis of someone else could easily backfire, once their competitor's crises is over.
Paper money producers have the same motivation as on the national level to increase their production, because their competitors are likely to bail them out. With such a moral hazard, inflation on a large scale is inevitable.
One way to escape this mess could be to completely avoid international trade - probably an even more destructive option. But what if all the paper money producers fused into one (possibly with a worldwide regulation of banking and capital markets)?
4. As was shown, there is a strong tendency to form currency blocks around paper monies used in the largest capital markets. States with a small income (or too small for their taste) have to turn to these standard currencies as well.
Even competitors are motivated to cooperate and eventually fuse. One currency for the whole world would be the logical continuation; and it was already called for, by Lord Keynes in Bretton Woods in 1944.
But even if all political hurdles were overcome, and "the humanity" was united, even if the secondary destructive effects were curtailed and all politicians became noble paragons of virtue and defenders of liberty... even then would the monetary union fail to bring the promised stability.
A global paper currency cannot escape the fate of the national ones - it must either collapse in hyperinflation, or force the state to regulate everything, and subject all economical resources to a total control. Or both.
But there is still hope, closes Hülsmann. We can still return to natural production of money, to the only defensible monetary system.
1. With the Fed's suspension of payments was created a large number of paper currencies, their exchange rates fluctuated wildly and every country could set its monetary policies as it desired. But very soon, international paper currencies have dominated the scene.
International businesses can of course profit from using a widespread currency, but how does a currency become widespread and how can it avoid overt fluctuations?
The reason is not hard to find. States have always need for more income. But for most states is living off their citizens insufficient. They can try to attract investments from foreigners, or try to make their own citizenry wealthier. But to accumulate wealth takes a lot of time and little interference, and few governments are willing to wait, denying themselves tax income. It is better for if foreign capital comes in. Since investors don't like to throw away their money, they must be persuaded, that the money won't be simply printed, letting the exchange rates fall and ruin their investments. There are several institutional precautions.
First, the states can produce bonds in a different currency than their own; many float bonds in Euro or the U.S. dollar.
Second, they can give public or implicit guarantees that the exchange rate will be maintained. They can inflate at will and dispossess their own people as well as the foreigners. It is assumed, says Hülsmann, that the Fed gave such guarantees to several countries in the 90s. When it was finally abolished, financial crises in the debtor countries followed (Mexico 1994, Asia 1997). This tactic was not attempted again.
Third, the debtor states have created currency boards, issuing notes backed by foreign paper money. Their own currency becomes a mere substitute for another paper money. It is used by e.g. Hong Kong, Bulgaria, Estonia, Lithuania, Bosnia and Brunei.
Fourth, they can abandon their national currency completely and use the currency of their lenders. This is called "dollarization" (does not have to be U.S. dollars). Recent examples include Ecuador, El Salvador, Kosovo and Montenegro.
International paper money is brought about by governments seeking more income sources. Preferred will be the currencies, that are legal tender in the largest capital markets. Thus have the Yen, Dollar and newly the Euro risen to the top.
2. After the fall of the Bretton Woods system began the governments of Western Europe to amass public debt to grow their welfare states. But it was soon recognized their wildly fluctuating currencies hindered international trade and could so undermine their income.
The first attempt to stabilize their currencies was the European Monetary System (EMS, founded 1978). It was a cartel of paper money producers, who agreed to stabilize the exchange rates between their currencies at certain levels, or parities. In practice, those inflating the least would determine the inflation rates of all others. If someone were to inflate more, they would have to persuade others to do the same, or risk a change of parity.
As it happened, the German Bundesbank was the most conservative of the central banks, so the pressing issue for other governments was to push the German Mark towards more inflation, to keep up with their own financial demands. It was only the rejoining of East and West Germany, that changed this. The price for the agreement of other western states, says Hülsmann, was the German Mark.
Within a few years were the paper money producers united in the European Central Bank (ECB, started operation in 1999). The Euro, lauded as a great boon for the citizens of European states, was just another means to control the money supply and secure the unlimited source of income, that paper money represents.
3. The current international monetary order is shaped by several competing currency systems, each based on a standard paper currency and a number of secondary and tertiary currencies. The most important are the U.S. dollar, euro and yen.
The relationship between these currencies are similar to those between a central bank and commercial banks. But there is no commodity money, that would limit inflation, and more importantly, there are no legal means to force them to cooperation. National sovereignty rules and the secondary and tertiary producers can inflate at will. This is compounded by the fact, that the primary producers will likely bail them out, in yet another manifestation of moral hazard.
