The Federal Reserve: Love it or Hate it

[Zygote]

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This isn't any more true than the first 10 times its been claimed:


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I admit what i said is a bit misleading. They just used their force to make it so competition is highly unlikely to ever come about.

What encouraged the prominence of the fed reserve notes is that all producers must be willing to sell their goods in USD. Therefore, fed can back up the notes with the value of national production.

Further, read this historical blurb:

http://www.mises.org/money/3s8.asp
A Central Bank attains its commanding position from its governmentally granted monopoly of the note issue. This is often the unsung key to its power. Invariably, private banks are prohibited from issuing notes, and the privilege is reserved to the Central Bank. The private banks can only grant deposits. If their customers ever wish to shift from deposits to notes, therefore, the banks must go to the Central Bank to get them. Hence the Central Bank's lofty perch as a "bankers' bank." It is a bankers' bank because the bankers are forced to do business with it. As a result, bank deposits became not only in gold, but also in Central Bank notes. And these new notes were not just plain bank notes. They were liabilities of the Central Bank, an institution invested with all the majestic aura of the government itself. Government, after all, appoints the Bank officials and coordinates its policy with other state policy. It receives the notes in taxes, and declares them to be legal tender.

As a result of these measures, all the banks in the country became clients of the Central Bank. [12] Gold poured into the Central Bank from the private banks, and, in exchange, the public got Central Bank notes and the disuse of gold coins. Gold coins were scoffed at by "official" opinion as cumbersome, old-fashioned, inefficient—an ancient "fetish," perhaps useful in children's socks at Christmas, but that's about all. How much safer, more convenient, more efficient is the gold when resting as bullion in the mighty vaults of the Central Bank! Bathed by this propaganda, and influenced by the convenience and governmental backing of the notes, the public more and more stopped using gold coins in its daily life. Inexorably, the gold flowed into the Central Bank where, more "centralized," it permitted a far greater degree of inflation of money¦substitutes.

In the United States, the Federal Reserve Act compels the banks to keep the minimum ratio of reserves to deposits and, since 1917, these reserves could only consist of deposits at the Federal Reserve Bank. Gold could no longer be part of a bank's legal reserves; it had to be deposited in the Federal Reserve Bank.

The entire process took the public off the gold habit and placed the placed the people's gold in the none-too-tender care of the State—where it could be confiscated almost painlessly.


Here's an interesting link too: http://mises.org:88/Block

[Zygote]

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so what would the alternative be. please explain the theoretically optimal system and what the economy woudl look like under it?

what indicators would you use?

how woudl they be measured and judged?

instead of only stating the problems with the current system, please suggest the alternative and all the accompanying theory and indicators you'd use to judge it.

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free banking and entrepreneurial activity. they will be judged by ability to please consumers.

if the fed is so good why do they outlaw competition?

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Without a doubt the stupidest comment on the Fed Ive ever heard, and thats going far with the Nman running around.

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right, the comment with an argument is dumb versus the one criticizing said comment which is void of argument or reasoning.

thanks for coming out though, try again next year.

[Zygote]

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what about all of the business cycles that occurred far before the advent of modern economic management or theory?

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large scale business cycles were set forth by a variety of governmentally influenced monetary abuses well before modern economic management. Never denied that.

Aside, central banking exasperates business cycle because there will be a cluster of errors in distorted central interest rates. Skilled entrepreneurs are extremely unlikely to all make the same mistake at the same time and dont have similar corrupt incentives.

The large credit expansions that occur through every boom and the vast credit crunch that occur in ever bust are almost always sourced to credit abuses from artificial manipulators.

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think france in the 1500s-1600s or britain's feasts and famine when money was backed by gold before the increase in money supply of gold came from global exploration? all of those cases point towards horribly large cycles in economic production and sustinance of people far before fiat money or central planning came to be.


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im still not sure exactly which cases your talking about. Did they have free banking at time in your cases?

Also what are you saying about gold and the money supply? i dont really get it.

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what about growth in industrial production? that is a great measure of aggregate economic activity.


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again, im not sure what your point is.

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the source of business cycles again doesn't come from any one institution.

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yes it does. large scale business cycles come from money supply expansions and contractions controlled through some variety of central banking that artificially injects and contracts (often artificially contracts like the great depression) money. i already cited works that show this much.

[AlexM]

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For the austrians here, what statistics should we be using to measure the health of an economy?

