Can bad lending be regulated out of existence?: Philosophy Forums

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Can bad lending be regulated out of existence?

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Can bad lending be regulated out of existence?

unrealist42
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Posted 03/14/08 - 07:07 PM:	#26
Fried Egg wrote: Firstly, get your facts straight. We came off the full blown gold standard in 1914. What we had in between the wars and for a while after WWII was not in anything but name a gold standard.{/quote] I am perfectly aware of that but you did not make the distinction in your previous post so forgive me for not mindreading. In fact, it was the panic of 1908 that lead directly to the creation of the Federal Reserve Bank and the abandonment of the gold standard a few years later. Secondly, the distinction between speculative and productive markets is entirely bogus. All investments are speculative and all speculation is inherently uncertain. Whilst it is true that market volatility can (and did) exist even under a more stable and tight monetary system, my point remains intact, in that markets were more stable. If that is so then why were there so many "panics" as they called them back then, at least 6 between 1860 and 1910? Was it the food? Were people just generally more flighty? What was it? [quote] Thirdly, the area that saw the most spectacular growth in the period to which you refer (1950-1990) is that of the state. Conventional GDP measures make no distinction between private and public economic activity. So, the GDP grew from $436Billion in 1950 to $5,806Billion in 1990 due entirely to the growth of government spending? I find that hard to believe. Especially when government spending was never more than 16% of GDP over the entire period and generally averaged around 10-12%.

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Posted 03/17/08 - 06:02 AM:	#27
Unrealist42 Firstly, when you compare GDP growth from 1950 onwards with that from the period of the gold standard, you have to take account of inflation. In the US, between 1774-1914 (last 40 years of gold standard) inflation averged at an annual rate of -0.33%. Between 1950-1990, it averaged at an annual rate of 4.32%. Once you factor in inflation, the growth subsequence to 1950 doesn't look quite so impressive. Secondly, I wouldn't claim that the growth subsequent to 1950 was all down to growth in the state, only that a large portion of it was. Infact, this was the primary reason why the gold standard was dropped. It allowed the state to grow at a hitherto unprecedented rate. The government, for all intents and purposes, can now bring money into existence at levels it found very difficult under the fiscal rules of the gold standard. One can see that governments in the past during wars have tended to do this to help fund the war effort. For example: Americal Civil war (1861-1865) 16.61% or US involvement in WWI (1917-1918) 17.47%. It was innevitable I suppose that governments would realise that they would like to be able to fund state expansion all the time and not just during wartime. Watering down the gold standard and eventually abandoning it altogether enabled them to do this. By the way, bankrolling WWI better explains why many countries came off the gold standard in 1914 than any preceding bank panics. If that is so then why were there so many "panics" as they called them back then, at least 6 between 1860 and 1910? Was it the food? Were people just generally more flighty? What was it? Well, as you pointed out in a previous post, this is a general and innevitable problem of fractional reserve banking. It is a risky endeavour and will innevitably lead to bank failures. At least then, banks that behaved irresponsibly were allowed to fail. Unlike nowadays, where they know they will be bailed out to prevent their failure, they are far more inclined to engage in risky endeavours. This is the reason there are less bank panics. Generally speaking, fractional reserve banking in conjunction with a state monpolised fiat money supply intent on pursuing a deliberate policy of inflation is to blame for the economic cycles we see today. Anyway, the problem of bank panics is something for advocates of fractional reserve banking to address. I'm not one of them. All statistics above taken from http://www.measuringworth.com/index.html

