Prechter interview: Fed may be ended within his lifetime.

From Yahoo! Tech Ticker last week. Lots of market talk, then Prechter makes the case for truly free banking, in which banks could decide for themselves what to use as money. He beleives that most banks and savers would chose gold, as they have for most of human history. The first segment below is mostly on the markets — the comments on the Fed are in the second:

EDIT: Sorry, I didn’t realize that there are actually two segments to this interview. The comments on the Fed are in the second half:

At the end, Prechter makes a key point about the gold standard: it is not a free-market solution, because it is a “standard” set by the government. Essentially, a gold standard is redeemable paper money, but as we saw in the early years of the Federal Reserve (and actually in older times with many other central banks), the exchange rate between paper and specie is set by the government. Paper money remains legal tender and the primary unit of account, so citizens are forced to use it and the banking cartel can still inflate.

A much better solution is no standard at all. Under such systems, the unit of account was typically a weight of gold or silver. Hence the British pound sterling, which was exactly that (sterling is 92.5% pure silver). Under these systems, there were safe banks that earned money by simply storing metal and clearing payments. Interest was low, but inflation was lower or negative, since the growth of human productivity from improved infrastructure and technology meant that goods and services became more abundant over time, while the money supply grew only as fast as new gold was mined.

This is why the price level fell steadily during the 1870s in the US while the economy grew at its fastest pace in history, and why the price of a postage stamp in England remained the same for 100 years, even as the country grew rich. There were booms and busts and banks failed, but because even big ones were allowed to fail, bubbles remained contained and the busts freed up capital for productive uses.

Such periods will come again. This is not the end of civilization, just the end of a long credit inflation.

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10 thoughts on “Prechter interview: Fed may be ended within his lifetime.

  1. “A much better solution is no standard at all. ”

    Time for an in depth debate here : this “much better solution” solves the problem of the money supply, but fails completely to address the velocity issue : Pure commodity currencies are “cornerable”. When left to themselves, it always ends in a situation where a few people hold the majority of the stock of money and extract a hefty rent from it (one doesn’t even need to take credit risk for that, triggering deflation ensures positive real returns). The existence of rents for a segment of the population is always a drag on productivity growth, as the idle moneyed class funds wasteful consumption by the rents it extracts from the productive class, whereas it is the latter that has the skills to grow the capital stock.
    Historically, the answer from authorities has either been currency debasement (the Humpty Dumpty solution : “a pound of silver weight as much as I want it to weight”) or outright expropriation of the money cornering class organizations (the “Order of the Temple” dissolution solution). More modern solutions involve central banking and paper money. No solution is perfect, and I think we can do much better than what we have today (my preferred solution is the banning of maturity transformation except for the Sovereign), but one has to acknowledge that there is a fundamental problem in the first place.

  2. Charles, the banking cartel has always pushed for paper money and a central bank, since they make the most money during inflation.

    This rent theory of yours sounds like 1930s Marxism. The old, almost-free-banking US had a middle class and unlimited possibilities for upward mobility.

    Gold was never “cornered” by anyone in the way the Hunt brothers tried to corner silver on the Comex. The relative stability of price levels from the 1800s to WWI proves it, but the idea makes no sense — gold was money, and money is valuable for what you can do with it. There were no Scrooge McDuck moneybins.

    I don’t understand your solution, but it sounds like it requires the use of force. It also is naive to think that government doesn’t work first and foremost for the rich — any solution that requires government force will be unjust and favor the rich, no matter how good it sounds in theory.

  3. Mike,

    During the 1800′s “Golden Age”, the opium wars occurred precisely because China was implementing a mercantilist policy that had the effect of sucking precious metals out of Europe.

    Fighting rents from monopolies and “managed” scarcities have nothing to do with Marxist analysis, you can find it in Adam Smith. Free markets only work when economic agents do not collude on a large scale. One has not found any better solution than a powerful, but principled, “trust busting” government for that purpose.

  4. I don’t know anything about the Opium Wars, but Europe did fine in the 1800s — it was the height of that civilization, precisely because the continent was never more free from government.

    I think if you look into the reality of “trust busting,” much as corporations essentially write their own regulations today, you would find that these government actions largely favored the oligarchs.

    Price-fixing and collusion are very unstable and nearly impossible to sustain without the force of government. This is why the only real monopolies are government-sponsored.

    http://punditkitchen.files.wordpress.com/2010/05/129170684251270550.jpg

  5. Charles,

    No libertarian would argue that a completely free society including its monetary system and financial sector is perfect. What they will argue is a free society with a completely free and private banking sector is the best system ever practiced and the best available.

    “One has not found any better solution than a powerful, but principled, “trust busting” government for that purpose.” This powerful, but principled government does not exist in the long-run, in my opinion.

    Tom

  6. Mike,

    I don’t understand how you can say that 19th century Europe was more “free from government” that the preceding era. It is quite the contrary. The UK embarked in a very successful government sponsored imperial project (these “free from government” merchant received a very strong help from the Royal Navy). France and Germany State apparatus developed very strongly during that century as well, together with their economies.
    Think about that : before the revolution in France, even tax collections were a private business ! Tax receipts were “securitized” and sold by the state to private collectors.

  7. Tom,

    A prosperous society requires a powerful and principled government anyway. The further decentralized a society is, the higher the burden on the Judicial Branch of the government, and on the executive branches of government that must enforce judicial decisions. Property rights are not borne out of thin air !

  8. “A government that is powerful enough to give you everything you want is powerful enough to take away everything you have.”

    THOMAS JEFFERSON

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