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Percentage of income spent above "sustenance" level, measured at the 10th, 30th, 50th, 70th and 90th percentiles. Figure out a base cost of how a cheap, well balanced diet per month (probably around $30-$50) and any overage qualifies as non-sustenance. Rent for a single bedroom in a rural area; enough electricity for cooking and hot water but not for air conditioning; etc. I imagine a person could easily live healthily on around $300 a month (probably less, but that's reasonable), so go with that.

Note that medical care counts as a luxury for this.

Mind you, I just made this up off the top of my head. [img]/images/graemlins/smile.gif[/img]

[DcifrThs]

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I also dont understand why we need to increase the money supply to match an increase in production.

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supply and demand. this is the very basis of why we need some sort of management. read the post above i quoted. flexibility is necessary.

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Assuming an electronic money supply with no physical barriers to transfer, I dont see why an economy couldnt just run of a set amount of money.

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shocks would severely hamper and/or destroy the system.

Barron

[ianlippert]

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The problems arise from different elasticities for wages vs prices and for commodities vs. durable goods, especially those that carry large inventories.

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Ive always heard that the prices for goods decrease faster than wages, so that in a deflationary period real wages would be rising.

[tomdemaine]

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I also dont understand why we need to increase the money supply to match an increase in production.

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supply and demand. this is the very basis of why we need some sort of management. read the post above i quoted. flexibility is necessary.

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Assuming an electronic money supply with no physical barriers to transfer, I dont see why an economy couldnt just run of a set amount of money.

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shocks would severely hamper and/or destroy the system.

Barron

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But money is just another good right? Why should I care about the relative prices of money and computers any more than I care about the relative prices of haircuts and computers?

[tolbiny]

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supply and demand. this is the very basis of why we need some sort of management. read the post above i quoted. flexibility is necessary.

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Precisely why the fed is bad. The fed doesn't offer flexibility it offers one solution to a nation of differing problems. There is ZERO reason that competing fiat monies can't exist the way that competing TV sets do. The fed prevents this and thus prevents the flexibility of people choosing between differing options.

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you are taking it literally. i'm using it as an example as to how "bad management" is actually irrational. for exmaple, why is it that the average mutual fund investor does FAR worse over time than the average mutual fund even controlling for dollar weighting?

because of the above extrapolative fallacy. people move money into mutual funds that have recently performed well in the past and out of mutual funds that have recently performed poorly (thus extrapolating that their performance will continue). people would do better if they just left their money in the fund.


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Why is it that people are heavily invested in the stock market when they don't understand it at all? Centralized banking like the fed has eliminated alternatives for the middle and lower classes to save money. You can't hide it in your own home without losing money on a regular basis, and competition between banks is limited by federal regulations keeping interest payments that banks will offer much lower than inflation (internet banking has started to alter this and pushed interest rates up). A heavily inflated money supply has forced people into vehicles they don't understand .

[tolbiny]

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what about all of the business cycles that occurred far before the advent of modern economic management or theory? think france in the 1500s-1600s or britain's feasts and famine when money was backed by gold before the increase in money supply of gold came from global exploration? all of those cases point towards horribly large cycles in economic production and sustinance of people far before fiat money or central planning came to be.

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A good example of why using incomplete proxies or analogies is worse than using none at all. France and England during this time period were heavily agrarian based economies with slow methods of transportation (relative to supplying people's needs for food) and few options for preserving food. A bad growing season (which has nothing to do with the money supply) will create massive swings in prosperity for large numbers of people.

[DcifrThs]

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I also dont understand why we need to increase the money supply to match an increase in production.

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supply and demand. this is the very basis of why we need some sort of management. read the post above i quoted. flexibility is necessary.

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Assuming an electronic money supply with no physical barriers to transfer, I dont see why an economy couldnt just run of a set amount of money.

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shocks would severely hamper and/or destroy the system.

Barron

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But money is just another good right? Why should I care about the relative prices of money and computers any more than I care about the relative prices of haircuts and computers?

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i keep hearing this but whoever says it doesn't seem to understand that while money may be "just another good" it is the base good from which demand for other goods can be derived.

the price of a haircut doesn't influence the price of a car, or the price of a factory, or the future price of toys. the price of money does influence all of those things.

further, the price of a haircut doesn't influence aggregate demand, which is the basis for production choices.

so sure, money is "just another good." but it also happens to be THE good from which demand for other consumption and investment goods/decisions derives.

Barron