Rothbard on Free Banking in Scotland

Rothbard on Free Banking in Scotland

Joakim Book has recently published an essay at AIER arguing that Rothbard was wrong to change his mind about free banking in Scotland. Rothbard had originally praised the episode of Scottish free banking in his 1983 book The Mystery of Banking, but then changed his mind in a 1988 essay on The Myth of Free Banking in Scotland. While the topic has been debated extensively throughout the 90s and 00s between free bankers and full-reserve advocates, it is worth responding to this latest argument against the Rothbardian position.

Setting the stage

Before moving on to answering Mr. Book’s specific charges against Rothbard, it is perhaps useful to briefly recount the background to the dispute over free banking. Is it possible to have stable fractional reserve banking in a free market, so-called free banking, where banks issue more bank notes and demand deposits than they have cash on hand to redeem? Or is such a system based on special privileges granted to banks, and will it inevitably result in bank panics and business cycles? Rothbard’s position was the second, while Lawrence White in the early 1980s, first in articles and then in his 1984 book Free Banking in Britain, advanced arguments for the feasibility of free banking on theoretical grounds while using the example of the Scottish experience with free banking 1716-1844 to show that it had also worked in practice. Rothbard’s initial praise for the Scottish experience was based on White’s first paper detailing the episode of free banking, but reading White’s 1984 book and reviewing the histories of Scottish banking himself made Rothbard change his mind and criticize the Scottish system, and White’s portrayal of it, harshly.

The present argument

The charges against Rothbard are three in number:

  1. Rothbard interprets the low failure-rate of Scottish banks as proof of government protection, whereas White and others see it as proof of the stability of the system.
  2. The Bank Restriction during the Napoleonic Wars apparently also applied to Scotland, meaning that the Scottish banks were rendered immune from the legal claims of their clients. This is “completely false” according to Mr. Book, as the only reason the Scottish bank customers did not demand specie was that they preferred bills of exchange and bank notes.
  3. Rothbard claims that the Bank of England was a lender of last resort to the Scottish banking system – which according to Book is a wrong-headed interpretation of the evidence.

As argument number 2 appears to me to get at the heart of the issue, I will deal with arguments 1 and 3 summarily before moving on.

Ad 1): Here I think we must return a Scots verdict – while it is true that we would regularly see firms go out of business in a free market, as more successful entrepreneurs displace the less competent, it seems to me that the banking sector is a special case. Presumably, the clients of the bank would not hold bank notes if they feared there was a risk of the bank going out of business, so people would only patronize very sound banks, meaning that the banking sector would be more stable than the surrounding economy. That’s just speculation, however. Since we don’t have any similar systems to compare the Scottish experience to (the English banks that White compares the Scottish to were artificially weakened due to government regulations meant to protect the Bank of England), we can’t say one way or the other what the low number of bankruptcies indicates.

Ad 3): It is hard to understand how Mr. Book can sustain this charge, let alone describe Rothbard’s position as a “strange historical twist”. It is true, as Mr. Book relates, that in the crisis of 1793 the British government, not the Bank of England, was the source of help for the Scottish banks (a fact that does little to sustain the notion of “free” banking in Scotland), but this is not news to Rothbard, who relates the exact same incident. Nor does it disprove Rothbard’s point about the importance of London for the Scottish banks, for while he does not say that the Bank of England was the lender of last resort to Scottish banks, he does cite the historians Frank W. Fetter and Sydney Checkland to the effect that “(r)edemption in London drafts was the usual form of paying note holders” and “the principal and ultimate source of liquidity [of the Scottish banks] lay in London, and, in particular, in the Bank of England.” That expert historians say something is obviously no guarantee that it’s true, but I think it behooves Mr. Book to realize that his argument is with these gentlemen, instead of making it seem like Rothbard invented the central role of the Bank of England to the Scottish system.

Getting gold in Scotland

Did Scottish banks at any point suspend convertibility, contrary to their legal obligations and the act of 1765 that governed Scottish banking? It is true, as Mr. Book alleges, that the Bank Restriction Act of 1797 only referred to the Bank of England and the Bank of Ireland – but that does not mean that Scottish bankers redeemed their bank notes in gold. As a leading authority on Scottish free banking notes, as soon as the leading bankers in Edinburgh got news of the suspension from the Bank of England, they met together and decided to follow suit.1 In clear violation of the law, the Scottish bankers en masse suspended redemption of their notes for the duration of the suspension in England. The result, as hard money advocates would predict, was a massive inflation in Scotland and erosion of the reserves of the Scottish banks. They went from having reserves of gold covering 10-20% of their outstanding issue of bank notes to only 0.5-3.2%.

