Sunday, December 26, 2010 28 Comments

Monetary reconstruction: presented without comment

The chronic UR reader will be familiar with my own humble periodization of American history, arranged by constitutional singularity: USG 1, the Congressional Republic, 1774-89; USG 2, the Original Deal, 1789-1861; USG 3, the Old Deal, 1861-1933; USG 4, the New Deal, 1933-present.

Some of us are so daring as to hope we live to see a USG 5 - or at least, the last of USG 4. For this weird and conceited handful, what better recreation could there be but a study of the intellectual roots of the New Deal? And for that study, there are few better journals to skim but the fascicles of that standard-bearer of progressivism, past and present: the New Republic.

Which still exists, of course; whose paywall drops with a bang at 1923, ten years pre USG 4. But so what? We live in the tree's vast canopy; we see its trunk; we seek its roots. Curious about the Third Reich? Try Arthur Moeller van den Bruck (1923), who not only coined the term, but had the good graces to off himself while one A. Hitler yet reposed in Landsberg am Lech. A pirate translation is here. Everything good about Nazi Germany is in this book. To know a thing, why not learn it at its youngest, its freshest, its best? And man being what he is, his best is often found not just in infancy, but utero. The unborn idea has no occasion for excuse. The oldest scans catch it in its sweetest veal, unmarked by reality's scars, unsullied by squid-ink, full of refreshing hope and innocence -- demanding true sympathy, not our usual tired contempt.

So to understand what Washington is today - what America is today - what the world is today - flick your mouse through this. For instance, you might find John Dewey's review of Walter Lippmann's Public Opinion. Concerned that democracy just don't work? Like Herr Moeller van den Bruck, you'll find yourself on the same page with Professor Dewey and Mr. Lippmann. They had no idea how their (rather different) solutions would work out. But you do! The student of history must often tense his facial muscles, lest hindsight fade to smug derision.

It's been too long, however, since we tackled economics. So I present without comment an essay in book-review form, entirely typical of early 20C progressive thinking on matters monetary, by the distinguished (and frighteningly long-lived) American economist Alvin Johnson. Suffice it to say that the roots of Paul Krugman, not to mention Warren Mosler, are not at all invisible - and easier, perhaps, to criticize.

From the New Republic, May 3, 1922:
Monetary Reconstruction, by Carl Strover. Published by the Author, 133 W. Washington St., Chicago. $1.50.

It is not often that an economic tract, modestly published by the author, can create a vivid impression upon minds worn smooth by the flood of economic books. Mr. Strover's essay is a brilliant exception. In ninety pages of simple, straightforward text he has presented as good a case as need be made for a currency of stable purchasing power, and a concrete plan which in point of practicability does not suffer in comparison with any other.

But the subject is not an interesting one? The money question is a closed issue, closed for all time by the adoption of the gold standard by all solvent nations? That, I think, is a shortsighted view. The gold standard is no doubt an improvement over the bimetallic confusion of the early nineteenth century. It is vastly superior to the fiat paper which is choking European commerce and industry. But considered in itself, it is not only enormously wasteful, but it is one of the most prolific sources of economic and social disorder.

Our whole economic life is based upon contracts which run in terms of price. Price is the measure of all things economic; but gold price fluctuates remorselessly. We know how many pounds constitute a bushel of wheat, how many cubic inches constitute a gallon, but nobody knows how much purchasing power constitutes a dollar, our unit of purchasing power. It follows that every contractual relation that runs over any appreciable period of time is vitiated by this defect in the standard.

The value of the dollar shrinks and millions of lenders, savings bank depositors, policy holders are defrauded of what is justly theirs. Millions of workers find that it is increasingly difficult to make ends meet, and an epidemic of high cost of living strikes afflicts the nation. The value of the dollar increases, sucking the life blood out of the debtor -- and in modern times the active spirits in industry are almost all debtors -- insolvencies become epidemic; production slackens; unemployment sets in, with all its attendant agonies and evils.