Bailing out others by printing money means of course the all of rates and rising prices, and both currencies will be less attractive for investors.
But not bailing out is risky too: a country in a crisis could threaten to switch to another standard, which could damage the standing of the primary currency. If countries started to avoid it, it would eventually travel back to where it has legal tender privileges, raising prices and potentially even create a hyperinflation. Since all countries are free to switch to a different currency, the more money is in foreign countries, the more likely is the primary producer to accept this blackmail.
The American central bank is aware of the risk and pays some of the foreign countries for their cooperation. But that is not enough. Cooperation between the producers of standard money may be required to stabilize currencies in times of crisis.
Why would the competitors help each other out? For once, those, who would blackmail their peers, could also blackmail them. And second, profiting from a currency crisis of someone else could easily backfire, once their competitor's crises is over.
Paper money producers have the same motivation as on the national level to increase their production, because their competitors are likely to bail them out. With such a moral hazard, inflation on a large scale is inevitable.
One way to escape this mess could be to completely avoid international trade - probably an even more destructive option. But what if all the paper money producers fused into one (possibly with a worldwide regulation of banking and capital markets)?
4. As was shown, there is a strong tendency to form currency blocks around paper monies used in the largest capital markets. States with a small income (or too small for their taste) have to turn to these standard currencies as well.
Even competitors are motivated to cooperate and eventually fuse. One currency for the whole world would be the logical continuation; and it was already called for, by Lord Keynes in Bretton Woods in 1944.
But even if all political hurdles were overcome, and "the humanity" was united, even if the secondary destructive effects were curtailed and all politicians became noble paragons of virtue and defenders of liberty... even then would the monetary union fail to bring the promised stability.
A global paper currency cannot escape the fate of the national ones - it must either collapse in hyperinflation, or force the state to regulate everything, and subject all economical resources to a total control. Or both.
But there is still hope, closes Hülsmann. We can still return to natural production of money, to the only defensible monetary system.
Saturday, August 1, 2009
The Ethics of Money Production: Chapter 16
Chapter 16: International Banking Systems, 1871 - 1971
Gold was legal tender in Great Britain since 1821 and the de facto currency in the US since 1834 (the Coinage Act). Australia and Canada followed 20 years later. The breakthrough for gold and the era of the classic gold standard began after the war between France and Germany (1870-1871). The German government received war damages of 5 billion francs in gold and made it fiat currency instead of silver, that was losing popularity at the time. The Prussian Bank ('Preusische Bank') was turned into a central bank ('Reichsbank'). Its notes became legal tender in 1909 - all a copy of the British system.
Why was it gold? For once, Great Britain, with the largest capital market in the world was using it. Several major lands using silver (Russia, Austria) have suspended payments by the time. Finally, silver has less purchasing power than gold, making its weight for large transfers rather problematic.
Practically all western lands and their many colonies have followed suit. In the heyday of free trade, when monopolies were frowned upon as never before, a unified monetary system seemed like a great idea; it was another massive state intervention, this time unopposed.
The classical gold standard has eliminated the fluctuations between gold and silver (though they were less than between today's paper currencies, it is a positive point). It also caused a significant forced deflation, with all its effects.
But the gold standard was still coupled with the practice of fractional reserve banking, and hence unstable. The coming of World War I. finished it off before it could collapse.
2. In the "classical" gold standard was a central bank of each country expected to hold enough gold in its reserves, while the commercial banks would rely mainly on its banknotes (another English practice, that spread out). The advantage were greater possibilities of inflation for them and more power for the central bank.
The 'Gold Exchange Standard' enhanced the already existing international cooperation between banks by a manifold. The American Fed and the Bank of England were to be the central banks for the whole world (with a few exceptions, notably France). Inflating slowly, others would rely on the pound and the dollar for backing, and could inflate much more. This unstable system lasted only from 1925 to 1931, the Great Depression of 1929 caused a rise of protectionist policies and foreign exchange controls, that choked the international currency trade. The Bank of England could not renew its gold reserves and suspended its payments, followed by other banks. From then on currencies fluctuated freely, which lasted until the end of World War II.
3. A new system was designed in 1944 in Bretton Woods (New Hampshire US), to make the production of banknotes even more 'flexible'. The gold reserves of the whole world should be concentrated in a single pool, the Fed would redeem its notes while all others would keep the US dollar as reserve. It was a logical choice, as the United States have attracted much gold and after WWII became Fort Knox the largest storage in the world. (England, represented by Lord Keynes, tried to push for a pure paper money, but it didn't come to be.)
