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A modern day gold standard with real bills - Dr. Fekete
roadrunner
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I thought this was a very thoughtful article by Dr. Antale Fekete. He intertwines some history as to why the 19th century gold standard worked to create the greatest 100 yr industrialization the world had ever seen.....all while on a true gold standard. The gold standard from 1914-1931 was a farce as there was no effective clearance mechanism for gold, hence no true gold standard. Fekete is against a 100% gold-backed monetary standard. His 91 day limit to clear real "gold" bills should be enough to cover more critical and faster moving goods/services through the system. He even suggests that as long as the clearance mechanism became more efficient, the amount of gold needed to handle the increasing transactions could remain the same or even lower.
Trying to follow Fekete's analysis of the real bills doctrine can be quite confusing. I don't quite fully understand what he means by multilateral vs bilateral trade in the excerpt below. Why doesn't or can't bilateral trade have an effective gold clearance mechanism? One thing about reading Fekete's articles, you never understand 100% of what he's talking about....at least that's my personal experience. If anyone can answer my question please chime in.
It can be seen that the market for real bills is the clearing house of the gold standard. In 1918, at the end of World War I, the victorious allies decided not to allow the world to go back to multilateral international trade. To be sure, they wanted to go back on the gold standard, witness Great Britain's decision to make the pound sterling once more convertible into gold at the pre-war exchange rate in 1925, but with only bilateral trade allowed. This meant nothing less than the castration of the gold standard: once its clearing house was amputated, it could not perform.
A nice read on how the gold standard once worked. Most of what we read today about so-called "gold standards" is nothing like this. And Fekete deftly handles a number of the typical "fiat-bug" criticisms on gold standards. Excellent article. I gave this topic its own thread because when looking for information on gold standard and real bills, I can never find it in the main economic thread.
How a gold standard should/could work
required architecture for a new financial system
roadrunner
Trying to follow Fekete's analysis of the real bills doctrine can be quite confusing. I don't quite fully understand what he means by multilateral vs bilateral trade in the excerpt below. Why doesn't or can't bilateral trade have an effective gold clearance mechanism? One thing about reading Fekete's articles, you never understand 100% of what he's talking about....at least that's my personal experience. If anyone can answer my question please chime in.
It can be seen that the market for real bills is the clearing house of the gold standard. In 1918, at the end of World War I, the victorious allies decided not to allow the world to go back to multilateral international trade. To be sure, they wanted to go back on the gold standard, witness Great Britain's decision to make the pound sterling once more convertible into gold at the pre-war exchange rate in 1925, but with only bilateral trade allowed. This meant nothing less than the castration of the gold standard: once its clearing house was amputated, it could not perform.
A nice read on how the gold standard once worked. Most of what we read today about so-called "gold standards" is nothing like this. And Fekete deftly handles a number of the typical "fiat-bug" criticisms on gold standards. Excellent article. I gave this topic its own thread because when looking for information on gold standard and real bills, I can never find it in the main economic thread.
How a gold standard should/could work
required architecture for a new financial system
roadrunner
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Comments
today i would think of it was the World Bank as far as multi-lateral
my history of WWI, and Money and Banking at that time is nil.
if i could do it over again, i'd be a history major with an econ minor.
roadrunner
It can be seen that the market for real bills is the clearing house of the gold standard. In 1918, at the end of World War I, the victorious allies decided not to allow the world to go back to multilateral international trade. To be sure, they wanted to go back on the gold standard, witness Great Britain's decision to make the pound sterling once more convertible into gold at the pre-war exchange rate in 1925, but with only bilateral trade allowed. This meant nothing less than the castration of the gold standard: once its clearing house was amputated, it could not perform.
I think the reference to real bills and a clearinghouse must be that since a bilateral transaction only establishes the price at that moment for the two parties, there would be significant market inefficiency. For instance, if England bought some wheat from the US and paid for it with some real bills set to expire in 90 days, France or Germany would not be required to pay gold or to accept the real bills from the US in payment for something else. If the US wanted to spend the real bills, they would have to wait until they matured in order to collect the gold (plus interest) back from England before they could spend the money. Without a multilateral clearing mechanism for the real bills, there would really not be much liquidity in the system. On the other hand, if every government or recipient of real bills could take them anywhere and collect the gold whenever they wanted, the system remains very liquid and every real bill is instantly negotiable based on the standard rate of interest vs. maturity (not to exceed 90 days).
