The vote seemed nearly inexplicable, even to the New York Times [See Plan to Capture an Asteroid Runs Into Politics]. NASA (the National Aeronautics and Space Administration) wants to capture a small asteroid, less than 10 meters in diameter, and haul it back into an orbit around earth where it can be examined closely, perhaps by astronauts. The original unmanned mission was planned for 2018.
Republican members of the Science Committee of the U.S. House of Representatives voted to kill the idea. It was not part of the bill they passed (the Democrats' bill included the NASA-recommendations). They prefer a focus on lunar landings, followed by a Mars mission. There are always arguments about how to use NASA's large but not limitless budget, so this might seem to be just another argument about priorities.
A deeper look depends on knowing what scientists might find if they do capture an asteroid.
Mining asteroids is a science fiction theme from last century. Today it is approaching reality, with at least one private group looking for a way to do it and make money at it. [See Tech Billionaires Plan Audacious Mission to Mine Asteroids]. While platinum is a more likely target, the group certainly would not turn away a gold asteroid if they found one.
Asteroids are believed to be quite varied in composition. They fall into three classes: carbon rich, stony, and metallic. The assumption is their composition is fairly reflected in meteorites (meteoroids that fall to earth). Metal meteorites are less common than stony and carbon rich ones, but they are not rare (about 6% of the total). The most common metallic meteorites are iron mixed with nickel.
There is a subgroup of meteorites which have a percentage of gold in them. It is likely that there are meteorites and asteroids which consist mostly or entirely of gold. In fact a current theory is that most or all of the gold in the earth's crust came from asteroid or meteorite impacts, since the planet's original gold would have sunk to the core of the planet. [See Huge Asteroids Brought Gold to Infant Earth]
It would be possible to select an asteroid that is mainly of the metallic type (M-type asteroids) by studying the spectra of various candidates. With advanced surveying gold bearing asteroids could be distinguished from the more common iron-nickel ones.
Why is this a political problem for Republican members of Congress? Because many (but not all) in the party now want to return to the Gold Standard for money. Many wealthy Republicans, and even middle-class Republicans, have spent the last decade accumulating investments in gold.
They say that Gold is the only real money (despite there being no Biblical evidence for that). But they suspect that if gold were more common, it would behave like other commodities: it would lose value. Behind their outward confidence in gold, they fear change. They fear the laws of supply and demand and free markets.
Suppose NASA captures a 10 meter cube of gold and got it back to earth safely. How much gold is that? Gold has a density of 19.3 grams per cubic centimeter. There are a lot of cubic centimeters in a 10 meter cube. There are 100 x 100 x 100 cubic centimeters in a cubic meter, and 10 x 10 x 10 cubic meters in a 10 meter cube. That is 1,000,000,000, or 1 billion cubic centimeters.
At a price of $1300 per ounce (gold bugs would say we should measure the value of dollars in gold, not the value of gold in dollars), 19.3 grams of gold, which is 19.3/28.35 or 0.68 ounces, is worth $884.
So the asteroid would be worth $884 billion dollars. Which would not pay for the estimated $2 to $3 billion needed to collect the asteroid.
Still, it would be a lot of gold. And it would mean that for all practical purposes, there is all the gold you want in space.
Only it would not be worth $884 billion, because who would buy it? Especially when even more gold goes whizzing by the earth once in a while, just needing a nudge to capture it?
A gold asteroid of very modest size would cause the value of gold on earth to plummet. This is partly because most gold already mined here is not used for anything, not even jewelry. It is in the hands of speculators, who hope it will go up relative to the U.S. dollar, so that they can buy things they really want, like more handguns, bigger mansions, fancier cars, and the more expensive Senators.
Who exactly voted for the bill [H.R. 2687] that left out the asteroid capture mission? Lamar Smith of Texas, Paul Broun Jr. of Georgia, Larry Bucshon of Indiana, Cynthia Lummis of Wyoming, Steven Palazzo of Missouri, Chris Steward of Utah, Jim Bridenstine of Oklahoma, Mo Brooks of Alabama, Thomas Massie of Kentucky, Kevin Cramer of North Dakota, Ralph Hall of Texas, Randy Hultgren of Illinois, Frank Lucas of Oklahoma, Michael McCaul of Texas, Randy Neugebauer of Texas, Bill Posey of Florida, Dana Rohrabacher of California, David Schweikert of Arizona, James Sensenbrenner Jr. of Wisconsin, Steve Stockman of Texas, and Randy Weber of Texas. Lots of Republicans from Texas on the Science Committee.
And for those of you who love details, here is the Text of H.R. 2687
Showing posts with label gold standard. Show all posts
Showing posts with label gold standard. Show all posts
Monday, August 5, 2013
Friday, April 26, 2013
The Accounting System #5: Physical Money As Portable Accounting
previous: #4: The Big Reversal
During the Age of Coin the normal relation of reality to symbols of reality was inverted for many people. This inversion permeates human culture even today, long after the Age of Coin (roughly 1400 to 1900) has faded into history.
Leaving aside human relations, possessions and their use are generally believed to hold value. Food, clothing, housing, tools, and land have obvious value. Coin, however, came to be the common denominator allowing people to think about the value of mixtures of types of possessions. A farmer could come up with a total numeric value of his land, cows, sheep, and money held in bank accounts and cash. An urban investor know how much his stocks were worth, and the shares of companies they represented in turn could be accounted for in terms of projected future profits and current assets that might include factories, inventories, and money in bank accounts, less what was owed on loans.