While this development hardly speaks to the purported stability of so-called free banking, it does not contradict Mr. Book’s charge that specie redemption was still possible in Scotland. After all, since the action of the Scottish banks in refusing to redeem their notes was clearly illegal, presumably a disgruntled client desirous of gold could take his bank to court. Why didn’t anybody do this? Surprisingly, we need only read the article on the bank restriction by George Selgin that Mr. Book himself links to in support of his claims to realize why. For the Bank Restriction Act did affect Scottish banks: while it did not make Bank of England notes legal tender, if anyone insisted on using such notes in payment of debts, “he was to be protected from arrest for debt” (Selgin quoting Frank W. Fetter). In other words, the legal remedies available to persons insisting on payment in gold were severely curtailed – in Scotland particularly so, as the Act deprived bank creditors of the right to summary diligence, a special procedure under Scots law for the enforcement of debts.

As is to be expected, the suspension of convertibility in Scotland lead to the complete disappearance of silver and gold coins from circulation2, per the working of Gresham’s Law, and bank notes proliferated, leading to the above-mentioned outcome that bank reserves dwindled to a fraction of what they were before the suspension.

All this leads us back to Rothbard. Rothbard claimed both less and more than Mr. Book attributes to him. He didn’t claim that the Act of 1797 applied to Scottish banks, merely that they used the opportunity to suspend convertibility – and this not on his own authority, but on that of Professors White and Checkland. However, Rothbard also claimed much more than simply a temporary suspension in Scotland during the early 1800s. It is worth quoting him at length since this claim seems to have escaped Mr. Book’s attention:

Now I come to the nub: that, as a general rule, and not just during the official suspension period, the Scottish banks redeemed in specie in name only; that, in substance, depositors and note holders generally could not redeem the banks' liabilities in specie. The reason that the Scottish banks could afford to be outrageously inflationary, i.e. keep their specie reserves at a minimum, is that, in practice, they did not really have to pay.

[Quoting Professor Checkland] The Scottish system was one of continuous partial suspension of specie payments. No one really expected to be able to enter a Scots bank … with a large holding of notes and receive the equivalent immediately in gold or silver. They expected, rather, an argument, or even a rebuff. At best they would get a little specie and perhaps bills on London. If they made serious trouble, the matter would be noted and they would find the obtaining of credit more difficult in future.

Rothbard goes on to describe a legal battle in the 1750s over the redemption of bank notes that ended up with a nominal victory for the cause of redemption, but in reality the courts refused to force the banks to pay up. The clear conclusion must be that convertibility of Scottish bank notes were only sporadically enforced throughout the existence of the much-vaunted system of free banking in Scotland.

This result should not surprise us, as the system was inherently unstable. While Mr. Book focuses on the issue of bankruptcy rates, this is not Rothbard’s main reason to deem the system unstable. Instead, he focuses on the fact (again using Checkland as his source) that throughout the existence of an independent Scottish banking system, the Scottish banks expanded and contracted credit in a long series of business cycles, as also Huerta de Soto has pointed out. What the Scottish bankers did was secure legal privileges in order to be able to engage in fraudulent credit expansion, and it is only after reading deeper in the history of Scottish banking that Rothbard realized this and subsequently changed his mind on the issue. Far from criticizing Rothbard, Mr. Book, who himself writes often and persuasively about the role of financial history, should recognize him as a kindred spirit – and accept the Rothbardian strictures on free banking in Scotland, based as they are on sound theory and historical inquiry.

Conclusion

The goal of this essay has been to show that, contrary to Mr. Book’s criticism, Rothbard’s change of mind on the issue of free banking in Scotland was based on a better understanding of the episode and was not, as Mr. Book alleges, “the imposition of perfectionist normative judgments” on the historical record. More generally, we have again shown that the claim that Scottish experience validates free banking theory is not supported by the evidence. On the contrary, the attempts by Mr. Book and other free bankers to explain away or ignore the myriad examples of government privilege and intervention in the Scottish case is starting to sound like a no true Scotsman fallacy – they are either ignored, or explained away as not really affecting the financial system.

