Austrian economists believe that economic crisis is caused by: * Central Bank created money supply * Fractional reserve banking * Cheap credit Which in turn fuels asset bubbles and distorts true price discovery in a free market. This massive asset misallocation eventually leads to crisis when the free market corrects itself. So the solution to solve economic crisis is: * Free banking with trusted currencies that cannot be created ex nihilo * Freely floating interest rates that would encourage sensible allocation of investment The free market will then become a self-regulating mechanism that will avoid economic crisis. However, what I want an answer to is this: If the Austrian School is correct, how does that explain the fact that in the period of the Classical Gold Standard of 1870-1914, the United States suffered no less than ELEVEN recessions and bank panics? This period is characterised by: * A gold standard * No Central Banking system Hmmm...
Bank runs keep banks honest. With 100% reserve backing, an honest bank will survive a run - a mismanaged bank will close, just the same as any poorly run business.
Banks are businesses. Businesses in all industries fail from time to time. By mismangement, incompetence, bad luck, etc... If you are looking for certainty you won't find it. Not in anything that you ever do. Everything in this world is just degrees of risk, whether it's driving a car, getting on a plane, having a shower (you could slip and break your neck) or lending money to an institution. The problem with Central; banking is that it hides the risks. And it can do so for a long time. It's like if you have severe stomach cramps and you go to the doctor and he gives you morphine. The pain goes away. But your appendix is still rotting away and getting worse. That's what happens with Central Banking. It takes decades for the problems to build but ultimately you end up with a huge crisis. The other problem is that it encourages irresponsibility. If I was looking to put my money in a bank and I was looking for low-risk, something where I could be almost (but not fully) certain my money is accessible I would not put it with a bank making the kinds of profits our banks do. High profits generally means high risks. Of course, our banks can take these huge risks knowing the govt is there to bail them out. The execs can virtually make huge risk-free profits and then throw the problem on the govt when it all goes sour. Talk about a transfer of wealth. Of course, this system is effectively one big bank and so I don't have any other reasonable alternatives (apart from to some extent PMs). The way I would imagine a free banking system to work, where everyone has to be responsible for where they put their money, is that I would think there would be a general demand to know which banks are the safest without each person having to constantly examine the balance sheet themselves. Thus, supply would meet demand in the form of independent agencies which would rate the banks. The banks would then generally try to get the highest ratings from the agencies as it would mean more business. Again, I'm imagining a system where there really is free choice, free of govt coercion. Over time, overall risk would continue to decrease but never hit 0 (which is impossible of course). I can't imagine rich bankers existing in such a scenario as margins would be cut to the bone as in any competitive industry. And the market would be forced to serve the needs of the customers. I tend to think this would only happen though if competitive currencies were allowed. I think a monopoly on the currency will always lead to a bad banking system. And I can't imagine the govt ever letting go of the currency.
The point is this: If Austrian economists claim an economy with free money and interest rates will create a self-regulating market that will avoid periodic crises, they must explain: * those conditions were pretty much met in 1870-1914 * there was no central bank * there was the gold standard * interest rates were free And yet there were 11 recessions in that period. So what is the explanation for that? Why did we have crisis when the Austrians have clearly stated there would not be?
Also, the period that you allude to was the period after the National Bank Act which was the pre-cursor to Central Banking. http://en.wikipedia.org/wiki/National_Bank_Act
No they don't they just have to explain why the current system is a travesty of justice. Which is very easy to do. Theft on a massive scale and extremely irresponsible.
Anyone can say the current system is a travesty, but this is not the point of creating an economic system. They have made specific claims about how the economy works. The economy doesn't seem to work in the way they explained. They need to explain why.
- Fractional Reserve Banking had long existed in America even prior to the period in question. - European Bankers instigated the Civil War, money was borrowed to finance the war (despite the issuance of Greenbacks) so that America as a whole was indebted to the banking system. - The National Banking Act (1863) gave European banks the monopoly they craved, enabling them to print money and thus control the money supply, which was steadily and deliberately contracted over time: 1866: 1.8 billion in circulation (50.46 per capita); 1867: 1.3 billion; 1876: 0.6 billion; 1886: 0.4 billion (6.67 per capita). This caused a financial panic, governments and its people were to weak to fight the bankers who ended up achieving their long-held aim: to establish a Central Bank in the United States (1913). Abraham Lincoln wasn't assassinated for nothing; he opposed the bankers who in turn had him assassinated. He introduced the Greenback which the bankers steadily withdrew from circulation. - The Gold Standard: The banks also craved a Gold Standard because it allowed them to control the amount of gold in the system. Gold was scarce. Silver was not. Silver was eventually demonetised. The money-changers are a blight on society and have been since time immemorial.
We would probably have to study the history of the House of Rosthchids, their involvement in the Napoleonic wars and internantional high finance, the branches they created and their positions in the financial system http://en.wikipedia.org/wiki/Rothschild_family#The_Napoleonic_Wars When Mayer Amschel Rothschild said "Give me control of a nation's money and I care not who makes the laws" i would suggest that also includes economic laws ....