It was a convenient fiction that any citizen could turn all assets into a pile of coin or paper currency, stand naked beside the pile, and know his or her worth. Even more conveniently, one could come close to this by selling everything, putting the resulting money into a bank account, and looking at a single number on a bank statement.
In reality not everyone could convert all their assets to currency or even into bank accounts at once. There was not enough currency to meet the demand if too many people demanded cash at any given time. The history of the United States of America, from colonial times until the creation of the Federal Reserve, was punctuated by proofs of this. Metallic coin, preferably silver or gold coin, was always in short supply because at first it had to be imported. After about 1850, when large amounts of gold and silver were found and mined in the states, coin remained in short supply because the rest of the economy expanded at such a fast rate. The Free Silver (coinage) and Greenback political campaigns encapsulated the deadening effect on the economy of the mindset that only gold could be real money, or represent real value.
Going back to our naked ape sitting beside a pile of coin (perhaps have kept aside a knife or six-shooter to defend it with), pretty soon, except in cases of insanity, hunger or discomfort would lead to spending down the pile. If no one was willing to trade food for gold, the pile was useless, and without value. We know from history that in times of famine scraps of food came to be "worth their weight in gold."
Another problem would occur if everyone tried to liquidate their assets at once. In that hypothetical situation, there would be no buyers. The value of truly valuable things drops to nothing if buyers cannot be found. This can be true even when there is plenty of money (coin, cash, account balances, or credit) to buy the assets. Thus we have had a series of asset bubbles over the centuries, some of the most famous being the Tulip bubble, the South Seas bubble, the Florida land bubble, the Internet stock bubble, the housing bubble of 2005-2006, and (as of April 15, 2013) the Gold bubble. In a bubble money is traded for something believed to have real value, until only the most foolish citizens can't see that the money value exceeds the real value. Then, when buyers become scarce enough, bubbles burst. Tulips are just tulips again, not investments. (My favorite bubbles: tropical fish bubbles and the farmed mink bubble).
Next: #6: Counting, Coins, and Crashes
[The Accounting System, Your Fate is in the Cloud, is a work in progress by William P. Meyers, ©2013]
During the Age of Coin the normal relation of reality to symbols of reality was inverted for many people. This inversion permeates human culture even today, long after the Age of Coin (roughly 1400 to 1900) has faded into history.
Leaving aside human relations, possessions and their use are generally believed to hold value. Food, clothing, housing, tools, and land have obvious value. Coin, however, came to be the common denominator allowing people to think about the value of mixtures of types of possessions. A farmer could come up with a total numeric value of his land, cows, sheep, and money held in bank accounts and cash. An urban investor know how much his stocks were worth, and the shares of companies they represented in turn could be accounted for in terms of projected future profits and current assets that might include factories, inventories, and money in bank accounts, less what was owed on loans.
It was a convenient fiction that any citizen could turn all assets into a pile of coin or paper currency, stand naked beside the pile, and know his or her worth. Even more conveniently, one could come close to this by selling everything, putting the resulting money into a bank account, and looking at a single number on a bank statement.
In reality not everyone could convert all their assets to currency or even into bank accounts at once. There was not enough currency to meet the demand if too many people demanded cash at any given time. The history of the United States of America, from colonial times until the creation of the Federal Reserve, was punctuated by proofs of this. Metallic coin, preferably silver or gold coin, was always in short supply because at first it had to be imported. After about 1850, when large amounts of gold and silver were found and mined in the states, coin remained in short supply because the rest of the economy expanded at such a fast rate. The Free Silver (coinage) and Greenback political campaigns encapsulated the deadening effect on the economy of the mindset that only gold could be real money, or represent real value.
Going back to our naked ape sitting beside a pile of coin (perhaps have kept aside a knife or six-shooter to defend it with), pretty soon, except in cases of insanity, hunger or discomfort would lead to spending down the pile. If no one was willing to trade food for gold, the pile was useless, and without value. We know from history that in times of famine scraps of food came to be "worth their weight in gold."
Another problem would occur if everyone tried to liquidate their assets at once. In that hypothetical situation, there would be no buyers. The value of truly valuable things drops to nothing if buyers cannot be found. This can be true even when there is plenty of money (coin, cash, account balances, or credit) to buy the assets. Thus we have had a series of asset bubbles over the centuries, some of the most famous being the Tulip bubble, the South Seas bubble, the Florida land bubble, the Internet stock bubble, the housing bubble of 2005-2006, and (as of April 15, 2013) the Gold bubble. In a bubble money is traded for something believed to have real value, until only the most foolish citizens can't see that the money value exceeds the real value. Then, when buyers become scarce enough, bubbles burst. Tulips are just tulips again, not investments. (My favorite bubbles: tropical fish bubbles and the farmed mink bubble).
Next: #6: Counting, Coins, and Crashes
[The Accounting System, Your Fate is in the Cloud, is a work in progress by William P. Meyers, ©2013]
Friday, April 19, 2013
The Accountings System #3: Bank Cycles of Credit and Gold
The banking system, which was at the heart of the accounting system, was also found to be wanting for a modern economy. This is because the banking system had three separate functions which did not go well together. It became the core of the social accounting system: a man might claim to be rich, but it his bank checks bounced, people knew the reality was otherwise. It allowed its depositors to keep their money safe and perhaps earn a bit of interest. To make a profit, bankers had to loan out the money of their depositors at an interest rate sufficient to keep their depositors happy, pay for the costs of operation, and still come out ahead. This was the credit system.