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Posted 03/21/08 - 06:30 PM:	#28
Fried Egg wrote: Floyd It seems to be that you not actually arguing against contracts as such, but rather contracts based on promises or expectations. And rightly so, because such theories of contract are not derivable from the general notion of property rights. Murray Rothbard wrote that the only contracts that should be enforcable are those where failure of one party to abide imply theft. This therefore is only the case where title to property has already been transfered. This is basically "title-transfer" theory of contracts. Of course, such a system of contract enforcement would not put an end to "capitalistic lending". Loans would need to be secured by assets of the debtor. Title to these assets would be transfered to the creditor on issuing of the loan and transfered back again later on repayment of the loan (or not as the case may be). But it would put an end to unsecured loans (among strangers anyway). If this is what you are driving at, then I am in full agreement with you. For the most part, that is what I am driving at. Insofar as there is property rights, I want a person to be able to sign them away today, but not be held to a promise (even if agreed on paper) today to sign them away tomorrow. I think it would hinder the ability of people to take advantage of the credit system and the speculation and such based on that (which are main contributers to the economic bubbles associated with bad lending); what do you think? Well, I must take issue with this point: Actually, property rights should be a general set of principles that govern how property comes to be owned, not a specific dictat assigning ownership. Furthermore, it is not about the state issuing people with property according to how it sees fit. It is about recognising people's natural right to the fruits of their actions. It is about a guiding set of principles that allow people to pursue their ends with the security of knowing where the boundaries are, that if they do not cross those boundaries, they will not run into conflict with others pursueing their ends. In some ways, I agree. But, when there are disagreements about what the principles are, it becomes might makes right, which is where the issue of property rights gets more complex, I think. Anyway, the issue of property rights is probably a topic for another thread.
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Fried Egg
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Posted 03/25/08 - 05:48 AM:	#29
Floyd For the most part, that is what I am driving at. Insofar as there is property rights, I want a person to be able to sign them away today, but not be held to a promise (even if agreed on paper) today to sign them away tomorrow. I think it would hinder the ability of people to take advantage of the credit system and the speculation and such based on that (which are main contributers to the economic bubbles associated with bad lending); what do you think? I don't really think it will help the problem of credit expansion driven booms and busts because they are still going to happen whilst the government monopolises the money supply, is intent on an expansionist monetary policy and acts as a lender of last resort to banks to prevent bad banks going out of business. The problem is that debts were secured against assets that were overvalued. And it was the expansion of credit, driven by the central banks that caused the overvaluing of assets.

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Posted 03/26/08 - 05:40 PM:	#30
Fried Egg wrote: Generally speaking, fractional reserve banking in conjunction with a state monpolised fiat money supply intent on pursuing a deliberate policy of inflation is to blame for the economic cycles we see today. Anyway, the problem of bank panics is something for advocates of fractional reserve banking to address. I'm not one of them. I believe the larger problem is fractional reserve banking, not central banking with fiat money though the problem is linked. With or without a gold standard or a central bank it is fractional reserve banking that creates a boom and bust economy. All the central bank does is replace the gold rush with a printing press. For fractional reserve banking to remain stable the economy must grow continuously since there is never enough money in the economy to pay all debts with interest. If it does not, boom turns quickly into bust. If the supply of money is constant or declining, this becomes inevitable. All the central bank does is manipulate the supply of money with the goal of matching the money supply to economic growth. Since this is impossible to do, the central bank often provides a surplus of money into the economy which creates inflation. To compensate, it then reduces the money supply below the level of economic growth which produces recession. This yoyo effect is the result of trying to maintain a stable reserve banking system, another impossibility since reserve banking is inherently unstable regardless of where the money comes from or who controls it.