Free banking has not passed the free market test, at least not in any of the cases that have been brought forward by the free bankers to support their claims. True free banking would indeed be a very stable system – but one with very high reserves. As Mises said:

Suspension of the bank-notes’ convertibility and legal-tender provisions had transformed the ‘hard’ currencies of many countries into questionable paper money. The logical conclusion to be drawn from these facts would have been to do away with privileged banks altogether and to subject all banks to the rule of common law and the commercial codes that oblige everybody to perform contracts in full faithfulness to the pledged word. Free banking would have spared the world many crises and catastrophes.

And:

It is a mistake to associate with the notion of free banking the image of a state of affairs under which everybody is free to issue bank notes and to cheat the public ad libitum. People often refer to the dictum of an anonymous American quoted by Tooke: "Free trade in banking is free trade in swindling." However, freedom in the issuance of bank notes would have narrowed down the use of bank notes considerably if it had not entirely suppressed it. It was this idea which Cernuschi advanced in the hearings of the French Banking Inquiry of October 24, 1865: "I believe that what is called freedom of banking would result in a total suppression of bank notes in France. I want to give everybody the right to issue bank notes so that nobody should take any bank notes any longer."

  • 1. Lawrence White, Free Banking in Britain: Theory, Experience and Debate, 1800-1845, (Cambridge: Cambridge University Press, 1984), p. 46
  • 2. Ibid., 46-7
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The Quarterly Journal of Austrian Economics Volume 22, Issue 2 is Now Available!

09/24/2019Mises Institute

This issue contains selected lectures, papers, and abstracts of papers presented at the 2019 Austrian Economics Research Conference in Auburn, Alabama. Articles include Daniel Ajamian's "The Cost of the Enlightenment," Michael Rectenwald's "Libertarianism(s) versus Postmodernism and 'Social Justice' Ideology," Edward Fuller's "Keynes and the Ethics of Socialism," Jeffery Degner's "Family Formation, Fertility, and Failure: A Literature Review on Price Increases and Their Impact on the Family Institution," and more.

Available here.

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Prolonged Monetary Easing Paves Way for Wealth Redistribution

09/24/2019Victor Xing

Recent Democratic debates focused on rising wealth inequality, as candidates introduced various ideas to roll back disparity by taxing the affluent and redistribute their wealth. This would punish working professionals and small business owners without capital market access nor legislative influence. Meanwhile, malinvestment reliant on central bank stimulus and the unproductive of “zombie firms” sustained by ultra-low rates would proliferate unabated.

Both the GOP and Democrats tolerate monetary stimulus, for elected officials view effects of easy money (higher equities and lower bond yields) as beneficial to economic growth. This enabled the triumph of asset owners over wage earners to create the most potent inequality catalyst of the 21st century.

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Inherent risks in the financial market used to decimate malinvestment and define capital gain in terms of risk-adjusted returns. However, central banks’ volatility suppression policies such as quantitative easing and negative rates have enabled a decade of policy-fueled capital gain to outpace wage growth. In the case of QE, relentless bond buying and “reach-for-yield” would immediately boost asset prices, while impacts on the real economy (and especially wage earners) would materialize over Milton Friedman’s famous “long and variable (policy) lags.” Under monetary intervention, fortunes have diverged along the lines of asset ownership.

If central banks release volatility back into the market, malinvestment will reprice and valuations will again couple with risks, while prudent management would reward astute investors. This is an organic path to solve the inequality puzzle, but prolonged easing (as central banks mistaken structural low inflation from globalization for cyclical weakness) have increased developed economies’ sensitivity to higher interest rates. As major central banks grab the volatility tiger by the tail, they have fostered a vicious cycle where brittleness under ultra-low rates would beget even more easing:

debttrap.PNG

Wealth Redistribution Follows Monetary Intervention

As rampant asset price appreciation worsen inequality, angry voters left behind by a buoyant market would give rise to anti-establishment candidates unsympathetic to consensus views. As protectionist policies take hold, erosions to global value chains (GVCs) would lift inflation and threaten major economies’ debt-fueled growth model. To make matters worse, central banks resorting to money printing would risk sending bonds yields soaring under higher inflation and subsequently threaten risky assets.