The credit system of the early 1800's in the United States is worth a close look because of the way it resembled and differed from our present system. Individuals were more likely to be sources of credits, which typically took the form of "IOUs." Andrew Jackson, before he became President, is a well documented example. Like most Americans of the era, he seldom could put his hands on much cash or coin, but he owned land, race horses, and slaves of considerable value. If he purchased goods he would write a personal note, an IOU, which he pledged to redeem at a later date, say when he received some cash to pay for his cotton crop.
A creditor holding the Jackson note might want to spend it before then, and would sign it over to another man, perhaps to buy a horse. If a man was considered to have good credit, as Jackson was, his notes might circulate for some time and be considered more sound than bank notes. If a note was collectable, and you took it to the Hermitage to demand payment, and Jackson still had no cash, he might try to pay you off with a slave, dog, horse, or perhaps some wine or whiskey. In effect Andrew would discount his own note, giving you, perhaps, a $250 race horse for a $300 note. As long as creditors were happy with the exchange his credit remained good. Similarly, if you were another local slaver and wanted to buy some possession of Jackson's and he was willing to sell, he would probably accept your IOU (which, along with the shortage of gold, was one reason most people had very little cash to play with).
The primitive banks of that era were in a strangely similar position to private individuals like Jackson. The bank might actually own nothing but a license from the state (usually obtained by bribing legislators), but usually began with a little bit of gold or silver coin. Banks would take deposits – hopefully coin, but also other bank's notes – and then would start making loans, which is to say, creating credit. They tried to avoid loaning their coins, instead issuing their own bank notes. If too many people came in demanding that the bank notes be redeemed in coin, the coin would run out, depositors would demand their deposits, and the bank would fail. The more clever bankers liked to loan to people a goodly distance from home, so that their notes would circulate afar and be unlikely to be redeemed.
This system led to credit cycles of boom and bust. When people were confident in the banknotes and IOUs a speculator could buy land and be confident of selling it in a year or two for more money. Sound familiar? During a boom farmers got good prices for their crops, and manufacturers had little problem selling their wares to the farmers. When credit contracted, as it invariably did, no one wanted to take an IOU or banknote. With little gold to go around, commerce collapsed and people returned to bartering until time healed the wounds and another upward cycle began.
Eventually Americans got tired of this ridiculous system, made banknotes illegal, and tried various banking reserve systems cumulating in the Federal Reserve System. Only the federal government could issue paper money, and that was backed by gold or silver. But that system did not work long either, as the Great Depression proved.
Next: The Big Reversal
[The Accounting System, Your Fate is in the Cloud, is a work in progress by William P. Meyers, ©2013]
The credit system of the early 1800's in the United States is worth a close look because of the way it resembled and differed from our present system. Individuals were more likely to be sources of credits, which typically took the form of "IOUs." Andrew Jackson, before he became President, is a well documented example. Like most Americans of the era, he seldom could put his hands on much cash or coin, but he owned land, race horses, and slaves of considerable value. If he purchased goods he would write a personal note, an IOU, which he pledged to redeem at a later date, say when he received some cash to pay for his cotton crop.
A creditor holding the Jackson note might want to spend it before then, and would sign it over to another man, perhaps to buy a horse. If a man was considered to have good credit, as Jackson was, his notes might circulate for some time and be considered more sound than bank notes. If a note was collectable, and you took it to the Hermitage to demand payment, and Jackson still had no cash, he might try to pay you off with a slave, dog, horse, or perhaps some wine or whiskey. In effect Andrew would discount his own note, giving you, perhaps, a $250 race horse for a $300 note. As long as creditors were happy with the exchange his credit remained good. Similarly, if you were another local slaver and wanted to buy some possession of Jackson's and he was willing to sell, he would probably accept your IOU (which, along with the shortage of gold, was one reason most people had very little cash to play with).
The primitive banks of that era were in a strangely similar position to private individuals like Jackson. The bank might actually own nothing but a license from the state (usually obtained by bribing legislators), but usually began with a little bit of gold or silver coin. Banks would take deposits – hopefully coin, but also other bank's notes – and then would start making loans, which is to say, creating credit. They tried to avoid loaning their coins, instead issuing their own bank notes. If too many people came in demanding that the bank notes be redeemed in coin, the coin would run out, depositors would demand their deposits, and the bank would fail. The more clever bankers liked to loan to people a goodly distance from home, so that their notes would circulate afar and be unlikely to be redeemed.
This system led to credit cycles of boom and bust. When people were confident in the banknotes and IOUs a speculator could buy land and be confident of selling it in a year or two for more money. Sound familiar? During a boom farmers got good prices for their crops, and manufacturers had little problem selling their wares to the farmers. When credit contracted, as it invariably did, no one wanted to take an IOU or banknote. With little gold to go around, commerce collapsed and people returned to bartering until time healed the wounds and another upward cycle began.
Eventually Americans got tired of this ridiculous system, made banknotes illegal, and tried various banking reserve systems cumulating in the Federal Reserve System. Only the federal government could issue paper money, and that was backed by gold or silver. But that system did not work long either, as the Great Depression proved.
