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George Will Repeats Fed Propaganda

“End the Fed” is much too radical for the American intellectual class, but everyone wants to jump aboard the anti-Fed bandwagon these days. So now we’re hearing, here and there, the “if only the Fed would return to its original mission” thing.

That’s the line George Will takes in his most recent column. The Fed’s current policies may be dreadful but we can’t close it down, Will hastens to caution us. “Before the Fed was created 99 years ago, the U.S. economy was in recession 48 percent of the time; since 1913, it has been in recession only about 20 percent of the time. The Fed has done much good.”

Will’s statistic about the 19th century is preposterous. It is based on long-discredited statistics that economists today no longer believe. The Fed chapter of my 2011 book Rollback discusses this point and brings together the avalanche of evidence against the familiar claim that the economy was notoriously fragile before the Fed was created and robust afterward. I said a little bit about this in a recent article I wrote (see myth #9) with Bob Murphy, and also in “Life With the Fed: Sunshine and Lollipops?”

Unlearn the Propaganda!

  • Scott Weisman

    In a stable money regime (like the classical gold standard) metrics like GDP (and its derivatives like GDP growth and GDP per capita) make no sense at all. I haven’t really seen this pointed out anywhere, but it makes sense. Only productive capacity and output make sense as measures of economic growth and strength. In the 1800s, railroads (number of miles of track and amount of cargo transported), and later electrical generation capacity and usage, probably make for good proxies to estimate those things. When looking at those, I would bet that growth throughout the 19th century was very robust with short and sharp downturns that coincided with the sporadic panics.

  • Anonymous

    I believe that pre-Fed “instability” is exaggerated, compared with post-Fed “stability”; however, I’m not sure what defenders of a “classical gold standard” are defending exactly. When was gold ever a market choice, either as a direct medium of exchange or as a standard of value for extending credit? It was never a market choice in the United States.

    If any precious metal was ever a market choice as money in central North America following European settlement, this metal was silver. Gold was never common enough to be a common currency in most of the country, and it still isn’t. Following the American Revolution, states declared gold or silver to be legal tender, so use of these metals as money was not a market choice.

    Even if one accepts the debatable proposition that the Federal Constitution requires the Federal government only to coin gold or silver as money, this view only restricts “money” to one of an extremely limited set of possible legal tenders left to the states. This restriction hardly makes either metal a market choice for money, and the Federal government ultimately favored gold over silver anyway.

    During the Free Silver movement, didn’t midwestern farming interests favor silver while northeastern banking interests favored gold?

  • Anonymous

    Your position is understandable, but silver and gold were the market-chosen commodities long before the US constitution. I’m more inclined to believe that the constitution was stated as it was to restrict the growth of government by not allowing it to print it’s own money, limiting it to gold and silver helps in that regard.

    There really isn’t much else besides the precious metals that could be used for international trade.Claims to barrels of oil is about the only other thing I can think of.

  • Anonymous

    I’m asking for evidence that gold specifically was ever a common currency anywhere, other than the vicinity of gold mining areas during a gold rush. Historically, gold seems more like the statesmen’s choice for exchanges among statesmen, or the large transactions you call “international trade”.

    The Constitution doesn’t limit the Federal government to coining gold and silver as money. It only limits the states to gold and silver as legal tender.

    The first Federal coinage act authorized copper coins without specifying any right to exchange the coins for gold or silver or even specifying the purity of the copper, and a copper penny then was more like a dollar today.

    The smallest denomination gold coin (a quarter Eagle nominally worth $2.50) contained four grams of pure gold, worth over $200 today. That’s not a common currency. How many $200 bills you typically carry around?

    The largest denomination sliver coin (a dollar) contained about $25 worth of silver at today’s price. I often carry $20 bills in my wallet but rarely carry $100 bills.

    Barrels of unrefined oil aren’t very useful to me. How about gallons of grade A whole milk? If I can use milk coupons as money with someone in Seattle, on the other side of North America from me, then I can use milk coupons as money with someone in Bangkok too.

  • Anonymous

    Really? Evidence that gold was a common currency anywhere? You are debating the fact that gold and silver were international currencies for thousands of years with an opinion of “statesmen prefer it that way.”.. I think you should be the one providing evidence here. Because it seems to me “statesmen” prefer the paper-money type and undoubtedly realize the restraints of using real commodities as a money.