I like this system alot. If Congress felt the need to give away another massive entitlement program, the funding would have to be presented as a direct tax increase. It would sure make the debate on appropriations more real, and it would force the economics of any new spending to be evaluated purely on a priority and political basis. There would be no more perception of "a free lunch". Also, there would be alot more circumspection before going to war, but once a war decision were made, I suspect that the objectives would be clear and wouldn't be open-ended. Like I said, I like that idea alot.
I knew it would happen.
roadrunner
Yes, like a 90-day letter of credit that could be cashed in anywhere for gold on the spot. Whoever holds the letter of credit is earning a nominal rate of interest, but there would be no derivatives and no fractional reserve banking because a firm's credit rating would hinge on it's repayment history, and a nation's ability to fund programs or projects would depend on it's gold reserves, which would simply reflect how productive that society was - output vs. input.
If a nation is productive, it ships goods out and receives gold. If a country is wasteful and screws up by making bad decisions all the time, i.e., lives beyond its means, then it runs out of gold. When it runs out of gold, it has to start working or it doesn't get it's next shipment of ethylene-glycol-laced pet food.
I knew it would happen.
<< <i>If a nation is productive, it ships goods out and receives gold. If a country is wasteful and screws up by making bad decisions all the time, i.e., lives beyond its means, then it runs out of gold. When it runs out of gold, it has to start working or it doesn't get it's next shipment of ethylene-glycol-laced pet food. >>
In that case would the US not be screwed as we have basically nothing to export now?
HH
1947-P & D; 1948-D; 1949-P & S; 1950-D & S; and 1952-S.
Any help locating any of these OBW rolls would be gratefully appreciated!
In that case would the US not be screwed as we have basically nothing to export now?
HH >>
DEBT ... In addition the US exports machinery, electrical machinery, agricultural goods (the US controls almost half of world grain exports) Other major exports are vehicles, aircraft, medical instruments & military hardware. Total approx $1.3 trillion dollars worth of goods.
roadrunner
Depression every 18 year on average.
20% of the 1800's was a depression.
Oh, how history repeats. These depressions lasted 3-6 years. This is what we're in for folks. The sooner you realize it, the sooner you will know what to expect and see opportunity.
http://history1800s.about.com/od/thegildedage/a/financialpanics.htm
Panic of 1819
•The first major American depression, the Panic of 1819 was rooted to some extent in economic problems reaching back to the war of 1812.
•It was triggered by a collapse in cotton prices. A contraction in credit coincided with the problems in the cotton market, and the young American economy was severely affected.
•Banks were forced to call in loans, and foreclosures of farms and bank failures resulted.
•The Panic of 1819 lasted until 1821.
•The effects were felt most in the west and south. Bitterness about the economic hardships resonated for years and led to the resentment that helped Andrew Jackson solidify his political base throughout the 1820s.
•Besides exacerbating sectional animosity, the Panic of 1819 also made many Americans realize the importance of politics and government policy in their lives.
Panic of 1837
•The Panic of 1837 was triggered by a combination of factors including the failure of a wheat crop, a collapse in cotton prices, economic problems in Britain, rapid speculation in land, and problems resulting from the variety of currency in circulation.
•It was the second-longest American depression, with effects lasting roughly six years, until 1843.
•The panic had a devastating impact. A number of brokerage firms in New York failed, and at least one New York City bank president committed suicide. As the effect rippled across the nation, a number of state-chartered banks also failed. The nascent labor union movement was effectively stopped, as the price of labor plummeted.
•The depression caused the collapse of real estate prices. The price of food also collapsed, which was ruinous to farmers and planters who couldn’t get a decent price for their crops. People who lived through the depression following 1837 told stories that would be echoed a century later during The Great Depression.
•The aftermath of the panic of 1837 led to Martin Van Buren’s failure to secure a second term in the election of 1840. Many blamed the economic hardships on the policies of Andrew Jackson, and Van Buren, who had been Jackson’s vice president, paid the political price.