Faced with voter anger and eager to counter the rise of anti-establishment challengers, elected officials would resort to another policy intervention to placate voters: wealth redistribution. In other words, wealth redistribution programs are often attempts to “amend” monetary policies’ distributional effects . Rather than unwinding policy disruption, authorities would double down with further measures to offset effects of prior policies. In the end, repeated interventions would exacerbate socioeconomic distortions to beget further redistribution.

At the July FOMC meeting, “a number of” Fed officials urged the central bank to be even more aggressive at interventions such as deploying quantitative easing, for they were encouraged by the perception  many of the potential costs of the Committee's asset purchases had failed to materialize.” The Fed officials did not connect the dots between rapid asset price appreciation, worsening inequality, and the 2016 election. As a result, their actions will likely pave way for further waves of follow-up wealth redistribution, as well as elected officials losing their seats to political insurgents capitalizing on popular discontent.

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The US Military Isn't As Invincible As It Thinks

09/24/2019Ryan McMaken

The United States itself has about a zero-percent risk of being invaded from any foreign power. This has been clear since 1945 that the Navy and nuclear arsenal make invasion of the US both politically and practically impossible for any foreign regime. The US Army could be totally abolished this afternoon without in any way increasing the risk of foreign military action against the US in North America.

The invincibility of the military itself, on the other hand, is something different. After all, the US military is mostly in the business of doing things other than protecting the borders of the United States. It primarily worries about projecting its power into every corner of the globe, propping up dictators in places like Egypt and Saudi Arabia, and bossing around foreign regimes that are no threat to the United States.

But most of this has long been based on the assumption that the US can do anything it wants to any country without any fear of significant repercussions to its allies anywhere.

Those days are rapidly coming to an end.

In the UK's Independent last week, Patrick Cockburn noted that some important targets are now sitting ducks, and the US and its allies have no economical defense:

On the morning of 14 September, 18 drones and seven cruise missiles – all cheap and unsophisticated compared to modern military aircraft – disabled half of Saudi Arabia ’s crude oil production and raised the world price of oil by 20 per cent.

This happened despite the Saudis spending $67.6bn (£54bn) on their defence budget last year, much of it on vastly expensive aircraft and air defence systems, which notably failed to stop the attack. The US defence budget stands at $750bn (£600.2bn), and its intelligence budget at $85bn (£68bn), but the US forces in the Gulf did not know what was happening until it was all over.

...a middle ranking power like Iran, under sanctions and with limited resources and expertise, acting alone or through allies, has inflicted crippling damage on theoretically much better-armed Saudi Arabia which is supposedly defended by the US, the world’s greatest military super-power.

...If the US and Saudi Arabia are particularly hesitant to retaliate against Iran it is because they know now, contrary to what they might have believed a year ago, that a counter-attack will not be a cost-free exercise. What happened before can happen again: not for nothing has Iran been called a “drone superpower”. Oil production facilities and the desalination plants providing much of the fresh water in Saudi Arabia are conveniently concentrated targets for drones and small missiles.

In other words, the military playing field will be a lot more level in future in a conflict between a country with a sophisticated air force and air defence system and one without. The trump card for the US, Nato powers and Israel has long been their overwhelming superiority in airpower over any likely enemy. Suddenly this calculus has been undermined because almost anybody can be a player on the cheap when it comes to airpower.

Meanwhile, the US is pouring money into expensive toys like the F-35 which after more than a trillion dollars offer no defense against dirt-cheap drones:

Compare the cost of the drone which would be in the tens or even hundreds of thousands of dollars to the $122m (£97.6m) price of a single F-35 fighter, so expensive that it can only be purchased in limited numbers. As they take on board the meaning of what happened at Abqaiq and Khurais oil facilities, governments around the world will be demanding that their air force chiefs explain why they need to spend so much money when cheap but effective alternatives are available. Going by past precedent, the air chiefs and arms manufacturers will fight to their last breath for grossly inflated budgets to purchase weapons of dubious utility in a real war.

It is unknown how long it will take for US military planners to accept "that they command expensive, technically advanced forces that are obsolete in practice. This means they are stuck with arms that suck up resources but are, in practical terms, out of date."

This doesn't mean, of course, that the US has no options here. The US could engage in a full-scale war against Iran, killing hundreds of thousands of Iranians and spending trillions. The number of US casualties would be very small by comparison, but probably not trivial. This bloodbath eventually incapacitate the Iranian state, but not before Iran destroyed the flow of oil out of the Persian gulf, and extracted its pound of flesh from US allies such as Saudi Arabia and Israel.