Next: The Big Reversal
[The Accounting System, Your Fate is in the Cloud, is a work in progress by William P. Meyers, ©2013]
Thursday, April 18, 2013
The Accounting System #2: The Coin Age
Once upon a time there was no Accounting System except Nature itself.
We do not know exactly when in history humans began counting in earnest. We know that some animals have some ability to count, for instance to notice when a child has gone missing. We also know that most animals can see the difference between "more" and "less."
By the time of the early urban civilizations we know about (Egypt, Palestine and Mesopotamia, and China for example) counting and keeping records of counts was a well-established set of skills. Rulers wanted to know how many cows were in their herds, how many soldiers were available for battle, and whether subordinates had contributed their fair share of grain to the royal stores. Merchants needed to track their inventories, as did anyone who farmed on a large scale. This keeping of records of counts of things is the earliest manifestation of The Accounting System.
The ledger, or written record of counts, thus preceded what we now call cash and coin. Coin is generally treated as having inherent value, and for that reason tended over the millennia to standardize on three metals: gold, silver, and copper. Coin stands as a way station between bartering (directly trading one kind of good or service for another) and systemic accounting through modern record keeping.
People counted coins, and thus accounting and bookkeeping seemed to be the art of coin counting. This was the case with the improved accounting systems of early Renaissance Italy. This led to misconceptions, both popular and among the professional accountants, which persist to this day.
Counting things other than coin did not go away, but accountants and ordinary people came to start measuring all things by their value in coin. To keep his books straight, a farmer might count his cows, multiply by a set value per cow, and account for the total as an asset in units of currency.
During the Coin Age (roughly 1400 to 1900) other aspects of the accounting system evolved and expanded. People, from peasants to kings, still needed to count their things. The most important thing to count was land, but that was somewhat more complicated than counting cows or shillings. It required a title system (note the term likely evolved from titles such as duke, lord, sir, and mister) and surveys, and a legal system as well. People who lived on land but had no legal title to it lost it over the centuries. This was particularly obvious in the Americas, where the natives were dispossessed of almost all of their tribal land. Today the land title system extends to every part of the world except the Antarctic.
The human identity system also expanded during the Coin Age. We know that ancient kings took censuses of their subjects. Various forms of identity papers evolved, particularly in Europe. Passports and visas were required for travel. Birth certificates evolved from baptismal records into a pervasive system that came to account for most births. Place of birth was attached to nationality, and the various national identity systems, including Social Security numbers, drivers licenses, and death certificates in the United States, evolved into a system that accounts for each individual human living and dead.
The rapid rise of industrialism, including the rise of industrial methods of agriculture, and parallel expansion of the global human population, put strains on the economic systems of the Coin Age.
In a throwback to the Platonic (or medieval Scholastic) system of intellectual architectures that don't reflect reality, Gold was declared by many people to be the only "real" money. This proved to be impractical to the point of economic disaster. At times the supply of gold did not grow as fast as the economy, leading to recessions and depressions. At other times the supply of gold from new discoveries grew rapidly, leading to inflation (it took increasing amounts of gold to buy other goods like cows, houses, and services).
Next: Bank Cycles, Credit and Gold
[The Accounting System, Your Fate is in the Cloud, is a work in progress by William P. Meyers, ©2013]
We do not know exactly when in history humans began counting in earnest. We know that some animals have some ability to count, for instance to notice when a child has gone missing. We also know that most animals can see the difference between "more" and "less."
By the time of the early urban civilizations we know about (Egypt, Palestine and Mesopotamia, and China for example) counting and keeping records of counts was a well-established set of skills. Rulers wanted to know how many cows were in their herds, how many soldiers were available for battle, and whether subordinates had contributed their fair share of grain to the royal stores. Merchants needed to track their inventories, as did anyone who farmed on a large scale. This keeping of records of counts of things is the earliest manifestation of The Accounting System.
The ledger, or written record of counts, thus preceded what we now call cash and coin. Coin is generally treated as having inherent value, and for that reason tended over the millennia to standardize on three metals: gold, silver, and copper. Coin stands as a way station between bartering (directly trading one kind of good or service for another) and systemic accounting through modern record keeping.
People counted coins, and thus accounting and bookkeeping seemed to be the art of coin counting. This was the case with the improved accounting systems of early Renaissance Italy. This led to misconceptions, both popular and among the professional accountants, which persist to this day.
Counting things other than coin did not go away, but accountants and ordinary people came to start measuring all things by their value in coin. To keep his books straight, a farmer might count his cows, multiply by a set value per cow, and account for the total as an asset in units of currency.
During the Coin Age (roughly 1400 to 1900) other aspects of the accounting system evolved and expanded. People, from peasants to kings, still needed to count their things. The most important thing to count was land, but that was somewhat more complicated than counting cows or shillings. It required a title system (note the term likely evolved from titles such as duke, lord, sir, and mister) and surveys, and a legal system as well. People who lived on land but had no legal title to it lost it over the centuries. This was particularly obvious in the Americas, where the natives were dispossessed of almost all of their tribal land. Today the land title system extends to every part of the world except the Antarctic.
