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What Has Government Done to Our Money? Paperback – June 1, 1990
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"Rebound" by Kwame Alexander
Don't miss best-selling author Kwame Alexander's "Rebound," a new companion novel to his Newbery Award-winner, "The Crossover,"" illustrated with striking graphic novel panels. Pre-order today
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Rothbard's most famous monetary essay has appeared in multiple editions and influenced two generations of economists, investors, and businessmen. After presenting the basics of money and banking theory, he traces the decline of the dollar from the 18th century to the present, and provides lucid critiques of central banking, New Deal monetary policy, Nixonian fiat money, and fixed exchange rates. He also provides a blueprint for a return to a 100 percent reserve gold standard.
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If Obama is a socialist, how come Geithner is Treasury secretary, one more in an unbroken string of Treasury secretaries who were Wall Street insiders, pushing the agenda of the parasitical financial sector?
The fact that Wall Street is capable of imposing its will through the current parliamentary system against the interests of the vast majority of the population calls the legitimacy of the Republic into question.
When a political system loses its political legitimacy, as the current political system has unquestionably done to a great extent, as I explained above, such a political system becomes vulnerable to the threat of violent revolution.
My proposal: Immediately summon a constitutional convention and create a constitution that works, one that effectively and definitively crushes the tyrannical power of finance capital.
The easiest way to do that is to change the electoral system by imposing mandatory proportional representation at all levels of government, as in Italy, Germany, Israel, etc. The current winner-takes-all system cements the duopoly of Republicans and Democrats, so third parties don't have a chance. It foils the will of the majority, because to gain political power a candidate must join the Repugnicans or the `Crats, thus becoming involved in a lot of bickering that has purely historical roots. The two-party system must be abolished by proportional representation. That is the best chance of curtailing the tyranny of parasitical finance capital.
I also propose that a large guillotine be placed in a prominent place on Wall Street, and kept well oiled.
1. Is a gold standard really needed? Individuals can own gold, so they can, if they like, convert their paper currency into gold, or any other commodity, on receipt. They could also hedge their future expected receipts of paper currency in the futures and options markets. So why bother with a gold standard?
2. Is returning to a gold standard really possible? A return to the gold standard would require cooperation between countries to establish a world currency. That's kind of odd given Rothbard's fear that we're moving towards a unified world fiat currency. The recent experience with the Euro should lay those fears to rest.
3. Rothbard asserts that money can only be created by the free market. This ignores the power of governments and the effect that what governments accept for tax payments affects what is defined as money.
4. Rothbard asserts that all inflation is a problem. I disagree that all inflation is a problem because expected inflation is built into security returns. A portfolio of t-bills has done very well at preserving the value of currency at virtually no risk. Yes, unexpected inflation is a problem, but owning real asset helps mitigate that risk.
5. Rothbard argues that it's fine for gold-backed currency to fluctuate in value. But then he asserts that it's a problem when the value of fiat currency fluctuates (pg. 54). He then asserts that inflation creates illusory profits that distort economic calculations. I've done tons of these sorts of calculations, and I can assure you that it is not a problem. I have always based my analyses on real expected cash flows and real discount rates.
6. Rothbard ignores the corrosive effects of deflations and glosses over the deflationary bias built into a gold standard. This is a real problem because returns may be better from hoarding gold than from making investments in real productive capacity.
7. Why gold? Why not some other commodity? I worry that using gold as money will necessarily limit its industrial uses. The cost of gold will rise and industrial uses diminish if it's just shifted from vault to vault.
8. Schwartz and Friedman found that the short-term purchasing power of the dollar fluctuated greatly when we were on the gold standard. Yes, the value of gold in dollars was fixed, but what could be purchased with those dollars fluctuated greatly (the California Gold Rush was an inflationary event).
9. New money would originate based primarily on mining activity in Russia and South Africa. Do we really want them to exert control over increases in the money supply? Here a quote from Brad DeLong: "For example, the discovery and exploitation of large gold reserves near present-day Johannesburg at the end of the nineteenth century was responsible for a four percentage point per year shift in the worldwide rate of inflation--from a deflation of roughly two percent per year before 1896 to an inflation of roughly two percent per year after 1896."
10. Rothbard's greatest fear seems to be the erosion of currency as a store of value. But how much wealth do most people actually tie up in currency? I use my currency to purchase rights to real assets in the stock market. After that, money is then really just used to calculate the current market value of my claim to real assets. And I do use some to support current purchases.
11. If you don't trust your government, then why would you trust it to maintain a gold standard? Governments can go off of the gold standard.
12. Private money has been tried before, and it was characterized by bank runs and higher transaction costs. So I find Rothbard's views here to be based more on ideology than on analysis. He asserts that private minters can guarantee coins. But didn't we just rely on private `independent' ratings agencies to vouch for the quality of Mortgage Backed Securities? That didn't turn out so well!
13. Recessions were deeper and longer when we were on a gold standard, and the US suffered through eight major recessions that tipped into depressions (1807, 1837, 1873, 1882, 1893, 1920, 1933, and 1937).
14. The money supply needs to grow, in a controlled way, with the size of the economy. That is not possible with a gold standard.
15. The gold standard restricts government policy options that may be needed to mitigate the collapse of aggregate demand. Friedman and Schwartz blame the severity of Great Depression on the Fed's failure to adequately expand the monetary base (I think they've over-stated their case). But that wasn't possible because the Fed had to defend the value of the dollar, so they raised rates. (Money matters, but not as much as Friedman claimed. Bernanke has done everything that Friedman claimed was needed to avoid depression. It's kept us from plunging deeper, but there's still a great deal of economic pain).
16. The gold standard severely limits the government's ability to deficit spend (some view this as a positive). That keeps the economy from operating at full capacity because consumers want to save.
17. Rothbard asserts that FDIC insurance has only a negligible proportion of backing for the bank deposits that it insures. This is clearly not a problem - the government can always pay obligations with a fiat currency. The real problem, in my opinion, is in the economic inefficiency of allowing banks to make bad loans that would necessitate a bail-out.