Is it conceivable that we shall forever content ourselves with such a disturbing ebb and flow of economic life? We shall have to put up with it until the mass of citizens begin to find such essays as Mr. Strover's interesting.

Mr. Strover's plan is simplicity itself. Substitute for the gold standard a standard of irredeemable legal tender paper. Immediately the reader's mind runs off along some such line of association as this: the Continental currency of our Revolutionary period; the currency of the Confederacy; the assignats of the French Revolution; the Russian ruble or Polish mark of today. Possibly he will concede that the British pound sterling of today is in fact irredeemable paper, yet not altogether a worthless currency, and in point of stability of purchasing power, not quite so bad a standard as our own gold.

But whether one chooses horrible examples or examples not so very bad, this is the wrong track. All these ventures were in the field of fiat money, money whose value was created by exercise of the sovereign power of the state, and what is of greater importance practically, created for the fiscal convenience of the state. There are thousands of instances of paper money issued with the purpose of covering the expenditures of the state; no bona fide instances of paper money issued for the purpose of systematically regulating the movement of general prices.

Mr. Strover's plan limits the function of the sovereign state to the establishment of legal tender and the creation of an institution of currency control entirely independent of the legislature and the exigencies of the treasury. According to this plan the control of the currency would be vested in a monetary commission of a non-political character.

The commission would be governed in its action by the results of expert statistical investigation of wholesale prices. On a falling curve of prices the commission would issue more currency -- enough to check the fall. On a rising curve it would retire currency. The ordinary mechanism by which it would issue currency would be in the purchase of government bonds, or other securities of stable value. Retirement of currency would be effected through sale of such securities.

Mr. Strover admits an alternative method -- retirement of currency through the impounding of taxation receipts, expansion through government expenditures. This, I think, is a tactical mistake. The separation of Treasury operations from the currency system needs to be absolute.

In putting such a plan into effect gold would have to be demonetized and government bonds based on gold would have to be readjusted to the new money. How this could be done is set forth very lucidly by Mr. Strover. It is worth noting that in the process of replacing gold with paper some billions of dollars of interest bearing bonds would be drawn into the portfolios of the Commission. There would be very considerable sums of interest to be covered into the Treasury. As for the gold itself, most of it would go abroad to serve as a medium of exchange for countries too lacking in political stability or economic common sense to follow our precedent.

But would not the adoption of such a plan throw our system of credit quite out of gear? There is no reason why it should. The new money would serve in bank reserves just as gold does now. Bond secured circulation would become an anachronism. Mr. Strover makes no place for any kind of bank notes. If he had taken the space to work out credit questions at length, I think he would have seen the advisability of allowing for a bank circulation based on commercial assets. More elasticity is needed than centralized control would provide.

But this is an unimportant detail, among a host of others that will be worth discussing once the fundamental idea has attained to its legitimate place in public opinion. That idea is that human intelligence is quite as competent to devise a rational and stable standard of value as a rational standard of weights and measures, and that much more depends on the former standard than on the latter.

It may be maintained that the present economic system is wholly perverse, not worth any effort toward improvement. Those whose believe otherwise cannot fail to recognize the evil that a fluctuating value standard works, nor can they with good grace refuse to consider well thought-out plans for removing the evil. ALVIN JOHNSON.


Anonymous Evil Rocks said...

What then the alternative? Surely not Bitcoins...

December 26, 2010 at 5:35 AM  
Blogger Vasile said...

What it all depends on whether you consider price stability to be a mandatory or, at least, desirable requirement.

If not, a commodity based money, be it gold, unobtainium, or bitcoin standard and a network of fully private full-reserve banks is The Alternative.

Did I mention, in a such an alternative there is no place for National Banks, lenders of last resort and state insurance of deposits? And that' there are no national moneys? (Like there's no national oil or national copper)

December 26, 2010 at 7:55 AM  
Anonymous Anonymous said...

Wow. Just wow. Case study in confusing "subjective" and "objective".

- ChevalierdeJohnstone

December 26, 2010 at 9:25 AM  
Anonymous Anonymous said...