The effect on rivals like China and Russia would be electrifying as well, since the US would then be viewed as having slipped the bonds of rational foreign policy.

This means the situation now is far different from what it was before. But don't expect the Pentagon to act any differently. It will keep demanding trillions of dollars for weapons of war designed to fight a 1960's-style war. But that all sounds perfectly reasonable in a place like Washington, DC where both Capitol Hill and the Pentagon exist in a world of fantasy built on printed money.

See more:

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How Entrepreneurs Can Survive the Next Recession

09/20/2019Per Bylund

There has been increasing talk of a burgeoning recession, whether because of a historically rare decade-long economic expansion or recent reports of an inverted yield curve, which is traditionally an indication of a downturn. Any recession is hard on all Americans, but it can be particularly devastating for entrepreneurs, who often have more to lose. Not only does an economic ebb add to the uncertainty of owning and running a business, but it also means opportunities become scarcer, with fewer potential partners willing to invest, consume and otherwise enter into deals.

Recessions, of course, are famously hard to predict, but even when there's mounting evidence of a looming crisis, it can be hard to anticipate timing and how it will affect your industry. Simply closing shop is no solution. It might not even be an option. A better strategy is to prepare for the worst and make your business downturn-proof. But how does one do that? Here are four things to think about that can help make your business recession-ready ... just in case.

Full article at Entrepreneur

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The Conscientious Objector

“Because liberty is so fragile, its true defender recognizes that war is its greatest enemy, and therefore the true patriot is often the courageous individual who opposes a particular war because he recognizes that it is unjust — that it would be fought for the wrong purposes or that the risk for the loss of liberty is greater than any benefit to be gained by the war.” - John V Denson

If we have freedom: are we not responsible for what we do and what we fail to do? History is littered with stories about valor and bravery on the battlefield. Men who went off to war, who fought, and died. But what about the men who refused to fight?

The World War II draft operated between 1940 - 1946, and inducted some 10 million men into forced military service. Of those 10 million men, approximately 72,000 were conscientious objectors, of which 25,000 entered the military in noncombatant roles, another 12,000 went to civilian work camps, and as Robert Higgs points out in the book, The Cost of War :

The government also imprisoned nearly 6,000 conscientious objectors- three-fourths of them Jehovah’s Witnesses- who would not comply with the service requirements of the draft laws.

One of those American conscientious objectors was Desmond Doss. During World War II he refused to carry a weapon and kill the enemy. Despite this, he is credited with saving 75 of his fellow soldiers during the Battle of Okinawa. To this day he is the only conscientious objector to receive the Medal of Honor for his actions on the battlefield.

Franz Jägerstätter was not as lucky as Desmond Doss. He was an Austrian conscientious objector during World War II who refused to fight for Nazi Germany. On February 23, 1943, he was drafted to serve and on March 1, 1943, upon entering into the Wehrmacht garrison, he declared his Conscientious Objector status and offered to serve as a paramedic instead. His offer to serve as a paramedic was ignored and he was arrested and later killed for refusing to fight for Hilter. He left behind a wife and three children.

These were men who dared to say no to war and murder and these are just two examples out of 1,000’s of men during that war. Why did these men oppose war? People may profit from studying their examples. For, As Lew Rockwell once pointed out :

“We don’t oppose the state’s wars because they’ll be counterproductive or overextend the state’s forces. We oppose them because mass murder based on lies can never be morally acceptable. So we don’t beg for scraps from the imperial table, and we don’t seek a seat at that table. We want to knock the table over.”

Conscientious Objectors refused to be pawns and knew that war was morally unacceptable, with some paying the ultimate price. Sadly, in a sense, there is a case to be made that these Conscientious Objectors were the only ones who truly did their job and upheld their oath.1 For all members of the military are instructed: they have a duty to obey all lawful orders, and conversely, they also have a duty to disobey unlawful orders. This principle is embedded in the precedent of the Nuremberg Trials whereby Nazi war criminals invoked the “just following superior orders defense” and were nevertheless found guilty as the orders were found to be illegal. It is worth noting at this point, that illegal orders can happen at any time, wartime or peacetime, civilian or military.