Panic of 1857
•The Panic of 1857 was triggered by the failure of the Ohio Life Insurance and Trust Company, which actually did much of its business as a bank headquartered in New York City. Reckless speculation in railroads led the company into trouble, and the company’s collapse led to a literal panic in the financial district, as crowds of frantic investors clogged the streets around Wall Street.
•Stock prices plummeted, and more than 900 mercantile firms in New York had to cease operation. By the end of the year the American economy was a shambles.
•One victim of the Panic of 1857 was a future Civil War hero and US president, Ulysses S. Grant, who was bankrupted and had to pawn his gold watch to buy Christmas presents.
•Recovery from the depression began in early 1859.
Panic of 1873
•The investment firm of Jay Cooke and Company went bankrupt in September 1873 as a result of rampant speculation in railroads. The stock market dropped sharply and caused numerous businesses to fail.
•The depression caused approximately three million Americans to lose their jobs.
•The collapse in food prices impacted America's farm economy, causing great poverty in rural America.
•The depression lasted for five years, until 1878.
•The Panic of 1873 led to a populist movement that saw the creation of the Greenback Party.
Panic of 1893
•The depression set off by the Panic of 1893 was the greatest depression America had known, and was only surpassed by the Great Depression of the 1930s.
•In early May 1893 the New York stock market dropped sharply, and in late June panic selling caused the stock market to crash.
•A severe credit crisis resulted, and more than 16,000 businesses had failed by the end of 1893. Included in the failed businesses were 156 railroads and nearly 500 banks.
•Unemployment spread until one in six American men lost their jobs.
•The depression inspired "Coxey's Army," a march on Washington of unemployed men. The protesters demanded that the government provide public works jobs. Their leader, Jacob Coxey, was imprisoned for 20 days.
•The depression caused by the Panic of 1893 lasted for about four years, ending in 1897.
Knowledge is the enemy of fear
<< <i>Panic of 1893
•The depression set off by the Panic of 1893 was the greatest depression America had known, and was only surpassed by the Great Depression of the 1930s.
•In early May 1893 the New York stock market dropped sharply, and in late June panic selling caused the stock market to crash.
•A severe credit crisis resulted, and more than 16,000 businesses had failed by the end of 1893. Included in the failed businesses were 156 railroads and nearly 500 banks. >>
Credit crisis...that sounds like 2007 & 2008 as well as the credit crisis that will resume once the goverment can no longer prop up the housing sector or the commerical RE sector. There is also the coming soverign nation debt crisis that will hit most of Europe and the US (because we are not on the gold standard)
<< <i>•Unemployment spread until one in six American men lost their jobs. >>
Currently about 40% of the US population is on food stamps and the REAL unemployment rate (similar to the way that the unemployment rate was measured back then) is running about 12% (1 in 8.3). And I read the other day that 1 in 5 men between the ages of 20 and 35 is currently unemployed.
<< <i>•The depression inspired "Coxey's Army," a march on Washington of unemployed men. The protesters demanded that the government provide public works jobs. Their leader, Jacob Coxey, was imprisoned for 20 days. >>
Imprisoning these people is a better idea than "giving" them work! Reminds me of the Caltrans sign that I saw on the freeway the other day "Putting America to Work," yeah cause that's what we need more people on the government's payroll getting paid too much for too little work. Goverenment "make work" programs don't add value to the country or economy.
<< <i>•The depression caused by the Panic of 1893 lasted for about four years, ending in 1897. >>
Due to the goverment meddeling, our depression will probably last closer to 10 or 15 years, think Japan's lost decade.
Depression every 18 year on average.
20% of the 1800's was a depression.
Oh, how history repeats. These depressions lasted 3-6 years. This is what we're in for folks. The sooner you realize it, the sooner you will know what to expect and see opportunity.
Cohodk, you're painting all the financial failures of the 19th century on gold, when in fact it was either a thoughtful decision to step away from the existing gold standard, or the bankers creating excess, unbacked, paper money (state chartered or national bank notes) that actually caused many of the problems.
The panic of 1819 was indeed bred by the huge borrowing created during the war of 1812 as well as a large expansion of credit/debt following the war. And that festered for years as the southern banks dumped paper into the system until the Federal govt stepped in to rectify the mess over several years. Note that there was no Federal USBank from 1812-1815. This wasn't the gold standard's failure, but the failure of the southern banks to adhere to standards. They just started printing money. Note that the Northeastern banks had no such issues in 1819 and their currencies maintained value during that period because they adhered to required standards.
