One of the problems with central banks acting as a lender of last resort is that of moral hazard. With the cost of bailouts spread out across society and benefits concentrated to a few large firms, the temptation to engage in excessively risky behavior is ever-present. Financial firms have become so used to getting their way from the government that they assume the Fed will bail them out of every difficult spot that comes along. The Federal Reserve’s monetary policy of the past eight years has been one huge bailout, funneling trillions of dollars of easy money to Wall Street, boosting stock prices, and creating bubbles throughout the economy. This loose monetary policy has led to such malinvestment that the economy will definitely fall into a recession or depression once the Fed takes away the punch bowl. Stock markets realize that the economy’s fundamentals are unsound, that firms are reliant on cheap central bank money for their continued performance, so the specter of Federal Reserve rate hikes and monetary policy normalization is leading to panic.
If you hoped that monetary policy would ever return to normal, you’re in for some disappointment. It appears as though central banks are hell-bent on doubling down on their mistakes. The past century has demonstrated time and again (Germany, Yugoslavia, Zimbabwe) the destructiveness of creating money out of thin air. Yet central banks continue with their money printing, going to greater and greater lengths and unveiling new tools and policies to try to stimulate their economies. It’s been so long now since monetary policy was “normal” that we’re into a new normal: permanent easing.
The years during and after the financial crisis saw a consensus of monetary easing among central bankers around the world. The Federal Reserve, the Bank of England, the European Central Bank, and the Bank of Japan all engaged in loosening their monetary policy, creating trillions of dollars worth of new money in an attempt to boost their economies. None of them wanted to be the only one not easing monetary policy, and none of them wanted to the first to return to “tighter” monetary policy. But are we beginning to see this easing consensus breaking down?
Economic activity can be either productive or non-productive. Productive activity is that which satisfies the wants of consumers and increases their well-being. Non-productive activity is that which detracts from consumer wants or lessens their well-being. Consider the example of a grocer who sells fresh food to consumers. His activity is productive in that he is providing a desired good to consumers, allowing them to purchase food that they wish to eat. If someone comes to his store and steals some of that food, that loss is non-productive. If the store owner has to put up security cameras or hire a guard to prevent theft that is also non-productive, as resources that he could have devoted to selling food to consumers instead have to be diverted to defending against theft.
The insidious nature of the war on cash derives not just from the hurdles governments place in the way of those who use cash, but also from the from the aura of suspicion that has begun to pervade private cash transactions. In a normal market economy, businesses would welcome taking cash. After all, what business would willingly turn down customers? But in the war on cash that has developed in the 30 years since money laundering was declared a federal crime, businesses have had to walk a fine line between serving customers and serving the government. And since only one of those two parties has the power to shut down a business and throw business owners and employees into prison, guess whose wishes the business owner is going to follow more often?
On this Throwback Thursday, we’ll run the first part of “A Brief Monetary History of the United States” from Ron Paul’s Monetary Policy Anthology. Subsequent sections of that history will run every Thursday for the next several weeks. If you haven’t downloaded the anthology yet, you ought to do so. The anthology is a compilation of Congressman Paul’s tenure as Chairman of the Subcommittee on Domestic Monetary Policy, including his exchanges with Ben Bernanke, the transcripts of his monetary policy hearings, transcripts of the “Tea Talk” lecture series, and additional commentary from prominent economists from the Austrian School such as Bob Murphy, Tom Woods, and Jesus Huerta de Soto.
The installments in this monetary history series can be found here:
“Those who cannot remember the past are condemned to repeat it.” – George Santayana
To avoid repeating the mistakes of the past and to provide for a more prosperous future, the lessons of history must be both explored and understood. This is no less true for something used in everyday life: money. The present monetary regime did not appear overnight. Rather, it is the result of centuries of concerted action, much of which has been forgotten by history. The following pages are intended to provide the reader with a brief yet relatively comprehensive introduction to the history of money and monetary policy in the United States from the late-18th century to the present. While not an all-inclusive look at American monetary history, this section covers the main historical events that have led to the current U.S. monetary system. If America seeks to achieve a sound and stable economy, it is necessary to examine the history of money in the United States and its evolution over time.
It’s not breaking news, but the cost of producing pennies and nickels is still higher than their face value. This has been an issue for the past decade, with no progress being made. If the US Mint decides to change the composition of the penny and nickel, operators of vending machines and other coin-operated machines would have to spend hundreds of millions of dollars retrofitting their machines, while the Mint would save a sum that’s only in the tens of millions of dollars. A far better solution would be just to stop using pennies and nickels altogether. Since the Coinage Act of 1792, the United States monetary system has used mils, but no coin was ever minted to provide for that 1/10 of a cent of value. The half cent was eliminated in the mid-19th century. Now it’s the turn of the penny and the nickel. The Federal Reserve’s inflationary monetary policy has so eroded the value of US coinage that those small coins aren’t even worth producing anymore. It’s only a matter of time before they will disappear from circulation anyway. One of the best commentaries on the government’s continuing fiasco with the penny and nickel is from Congressman Ron Paul’s statement at a Congressional hearing on coin production. It’s well worth a read.