The human identity system also expanded during the Coin Age. We know that ancient kings took censuses of their subjects. Various forms of identity papers evolved, particularly in Europe. Passports and visas were required for travel. Birth certificates evolved from baptismal records into a pervasive system that came to account for most births. Place of birth was attached to nationality, and the various national identity systems, including Social Security numbers, drivers licenses, and death certificates in the United States, evolved into a system that accounts for each individual human living and dead.
The rapid rise of industrialism, including the rise of industrial methods of agriculture, and parallel expansion of the global human population, put strains on the economic systems of the Coin Age.
In a throwback to the Platonic (or medieval Scholastic) system of intellectual architectures that don't reflect reality, Gold was declared by many people to be the only "real" money. This proved to be impractical to the point of economic disaster. At times the supply of gold did not grow as fast as the economy, leading to recessions and depressions. At other times the supply of gold from new discoveries grew rapidly, leading to inflation (it took increasing amounts of gold to buy other goods like cows, houses, and services).
Next: Bank Cycles, Credit and Gold
[The Accounting System, Your Fate is in the Cloud, is a work in progress by William P. Meyers, ©2013]
Saturday, March 17, 2012
Gold, Black Friday 1869, and the Federal Reserve
Most Americans don't know about Black Friday 1869, a day that saw one of the many Wall Street Panics that have wracked our nation's history. Yet given the numbskull proposals for economic reform being bandied about today, a close look would be illuminating.
Typical treatments in American History books provide little insight. Take, for example, this passage from The American Pageant by Stanford historian Thomas Bailey:
"The low ethics of the [Ulysses S.] Grant era are well illustrated by a fantastic scheme of "Jubilee Jim" Fisk and Jay Gould. This precious pair conceived the plot, in 1869, of cornering all the gold on the New York market and netting additional millions. Their cunning game could succeed only if the Federal Treasury would hold back its funds. The conspirators worked on Grant directly, and also on his brother-in-law, who received $25,000 for his complicity. On "Black Friday" September 24, Fisk and Gould madly bid the price of gold skyward, while scores of honest businessmen were driven to the wall. The bubble broke when the Treasury, contrary to Grant's earlier assurances, was forced to release gold."
Returning to the gold standard is a hallmark of Ron Paul's presidential campaign. Running parallel to the current gold bubble (which may already be popping), the idea that gold is the only sound form of money (excepting maybe silver) has become quite popular. The idea only appeals because people have had time to forget just how unworkable the gold standard used to be. Black Friday 1869 illustrates that, and more.
The debate about creating a sound money and banking policy for the United States dates back to the colonial era. Money, until the 1900's, was thought of as either being metallic or paper. Metallic money tended to maintain its value better, but the U.S. had to import most of its gold and silver until gold was discovered in California in 1848. Prior to that time the economy was constrained by a lack of gold currency. While paper money could easily be printed to alleviate the shortage of coins, the temptation to just keep printing it has been difficult for politicians and bankers to resist. Too much paper money causes the prices of goods in terms of money to go up: we get inflation. It should be noted, however, that when new sources of gold were found, that also caused too much money to be coined, resulting in inflation. Gold has less inflationary danger as a whole because you can't just print all you want, so for the most part the gold standard has been associated with either price stability or deflation resulting from the constraint on trade from insufficient gold in circulation.
But wrap your head around this: most money today is electronic. That is right. While Tea Party economists prescribe gold as an antidote for Federal Reserve Notes, only a tiny percent of American money today is paper. Money now sits on computers. Bank computers, grouped together, are an accounting system that electronically registers how much money each person has or owes. What is important is not that it is in electronic form (it used to be on old-fashioned paper ledgers), but that the accounting system itself is fair, accountable, and manageable. The Federal Reserve's real job is to keep our economy, and our individual stakes in it, accountable. That is a very hard concept for people who shy away from abstract and complex thoughts, which is most of us most of the time.
The United States economy had seen numerous boom and bust cycles before the Civil War, each with their own unique aspects. The expense of the Civil War led to a number of important economic changes. Paper money was issued by the Federal government; previously it had been issued by private banks. These federal "greenbacks" were meant to supplement, not substitute for, the gold supply and bank-issued money. They could be redeemed for government gold. They allowed for a tremendous expansion of economic activity in the North during the war.
A national banking reserve system was also put in place before 1869. To make bank notes roughly equivalent and prevent bank failures, smaller (typically rural) banks had to keep reserves in larger (urban) banks, and in turn New York City banks held reserves of the banks around the country. While this helped with many old problems, it left a seasonal liquidity problem. Even after the Civil War America's wealth was largely farming-based. In the fall, when farmers sold their crops, "actual cash money" was needed to pay them. This drained the local banks, who in turn called in their reserves. In New York City the reserves drained out of the major banks, and out of the stock and commodities markets. Since this happened each year, and could be predicted, while some banks tried to be prepared, certain speculators took advantage of the situation. In the simplest version, if you wanted to take over a corporation, you could usually buy its stock cheaper in the fall than during the rest of the year.
As described in The First Tycoon: The Epic Life of Cornelius Vanderbilt
by T. J. Stiles, railroads were the biggest American corporations of that era. "Commodore" Vanderbilt had achieved successful railroad takeovers partly by purposefully creating money crunches, then buying the stock of rivals cheap. Sometimes he even forced down the price of stocks he owned, so that he could buy back a larger share at low prices. On September 19, 1869 he dumped his stock in the Lake Shore railroad. Lockwood & Company, a large Wall Street brokerage house, had borrowed money to invest in Lake Shore, and was driven to bankruptcy.