The same reasoning can be applied throughout much of the 19th century. During the charter bank era of 1836-1862 it was like the wild west with an average bank surviving for approx 5 yrs. With that short lifespan how many do you think were cooking the books? It didn't help any that from 1843-1848 the banks increased money supply by >100% and then again by >100% from 1849-1854. Then a monetary contraction helped set up the panic of 1857. The paper money supply is more than tripled over those 11 years and then is contracted....and the ensuing correction is gold's fault? Obviously there was no effective gold standard in play from 1843-1858.
Bankers learned quickly that gold on deposit wasn't earning them any money and most people just left it there. So eventually they loaned out more than they should have and printed more money to boot. Same reasoning for booms and busts that have occured since we went off a strict gold standard in 1913. There was not even a USA gold standard in effect from 1861-1879 so the panic of 1873 was the final culmination of over printing of greenbacks during that period. Gold has no blame here.
Can we really blame the depression of the 1890's solely on gold when there was in fact a war waging between what to use as the primary monetary metal - gold or silver? The dumping of huge amounts of western-mined silver into the economy from 1878-1893 certainly didn't help for monetary control. The dumping of silver was akin to the mindless printing of greenbacks. The charter bank era of 1863-1913 was no panacea either where treasuries were required to be held to back deposits. Continual liquidity spikes in Treasuries caused great strain on bank liquidity and sometimes lead to bank runs.
One cannot have rampant speculation in Rail Road's and Insurance companies (or banks) without someone deciding to cut corners and cheapen the currency or fail to back it properly. Laying the woes of the 19th century solely on gold doesn't seem to be the answer. If you look at what the banks are doing wrong, one can usually find the source. No different today where JPM, GS & Co. worked around the standard monetary system by creating an elaborate system of otc derivatives and false security ratings (ie made up their own monetary system free and clear of any regulation).
There's a lot more going on in the 19th century than just gold, although it has always been a convenient target for the miscues of bankers. And why not, the last thing any banker wants is a gold standard which adds regulation and control. Suspension of specie payment played important roles in the outcomes of the panics of 1819, 1837, and 1857. And I've always said that even with a gold standard banks would still be tempted to cheat on it. So even with a gold standard from 1971-2009 the big banks still would have created their shadowy otc derivative system and crashed the economy. The bankers will always find a way. It still comes down to boom and bust cycles boosted by creation of paper money and lending without proper/consistent standards. To compare the hodge podge of 19th century banks and banking regulations to the 20th century is quite a stretch. But then to blame it all on gold? Fekete has shown how a gold standard does not require 100% backing for every dollar in existence. Real Bills fill that short term liquidity role.
Odd that if our nation was such a depressionary place to be in the 1873-1900 period (extended panics) that immigrants poured into our nation in record amounts looking for what we had. And at that same time some of the greatest industrial expansion the world had ever seen was taking place. Could it be possible that because we did have a gold standard, that those immigrants were seeking out a country with real money and hence real growth? Could we have even have had such lasting growth on a pure paper system in the 19th century? The US was the last major nation supporting some type of gold standard. And because of that (and owning most of the gold) we got the prize in 1944 at Bretton Woods.
roadrunner
roadrunner
<< <i>RR I don't believe that cohodk blamed the recessions on Gold, but did make the point that they existed while the U.S. was on the Gold Standard. >>
That was exactly my intention. Thank you, Opa.
Gold or fiat will not protect an economy from economic collapse due to greed, excess, misappropriation, political pandering, malfeasance or natural disaster.
We dont need a gold standard. We need a population who is willing to live within their means.
Look at the extreme we've taken the credit/debt/fiat "expansion" to from 1982 to 2009 with no gold standard.
This should have been massively inflationary. Was it? Is it a bubble? If so, what happens if it pops?
Knowledge is the enemy of fear
<< <i>
<< <i>RR I don't believe that cohodk blamed the recessions on Gold, but did make the point that they existed while the U.S. was on the Gold Standard. >>
That was exactly my intention. Thank you, Opa.