    Milk would not be particularly good as a money, due to the fact it spoils and is not serviceable for very long, at least compared to precious metals or barrels of oil. Oil is at least a global commodity with many uses, whereas milk is just a consumer’s good.

  • Anonymous

    O.K. I’m still waiting for the evidence.

    You say, “No, you give me the evidence,” but I’m only asking you for one instance of gold as a common currency, as opposed to a fiat currency controlled by a state. To prove the opposite, I must show you that every common currency was something other than gold. In other words, you’re asking me to “prove a negative” here.

    I’ve already given you the prima facie evidence that gold was never a common currency in the U.S. How could it have been? Common people rarely carry hundred dollar bills around now. Were common people richer in the past?

    Also, I have already suggested that silver was common currency in the nineteenth century in the U.S. and also a market choice in the eighteenth century before the American Revolution. I’m not denying that markets chose precious metals as money in the past.

    Money is a medium of exchange. You accept it only to exchange it for something else. Milk would be a particularly good money precisely because it spoils. No one hoards milk.

    Unrefined oil is not a good common currency precisely because it is not a consumer’s good.

  • Anonymous

    I don’t think we disagree in principle, but it’s good to stay sharp. Though, I don’t think claims for milk would ever be a viable medium of exchange, any cow farmer could make as much money as he wanted, plus there are natural differences in the quality of milk produced, and what type of milk? Vitamin D, 2%, 1%, skim, soy? Crude oil coming out of the Gulf of Mexico or Alaska is equally interchangeable to oil coming out of Saudi Arabia or Russia. But these details are really beside the point.

    Gold seems to have always been undervalued by governments, which would keep it out of circulation (somebody’s effect, the name escapes me). Gold is rarer and hence would likely only be used for larger transactions, or bank reserves. Carrying or storing any kind of coin becomes burdensome eventually, hence the creation of paper claims to specie in gold or silver. Is it not reasonable to assume that a bank, or any individual, might prefer storing 100 lbs of gold instead of 10 tons of silver? You refer to gold and silver separately, I refer to them together as precious metals serving the same purpose. I just don’t see why you think making gold and silver “legal tender” is detrimental to the economy if those are, historically, the market-determined preference. The real injustice is central bank’s privilege to issue and create money, not the government coining gold or silver or copper which are limited by nature. The past injustice of gold and silver is govt mandated exchange ratios between them. You are correct the the main coins in the early years were silver, but all money from every country has always been determined by government, in that case the Spanish govt. Call it a silver standard or gold standard, it’s better than no standard.

  • Anonymous

    … any cow farmer could make as much money as he wanted …

    When Walmart milk coupons are money, a cow farmer cannot make as much money as he wants, because he doesn’t produce grade A whole milk packaged and sitting on Walmart’s shelves.

    What type of milk?

    “Grade A whole milk” is a standard quality of milk, just as “light, sweet crude” is a standard quality of oil.

    Gold seems to have always been undervalued by governments, which would keep it out of circulation (somebody’s effect, the name escapes me).

    Under the monometallic standard established after the American Revolution, gold was supposed to be valued in terms of the Spanish silver dollar at market prices, but Spanish dollars were already the common currency at this time, and for several decades thereafter, the U.S. remained on a silver standard primarily.

    In 1834, Congress did the opposite of what you suppose. It overvalued gold relative to silver and drove silver coins from circulation, and the U.S. remained on a de facto, monometallic gold standard thereafter, despite repeated efforts by the Free Silver movement to return to a silver standard.

    See section III of George Selgin’s paper “The Rise and Fall of the Gold Standard in the United States”. You can download it here.

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2139115

    Is it not reasonable to assume that a bank, or any individual, might prefer storing 100 lbs of gold instead of 10 tons of silver?

    100 lbs. of gold is three million dollars worth of gold. People commonly don’t have three million dollars worth of anything.

    If you want something even more valuable, per unit of mass, try 20% enriched Uranium. One pound of that stuff is worth millions of dollars; however, you must go to war with the states monopolizing it these days. Just ask Iran.

    Monopolizing silver is just a lot more difficult as a practical matter, even for states with 90% enriched Uranium.

