Thoughts on Something Milton Friedman Said

[Exsubmariner]

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Read the reference above. Being on a hard standard does not prevent inflation of the money supply in the presence of fractional reserve banking. That was the cause of bank failure; printing more notes (receipts for gold) than gold existed in the vaults.


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I know that. I was pointing it out so as to illustrate the difference between the monetary situation today and back then.

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In other words, you are just assuming your conclusion.



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Is it beyond your conception, man, that the market is not perfect?

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How is the Fed printing money out of nothing a "market inefficiency"?


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You just were talking about still being able to have monetary inflation while on the gold standard? Now which is it? Today, or back then?

To answer your question, the fed holds a monopoly on currency. Monopolies and the formation of cartels that control a particular commodity, in this case currency, would not be possible if the market were as perfect as you say it is.

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Government will use any trumped up excuse that it can to try to regulate anything it possibly can, because regulation is power.


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Of course.

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Lol. Those in government make up "inefficiences" so that they can justify taking control and increasing their power.

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So what? Just because the government is willing to make up excuses to expand doesn't mean that market efficiency doesn't exist.

[ianlippert]

Some other good reading is An Austrian Persepective on the History of Economic Thought.

The inflationist controversy isnt anything new, it wasnt invented by Keynes. This debate has been going on pretty much since the invention of the printing press. Governments have historically printed money to fund wars and their countries almost always experience recessions afterwards.

[pvn]

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Some other good reading is An Austrian Persepective on the History of Economic Thought.

The inflationist controversy isnt anything new, it wasnt invented by Keynes. This debate has been going on pretty much since the invention of the printing press. Governments have historically printed money to fund wars and their countries almost always experience recessions afterwards.

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I thought war was "good for the economy"!??!?

[adios]

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....I submit that government intervention in the market is a necessity, however. I base this on the premise that there are certain market inefficiencies. One market inefficiency occurs in the case of fraud. Widespread bank and securities fraud sparked the great depression.

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Since we got off on the depression and it's causes. Friedman maintains that Fed policy led to the Great Depression. His claim is that a normal economic downturn was turned into a disaster by Fed policy. He maintains that the run on the banks could have been mitigated by the Fed interjecting more liquidity into the financial system i.e. increasing the money supply. BTW Friedman wrote that government control of the currency was not a desirable thing to say the least. Here's a graph and data of the money supply (measured by M2) and CPI from 1800-2003:

Monetary Data 1800-2003

Note that the money supply actually contracted during the depression years. Friedman maintains that this contraction was the root cause of the Great Depression and thus that Fed monetary policy was the reason for the long and disasterous economic downturn.

There have been more severe inflationary periods than existed from 1920-1929. Look at 1970-1980 for example and indeed there was a severe recession following this inflationary period but it wasn't anything close to the Great Depression. So I think Friedman is right, a normal economic downturn was turned into a disaster by Fed policy. IMO this actually makes the argument for a full reserve monetary system based on a commodity like gold much, much stronger. Government control of the currency has been at times disasterous and the potential for economic disaster is still there.

Friedman argued in his 1960's genre book Capitalism and Freedom that a gold standard was appealing but probably impractical due to the resource costs. He changed his opinion somewhat after he saw the runaway inflation in the 70's and stated more or less that a full reserve gold standard was much preferable to what the Fed was doing. He liked Alan Greenspan though and thought he did an excellent job as Fed chairman. Friedman argued in Capitalism and Freedom that monetary policies should be set by hard and fast rules (like inflation targeting for example) and not set by political considerations.

[mjkidd]

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It doesn't matter.

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Be more specific.

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It doesn't matter how much money there is. If you could magically evenly double the amount of money in circulation overnight, every dollar in every account, pcket, wallet and purse becomes two, prices would be bid up to double what they previously were. If every dollar became 50 cents, prices would fall by half.

The problem is Cantilon effects. Fiat money is not created and distributed evenly in proportional alloquat share to all current dollar holders. Some people get the new counterfeit money first. They benefit at the expense of everyone else who does not, since they get to buy things at the old prices before the new money has inflated them. They bid up some prices before others, distorting the price system.

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This argument intrigues me. Are there any books that discuss this effect in greater detail?

[yukoncpa]

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Read the reference above. Being on a hard standard does not prevent inflation of the money supply in the presence of fractional reserve banking. That was the cause of bank failure; printing more notes (receipts for gold) than gold existed in the vaults.