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Posted 03/27/08 - 12:04 AM:	#31
unrealist42 I believe the larger problem is fractional reserve banking, not central banking with fiat money though the problem is linked. With or without a gold standard or a central bank it is fractional reserve banking that creates a boom and bust economy. All the central bank does is replace the gold rush with a printing press. There are some essential differences. Firstly, it is undeniable that the printing press has enabled far greater rates of inflation than did gold mining. This is clearly evidenced by history. Under a gold standard, the extraction of new gold is generally market driven in that as it's purchasing power increases, it becomes more profitable to extract. As the purchasing power falls, less profitable. Thus it's rate of growth is determined within the market and not by some authority external to the market attempting to impose certain economic conditions. Secondly, the central bank (and ultimately the treasury) acts as a lender of last resort, bailing out failing banks. Banks, with their privillaged position, can expect far more support in times of trouble than any other type of business. Thus, it is hardly surprising that they tend to engage in riskier behaviour and need more regulation. Thirdly, under a system of free banking, there is a natural mechanism that will keep banks from expanding credit significantly. If one bank starts expanding credit and issuing notes at rate greater than others on the market, it's reserves will be quickly depleted as banks settle their accounts at the end of each day (and reserves have to be transferred). It will find itself quickly insolvent if it does not then start reducing credit and the issue of banknotes. In otherwords, central banking allows for the fraction of reserve to fall to levels far below what would be possible in it's absence. All the central bank does is manipulate the supply of money with the goal of matching the money supply to economic growth. Since this is impossible to do, the central bank often provides a surplus of money into the economy which creates inflation. To compensate, it then reduces the money supply below the level of economic growth which produces recession. It should be obvious from what's going on at the moment that this is not the case. The American central bank (and others for that matter) expanded the money supply with the expectation of fostering economic growth. The contraction of the money supply we see now is due to the collapse of credit in the banking system. The central banks are doing everything in their power to counteract this contraction with cash injections and other methods.

unrealist42
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Posted 03/30/08 - 02:03 PM:	#32
Cyclical credit contractions are an innate part of a reserve banking system. What the Fed is trying to do is inject liquidity to preclude a total collapse of the economy which is the usual outcome in this part of the cycle. Fried Egg wrote: In the past, gold extraction was not a matter of market forces so much as serendipity. Thirdly, under a system of free banking, there is a natural mechanism that will keep banks from expanding credit significantly. If one bank starts expanding credit and issuing notes at rate greater than others on the market, it's reserves will be quickly depleted as banks settle their accounts at the end of each day (and reserves have to be transferred). It will find itself quickly insolvent if it does not then start reducing credit and the issue of banknotes. In otherwords, central banking allows for the fraction of reserve to fall to levels far below what would be possible in it's absence. Under this scenario it is entirely possible for one bank to issue enough false credit to buy up other banks notes and settle its overnight accounting with them with these deflated notes. In the early 1800s free banking was the norm in the US and all sorts of such shenanigans would occur. It was an extremely unstable system and bank failures were a daily occurrence. And your idea that banks transfer reserves at the end of each day to settle accounts will keep them honest ignores the myriad of vehicles that are exchangable to do so.

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Posted 03/31/08 - 02:04 AM:	#33
unrealist42 Under this scenario it is entirely possible for one bank to issue enough false credit to buy up other banks notes and settle its overnight accounting with them with these deflated notes. I think you misunderstand the nature of a free banking system. Each bank is free to issue it's own notes or credit which are claims on it's reserve (say gold or some other commodity). These claims on the banks reserves are money substitutes. The banks settle accounts with each other only with real money. All claims to another bank's reserves that are held by each bank are settled at the end of each banking day. Reserves will be transfered to settle the outstanding balances. It should be obvious to see that a bank that starts issuing fiduciary media (claims in excess of it's total reserves) will find, at the end of the day, that it expands the number of claims to it's reserve in the hands of other banks who will expect their account to be settled. An expansionary bank will soon find it's reserves dwindling if it does not change it's policy and reduce the number of issued claims. In the early 1800s free banking was the norm in the US and all sorts of such shenanigans would occur. It was an extremely unstable system and bank failures were a daily occurrence. The so called "Free banking era"of the United States between 1837 and 1862 was hardly free. Only state chartered banks were allowed to operate and they were regulated as to their reserve requirements, interest rates and capital ratios. And your idea that banks transfer reserves at the end of each day to settle accounts will keep them honest ignores the myriad of vehicles that are exchangable to do so. One bank might choose to hold, for a period of time, bank notes (or other money substitutes) issued by another bank in reserve but only for so long as it has complete confidience in the issuing bank's ability to redeem all issued claims. As soon as confidence begins to slip, it will seek to immediately redeem it's holdings and may even stop accepting the notes of that bank in payments (from it's customers). A crisis in confidence will quickly catch out such banks and will therefore act as a deterrent to expansionary practicies.