Does ‘Conscientious Objection’ relate only to war and military personal? Or, are there other circumstances to which this term may be applied? I contend that conscientious objection can and should apply to a variety of circumstances other than war, for example whenever morality and ethics are at play. Objections based on one’s conscience may arise in numerous and more mundane circumstances. The world would be a much better place if the principles of conscientious objections were more universally applied, and daily.

Consider this, the category of human action can refer to either an action, or an inaction. Both actions and inactions potentially have value, as Ludwig von Mises noted:

“For to do nothing and to be idle are also action, they too determine the course of events.”2

Let’s ask ourselves: Is Patriotism defined as blind obedience to governmental authority? Can saying ‘no’ be more heroic than saying ‘yes’, when your conscience tells you its wrong that the Government requires innocent blood on your hands? As the Afghanistan war enters its 18th year, it’s long past time we reconsider the examples set by those who conscientiously objected to war. In the words of the late Justin Raimondo,

“We have to show the American People that war is not patriotic.”

  • 1. Murray Rothbard noted that “ There have been only two just wars in American history that were, in my view, assuredly and unquestionably proper and just.”
    https://mises.org/library/just-war
  • 2. Murray Rothbard also stated in Man, Economy, and State that “Action does not necessarily mean that the individual is ‘active’ as opposed to ‘Passive,’ in the colloquial sense.”; See also Carl Menger’s discussion of useful inactions in Chapter 1, Principles of Economics.
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Let Alaskans Decide The Fate of Alaska's Forests

09/19/2019Ryan McMaken

Mother Jones today reports on how the Trump administration is loosening some restrictions on logging in some public-lands areas of Alaska.

In response, a group of indigenous women traveled to Washington to oppose the plan.

Most of the article goes into how the forests — left untouched — are good for local residents, and how the forests are allegedly a defense against global warming.

But it was a phrase in the headline that struck me most: "These Native Women Traveled 3,000 Miles to Stop It."

That is, a group of people from the Alaska panhandle, in order to talk policy about a forest right next door, had to fly thousands of miles to do so.

That strikes me as a bit odd.

I was reminded of the outcry from non-Alaskans when the Feds proposed renaming the state's highest mountain, now called Denali. Back in 2015, I wrote:

Here's the basic story: About 100 years ago, some people started calling Denali mountain in Alaska "Mount McKinley." Eventually they managed to convince the federal government to make "McKinley" the official name. In 1975, however, the government of Alaska petitioned the federal government to change the name back to "Denali." To this day, Alaskans routinely refer to the mountain as "Denali" in spite of the fact that the Federal government, seated 4,000 miles away in Washington, DC, had not respected their request. Then, during a recent trip to Alaska, Barack Obama decided that the federal bureaucracy is going to start using the name "Denali" for the mountain.

Reading this, the whole thing should strike any sane person as immediately absurd. Why do people in Alaska have to ask a bunch of non-Alaskans thousands of miles away to call their name by the locally preferred name? If the Alaskan government, not to mention most of the locals, call a mountain "Denali," then the mountain is obviously named "Denali."

But that's not how it works in the land of the free. Here in America, apparently, people from Ohio (McKinley's home state), 3,000 miles from the mountain in question, get to veto Alaskan petitions. In this article in the Washington Post, a writer from Ohio makes the case (with a straight face, no less) that it's mean and nasty of the federal government to defer to the Alaskans about the names of Alaskan mountains. For the Ohioans, it seems, it is of monumental importance that the United States Congress, composed of 533 non-Alaskans, and three actual Alaskans, decide what that mountain should be called.

This latest controversy over an Alaskan forest just highlights the absurdity of federal control of federal lands yet again. But while Mother Jones highlights the fact Alakans had to travel across a continent to address issues going on 50 miles away, the publication nonetheless considers this to be perfectly right and normal.

This, of course, is to be expected from those with a progressive mindset. For them, policy should be decided by "experts" perhaps 3,000 miles away who ought to control every aspect of life for people who have far less power and far less ability to affect policy than the experts in the metropolitan centers of power.

If this group of Alaskans fails to win the day, then that's just a sign that maybe some California billionaires should get involved bossing Alaskans around from a different ideological perspective.

The idea that It's the same attitude, of course, that we encountered in response to the Brazilian forest fires in recent months. Wealthy, powerful first-world politicians united to boss around impoverished Brazilians and tell them how to run their country. After all, we were told the Brazilian forests aren't really Brazilian anyway. They belong to everyone else because they are "the lungs of the world." Therefore, in their minds, the Frenchman Emmanuel Macron ought to be dictating to the Brazilians on the matter.

