Tuesday, April 5, 2011

Private Issues (2): The Setting

A while back, I posted an excerpt from Warren Mosler's Soft Currency Economics. I repeat some of the excerpt here:

The gold standard was established in the U. S. in 1834... The monetary authority was then committed to keep the mint price of gold fixed by being willing to buy or sell the gold in unlimited amounts.

The gold standard was suspended from 1861 to 1879 due to the Civil War. The variant which prevailed in the U. S. from 1880 to 1914 was a fractional reserve gold coin standard...

Mosler's summary refers to the dates 1834 and 1861, closely comparable to the 1836-1863 "free banking" period David noted in yesterday's post.

Jbmoore's comment on my Mosler-excerpt post refers to "the limitations of the gold standard. (It has to do with the banks lending more money than they own in gold.)"

Aye. It is the essential feature of banking, to generate money. And that is the origin of monetary imbalance. That is how M3 became so much bigger than base-money.

M3 and Base MoneyM3 divided by Base Money

As the right-hand graph shows, some attempt was made to correct the imbalance between private-issue money and base money in the '80s and early '90s. The anomaly of 1990-94 we have seen before, here ("the big bump there in the middle") and here ("After the mid-1990s the trendline loses its "bowl" shape") and in wiggles on my DPD and MRTO graphs.

Monetary imbalance -- the excess of private-issue money relative to base -- is the recurring problem. It is the cause of inflation and of crisis and depression.
Things are not so simple that "printing money" explains it all.
For us today, crisis and depression are problems. But for the economy, crisis and depression are solutions to a problem. They are a solution to Problem X, the problem of monetary imbalance.

I propose to solve the problem of monetary imbalance.

In another old post I reprinted parts of the history of money from the Standard Catalog of United States Paper Money that I bought at a coin shop some years ago. Taking another look at the history that book tells, we find this:

With states denied the power to issue money by the Constitution of the United States, and the powers of the Federal Government to do so left unspecified, various private issues of banks, railroads, utilities, and even private citizens, cropped up, with varying resources to guarantee their value, until the Government halted the practice in 1863.

Issued current with the Colonial and Continental currencies were numerous privately-sponsored paper monies ...

These issues continued after the Revolutionary War, and proliferated in the 19th century.

The only restraints on the issue of paper money at that time were those which the individual states cared to apply, and such restraints were infrequent and ineffective.

The Federal Government put an effective end to these halycon days of currency free-for-all in 1863, by imposing a 10% tax on outstanding notes...

This, then, was the era of free-banking.

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