unrealist42
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Posted 03/31/08 - 04:21 PM:	#34
So, this free banking system you propose would essentially require 100% reserves. In other words it would not be a reserve banking system. So why bother with bank notes at all unless carrying around your gold was dangerous or inconvenient or you are involved in trade at a distance that requires the timely exchange of money? Why bother to be a banker? If your "free banking" system does allow reserve banking then its stability depends only on human emotion. Confidence is what drives banking. Even in the 1500s it was confidence that enabled the early banks to issue notes beyond their reserves. The problem is that at some point confidence wanes and banks fail. It is inherent to reserve banking.

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Posted 04/01/08 - 01:29 AM:	#35
unrealist42 Indeed, the issue of fiduciary media would be extremely limited although not necessarilly completely eliminated. Certainly we would see it greatly reduced below the levels we see today. What is the point of banks in a (or near) 100% reserve system? Well, you've already answered your own question. Another reason banks would be in demand is for fixed term deposits. i.e. you have to deposit your money for a fixed period of time during which you may not draw upon it. This money can then be leant out and invested. Obviously, carrying around gold would not be a preference to most people. In this day and age, even bank notes are an unnecessary burden. Electronic credit would be the the prefered money substitute. Of course, the cost of banking to the banking customers would likely increase. A cost that would reflect the benefit that banking customers derive from the use of the service. The added benefit that economy would enjoy much improved stability and virtually zero long term price inflation.

unrealist42
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Posted 04/03/08 - 07:51 PM:	#36
It seems that banking in this scenario would be a low profit business with a modicum of risk to its principle owners who would necessarily be putting up their own capital to cover loan risk. Consider this. A bank is capitalized with $10Million by its owners. It attracts another $100Million in 10 year deposits and promises to pay 5% interest on it. It loans out the $100million for 10 years at 7% interest. Can it really do this? No, because it must keep $100million in reserves to cover the deposits. What the bank can loan out in a 100% reserve system is the original $10Million and there is no way it could make enough on that to pay other depositors and since it cannot use their money anyway, why bother to take it except for the fees it could charge for the convenience. In a 100% reserve banking system all banks would be private investment banks with all depositors as owners and risk takers. The bank could loan the money out and try to have it all back with interest at the end of the ten years while keeping some fraction as a reserve but this would be fractional reserve banking since it does not keep on hand all of the depositors money. If it could do this it could loan out more than its deposits while keeping a fraction of the deposits as a reserve and for settling accounts with banks that are unwilling to hold its demand notes thus inflating the money supply. Since it would be taking in notes from other banks the daily settling of accounts would be an intricate time consuming exchanging of notes. Most would not bother with this exercise except with banks they suspect of failure. It would be very much like the early 1800s in the US excepting that a complete lack of regulation would make it even more volatile than then which was a pretty wild time for banking. The demand notes of banks would become the common currency and the values of these notes would vary widely depending on the bank's reputation. This would be a serious impediment to monetary transactions as the value of each note would need to be researched and negotiated. Imagine instead of one currency there were 10,000. This would become especially true if the supply of real money was fixed, like gold. As the economy grew, the value of real money would increase and prices would deflate to the point where the money would become divided into minuscule portions for day to day transactions. A few grains of gold for a loaf of bread is an unweildy transaction but that gold could be traded for a note from a bank that would make the transaction easier. It was less than 100 years ago that mills, 1/10th of a cent, were commonly used in the US.