The same thinking rules the day in Washington, DC, including among Republicans who have no intent of relinquishing control over federal lands they now enjoy. For instance, when questioned about his willingness to decentralize control of federal lands to the states, Trump appointee Perry Pendley of the Bureau of Land Management called the idea "silly" and "illogical" even though he has admitted that the authors of the US constitution never envisioned the sort of vast federal land holdings that are now common in the US.

If there's anything DC politicians can agree on, it's that Washington, DC should have the final say over everything everywhere. This, of course, even extends to foreign countries.

For them, the idea of leaving Alaska to the Alaskans remains simply a bridge too far.

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3 Charts Showing Just How Boxed-in the Fed Is

The Fed met market expectations by cutting its target for the fed funds rate by 25 basis points, down to the range of 1.75 - 2.00 percent. In this post I want to demonstrate just how boxed in the Fed has now become, with the help of 3 charts.

First, let's review just how low interest rates have been (and still are), in a long-term historical context:

fed funds.png

As the chart shows, the (effective) fed funds rate was in this range back during the early 2000s, which helped spawn the housing bubble and bust (as I predicted in this Mises.org article which ran 11 months before the financial crisis). Before then, we have to go all the way back to the early 1960s to see rates this low. And furthermore, to the extent that Mises was right, and artificially low interest rates lead to an unsustainble boom, then the seven years of virtually zero percent interest rates (from December 2008 - December 2015) have fostered a plethora of malinvestments.

Now here's the irony: In the midst of the Fed cutting rates, and injecting $75 billion in repo operations on Tuesday to push down a spike in short-term rates, at least on paper we see that everything seems to be fine. Specifically, consumer price inflation is a bit lower than the Fed's desired level but is still at a "healthy" 1.8% (year over year, as of August), while the official unemployment rate is still at a 50-year low:

unemployment.png

Finally, despite the apparently healthy economy (vis-a-vis the Fed's "dual mandate"), there is still an extraordinary stockpile of excess reserves in the banking system, relative to the pre-crisis era:

excess reserves.png

Medical metaphors for economics are never perfect, but we can certainly say this: Far from being in the midst of a robust "recovery," the patient--i.e. the US economy--is still incredibly weak, needing constant infusions of medicine to stave off a crisis in its circulation.

On the one hand, it's refreshing that Fed officials don't think the economy can be summed up in two numbers, namely the official unemployment and consumer price inflation rates. But on the other hand, the fact that the Fed is cutting rates now, in spite of the "healthy numbers," is an ominous indication of just how deep the rot goes in the economy's capital structure.

Unfortunately, the world may soon see exactly why 7 years of unprecedently loose monetary policy was a very foolish idea.

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Joey Rothbard

09/17/2019David Gordon

Today would have been Joey Rothbard's 91st birthday. She was Murray Rothbard's "indispensable framework." She was a scholar in her own right, but she devoted her life to helping Murray. She was a wonderful friend, and I miss her very much.

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"This Is Basically Clown World," Jeff Deist Talks Negative Interest Rates on RT

09/13/2019Jeff Deist

Jeff Deist joins Rick Sanchez to weigh in on the European Central Bank’s introduction of negative interest rates and why it signals a global recession.

Europe’s desperation move to avert global recession

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European Central Bank Doubles Down on Ultra-Easy Money

09/13/2019Ryan McMaken

Not that QE ever really went away, but the European Central Bank is taking it up a notch with today's rate cut. According to the Wall Street Journal today :

The European Central Bank cut its key interest rate and launched a sweeping package of bond purchases Thursday that lays the ground work for a long period of ultraloose monetary policy, jolting European financial markets and triggering an immediate response from President Trump.

The ECB’s pre-emptive move was aimed at insulating the eurozone’s wobbling economy from a global slowdown and trade tensions. It is the ECB’s largest dose of monetary stimulus in 3½ years and a bold finale for departing President Mario Draghi, who looks to be committing his successor to negative interest rates and an open-ended bond-buying program, possibly for years.

But the move triggered opposition from a handful of ECB officials, according to people familiar with the matter, while leaving key practical questions unanswered. Primarily: How long can the ECB keep purchasing bonds without significantly enlarging the pool of assets it can buy? Some analysts estimated it might be less than a year.

