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Posts Tagged ‘money supply’

English: This image is of economist Walter Blo...

In his June 4, 2012 interview with Dr. Stan Monteith of Radio Liberty, which I helped to arrange, Dr. Walter Block stated (at 26:28):

Well, there are two definitions of inflation — one is an increase in the money supply, and the other is higher prices. The Austrians go for the first one, the more mainstream economists go for the second. I guess I go for both.

I always thought the definition of inflation as simply an increase in the money supply to be a facile definition, since despite an increase in the money supply leading to an increase in general prices in the long-run, it fails to address things that are more relevant to one’s particular daily circumstances, such as being underwater in your home mortgage because of rapidly falling prices.

As it turns out, Austrian economist Dr. Walter Block also agrees that the Austrian School definition is inadequate.

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Jeff RenseOn March 23, 2012, I noticed that Jeff Rense’s site had linked to the mass media article by Reuters, Bernanke says gold standard won’t solve problems, with the editorial title, Bernanke’s Idiotic Lies About A Gold Standard. It is still there as of April 1.

Here’s all the article says about Bernanke referencing the gold standard:

Since the gold standard determines the money supply, there is not much scope for the central bank to use monetary policy to stabilize the economy,” Bernanke said. “Under a gold standard, typically the money supply goes up and interest rates go down in a period of strong economic activity – so that’s the reverse of what a central bank would normally do today.

First of all, a government-guaranteed gold standard — which is what Bernanke is referring to — DOES determine the money supply, since a certain percentage of the money supply is backed by gold, by law, under such a standard. Bernanke is also right that under such a standard, “the money supply goes up and interest rates go down in a period of strong economic activity.”

The money supply goes up because it’s usually only partially backed by gold — up to 40% prior to the last gold exchange standard in the U.S. that ended in 1933. The Roaring Twenties followed by the Great Depression is the best example of this. It was the low interest rates that contributed to the easy-money situation that extended banks far beyond their ability to meet eventual customer demand for their money in cash or gold.

The implication of Rense’s link is that a government-guaranteed gold standard is somehow good, which is ironic, given that he considers the Protocols to be an authentic document, and in that document, it mentions using gold to control economies! (Note: I don’t regard the Protocols as authentic, despite its accurate statements about a gold standard —  but he does):

“22. YOU ARE AWARE THAT THE GOLD STANDARD HAS BEEN THE RUIN OF THE STATES WHICH ADOPTED IT, FOR IT HAS NOT BEEN ABLE TO SATISFY THE DEMANDS FOR MONEY, THE MORE SO THAT WE HAVE REMOVED GOLD FROM CIRCULATION AS FAR AS POSSIBLE.”

Was this simply a case of editorial license for the sake of getting thousands of cheap clicks, or does he really support a government-guaranteed gold standard?

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Gary North

Here is my email to him, with extra links included:

Dr. North,

It’s unfortunate for you if you actually kept you word and blocked all future emails for me after Max Keiser picked up my article exposing your fool’s gold standard, since I am now providing you with an opportunity to smoke out another alleged false flag infiltrator, as you claimed to have done with Ellen Brown.

Today, Nelson Hultberg, in an interview with the Daily Bell, revealed that his “Two Pillars Strategy” of the Conservative American Party involves temporarily implementing “Milton Friedman’s 4% auto-expansion plan for the Fed. This will mandate by law that the Fed can only increase the money supply by 4% every year.”

You know, the plan which you so roundly criticized in your March 19, 2011 article, Milton Friedman’s Contraption, where you stated: “Milton Friedman’s contraption was the unchecked welfare-warfare state: unchecked by annual taxation without withholding and unchecked by the gold standard.”

Regards,

Jason

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A small-sized 1953 $2 note, displaying the sma...

Monetary reform activist, Kirk Mackenzie, was on Radio Liberty with Dr. Stan Monteith on August 17, 2011, and outlined a temporary transition period toward a free-market monetary system that involves the federal government issuing debt-free and interest-free currency over 10 years to make up for the intentional contraction of the money supply that would ensue by the banksters resisting true monetary reform, as history indicates with President Andrew Jackson’s war on the Second Bank of the United States.