Jim Fisk and Jay Gould were rivals of Vanderbilt. Vanderbilt's Lake Shore scheme came during the Gould-Fisk gold corner scheme, which was part of a bigger plan. If dollars sank in price compared to gold, then American crops would be more competitive overseas. Hence, they would need to be exported, and to do that they would have to be shipped to East Coast ports via railroads owned by Fisk and Gould. They would make money on the gold corner and make money for their railroads. They acquired large amounts of gold starting in August, and by mid-September gold was in a bubble, which they planned to deflate while taking profits and after the crops had been shipped.
On September 24, 1869, the Federal Government announced it would sell some (not that much, a few million dollars worth) of its gold. The price of gold collapsed; stocks followed gold down. Many Wall Street companies failed. Neither the gold supply nor the banking reserve system could supply enough liquidity to allow the markets to right themselves.
Vanderbilt, probably the richest man in America, calmed the markets. He had not meant to sink the entire American economy, just some of his railroad rivals. As gold dropped in value, people stopped hoarding it, so gradually both gold and paper money supplies returned to normal.
The nation had several more lessons in the need for a money system that could expand and contract in line with both short term economic conditions and longer trends. Finally, in 1913, the Federal Reserve System was formed.
There are certainly problems with the Federal Reserve System. The Great Depression was not prevented by Federal Reserve action. Neither was the inflation of the 1970s. Nor can the Federal Reserve by itself make up for the stupidity of Congress, or of Wall Street guys who, like Fisk and Gould, outsmart themselves.
But forget the Gold Standard. It is suitable only for antique shows along with muskets, horse-drawn trams, and cowrie-shell money.
Fix and improve the Federal Reserve System; don't abolish it. Clearly it needs to be run by better decision makers. They should put the public interest above the current mission of insuring profitability for bankers and their fat-cat Wall Street shenanigans.
Just as we really need to increase math and science literacy in the United States, we need to increase business and economics literacy. An ill-informed electorate is apt to elect ill-informed and crooked men who can break any system, no matter how well-constructed the system itself is. Discussing the gold standard is a great opportunity to explain how the modern electronic-money economy can be made to work.
Typical treatments in American History books provide little insight. Take, for example, this passage from The American Pageant by Stanford historian Thomas Bailey:
"The low ethics of the [Ulysses S.] Grant era are well illustrated by a fantastic scheme of "Jubilee Jim" Fisk and Jay Gould. This precious pair conceived the plot, in 1869, of cornering all the gold on the New York market and netting additional millions. Their cunning game could succeed only if the Federal Treasury would hold back its funds. The conspirators worked on Grant directly, and also on his brother-in-law, who received $25,000 for his complicity. On "Black Friday" September 24, Fisk and Gould madly bid the price of gold skyward, while scores of honest businessmen were driven to the wall. The bubble broke when the Treasury, contrary to Grant's earlier assurances, was forced to release gold."
Returning to the gold standard is a hallmark of Ron Paul's presidential campaign. Running parallel to the current gold bubble (which may already be popping), the idea that gold is the only sound form of money (excepting maybe silver) has become quite popular. The idea only appeals because people have had time to forget just how unworkable the gold standard used to be. Black Friday 1869 illustrates that, and more.
The debate about creating a sound money and banking policy for the United States dates back to the colonial era. Money, until the 1900's, was thought of as either being metallic or paper. Metallic money tended to maintain its value better, but the U.S. had to import most of its gold and silver until gold was discovered in California in 1848. Prior to that time the economy was constrained by a lack of gold currency. While paper money could easily be printed to alleviate the shortage of coins, the temptation to just keep printing it has been difficult for politicians and bankers to resist. Too much paper money causes the prices of goods in terms of money to go up: we get inflation. It should be noted, however, that when new sources of gold were found, that also caused too much money to be coined, resulting in inflation. Gold has less inflationary danger as a whole because you can't just print all you want, so for the most part the gold standard has been associated with either price stability or deflation resulting from the constraint on trade from insufficient gold in circulation.
But wrap your head around this: most money today is electronic. That is right. While Tea Party economists prescribe gold as an antidote for Federal Reserve Notes, only a tiny percent of American money today is paper. Money now sits on computers. Bank computers, grouped together, are an accounting system that electronically registers how much money each person has or owes. What is important is not that it is in electronic form (it used to be on old-fashioned paper ledgers), but that the accounting system itself is fair, accountable, and manageable. The Federal Reserve's real job is to keep our economy, and our individual stakes in it, accountable. That is a very hard concept for people who shy away from abstract and complex thoughts, which is most of us most of the time.
The United States economy had seen numerous boom and bust cycles before the Civil War, each with their own unique aspects. The expense of the Civil War led to a number of important economic changes. Paper money was issued by the Federal government; previously it had been issued by private banks. These federal "greenbacks" were meant to supplement, not substitute for, the gold supply and bank-issued money. They could be redeemed for government gold. They allowed for a tremendous expansion of economic activity in the North during the war.