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Meanwhile, the president attempted to use the move to put additional pressure on the Fed to ratchet up its own QE plans, writing: "European Central Bank, acting quickly, Cuts Rates 10 Basis Points. They are trying, and succeeding, in depreciating the Euro against the VERY strong Dollar, hurting U.S. exports.... And the Fed sits, and sits, and sits. They get paid to borrow money, while we are paying interest!"

Trump, apparently is unconcerned by the effects of negative rates on the banking sector or on family budgets.

For example, the European banking sector has been hit hard by negative rates, as shown by Maurus Adam recently at mises.org:

Low interest rates make credit for private banks — and in turn, for consumers — cheaper. But at the same time, the low return on government bonds makes investment in these long-term options unattractive. Inflation and low return on investment options discourage people from saving and investing capital but encourage spending. Moreover, the low interest rates result in a low return for banks on the credit they grant to consumers. High consumption, low investment, and low profit on all banking activities strongly affects the ability of European banks to compete. Consequently, Markets Insider reports :

The bank has struggled financially amid rock-bottom interest rates in Europe and fierce competition in the German banking industry, limiting its ability to invest and expand in line with US rivals.

The extremely low interest rates in the Eurozone hit the bank’s investment branch hard...

And, as reported by Matt Egan at CNN:

Deutsche Bank's struggles have also been amplified by something the 149-year-old lender never imagined, mostly because it had never happened before in modern history: negative interest rates. In 2014, the European Central Bank wanted to boost the sluggish economy but interest rates were already at zero. The unconventional decision to take them into negative territory was aimed at encouraging growth and avoiding deflation, but it meant banks were charged a fee for parking their reserves with the central bank. The ECB's extreme policies may have injected some life into Europe's sleepy economy, in turn giving Deutsche Bank and other lenders a boost. However, negative rates are also crushing the profitability of all banks, Deutsche Bank included. And this unorthodox policy — one that the ECB is on the verge of doubling down on — is making it awfully difficult to revive the champion of Germany's banking system. But rates don't have to be negative to have a negative impact on savers and pensioners. In order to see any meaningful gains from saving in an economy with ultra-low rates, an investor must engage in yield chasing. but that;s much more difficult for ordinary households who don't have the tools of wealthy investors at their disposal - tools that allow for a variety of risky investments that may bring sizable returns. Ordinary people, in contrast, can't gamble their savings in that way, and can't even access hedge funds and other tools designed to seek out returns in an environment with so few opportunities for yield.

Moreover, pension funds that rely on more safe and traditional investments must pursue riskier investments, or do without the sorts of gains they need. That means future retirees will face far fewer returns and a falling standard of living.

None of this concerns the president, apparently, as he now appears to be champing at the bit to get his over version of European style QE.

Just yesterday, he was demanding the Fed cut the federal funds target rate "down to ZERO, or less":

That is, the president apparently believes savers should have to pay to save money, as is potentially the case under a negative-rate regime.

The president might also want to consider the fact that even after a decade of extreme easy-money policies, the European economy is still weak, and the euro zone's growth has slowed to under one percent.

This won't surprise hawks who understand that easy money is not exactly a miracle formula for economic growth. But this fact is seemingly irrelevant to the president who sees monetary policy as little more than a tool to spur exports.

Although the Fed is now expected to cut its own target rate later this month, one can only hope that it keeps to only 25 basis points.

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After all, the good news here is that, with a target rate of 2.25 percent, the US's central bank looks relatively sane compared to the ECB and the Bank of Japan, both of which are employing negative rates. The Fed is even clocking in at well above the Bank of England's target rate of 0.75 percent.

So long as the Fed does not significantly increase its own balance sheet and other QE efforts in response to the ECB and other central banks, the dollar will continue to look relatively attractive compared to other currencies. Predictions that the dollar will quickly devalue in relation to other currencies are likely overstated. It is true that larger geopolitical trends, such as de-dollarization efforts among some major world economies , are a threat. But these efforts lie outside run-of-the-mill monetary policy right now which continues to point to a relatively sound dollar.

A summary of the most recently set rates:

  • USA: 2.25%
  • Canada: 1.75%
  • UK: 0.75%
  • Australia: 1.0%
  • ECB: -0.5%
  • Japan: -0.1%

Note: All graphs by Ryan McMaken. Here are the specific key rates discussed here, with links:

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