He was asked about inflation under such a scenario, and it’s important to outline the historical experience with Greenbacks that goes almost completely unreported these days, and how he is right about it being a model where inflation shouldn’t present much of a problem, if at all.

From Sarah Emery’s 1894 book, Seven Financial Conspiracies, she points out how the first $60 million in Greenbacks, a large sum in 1861-62, traded at par with gold, and it wasn’t overprinting that resulted in their decline, but it was two banker-engineered actions in Congress that did so.

First, with the inclusion of the exception clause, which said that the Greenbacks were no longer valid for payment of duties on imports and interest on the public debt, back when duties on imports accounted for a substantial portion of government revenue, unlike today.

Then, the so-called Credit Strengthening Act was passed, which further depressed the value of the Greenbacks, in requiring payment in gold for the interest on particular long-term Treasury bonds, which created an artificial demand for gold.

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Gold Bars

On liberty-themed radio shows and sites, one often hears the claim that fiat currencies don’t last long, and in some generous but inaccurate cases, that a fiat currency has never lasted more than a couple hundred years.

The English tally sticks were an example of a fiat currency that lasted more than 500 years. Before you say that it wasn’t a currency because it didn’t circulate widely, how is circulation between the citizens of England and the government not widespread circulation?

The gold double standard is this: pointing to examples of fiat currencies failing, and completely overlooking examples of failed gold standards. The argument is that it was government’s fault for historical instances of gold standards failing. Ah, but isn’t that the same blame foisted upon most fiat currencies as well?

One aspect of the gold double standard is the use of word association of fiat currency with fractional reserve banking. That is, the lending of more fiat currency than the fraction of reserves held. Where did fractional reserve banking originate? From goldsmiths, not fiat currency bankers.

One of the primary arguments against a fiat currency is that it is doomed to fail because governments will progressively issue more currency than is in productive demand, and that a gold standard is necessary to tie the government’s hands in limiting the increase in the money supply. But how did the gold standard prevent the Great Depression starting in 1929?

Some will argue that the gold standard in effect in 1929 only backed the currency by 35-40%, and that its failure resulted from less than 100% backing. However, with 100% backing, where does the money come to pay the compound interest demanded from bankers on their loans of gold?

An insidious consequence of a 100% gold reserve standard with compound interest is that those who own the gold will eventually control all the money supply.

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Thomas DiLorenzo

At his February 9, 2011 testimony to Congress, Professor of Economics at Loyola University Maryland, Thomas DiLorenzo, asserted:

“Monetary policy under the direction of the Federal Reserve has a history of creating and destroying jobs. The reason for this is that the Fed, like all other central banks, has always been a generator of boom-and-bust cycles in the economy.”

What he fails to point out, however, are the boom-and-bust cycles that were created in the United States without a central bank. Namely, from 1837 to 1913.

A simple Wikipedia search for “panic of” shows articles for the financial panics of 1837, 1857, 1873, 1884, 1890 and 1907.

So much for the implication, whether intended or not, that financial panics are rare without a central bank.

“It was not the Fed’s subsequent restrictive monetary policy of 1929–1932 that was the problem, as Milton Friedman and others have argued, but its previous expansion.”

DiLorenzo needs to argue for that based on his Austrian economist notion that inflation is nothing more or less than an increase in the money supply, and therefore, the cause of so many of the ills in the economy, and not other reasons, such as unpayable debts.

The question I have for him and other Austrian economists is, without an increase in the money supply, where is the money supposed to come from to pay interest on the debts issued by banks and other lenders?

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From page x of The Gold Standard: Perspectives in the Austrian School:

In 1920, early in his career, Hayek advocated the international gold standard, even suggesting that a proper monetary reform would consist of a 100 percent gold cover for notes as well as bank deposits.

Another variant of pro-gold standard positions among Austrians favors free banking with fractional reserves, and White represents this view.

So we see from these quotations that the gold standard doesn’t necessitate 100% reserves of gold backing the entire money supply, and that several variants are permitted.

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