To reduce the resulting dependency on the Fed, and to make it politically acceptable, two organizations were created: the International Monetary Fund (IMF) and the World Bank, both to influence the distribution of new banknotes. They would supply short-term (IMF) and long-term (WB) credit to member states in trouble, primarily the board members.
The growth of inflation, the main purpose of the Bretton Woods, was so successful, that the Fed eventually ran out of gold and had to suspend its payments in 1971. That was the end of the so-called gold standard and its versions.
4. The IMF and the World Bank did not die with the Bretton Woods system and started to supply credit to third world countries, transferring the income of western taxpayers. Since responsible states can get credit easily, it is often given to those not paying their debts, those nationalizing foreign investments or regulating overly their own countries. Thus arises a tendency to support dictators and violent regimes, often in exchange for other concessions. Their rule tends to be prolonged and the declared goal of fighting against poverty becomes more than a little dubious.
(Aside: back in Introduction I remarked on the light, friendly tone of the book and it stayed so for the most part. But this chapter seemed to have so far the sharpest tone of all. Interesting.)
Gold was legal tender in Great Britain since 1821 and the de facto currency in the US since 1834 (the Coinage Act). Australia and Canada followed 20 years later. The breakthrough for gold and the era of the classic gold standard began after the war between France and Germany (1870-1871). The German government received war damages of 5 billion francs in gold and made it fiat currency instead of silver, that was losing popularity at the time. The Prussian Bank ('Preusische Bank') was turned into a central bank ('Reichsbank'). Its notes became legal tender in 1909 - all a copy of the British system.
Why was it gold? For once, Great Britain, with the largest capital market in the world was using it. Several major lands using silver (Russia, Austria) have suspended payments by the time. Finally, silver has less purchasing power than gold, making its weight for large transfers rather problematic.
Practically all western lands and their many colonies have followed suit. In the heyday of free trade, when monopolies were frowned upon as never before, a unified monetary system seemed like a great idea; it was another massive state intervention, this time unopposed.
The classical gold standard has eliminated the fluctuations between gold and silver (though they were less than between today's paper currencies, it is a positive point). It also caused a significant forced deflation, with all its effects.
But the gold standard was still coupled with the practice of fractional reserve banking, and hence unstable. The coming of World War I. finished it off before it could collapse.
2. In the "classical" gold standard was a central bank of each country expected to hold enough gold in its reserves, while the commercial banks would rely mainly on its banknotes (another English practice, that spread out). The advantage were greater possibilities of inflation for them and more power for the central bank.
The 'Gold Exchange Standard' enhanced the already existing international cooperation between banks by a manifold. The American Fed and the Bank of England were to be the central banks for the whole world (with a few exceptions, notably France). Inflating slowly, others would rely on the pound and the dollar for backing, and could inflate much more. This unstable system lasted only from 1925 to 1931, the Great Depression of 1929 caused a rise of protectionist policies and foreign exchange controls, that choked the international currency trade. The Bank of England could not renew its gold reserves and suspended its payments, followed by other banks. From then on currencies fluctuated freely, which lasted until the end of World War II.
3. A new system was designed in 1944 in Bretton Woods (New Hampshire US), to make the production of banknotes even more 'flexible'. The gold reserves of the whole world should be concentrated in a single pool, the Fed would redeem its notes while all others would keep the US dollar as reserve. It was a logical choice, as the United States have attracted much gold and after WWII became Fort Knox the largest storage in the world. (England, represented by Lord Keynes, tried to push for a pure paper money, but it didn't come to be.)
To reduce the resulting dependency on the Fed, and to make it politically acceptable, two organizations were created: the International Monetary Fund (IMF) and the World Bank, both to influence the distribution of new banknotes. They would supply short-term (IMF) and long-term (WB) credit to member states in trouble, primarily the board members.
The growth of inflation, the main purpose of the Bretton Woods, was so successful, that the Fed eventually ran out of gold and had to suspend its payments in 1971. That was the end of the so-called gold standard and its versions.
4. The IMF and the World Bank did not die with the Bretton Woods system and started to supply credit to third world countries, transferring the income of western taxpayers. Since responsible states can get credit easily, it is often given to those not paying their debts, those nationalizing foreign investments or regulating overly their own countries. Thus arises a tendency to support dictators and violent regimes, often in exchange for other concessions. Their rule tends to be prolonged and the declared goal of fighting against poverty becomes more than a little dubious.
(Aside: back in Introduction I remarked on the light, friendly tone of the book and it stayed so for the most part. But this chapter seemed to have so far the sharpest tone of all. Interesting.)
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