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Posted 04/04/08 - 01:08 AM:	#37
unrealist42 It seems that banking in this scenario would be a low profit business with a modicum of risk to its principle owners who would necessarily be putting up their own capital to cover loan risk. Consider this. A bank is capitalized with $10Million by its owners. It attracts another $100Million in 10 year deposits and promises to pay 5% interest on it. It loans out the $100million for 10 years at 7% interest. Can it really do this? No, because it must keep $100million in reserves to cover the deposits. I think you are failing to make the distinction between fixed term deposit accounts and current accounts. A fixed deposite account for 10 years cannot be drawn upon by the depositor at any time other than at the point of completion. The bank only need assure that it has the 100% of the money ready for withdrawal after the 10 year term had elapsed. Note, this is not fractional reserve banking because fixed term deposits cannot be considered a money substitute (as a current account can) and thus does not expand the money supply. If it could do this it could loan out more than its deposits while keeping a fraction of the deposits as a reserve and for settling accounts with banks that are unwilling to hold its demand notes thus inflating the money supply. Since it would be taking in notes from other banks the daily settling of accounts would be an intricate time consuming exchanging of notes. Most would not bother with this exercise except with banks they suspect of failure. Is it really any different than the cheque clearing system that we see today? Cheques drawn against each bank are balanced against those paid in. The difference is settled by a transfer of reserves. It would be very much like the early 1800s in the US excepting that a complete lack of regulation would make it even more volatile than then which was a pretty wild time for banking. The demand notes of banks would become the common currency and the values of these notes would vary widely depending on the bank's reputation. Not attall. Since each banknote is a claim on a bank's reserve, either people have confidence in it and it is traded at face value, or it's confidence is trashed and it's use is abandoned. There would be no variance in value nor increased instability. The very fact that there is no lender of last resort to bail out irresponsible banks and the fact that wildly expansionist policy would lead to a bank's insolvency would serve to act as a self regulating mechanism. This would become especially true if the supply of real money was fixed, like gold. As the economy grew, the value of real money would increase and prices would deflate to the point where the money would become divided into minuscule portions for day to day transactions. A few grains of gold for a loaf of bread is an unweildy transaction but that gold could be traded for a note from a bank that would make the transaction easier. It was less than 100 years ago that mills, 1/10th of a cent, were commonly used in the US. What difference would it make for bank notes to be issued of ever smaller denominations as required by the public? What does it matter how much physical gold a bank note is a claim for? I see no practical limit to the size of a monetary denomination. However, when one looks at the historical period of the gold standard, one sees that overall price inflation remained at around zero percent in the long term (despite economic growth). This is because the gold supply must have increased. Infact, the rate of gold extraction itself became self regulated by the market. As the purchasing power of gold increased, the profitability of gold extraction increased and therefore the amount of gold extracted increased. If however the rate of gold extraction increased too far, the purchasaing power of gold would fall leading to a reduction in the profitability of gold extraction and therefore a reduction in the rate of extraction.

unrealist42
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Posted 04/06/08 - 05:58 PM:	#38
Historically, increases in the gold supply created a boom economy of inflation followed by a perod of stagnation and deflation until new gold supplies were found. This was a regular occurrence throughout the 19th century as gold strikes were found in California and then the Yukon and Nome. Each one produced a spate of economic expansion and inflation followed by contraction and recession as the economy grew into the new supply of money and was then constrained by the lack of more money necessary for continued economic growth. In other words, the supply of money was never matched to the needs of the economy. It would overshoot with each new gold discovery and become insufficient for continued growth as the economy continued to expand beyond the capacity of the money supply to support. The supply of money controls economic growth. If the money supply grows too fast we get inflation. If it is constant we get stagnation unable to meet the growing needs of an expanding population. If it shrinks we get deflation. If growth in the money supply exactly matches growth in the economy we get steady economic growth without inflation or stagnation or deflation, an economy growing to meet the needs of an expanding population. If the population was not expanding your argument might have some merit and indeed it would be foolish to not adopt it but that is not the case now. So, the economy must be expanded for some time into the future until all these people are accomodated and to do that, the supply of money must continue to increase. The curent chaos in the markets cannot be resolved until the population and its economic position stabilizes. Once an equlibrium of population and economic growth is reached a fixed supply of money would certainly be the desireable outcome. The price mechanism would stabilize, supply and demand would be more regular, rescource allocation could be decided by the market, etc. Economists could actually design models that work.

