Every one of your points, FE, make sense, but I'm not too sure about the import duties and tariffs. On the surface it looks good, but how it compares to free trade and why one is better than the other ... don't know enough. Sounds too Pat Buchananish to me. Didn't Smoot-Hawley sink us the last GD? I aways understood it to be the final straw.
The other thing I don't understand is this whole fiat currency thing versus a precious metal standard. Seems like in a global market, you would want to have each country's currency float with the other.
Rick, thanks for the book tip. Central banking versus free banking is another thing I don't have a handle on. But why would one not want a strong, independent bank setting interest rates and determining when to increase or lower the money supply? Is it just because the constitution said it was congress's responsibility? Wouldn't having all of these other institutions making their own rates and drawing cash from their supply of deposits ... maybe I just answered my own question. Competition. Well, as long as monopolies and oligarchies didn't form and they had to have “x” amount of cash on hand.
***The other thing I don’t understand is this whole fiat currency thing versus a precious metal standard.***
It depends who you talk to. Those in favor of a metallic standard tend to believe that growth will not be affected and that there will no longer be inflation. They point to the CPI over the 1800’s which shows little to no average inflation over the century. Although there are some fluctuations in the money supply, they tend to attribute this to wars in which the government goes off the gold standard. They also point to the CPI over the 1900’s which has seen the dollar lose 95% of its value. They would probably point to a chart like this http://oregonstate.edu/cla/polisci/faculty-research/sahr/pl1665.htm that shows the money supply exploding with the advent of fiat currency. Fiat money allows for rampant and continuous inflation, and some maintain it is the cause of the business cycle or at least a contributing factor.
Those in favor of fiat currency tend to believe a steady amount of inflation is necessary for growth and that a metallic standard doesn’t allow the supply of money to expand to meet the needs of industry. They also point to the CPI during the 1800’s but focus more on the fluctuations in the supply of money, especially during economic depressions when the changes in the quantity of money are often quite large. By comparison, 20th Century inflation is more controlled and, with the exception of the Great Depression, changes in the money supply have been much more moderate. They would probably point to a graph like this http://upload.wikimedia.org/wikipedia/commons/thumb/2/20/US_Historical_Inflation_Ancient.svg/800px-US_Historical_Inflation_Ancient.svg.png which shows far more fluctuations in the supply of money before the 1900’s.
I’ll get more into this later in the post.
***Central banking versus free banking is another thing I don’t have a handle on.***
There are really 3 categories in this debate: central banking, free banking, and 100% reserve banking. Both central banking and free banking make use of fractional reserve banking, but the former tends to utilize fiat currency (in order to be effective as a lender of last resort, it has to) while the latter tends to have a metallic money (generally if free banking has fiat money, a central bank will be established). 100% reserve banking can have either fiat or metallic money but most supporters of it will favor some sort of metallic or free market money.
On a side note, technically a metallic standard is a form of fiat. The word fiat is associated with paper not because it means paper, but because the only way to make a population accept paper as money is by law, i.e. by fiat. A metallic standard, though it protects against inflation is still a form of fiat in that the government is declaring the metal as legal tender. A free market in money would mean there are no legal tender laws and so people would be able to contract in any currency they desired, whether it be gold, shells, rocks, butter, paper, etc. Usually, metals tend to be selected as the general medium of exchange (gold and silver in particular). Most people when referring to a metallic standard do so not because they want the government passing laws saying what is and what isn’t money, but because metals have traditionally been the commodities chosen by the market as the best media of exchange. Thus a free market in money and a metallic standard are practically, but not technically, interchangeable.
Supporters of fractional reserve banking believe that it is necessary in order to provide funds for investment since the banking system adds new money to the economy in the form of new loans. Once the loans are repaid, the money disappears from the economy (if you’d like an explanation of fractional reserve banking, I’d be happy to give it to you), so as long as loans are being created and repaid at a similar rate, fluctuations in the money supply will be low, preferably towards moderate inflation. They believe that 100% reserve banking leads to too little investment since banks cannot use deposits for loans, only money that they own or that has been given to them for the purpose of loaning.
Supporters of 100% reserve banking believe that the only true investment in an economy comes from savings and that investment beyond society’s savings constitutes malinvestment which leads to the business cycle. In addition, loans from deposits or loans created out of thin air in fractional reserve banking do not add new purchasing power, they simply divert it since any increase in the supply of money will simply raise prices. Also, since inflation tends to be lower (usually to the point of being slight deflation) in 100% reserve banking, savings is encouraged because money gains value. This will produce more savings and thus more genuine investment as opposed to the malinvestment of fractional reserve banking.
***But why would one not want a strong, independent bank setting interest rates and determining when to increase or lower the money supply?***
The simple way of looking at this is by looking at the interest rate as a price, the price of borrowing money. If you are familiar with price controls, you know they can have a devastating effect on the economy, or at least an unpleasant one. The free market, or natural, interest rate would be set by the supply and demand of loanable funds (society’s voluntary savings), as well as premiums for risk or inflation/deflation. The central bank directly set all interest rates though (It sets the Discount rate, but this is usually closely correlated with the Fed Funds rate, which is not directly set). It targets them by increasing or decreasing the supply of loanable funds (increased supply=lower interest rate and vice versa), though these funds are not from society’s savings needless to say.
Increasing the money supply does not simply raise the general price level as some hold. It must first be given to and subsequently spent by someone. The act of printing money does nothing to prices, it is only when this money is spent that prices begin to rise and they will rise according to where the new money is spent. So certain sectors of the economy will spend the new money and and the receivers of that spent money will begin to raise prices. This affects all other customers of those sectors who did not receive the new money because they see prices going up with no corresponding rise in income, relatively speaking. This process trickles throughout the economy. Those who receive the new money last are hurt most since they have been paying higher and higher prices.
Hope this helps. If there’s anything you have questions about or anything that was unclear, I’d be happy to answer or re-explain.
The primary reason we have a centralized credit system is because ‘we the people’ apparently demand far too big a government. The book I reccomended will give you a very seldom heard historical view of the virtues of free-banking; but regardless, our culture is too big government to revert back to a system that promotes creation....vs consumption.
I should also add that the gold standard we had in the 19th Century existed with central banking and free banking (not at the same time obviously). And although it was called free banking, the banks were often bailed out or allowed to suspend specie payment in times of trouble, so it wasn’t truly free banking. In any case, the gold standard was one with fractional reserve banking. This is why there are such large fluctuations in the money supply in the economy at various times in the 1800’s (in addition to wartime spending when the gold standard was more or less suspended).
As far as money goes, the economy can be structured in 4 ways. The first is 100% reserve banking with a medium of exchange whose supply can not be manipulated by the government (e.g. a metallic standard or a free market in money). The second is 100% reserve banking (hard/sound) with a medium of exchange whose supply can be manipulated by the government (e.g. unbacked paper money). The third and fourth are the first and second scenarios respectively, but with fractional reserve banking instead of 100% reserve banking. The third scenario would probably have free banking (though not necessarily) while the fourth scenario would probably have central banking.