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What’s wrong with fractional reserve banking? It not only creates more money, but It also facilitates tremendously in the creation of real wealth. It’s been around a lot longer than the Federal Reserve System and has worked fine as long as banks are actually competing for customers rather than expecting a bail out, either through discount lending etc., from a Federal reserve system.

I see nothing unethical or wrong about it, as long as it is disclosed to me, that some X percentage of deposits will be subject to being lent out and that I will receive X amount of interest for allowing this to happen. And of course, as long as I can freely shop around for better deals.

[ianlippert]

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This argument intrigues me. Are there any books that discuss this effect in greater detail?


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Think about if we were to set up a small economy on an island and we had to decide how much money to use. Assuming that there is no barriers to the physical exchange of money (ie electronic money) it wouldn't matter whether we grant this economy $1 or $1 million to facilitate trade. The value of goods will find an equilibrium with each other in relation to the amount of money in circulation, the real value of goods will be the same.

To give you a taste of rothbards book on the Austrian persepective on economc history I have this quote that demonstrates just how old this debate is:

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In the course of the 'High Price' [1810], Ricardo set forth clearly the important point that there is no such thing as a shortage of specie or a great need for more of it: that, in effect, any level of the money supply is optimal:
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If the quantity of gold or silver in the world employed as money were exceedingly small, or abundantly great...the variation in their quantity would have produced no other effect than to make the commodities for which they exchanged comparatively dear or cheap. The smaller quantity of money would perform the functions of circulating medium as well as the larger.

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So I'm very sceptical of anyone that uses the great depression as justification for complete governmental control of the money supply. You dont examine one experiment in physics and declare Newtownian mechanics obsolete. Similarly to evaluate a theory of the business cycle we must look at all the evidence from history. IMO the Austrian theory is the most consistant with the historical evidence.

[natedogg]

let's just say that Sarbanes-Oxley is one of the worst examples you could have come up with to support your position.

natedogg

[Exsubmariner]

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let's just say that Sarbanes-Oxley is one of the worst examples you could have come up with to support your position.

natedogg

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Parts of Sarbanes-Oxley
Public company oversight board-
• Register all public accounting firms that provide audits for public companies.
• Establish standards relating to the preparation of audit reports for public companies.
• Conduct inspections (reviews) of accounting firms.
• Conduct investigations and disciplinary proceedings and impose appropriate sanctions on pubic accounting firms whose performance is inadequate.
• Enforce compliance with the Sarbanes-Oxley Act

Constraints on Auditors – Designed to ensure that auditors remain independent.
-Accounting firms are prohibited from providing non-accounting services to clients.
- Auditors rotated every five years
- Reports to company’s audit committee and not the management

Constraints on Management – designed to ensure validity of financial statements.
-Management makes statements asserting the accuracy of data.
- Public companies must develop and enforce an officer code of ethics.
- Loans to company officers are prohibited.
-Support of an audit committee. Not part of management & reports to board of directors.

One assumption that the government must reinforce to promote trust is that of ethical action on the part of the participants in the market. Ethics is a very confusing subject, however, and means many different things to many different people. While certain universal ethical principles exist that transcend culture and religion, many people act on cultural or religious premises believing they are ethical. The government cannot mandate a particular code of ethics to market participants. The best approach that can be taken is to set laws such as those the SEC enforces that are supposed measures of ethical action. In the case of Sarbanes-Oxley, the law is in place to foster a situation in publicly traded firms where ethical action on the part of all parties is the best course of action. Of course, the old way of doing things where the board, accounting firms, bankers, stockholders, etc got together assumed the best course of all parties was ethical until Enron happened.

Through the establishment of laws, the government promotes the perception of ethical behavior through the assumption that to obey the law is to act ethically. The actions taken by many corporations involved in scandals in 2001-2002 were not technically illegal, however. Although unethical in context, certain actions can be considered legal. But the shortcomings of law in this regard are unimportant in the face of establishing trust in the market.

Arguably, the economy, businesses, consumers and government are better off today after the passage of Sarbanes-Oxley. The market has recovered from a 10 year low in the early 2000’s to record levels. As of today, five years after Sarbanes-Oxley, the economy is booming, unemployment is at a record low, and tax revenues are surging in decreasing the deficit. The approach of the government to the ebb and flow of trust in the capital markets is clearly effective when action is taken.

[BCPVP]

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This argument intrigues me. Are there any books that discuss this effect in greater detail?

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Tons of stuff at Mises.org if you want the Austrian perspective. Otherwise, Boro's already linked Murray Rothbard's book on the Great Depression earlier in the thread.