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Posted 04/06/08 - 11:50 PM:	#39
unrealist42 Your analysis does not fit the historical facts, nor does it make any sense according to economic theory. Mises proved that an economy can function with a money supply of any size. The quantity of money is irrelevant as long as denominations are suitably small or large enough to cope with the price structure. Therefore it is patently false to suggest that an expanding economy requires an expanding money supply. Throughout the 19th century we did experience many bouts of deflation, but that is not to be confused with the deflation experienced in the great depression. Price deflation, in an economy with a fixed money supply is indicative of economic growth. It is a natural and desireable result of expanded production in that it allows everyone (holding money) to buy more. What we do have now are many institutional impediments to prices adjusting downwards (particularly in the area of labour) and those would need to be reformed if we were not to experience problems with growth induced deflation. So, whilst the size of the money supply is not a problem for a growing economy, changes in the money supply are certainly not harmless. Increases to the money supply cannot be introduced in a neutral manner without disrupting the price structure and causing a transfer of wealth from those last to adjust to an expanded money supply to the early holders of the new money (who get to increase their consumption without having first increased their production). Thus, even if we deemed it desireable that the money supply should grow in line with the economy, we should find it impossible to administer the new money in a fair and neutral manner. Edited by Fried Egg on 04/06/08 - 11:56 PM

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Posted 04/09/08 - 07:20 PM:	#40
Certainly increases in productivity can lead to declining prices and that was certainly apparent in the 19th century but this usually proceeds on a piecemeal and gradual basis and the economy generally adopts without undue dispruption. Increased productivity created price declines do not generally bring about the rapid and widespread economic calamity and dislocation precipitated during the deflationary periods of the 19th century. Mises has never proved anything except that gullible minds will believe anything if you preach a bunch of unsupportable statements as undeniable fact long enough and loud enough. The median wage has been on a steady decline for over 30 years. I just don't understand your fixation on that unless it is a pet peeve of Mises. But, even with a fixed money suppply we can see inflation when productivity declines. Much of the contemporary resistance to price declines has to do more with a lack of competition and the many cartels that control much of the production in basic industry of the world today. Where there are many competitors unrestrained by cartels or monoplies or near monoploies or much government interference we see steady increases in productivity and price declines. Consider the computer industy. Performance has increased for decades while prices have steadily declined. That you think there is no fair and neutral way to distribute new money introduced into the economy but there is a way to do it, just mail everyone a dollar a week, or a dollar a day, or whatever is deemed necesary to increase the money supply. That way no one would be able to get any individual advantage.

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Posted 04/09/08 - 11:11 PM:	#41
unrealist42 Mises has never proved anything except that gullible minds will believe anything if you preach a bunch of unsupportable statements as undeniable fact long enough and loud enough. Now you're just betraying your ignorance of economics. But confining ourselves to the size of the money supply, why is it you keep on claiming that the money supply needs to grow in order to allow the economy to grow. Why don't you flesh this statement out with a little reasoning rather than just supposing it to be true. Anyway, even if your claim were true, it does not explain the actions or policy of central banks and governments today. They aim at positive price inflation, not zero. And they aim to do far more than merely accommodate growth. They seek to stimulate growth by stimulating consumer spending under the mistaken belief that you can generate sustainable growth merely by causing people to consume more. Most importantly though, governments like inflation because they are the first holders of the new money and they get to increase spending without having to raise taxes as much. That is why even if they could find a fair and neutral way with which to distribute new money (your suggestion wasn't serious, was it?) they wouldn't because they want to be the ones to take advantage of it. The median wage has been on a steady decline for over 30 years. I just don't understand your fixation on that unless it is a pet peeve of Mises. Whether or not this is true, it makes no difference because there exist institutional barriers at the lower end of the labour market (i.e. minimum wage) that prevent the market from operating properly. This would pose particular problems in an economy where moderate price deflation was the norm. Much of the contemporary resistance to price declines has to do more with a lack of competition and the many cartels that control much of the production in basic industry of the world today. Whether or not there are such cartels maintaining prices, in a deflationary economy, they would be forced to lower prices anyway (even if they did so by agreement).