Reading Keynes’ critique of Silvio Gesell the key intellectual failing of Keynes’ entire body of work is best exemplified in this concluding remark:

“Thus if currency notes were to be deprived of their liquidity-premium by the stamping system, a long series of substitutes would step into their shoes — bank-money, debts at call, foreign money, jewellery and the precious metals generally, and so forth.”

If Keynes had merely taken one more step beyond Gesell (and himself) to identify in-place liquidation value of net assets as the tax base (or, if one prefers, one can call it the ”demurrage base") he would have escaped the profound irony embodied in his initial observation of Gesell:

“..whose work contains flashes of deep insight and who only just failed to reach down to the essence of the matter.”

December 26, 2010 at 1:58 PM  
Anonymous zanon said...

Strover got what he wanted -- "retirement of currency through the impounding of taxation receipts, expansion through government expenditures" except neither Paul Krugman nor UR see that it is so. On this one note, Mencius decides to embrace the Progressive side and finds himself in agreement with Krugman. Why this one exception? We wait to hear.

Mosler understands how monetary operations actually work when you are in pure fiat

December 26, 2010 at 4:25 PM  
Blogger George Weinberg said...

Kind of a shame that M didn't comment on the piece, since it refers to a strong argument against the gold standard which AFAIK Mencius has never addressed: the fact that the purchasing power of gold can vary considerably over time in unpredictable ways makes gold less than ideal for the denomination of value in long term contracts.

December 26, 2010 at 5:03 PM  
Anonymous Omid said...

Searching for what Mencius may have said about Spengler I found this

It asserts to be a copy of a post from this blog, and it sure is unmistakeable style of Mencius, but the original post can't be found here. What has happened to it? Has Mencius removed it after a change of mind? Is it just a technical glitch? Or a mysterious force?

I find it important because I always thought of MM as a firm believer in possibility of unlimited exponential (technical) progress, whose problem with neo-Calvinists is with content of progress they define not this basic premise.

Does MM care enough to explain? What other commenters think?

December 26, 2010 at 7:44 PM  
Anonymous Anonymous said...

Some of the other commenters think that Omid should learn the Google:

December 26, 2010 at 8:27 PM  
Blogger TGGP said...

Heh, Nick Rowe is inspired by a comment at this very post.

December 26, 2010 at 9:24 PM  
Anonymous Omid said...

Eh, sorry. What I did was looking into monthly archive that I had read and not seen that one - and it can't be found there.

December 26, 2010 at 9:42 PM  
Blogger Vasile said...

@George Weinberg

the fact that the purchasing power of gold can vary considerably over time in unpredictable ways makes gold less than ideal for the denomination of value in long term contracts.

Well, the observed fluctuations in the price of gold you are referring entirely explained (out) by the cyclical nature of credit expansion. You're blaming the wrong tree, sheriff.

December 26, 2010 at 11:29 PM  
Anonymous Steve Johnson said...

George Weinberg,

Re-read this passage:

"Price is the measure of all things economic; but gold price fluctuates remorselessly. We know how many pounds constitute a bushel of wheat, how many cubic inches constitute a gallon, but nobody knows how much purchasing power constitutes a dollar, our unit of purchasing power. It follows that every contractual relation that runs over any appreciable period of time is vitiated by this defect in the standard."

When you can understand that only an economic illiterate could write or believe that you'll understand the flaw in Alvin Johnson's argument.

Hint: price discovery.

December 27, 2010 at 12:33 AM  
Anonymous Anonymous said...

Jay Hanson of has a short slideshow on money.

December 27, 2010 at 2:22 AM  
Anonymous edumds said...

@george weinberg

if gold´s purchasing power variation does not come from a flood of new gold entering the system than it only reflects changes in demand and supply for/of other products (in a regime where gold is the standard of exchange), such an atribute is necessary if you want a functioning market where excess and scarcity are properly signaled.