    I just don’t see why you think making gold and silver “legal tender” is detrimental to the economy if those are, historically, the market-determined preference.

    Making anything a legal tender is the opposite of a market determined preference, and again, I deny that gold has ever been a market determined, common currency.

    If you want to trade in gold, that’s fine with me. If you and someone else agree contractually to exchange something for gold, I want a court to respect the terms of your contract, but that’s not what “legal tender” means. A court orders payment in a legal tender regardless of the terms of contract, even without a contract when imposing criminal fines and torts and taxes. If gold is a legal tender, a court can order you to pay in gold even if you agreed contractually to pay in silver, and even if courts don’t go that far, they still order you to pay taxes in gold even though you do all of your business in silver.

    The real injustice is central bank’s privilege to issue and create money, not the government coining gold or silver or copper which are limited by nature.

    Inflationary monetary policy is just another form of taxation. States only inflate when inflating is easier than taxing otherwise. Take away the power to inflate without taking away the power to tax more generally, and you only get lower inflation and higher taxes. Make gold a legal tender, and you only force common people to chase gold. Ft. Knox and the New York Fed’s vaults alone hold about 7.5% of all the gold ever mined in human history, and other states and incredibly wealthy interests allied with states hold most of the rest. You’ll read that 80% of the world’s gold is “privately held”, but “privately held” includes Saudi princes.

    Call it a silver standard or gold standard, it’s better than no standard.

    I want you to have use any standard of value you want to use in your accounting, but I don’t want any state telling people generally what standard to use.

  • Anonymous

    Well, I feel kinda bad for blowing up Tom’s blog about all
    this.

    Gresham’s Law, that’s what it was. I’ll read up on Seglin, but I’m sticking firm in that a gold or silver standard is much better than central banking, not equally as bad as you suggest. Mainly because it at least limits the enlargement of government, whereas the Fed
    only exists to give it more control.. That’s all I was trying to get at, aside from oil probably being a better commodity for indirect exchange and store of value than milk.

  • http://plenarchist.wordpress.com/ plenarchist

    The “gold standard” term to me is really just semantic. That’s why I prefer the term “sound money.”

    The main benefit of sound money is to have a generally constant supply of currency units which can’t be arbitrarily inflated, right? That can be with any kind of metal. Maybe copper and nickle make better coinage for day-to-day transactions.

    My main concern with sound money is that it isn’t suitable for our digital age. I haven’t read any discussion of this issue among sound money proponents.

    You can’t send silver coins over the wires. That means that all digital transactions must be made as representations of the underlying metal currency contained in some vault somewhere.

    In practice then we would more likely have only the *illusion* of sound money which might be as bad or worse than what we already have.

    Gov’s have debased their metal currencies throughout history and likely will again under such a regime – except in our digital age, it will be even easier for them I’m afraid.

    I think what I’m really saying is that the sound money people seem to be hoping that by adopting this monetary system, it would put the gov in a fiscal straight jacket and I think that’s just not likely to happen. That the problems we have are much more fundamental than the fact there is fiat currency or the Fed. The political model itself is deeply flawed.

  • Anonymous

    We haven’t blown up the blog. We both want to end the Fed, so we should discuss alternatives to it. The classical gold standard is just the statutory monetary system that preceded the Fed. Even if it was better than the Fed in some sense, it was also a stepping stone to the Fed. The state is not interested in stepping back. The only “gold standard” we’ll get from the state will empower the state further.

  • Anonymous

    If Mises’s regression theorem is correct, I suppose milk tickets could function as a “money” equally as well as claims to barrels of oil as long as they were desired commodities. It is about the legal tender tender laws.
    Rothbard sums up:

    “.., for a commodity to become used as money, it must have originated as a commodity valued for some nonmonetary purpose, so that it had a stable demand and price before it began to be used as a medium of exchange”
    (The Case for a Genuine Gold Dollar as printed in Economic Controversies)
    Still reading and learning every day lol

  • Anonymous
  • Anonymous

    Silver for the common man – small transactions.

    Gold for international settlements, large payments, and storage of wealth for rich and poor alike.

  • Anonymous

    It doesn’t. Selgin discusses private coinage of silver and copper primarily. The question involves gold. Was gold ever a common currency anywhere?