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Posted 04/11/08 - 09:07 PM:	#42
Central banks have two semi-contradictory missions and one of them is to keep employment at a high level. To do this they necessarily have to increase the money supply in an inflationary fashion. Their other mission is to keep inflation low. They have no brief to remove inflation entirely though a few years ago some republican congressmen tried to get just such a law passed. It failed miserably, voted down by a large majority of their own party members along with the opposition. Anyway, the Federal Reserve Bank is owned by the regional Federal Reserve Banks which are in turn privately owned. The government appoints its directors but does not own it. The US Treasury oversees the printing of the currency but that is only a tiny fraction of the money supply and it does not distribute it. That is done by the Federal Reserve Bank which is, as I said, privately owned. So, your conception that the government gets first use of the money is misconstrued. The way the Fed controls the money supply is by buying and selling its notes and bonds to a special number of participating banks. When it sells, money is brought into the Fed and the money supply is reduced. When it buys, money is released into the economy. The Fed also offers loans to participating banks. The US Treasury is unable to spend directly the money it prints. Instead it trades for it with the Fed for notes and bonds that are auctioned on an open market. If we had a deflationary economy I doubt there would be much need for a minimum wage. Besides, minimum wage earners amount to less than 2% of all workers. Cartels will do what they like regardless of the underlying economics. Sure, they could eventually lower prices but they would have no reason to unless their prices were restraining demand for their product to less than the members felt was reasonable or some new competitor or substitute cam along that broke their control of the market.

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Posted 04/14/08 - 02:27 AM:	#43
unrealist42 Central banks have two semi-contradictory missions and one of them is to keep employment at a high level. To do this they necessarily have to increase the money supply in an inflationary fashion. Their other mission is to keep inflation low. The idea that employment and inflation are related in a strictly inversely proportional way is a Keynesian myth that has long been blown away. The kind of growth (and subsequent employment) that inflation brings about is of the nebulous and unsustainable variety. Anyway, the Federal Reserve Bank is owned by the regional Federal Reserve Banks which are in turn privately owned. The government appoints its directors but does not own it. The US Treasury oversees the printing of the currency but that is only a tiny fraction of the money supply and it does not distribute it. That is done by the Federal Reserve Bank which is, as I said, privately owned. So, your conception that the government gets first use of the money is misconstrued. The way the Fed controls the money supply is by buying and selling its notes and bonds to a special number of participating banks. When it sells, money is brought into the Fed and the money supply is reduced. When it buys, money is released into the economy. The Fed also offers loans to participating banks. The US Treasury is unable to spend directly the money it prints. Instead it trades for it with the Fed for notes and bonds that are auctioned on an open market. When government securities are purchased by the central bank, new money is effectively brought into existence. The buying and selling of government securities is one of the central bank's monetary policy tools. One that is only possible because the money supply is not backed by a commodity. The central bank can bring new money into existence without fear of people demanding they be redeemed for gold. The buying and selling of government securities has allowed for unprecedented growth in government spending.

unrealist42
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Posted 04/20/08 - 03:19 PM:	#44
Governments have borrowed money and run up deficits and inflated the money supply for centuries. Just because the money was gold or silver had no bearing on their activities and no different effect. England borrowed huge amounts of gold and silver from the Hapsburgs and Rothschilds to finance its wars with France which resulted in massive inflation and the eventual privatization of the Bank of England.

Fried Egg
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Posted 04/30/08 - 08:07 AM:	#45
There used to be consequences to increasing the supply of bank notes without simultaneously increasing the reserves of gold; namely an outflow of gold to other economies with tighter monetary policy. Under the gold standard, governments found out that they had to suspend the redemption of bank notes in order to allow them to significantly inflate the money supply (usually during war time). Obviously, the real solution is to end the government/central bank monopoly of the money supply; i.e. Free Banking.

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