December 27, 2010 at 6:19 AM  
Anonymous jkr said...


or a shift in the demand for gold itself (for money). the question is whether the value of money (gold) should shift freely in response to changes in demand, or whether a central monetary authority should manage the supply of currency to offset abrupt changes in demand. the third alternative is a free banking system which supplies the currency according to market demand.

December 27, 2010 at 1:29 PM  
Anonymous Anonymous said...

Steve Johnson: Price discovery is achieved through current and future markets? If the currency, gold, is vulnerable to changes unexpected by pricing participants, then the value storage and exchange mechanism of the economy is unstable.

Higher variability in the currency also seems inherently inefficient. What is the cost, how do we discover the price of price discovery?

But gold or another physical standard may still be the most stable.

December 28, 2010 at 3:15 AM  
Anonymous edumds said...


"or a shift in the demand for gold itself (for money)"

yes, I agree with you but in a regime where gold is the money a shift in demand for it will represent the shifting value of future goods in relation to present ones (thus it continues to signal excess and scarcity through interest rates).

the question here is whether the market(free banking system) is a robust enough mechanism to deal with huge swings in demand for money (we know central banks are not, history tells us). I am of the opinion that free banking is the better option and yet I think austrians do not appreciate the fact that the system may collapse even in the absence of central intervention (when you measure value of present goods in relation to future ones you´re up to a pretty difficult forecasting task, you expect that even collective forecasting ,aka the market, will miss the target by an infinite, for all our purposes, amount)

December 28, 2010 at 5:16 AM  
Anonymous Zanon said...

Eurozone is currently in de facto gold standard. How is that working out?

December 28, 2010 at 7:35 AM  
Anonymous edumds said...


interesting, is it really true? I´d appreciate if you could defend the case.

December 28, 2010 at 9:10 AM  
Anonymous Zanon said...

Euzone, by design, has no currency issuer. There is no equivalent of us treasury bind. Therefore, all euro members are currency users. This is essence of gold standard--every one is schlub user. There is no Sovereign Issuer

December 28, 2010 at 11:07 AM  
Blogger George Weinberg said...

Well, the observed fluctuations in the price of gold you are referring entirely explained (out) by the cyclical nature of credit expansion.

Even if that's true, and I'm not convinced it is, I don't see how that gets rid of the problem. Here's how I understand it: in an economy with a gold based currency, most people won't want to hold much physical gold if they can instead hold interest bearing bonds (or whatever) instead. The amount of gold individuals choose to hold depends on their need for ready cash, the difficulty in liquidating securities, and the degree of confidence people have that bonds will in fact pay off. The point is that the ratio of the total value of the world's gold to the value of its non-gold assets or to the value of annual goods and services produced aren't fixed in time nor known in advance.

Times of unusual economic uncertainty (like now) are likely to increase peoples' desire to hold physical gold and hence increase the purchasing power of gold (as we've been seeing for years now).

My impression is that gold standard advocates generally say that you only get problems because of a boom and bust cycle, and with a real gold standard the booms and busts wouldn't happen in the first place. I don't think this has been convincingly demonstrated.

December 28, 2010 at 12:14 PM  
Blogger George Weinberg said...

On a related but separate topic, I see two general arguments against a constant-vale money:
1) Because the prices of goods are in constant flux relative to each other and because of the entry of new goods into the marketplace, the idea of a constant-value money is ill-defined.

2) Whatever its nominal charter may say, any entity with the power to expand and contract the money supply will do so for reasons of its own.

Although both are true as far as they go, I don't think either is devastating to the concept. It seems obvious to me that ceding the authority to any entity the power to determine the "value of money" is something one would wish to avoid, and I think it is avoidable. For purposes of specifying long-term contracts I don't think it's all that important precisely what the rules are for determining what a "dollar" is, provided there are rules which are known prior to signing the contract and which will not change over the course of the contract. But some rules are better than others, and I think it's pretty clearly possible to do better than "a dollar is a fixed quantity of gold".