From my limited study of Austrian school I gather that boom and bust is a natural forces of a market, free or otherwise. There will always be ups and downs regardless of gold standard or not. It has been asserted that the gold standard too is a manipulated standard. The governments may influence the height of gold's purchasing power either by credit expansion, even if it is kept within the limits drawn by considerations of preserving the redeemability of the money-substitutes, or indirectly by furthering measures which induce people to restrict the size of their cash holdings. This is true. It cannot be denied that the rise in commodity prices which occurred between 1896 and 1914 was to a great extent provoked by such government policies. But the main thing is that the gold standard keeps all such endeavors toward lowering money's purchasing power within narrow limits. The inflationists are fighting the gold standard precisely [p. 475] because they consider these limits a serious obstacle to the realization of their plans. http://mises.org/humanaction/chap17sec19.asp
Bank runs cause good banks and bad banks alike to go under. That's simply the nature of a "run" on a bank - everyone rushes to pull their money out, usually at a faster rate than the bank can call in the funds it has loaned out, and as soon as they deplete their on-hand reserves they have to shut the teller window. From that point, their reputation is mud, regardless of whether they have more overall assets than liabilities. If you look at the 1907 Panic, there were heaps of banks that went under for no other reason than people were all afraid of banks (generally) going under and who therefore tried to pull all their cash out which in turn made the banks more likely to go under. See: http://en.wikipedia.org/wiki/Diamond-Dybvig_model
(Hit Thanks rather than Quote). People stashed all their money under the mattress they'd have 100% reserves and wouldn't need a bank in the first place.
"Natural forces" does not explain anything. Specifically there needs to be an identification of the causes of boom and bust. Quite simply, the Austrians believe the causes are as I noted, easy credit, a money supply that can be created out of thin air and distorted interest rates. This creates malinvestment and inefficient allocation of resources, leading to imbalances and hence a boom bust cycle. Yet in the 1870-1914 example where many of the features the Austrians desire was already in place, booms and busts still happened on a regular basis. Clearly the explanation is inadequate to why we have booms and busts. But two things put forward are: 1) The Europeans conspired to destabilise the US economy to get them to make a Central Bank 2) Gold standards are imperfect but are still better than a fiat system in regulating market imbalances And the first argument is a conspiracy theory: but it is unclear to me who would actually be creating currency in a free system if not for financial institutions like banks. The problem with the second argument is if you look at the frequency of recessions and amount of contraction that occurred in economic activity in each recession during the gold standard, it does not show itself any better than the economic booms and busts after the true gold standard was abandoned.
The Rothschilds were in the 1800s, and still are, major players in the gold market .... From humble beginnings as a rare coin trader, Mayer quickly built a private merchant banking empire which was the choice of not only the German Prince William, but also the financier of choice of the major powers of Europe. The Rothschild name became synonymous with merchant banking quality and safety. The financial acumen of Mayer and his five sons became legendary. The acumen and the accumulated wealth of Mayer has been continually passed down to the next male generation of Rothschilds, without dilution. Their market worth has never been audited or accounted for, following from Mayer's clever accounting practices and the keeping secret books and subterranean vaults which were never the privy of auditor, legal counsel or state taxmen. Their mastery in financing both economic growth and war in Europe with both gold and fiat currencies undoubtedly continues unabated into the 20th century, though romantic auto-biographical accounts might lead you to believe that "that was history." Their financial hand has been in virtually every major European event, including financing the Duke of Wellington defeat of Napoleon at Waterloo, to financial aid to Prince Metternich of Prussia. The Rothschilds were the first to build the railways of Europe. Studying the Rothschild family acumen for stock markets, gold trade, and financing of nations provides an insight into how 'Smart Money' survives. Today, their historical ingenuity and financial acumen is undoubtedly at work building new wealth regardless of a bear or bull stock, bond, or gold market. They undoubtedly revolve in circles that include the LBMA, and possibly every important central bank board of directors, including the IMF. While even by conservative accounting, they are undoubtedly the wealthiest family in the world, though you will never see them listed in Fortune magazine. Through the involvement of N.M. Rothschild and Sons Ltd. in the LBMA in London, I believe they benefit from virtually every transaction in financial trading, whether treasuries or gold bullion, negotiating gold lease terms for central banks and mining companies, or simply purchasing their own share of gold and gold real estate. One could even imagine that they are involved in the trading of oil for gold and dollars (as per ANOTHER's hypothesis), given their family's interests in Royal Dutch Shell, the world's largest oil company. As Count Corti in 1926, we shall examine the "reported" evidence of their past and current influence in world financial events. more at http://www.gwb.com.au/gwb/news/banking/rothchild.html
Remember, economics is not an exact science, its just a theory... I think the facts speak for themselves: The Gilded Age: 18651900 The rapid economic development following the Civil War laid the groundwork for the modern U.S. industrial economy. By 1890, the USA leaped ahead of Britain for first place in manufacturing output.[57] The Gilded Age saw the greatest period of economic growth in American history. After the short-lived panic of 1873, the economy recovered with the advent of hard money policies and industrialization. From 1869 to 1879, the US economy grew at a rate of 6.8% for real GDP and 4.5% for real GDP per capita, despite the panic of 1873.[62] The economy repeated this period of growth in the 1880s, in which the wealth of the nation grew at an annual rate of 3.8%, while the GDP was also doubled. Austrian Economist and scholar Murray Rothbard stated that for the 1880s: Gross domestic product almost doubled from the decade before, a far larger percentage jump decade-on-decade than any time since. Capital investment also increased tremondously during the 1880s, increasing nearly 500%, while capital formation doubled during the decade. Rothbard states that: This massive 500-percent decade-on-decade increase has never since been even closely rivaled. It stands in particular contrast to the virtual stagnation witnessed by the 1970s.[65]
Even with a gold standard you could get too indebted couldnt you governements and population alike, which can cause recessions. Its just that with today's money government gets indebted and can steal money through inflation and pay it off, and in a gold standard if they owe 1 million ounces today they still owe that much tommorow plus a bit of interest not calculated in $/pounds etc that could reevaluated at any point in time. At one point i think in '30s the governemnt banned gold and cofiscated at rate of $22 and about a year passed and they allowed gold again to be used as money but now it was $35 an ounce(the dollar values I'm not 100 % sure of but approx should be correct). In other words population lost nearly half of their saving so government can make up their shortfall in revenue that they need to pay their bills. Kind of like carbon tax or for that matter any new tax that gets introduced