Gold or fiat will not protect an economy from economic collapse due to greed, excess, misappropriation, political pandering, malfeasance or natural disaster.
We dont need a gold standard. We need a population who is willing to live within their means. >>
They need to have examples which most are gone!
When a freeking cell phone release is most talked about happening of the week!
Houston we got A HUGE problem!
<< <i>
<< <i>
<< <i>RR I don't believe that cohodk blamed the recessions on Gold, but did make the point that they existed while the U.S. was on the Gold Standard. >>
That was exactly my intention. Thank you, Opa.
Gold or fiat will not protect an economy from economic collapse due to greed, excess, misappropriation, political pandering, malfeasance or natural disaster.
We dont need a gold standard. We need a population who is willing to live within their means. >>
They need to have examples which most are gone!
When a freeking cell phone release is most talked about happening of the week!
Houston we got A HUGE problem! >>
Are you gone?
Of course you cant solve all them problems, but if you have kids, then you can teach them. Eventually the rotten apples will wither away. Keep your apples crisp and clean.
Knowledge is the enemy of fear
I tell them I ain't got much but it's all mine.
Maybe with time they will catch on
Look at the extreme we've taken the credit/debt/fiat "expansion" to from 1982 to 2009 with no gold standard. This should have been massively inflationary. Was it? Is it a bubble? If so, what happens if it pops?
From a monetary standpoint it was massively inflationary. But the majority of that US inflation was exported overseas. Bottom line is that eventually will find its way back to the US. It is a bubble. And I don't think the FED/Treasury will allow it to completely pop without first running the printing presses into complete exhaustion. We can argue about what comes first Deflation or Inflation....but high price inflation will come back to haunt us even if somewhat specific to certain asset classes.
roadrunner
<< <i> Look at the extreme we've taken the credit/debt/fiat "expansion" to from 1982 to 2009 with no gold standard. This should have been massively inflationary. Was it? Is it a bubble? If so, what happens if it pops?
From a monetary standpoint it was massively inflationary. But the majority of that US inflation was exported overseas. Bottom line is that eventually will find its way back to the US. It is a bubble. And I don't think the FED/Treasury will allow it to completely pop without first running the printing presses into complete exhaustion. We can argue about what comes first Deflation or Inflation....but high price inflation will come back to haunt us even if somewhat specific to certain asset classes.
roadrunner >>
How so? If the dollar was falling for the past 25 years, wouldnt that be inflationary for us and deflationary for the rest of the world, as their currencies appreciated? They could buy more of us using less of their currency. I think it may have been entirely possible that the last 25 years was the peak in a parabolic move of inflation--lasting 75 years-- that has now popped.
Knowledge is the enemy of fear
Regarding the OP link, when you read something that tries to make something sound more complicated than it is, they I bet it is not factual.
Well, if we take that statement at face value, then gold was not responsible for any of the panics/depressions of the 19th century because we had no official gold standard, but merely bimetalism. Works for me. Let's blame bimetalism for everything, or maybe even silver. But in reality, little silver traded compared to gold for most of that century so gold was the go-to metal with silver being so bulky to store. With tons of silver dollars being coined from 1878 it certainly debased the value of the dollar, at least compared to gold. Gold was not at fault here.
Regarding the OP link, when you read something that tries to make something sound more complicated than it is, they I bet it is not factual.
Economic/monetary analysis in some areas is extremely tedious and difficult to conceptionalize. When I first started reading Fekete 5 years ago I understood a lot less of what I was reading. Today I can wade through most of his stuff on the first try. When it comes to things like marginal utilization of debt and other tasty topics, they just aren't easy the first time through. Doesn't mean they aren't factual. If you are at odds with Fekete's points or even just one of them, please post your specific rebuttals rather than painting with a broad brush of "too hard." That's one of the reasons I post material like this. There are always 2 sides to it. Imagine if college students tossed aside their studies as bogus when it got "too hard."
I remember taking a 3 person mathematics abstract analysis (AA) seminar in my junior year. There was nowhere to hide! Man, that stuff was hard and usually up in the clouds and it made my head spin...just like the "introductory" AA course had done first semester. The professor's chalk was always on fire as he layed down tedious proof after proof across the board. It didn't seem grounded in anything that I could touch which is unlike most mathematics. I ended up realizing my handle on math might have to remain on the ground and not with Topology and Cauchy spaces. You know, on second thought, abstract analysis is purely non-factual!