December 28, 2010 at 12:53 PM  
Anonymous edumds said...


la wik says:"Rescue operations involving sovereign debt have included temporarily moving bad or weak assets off the balance sheets of the weak member banks into the balance sheets of the European Central Bank. Such action is viewed as monetization and can be seen as an inflationary threat, whereby the strong member countries of the ECB shoulder the burden of monetary expansion (and potential inflation) in order to save the weak member countries."

hardly a de facto gold standard

December 28, 2010 at 1:39 PM  
Anonymous edumds said...

@george weinberg

"I think it's pretty clearly possible to do better than "a dollar is a fixed quantity of gold"."

maybe, but isn´t the whole idea of hedging based on your concerns? cds, options and all that stuff? at the end of the day uninsured risks will comeback with a veangence and it is not gold's fault. The anonymous who said the system is inherently unstable is right, it is a house of cards indeed.

December 28, 2010 at 2:24 PM  
Anonymous zanon said...

edmunds: although i love the wikipedia, it is not a good source for this kind of information.

the rescue operation where the ECB bought member bank asset is operationally similar to US TARP -- it is better characterize as capital forebearance. It is not accurate to call it "monetization". it is also this operation happen from central bank and not treasury (which EU has not at supranational level).

the ECB action which is closer to monetization is when ECB began to buy member nation debt in early December. ECB stepped in and did this because the eurozone was on verge of collapse because of its idiot gold standard rule. It was failing for exactly same reason as all gold standard economy eventually fail.

EU story today is very much like gold standard failure that lead US to begin abandonment in 1930. But here we are 80 year later, and we still are on mix of gold standard and fiat.

When Mencius mock constitution for being degenerate, so called "reactionaries" here agree. But gold standard is as degenerate as constitution. But we have unprincipaled exception.

Here is hint for everyone -- when mencius and paul krugman agree, it is not because paul krugman suddenly has seen the light and abandoned Progressivism.

December 28, 2010 at 8:15 PM  
Anonymous Paul Milenkovic said...

So, is Wisconsin Governor-Elect Scott Walker's plan to abolish the Wisconsin Department of Commerce and replace it with a "Wisconsin Development Corporation", with a CEO and Board of Directors appointed by the Governor and confirmed by the Legislature, with the Governor having authority to fire the CEO, is this plan the beginning of USG 5 -- Mencius' Sovereign Corporation?

Or is this a form of Corporatist Fascism? Ideas? Insights?

December 29, 2010 at 10:59 AM  
Anonymous edumds said...


you´re right about the wikip. and the ECB not monetizing, but the reason euro is collapsing is not its idiot gold standard rule(it may be idiot all the same though) unless you do believe sovereign states can be trusted with the money press and run deficits. The gold standard is only as degenerate as the State. Come to think, any sovereign state with power enough to enforce its legal tender will eventually f*ck things up and we may not have a solution.

December 30, 2010 at 4:55 AM  
Anonymous zanon said...

edumds: I think you are correct. monetary sovereignity is extention of state sovereignity. we are on reactionary blog here, so i assume everyone can at least entertain notion of state sovereignity being a good idea.

for reason i cannot understand though, mencius and his acolytes grow quesy when this element of sovereignity come ups. So I guess what they really support is limited sovereignity. Maybe a republic? Who knows. I take my sovereignity neat.

if a state give up monetary sovereignity, then it either is at whim of some other clown (US Gov if it dollarizes it economy, god help it) or a rock. Either way, it has no ability to handle change in private sector demand for net financial asset. Therefore it can fall into inflation or deflation and has no tool to deal with it and support real economy.

EUZone had no capacity to fund change in private sector demand for net financial asset. This was idiot gold standard element built into system. They thought this would force good governance into member states -- TOTAL FAILURE of course as anyone who understand this stuff can predict.

So now they abandon gold standard as everyone else always does, except in this case it seems ECB is taking on a semi-combine Treausry and CB role, which is actual improvement over US system. So maybe they will be laughing in the ends.

December 30, 2010 at 11:05 PM  

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