A national banking reserve system was also put in place before 1869. To make bank notes roughly equivalent and prevent bank failures, smaller (typically rural) banks had to keep reserves in larger (urban) banks, and in turn New York City banks held reserves of the banks around the country. While this helped with many old problems, it left a seasonal liquidity problem. Even after the Civil War America's wealth was largely farming-based. In the fall, when farmers sold their crops, "actual cash money" was needed to pay them. This drained the local banks, who in turn called in their reserves. In New York City the reserves drained out of the major banks, and out of the stock and commodities markets. Since this happened each year, and could be predicted, while some banks tried to be prepared, certain speculators took advantage of the situation. In the simplest version, if you wanted to take over a corporation, you could usually buy its stock cheaper in the fall than during the rest of the year.
As described in The First Tycoon: The Epic Life of Cornelius Vanderbilt
by T. J. Stiles, railroads were the biggest American corporations of that era. "Commodore" Vanderbilt had achieved successful railroad takeovers partly by purposefully creating money crunches, then buying the stock of rivals cheap. Sometimes he even forced down the price of stocks he owned, so that he could buy back a larger share at low prices. On September 19, 1869 he dumped his stock in the Lake Shore railroad. Lockwood & Company, a large Wall Street brokerage house, had borrowed money to invest in Lake Shore, and was driven to bankruptcy.Jim Fisk and Jay Gould were rivals of Vanderbilt. Vanderbilt's Lake Shore scheme came during the Gould-Fisk gold corner scheme, which was part of a bigger plan. If dollars sank in price compared to gold, then American crops would be more competitive overseas. Hence, they would need to be exported, and to do that they would have to be shipped to East Coast ports via railroads owned by Fisk and Gould. They would make money on the gold corner and make money for their railroads. They acquired large amounts of gold starting in August, and by mid-September gold was in a bubble, which they planned to deflate while taking profits and after the crops had been shipped.
On September 24, 1869, the Federal Government announced it would sell some (not that much, a few million dollars worth) of its gold. The price of gold collapsed; stocks followed gold down. Many Wall Street companies failed. Neither the gold supply nor the banking reserve system could supply enough liquidity to allow the markets to right themselves.
Vanderbilt, probably the richest man in America, calmed the markets. He had not meant to sink the entire American economy, just some of his railroad rivals. As gold dropped in value, people stopped hoarding it, so gradually both gold and paper money supplies returned to normal.
The nation had several more lessons in the need for a money system that could expand and contract in line with both short term economic conditions and longer trends. Finally, in 1913, the Federal Reserve System was formed.
There are certainly problems with the Federal Reserve System. The Great Depression was not prevented by Federal Reserve action. Neither was the inflation of the 1970s. Nor can the Federal Reserve by itself make up for the stupidity of Congress, or of Wall Street guys who, like Fisk and Gould, outsmart themselves.
But forget the Gold Standard. It is suitable only for antique shows along with muskets, horse-drawn trams, and cowrie-shell money.
Fix and improve the Federal Reserve System; don't abolish it. Clearly it needs to be run by better decision makers. They should put the public interest above the current mission of insuring profitability for bankers and their fat-cat Wall Street shenanigans.
Just as we really need to increase math and science literacy in the United States, we need to increase business and economics literacy. An ill-informed electorate is apt to elect ill-informed and crooked men who can break any system, no matter how well-constructed the system itself is. Discussing the gold standard is a great opportunity to explain how the modern electronic-money economy can be made to work.
Wednesday, August 22, 2007
Ron Paul's Crazy Gold Standard Proposal
I like many of the stances of Ron Paul, currently in the U.S. House of Representatives for Texas and seeker of the Republican nomination to become President of the United States. I even agree with him on some of his critique of the Federal Reserve System. But his idea of returning to the gold standard for money is crazy, and it is important to understand why.
Let me begin by asking this: what would you think of a candidate that urged returning to the wampum standard? What do the gold standard and wampum standard have in common, and how are they different? What does the U.S. Constitution say? How does Ron Paul's proposal differ from the gold standard used in the 19th century in the United States? Finally, having covered that extensive ground, I
First of all, you should know that none of Ron Paul's ideas are new. They have been discussed by those interested in monetary policy since before Alexander Hamilton laid out the blueprint for the U.S. financial system (though he did not foresee the need for a Federal Reserve).
Wampum (see Wampum) is a kind of money made from sea shells that used to be used by Native American Indians. It had value because it was believed to have value. Like other forms of money, it could facilitate trade, lifting an economy above the pure barter level. While the shells themselves might have some ornamental value, mainly they were a symbol for work done. Much like a modern dollar bill. There were two problems with using wampum for money that would have shown up in a more trade-oriented, modern society. One is that there could be a shortage of wampum if not enough of the appropriate shells could be found. That could constrain trade. The other is that either too much wampum could be produced, or that it could be counterfeited. Then the value of wampum would fall relative to real goods; in effect, you can have inflation even on the wampum standard.
Gold (see Gold) is a metal used for ornamentation and other purposes; it used to be used as money. While more difficult to counterfeit than wampum, it had the same problems when used as money. It did not always prevent inflation. For instance, when the Spanish conquered Mexico and Peru, so much gold and silver was mined that there was inflation in Europe. In the 19th and 20th century, with major veins of native (metallic) gold mostly tapped out, there was not enough gold available to facilitate the rapid growth of commerce. With the introduction of modern methods of extracting low-grade gold ores a related problem arose: the high cost of producing metallic gold.
Even paper money is becoming obsolete; most money today is tracked electronically.