How so? If the dollar was falling for the past 25 years, wouldn't that be inflationary for us and deflationary for the rest of the world, as their currencies appreciated? They could buy more of us using less of their currency. I think it may have been entirely possible that the last 25 years was the peak in a parabolic move of inflation--lasting 75 years-- that has now popped.
The last 25 years was certainly an inflationary spiral with respect to the prices of certain assets, goods, and services (health care, education, fed and state largesse, govt payrolls, unions, taxes & fees, homes, stock market, lawyer and doctor fees for example). But it was certainly not inflationary for commodities in general including many commonly used foods, grains, etc. Commodities only started their move 10 yrs ago and history has shown those moves last longer than that....just as SM down moves last longer than 10 yrs down as well, esp. after 25 yrs up. I suggest we'll continue to see inflation in those items that were beaten down in price from 1980-2002 and deflation in those items that were pushed upwards from 1982-2000. I see higher prices for food, energy, and PM's over the longer haul...and continued depressed/constant prices in durable goods, homes, CRE, cars, etc. It's obvious that the SM and housing markets have popped. But based on the prices of many commodities and specifically PM's, they certainly haven't popped and gone away. I don't know that I can explain with economic theory how this all occured, just that this is what I've observed. Though the fact that 80% of the world's otc derivatives (>$1 QUAD) are interest rate based probably has had much to do with skewing economic reality/theory for the past 15 years. What we see is not what we have/will ultimately get.
roadrunner
Responsible, no. During the Civil War we went off a "coin" based economy to a "paper" economy. From 1866 to 1879 the Government tried and was successful at putting the "paper" demon back in its place. They didn't want to go off and have a paper economy again, so they let the financial crisises come every 20 years or so. The 1893 crisis was very detrimental to the health and happiness of the people. It wasn't gold's fault, it was a strict monetary policy that was to "blame". If we went back to that, then there would be no tool available to deal with economic crisis.
Silver was debased because Germany went on the gold standard in 1871 and flooded the market with silver. Coining cheap silver into dollars didn't debase the dollars or its value.
Knowledge is the enemy of fear
The banks won't allow that to happen without first being paid off where they have the winning bet in play. They already made this happen with BSC, Lehman, AIG, etc. They will insure they get paid off properly for any winning derivative bets they have made. States, nations, corporations, pension funds, etc are on the losing end of many or most of those bets. Every time there has been the possibility of not being paid off the banks tank the stock market and tie up credit even tighter. They have control of the nation's GDP in their back pockets as well as most of Congress. When it comes to the losing bets, they'll keep those on the books at marked to model until it's time to tank the system for good - and then shift into the new monetary system relatively unscatched.
Rather than deflation, the popping of those derivatives will ensure a steady flow of trillions in bail out money to the "too big to fail" banks via their winning bets. It's all about transfering wealth from J6P and "too small to matter" nations back to the TBTF banks. Even if the banks "only" collect a fraction of the >$1 QUAD, $20-$100 TRILL is still plenty of "spending" money to drive specific asset prices of their choosing through the roof (ie the ones that they will be holding). What do banks care if others experience crushing deflation in other low-demand assets or massive inflation in high demand crops that are in short supply?
roadrunner
Dr. Fekete expounds a bit from his last article on the gold standard. Some new points on what things need to be added or removed from our current system to have a working and properly backed monetary system. The fact that you never hear these types of points discussed openly at any level in politics or economics tends to indicate that either people are totally ignorant/blinded today or that Fekete is out in left field all by himself. I tend to believe that Fekete's ideas are soundly grounded in history. But the bankers and politicians have convinced J6P that a fiat system is the right one. So here we are today. And until one of those 3 breaks away or the system buckles under its own debt.....nothing will change.
One fascinating point that Fekete highlights is that debt is never extinguished in today's world....it only gets transferred and grows ever larger. FRN's, credit cards, checks, TBills, etc. are just other ways of relabeling debt. But it never leaves the system. We have no way of removing debt today. Best case is that it all gets transfered to the national govt for the people to pay down for decades.
roadrunner
real bills revisited - Fekete
roadrunner