Tuesday, September 1, 2009
"It is our purpose, in this and its succeeding articles, to discuss the subject of Free Banking. ... Whilst we will attempt no formal defense of the banking laws of Louisiana now in operation, we will, as fairly as possible, meet all the arguments urged in favor of the New York system, and endeavor to prove it faulty in its nature, and ill-adapted to the wants of our condition. ... Free Banking is a taking phrase, and well adapted to the popular ear, but its meaning is highly technical; and when the words are used, that system only is referred to which has for the basis and guarantee of its circulation, municipal, state or national stocks. [Note: by stocks the author means debts] ... Without such debt no stock would exist; and in its proper place we will discuss the propriety of making state or municipal credits the basis of our medium of exchange. ... We will make our inquiry still easier if we go at some length into the nature of banks in general, and from the history and experience of the past, eliminate such general truths as may guide us in the coming discussions. By the term banks, we of course allude to those institutions which receive deposits, discount notes, and issue paper money. Important as all their functions are, the last named is far the most potent", 610.
"Far more extensive are the powers of banks of issue. Their operations touch every branch of industry, and either for weal or woe, most sensibly affect the great producing and laboring classes of the community. ... Trite as the truth is, we must in this discussion unceasingly remember that paper money is nothing but a loan from the public to the bank which issues it. They are mere substitutes for money, and bear no higher relation to the public wealth than individual promissory notes. ... But such institutions can no more create money than the mill which converts rags into paper. ... Another fruitful source of popular error here stares us in the face. It is the supposed influence of banks on credit. The earnest advocates of these institutions generally commence by an exaggerated statement of the benefits resulting to individuals and nations from the greatest possible extension of credit. Assuming that the banking system is the one more likely to effect this object, they forthwith declare it is the credit system, and denounce any attempt to reform its abuses as a war upon credit itself. ... For it is not true that individuals or nations are benefitted by the greatest possible extension of credit. Credit may be pushed to an excess which generates extravagance and wild speculation, results that bear with them, as we of the South know too well, a train of the most disastrous consequences. It is not true, as is often urged by the friends of this system, that the great prosperity of the United States has been owing to the principle of credit", original italics, 611.
"The favorite topics of our fathers were not the advantages of getting credit, but of industry, economy, temperance and freedom from debt. ... There are two parties to all transactions of credit. If one gives credit, the other gets into debt. Now debt, absolutely viewed, is a bad thing, and it is only by comparing the results of the operation as viewed under both of these aspects, that we can decide whether it will prove beneficial or otherwise. ... But where credit is articifically stimulated by law--when companies are incorporated for the express purpose of making loans, and virtually supplied by the state with unlimited amounts of fictitious capital, to be employed in this way, it is apparent that the principle will and must be pushed to ruinous excess. ... The first essential of sound banking is, that its paper shall be instantly, and on demand, convertible into the money it professes to represent. ... Already we hear of schemes advocating inconvertible and irredeemable paper money, based on the landed property of the state. It is true that they are mere theories, and ever may they remain such. ... Legislatures have in vain enacted penal clauses to prevent mismanagement of banks. In vain have they attempted a supervisory control over them, through boards of currency and examining committees. All such expedients, good enough as far as they go, utterly fail to guarantee to us a sound paper currency. The ingenuity of man is superior to the restraints of law; and where interest impels, legal hindrances are mere cob-webs in the path of the adroit. 'To drive a coach and four through a bill in chancery' is not easier than to drive one through a banking law. Instant convertibility to specie is therefore vitally important in securing a sound paper currency", 612.
"It is clear that gold and silver, whilst they have in themselves an inherent value, are not desired by the tradesman, the laborer, and the merchant for such innate worth. ... First, like corn, tobacco, and cotton, they are worth precisely the cost and just return for their labor and capital in the price of the ore, they would at once abandon its production, until a decrease of supply enabled them to obtain a fair remuneration for their toil and outlay. ... 'On the whole, no commodities are so little exposed to causes of variation. They are more constant than almost any other things in their cost of production; and from their durability, their total quantity in existence is at all times so great in proportion to the annual supply, that the effect of value, evne of a change in the cost of production, is not sudden. ... In order that the value of the currency may be secured from being altered by design, and may be as little as possible liable to fluctuations from accident, the articles least liable of all known commodities to vary in their value, the precious metals, have been made in all civilized countries the standard of value for the circulating medium; and no paper currency ought to exist, of which the value cannot be made to conform the theirs'," 614, internal quote from Mill's Political Economy, 1848.
What is this wisdom's source? It deals with current issues. DeBow's Review, "Free Banking", Vol. 2, No. 6 (June, 1852). 157 years ago?! Yes. No new monetary theory in 157 years? Mill anticipated my 1980 "stock-flow ratio" concept by 132 years! Believers in regulation, repent. Come forward, tear your clothes. Don ashes. End your idolatry. That you may be forgiven. "You shall not made for yourself an idol in the form of anything in heaven above or on the earth beneath or in the waters below. You shall not bow down to them or worship them; for I the LORD your God, am a jealous God, punishing the children for the sin of the fathers to the third and fourth generation of those who hate me", Exodus 20: 4-5 (NIV). Not to paper money? Is paper money an idol? Not to the: Fed, Treasury, FDIC, OCC, Goldman, etc. Well only to Goldman. California would like its "stocks" to be locally used as money. I wonder what DeBow thinks of: Freddie, Fannie, Sallie and such. "Artificially stimulated by law"? Like Zimbabwe Ben's suppressing interest rates? "Unlimited amount of fictitious capital", like TARP funds? Timmy Boy Geithner should read this. He might abandon his Quixotic quest to "reform banking regulation". See also my 1 March 2008 post: http://skepticaltexascpa.blogspot.com/2008/03/get-gold.html.