Ron Paul proposes to fix the problem of gold by allowing the value of gold relative to silver to float in value as determined by markets shows how far his mind has wandered from reality. This was a real issue in the U.S. in the 1880's. The Democratic Party, having lost the Civil War (it was the party of Slavery), tried to get back in power at a national level by changing the official silver-to-gold exchange ratio, as exemplified in (losing) presidential candidate William Jennings Bryan's famous Cross of Gold speech. The problem with gold and silver used as money lies not in their exchange ratio, but in the fact that the supply from mining varies over time and does not match the variation in economic activity.
So forget the gold standard.
Ron Paul does remind us that the U.S. Constitution does not clearly allow for paper money, much less authorize the Federal Reserve System. It specifically states in Article I, Section 10 "No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts." However, here "state" is specifically one of the states, not the federal government. In Section 8 it had already given Congress the power "To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;
To provide for the Punishment of counterfeiting the Securities and current Coin of the United States;" which seems to give it the power to issue securities, which could be bonds, but has been interpreted as the ability to issue paper money. Why allow issuance of federal paper money and then prohibit the states from accepting it for the payment of debts? This issue was got around for a time by issuing paper money backed by gold or silver. As in so many cases, when the Constitution should have been amended, it was simply re-interpreted.
As to the Federal Reserve, I agree there are problems with it. It is supposed to allow for creation of a money supply sufficient to allow the economy to improve, but not so great as to cause inflation. But it is composed of bankers. Bankers are not like the rest of us. They have a long history of being far more sympathetic to the perceived problems of the rich than to the very real problems of the poor, the working class, and the middle class.
So sure, let's talk about reforming the Federal Reserve to make it responsive to all the people, not just the banks and Wall Street. Let us make it more transparent and find a way to hold those running the Federal Reserve System accountable. But forget the gold standard.
More data:
Ron Paul's Presidential campaign site
Let me begin by asking this: what would you think of a candidate that urged returning to the wampum standard? What do the gold standard and wampum standard have in common, and how are they different? What does the U.S. Constitution say? How does Ron Paul's proposal differ from the gold standard used in the 19th century in the United States? Finally, having covered that extensive ground, I
First of all, you should know that none of Ron Paul's ideas are new. They have been discussed by those interested in monetary policy since before Alexander Hamilton laid out the blueprint for the U.S. financial system (though he did not foresee the need for a Federal Reserve).
Wampum (see Wampum) is a kind of money made from sea shells that used to be used by Native American Indians. It had value because it was believed to have value. Like other forms of money, it could facilitate trade, lifting an economy above the pure barter level. While the shells themselves might have some ornamental value, mainly they were a symbol for work done. Much like a modern dollar bill. There were two problems with using wampum for money that would have shown up in a more trade-oriented, modern society. One is that there could be a shortage of wampum if not enough of the appropriate shells could be found. That could constrain trade. The other is that either too much wampum could be produced, or that it could be counterfeited. Then the value of wampum would fall relative to real goods; in effect, you can have inflation even on the wampum standard.
Gold (see Gold) is a metal used for ornamentation and other purposes; it used to be used as money. While more difficult to counterfeit than wampum, it had the same problems when used as money. It did not always prevent inflation. For instance, when the Spanish conquered Mexico and Peru, so much gold and silver was mined that there was inflation in Europe. In the 19th and 20th century, with major veins of native (metallic) gold mostly tapped out, there was not enough gold available to facilitate the rapid growth of commerce. With the introduction of modern methods of extracting low-grade gold ores a related problem arose: the high cost of producing metallic gold.
Even paper money is becoming obsolete; most money today is tracked electronically.
Ron Paul proposes to fix the problem of gold by allowing the value of gold relative to silver to float in value as determined by markets shows how far his mind has wandered from reality. This was a real issue in the U.S. in the 1880's. The Democratic Party, having lost the Civil War (it was the party of Slavery), tried to get back in power at a national level by changing the official silver-to-gold exchange ratio, as exemplified in (losing) presidential candidate William Jennings Bryan's famous Cross of Gold speech. The problem with gold and silver used as money lies not in their exchange ratio, but in the fact that the supply from mining varies over time and does not match the variation in economic activity.
So forget the gold standard.
Ron Paul does remind us that the U.S. Constitution does not clearly allow for paper money, much less authorize the Federal Reserve System. It specifically states in Article I, Section 10 "No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts." However, here "state" is specifically one of the states, not the federal government. In Section 8 it had already given Congress the power "To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;
To provide for the Punishment of counterfeiting the Securities and current Coin of the United States;" which seems to give it the power to issue securities, which could be bonds, but has been interpreted as the ability to issue paper money. Why allow issuance of federal paper money and then prohibit the states from accepting it for the payment of debts? This issue was got around for a time by issuing paper money backed by gold or silver. As in so many cases, when the Constitution should have been amended, it was simply re-interpreted.
As to the Federal Reserve, I agree there are problems with it. It is supposed to allow for creation of a money supply sufficient to allow the economy to improve, but not so great as to cause inflation. But it is composed of bankers. Bankers are not like the rest of us. They have a long history of being far more sympathetic to the perceived problems of the rich than to the very real problems of the poor, the working class, and the middle class.
So sure, let's talk about reforming the Federal Reserve to make it responsive to all the people, not just the banks and Wall Street. Let us make it more transparent and find a way to hold those running the Federal Reserve System accountable. But forget the gold standard.
More data:
Ron Paul's Presidential campaign site
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