The banks, they seem to have thought, could extend their credits to whatever sum might be wanted, without incurring any other expense besides that of a few reams of paper. They complained of the contracted views and dastardly spirit of the directors of those banks.... -- Adam Smith
"Quantitative Easing" is a fancy new euphemism for an old practice: bailouts demanded by merchants of bankers.
Adam Smith, in An Inquiry into the Nature and Causes of the Wealth of Nations, was an early critic of the practice. From Book II, Chapter II:
It is now more than five-and-twenty years since the paper money issued by the different banking companies of Scotland was fully equal, or rather was somewhat more than fully equal, to what the circulation of the country could easily absorb and employ. Those companies, therefore, had so long ago given all the assistance to the traders and other undertakers of Scotland which it is possible for banks and bankers, consistently with their own interest, to give. They had even done somewhat more. They had overtraded a little, and had brought upon themselves that loss, or at least that diminution of profit, which in this particular business never fails to attend the smallest degree of overtrading. Those traders and other undertakers, having got so much assistance from banks and bankers, wished to get still more. The banks, they seem to have thought, could extend their credits to whatever sum might be wanted, without incurring any other expense besides that of a few reams of paper. They complained of the contracted views and dastardly spirit of the directors of those banks, which did not, they said, extend their credits in proportion to the extension of the trade of the country; meaning, no doubt, by the extension of that trade the extension of their own projects beyond what they could carry on, either with their own capital, or with what they had credit to borrow of private people in the usual way of bond or mortgage. The banks, they seem to have thought, were in honour bound to supply the deficiency, and to provide them with all the capital which they wanted to trade with. The banks, however, were of a different opinion, and upon their refusing to extend their credits, some of those traders had recourse to an expedient which, for a time, served their purpose, though at a much greater expense, yet as effectually as the utmost extension of bank credits could have done. This expedient was no other than the well-known shift of drawing and redrawing; the shift to which unfortunate traders have sometimes recourse when they are upon the brink of bankruptcy.
... In the last 100 years, there has been unbridled recourse to fiat currency. This column draws heavily on a benchmark address by Lewis E. Lehrman on “The Federal Reserve and the Dollar” at the 31st Annual Monetary Conference at the Cato Institute, Washington DC.,US (November 14, 2013).
Lehrman quotes Keynes in “Indian Currency and Finance”, to say that whether a central bank holds its reserves in gold or in foreign exchange “is a matter of comparative indifference …India, in her Gold-Exchange Standard… far from being anomalous, is in the forefront of monetary progress …(heading towards) “the ideal currency of the future”. What glory for India!
... It is difficult to interpret [Jeb] Hensarling’s declaration to hold hearings on “the entirety of their hundred year history and what America has looked like since adopting a fiat currency” as anything but an intention to bring the Commission up for a vote. Hensarling promises to process vast amounts of information. The constraints on a committee hearing, and on a committee staff, cannot do such a huge topic justice. As Rep. Kevin Brady put it in his own remarks at Cato, a “brutally bipartisan” Commission — with Hensarling a Commissioner — is called for.
Publisher's Note: Originally released in June/July of 1991, this detailed report discusses Jacques Rueff's economic theories and applies them to modern economic events.
By John D. Mueller
The Problem of Say's Law
For several decades, the theories of John Maynard Keynes replaced the classical theory which had dominated policy-making for more than a century until the Great Depression. This brought things full circle, because the classical economists had succeeded the Mercantilists. And the Mercantilists were proto-Keynesian in their contention that, left to itself, the economy has a tendency toward “under-consumption,” which, they argued, must be combated by public spending, combined with measures to increase the money supply.
"Double-entry bookkeeping developed in 14th century Italy, whence the precise, simplified ledger and balance sheet accounting basis for the development of a 'fractional' reserve banking system emerged. In such a banking system a new kind of 'abstract' fiduciary money developed – subject to transfer by checks. They came to be called book entry bank deposits, bank advances, credit money, or checking accounts, sight liabilities, or demand deposits. The banks held bullion or coin reserves against this new credit money. The precious metal reserves were equal to a prudent 'fraction' of the total bank note and deposit money circulation, hence the phrase 'fractional reserve banking system'."
The Federal Reserve tries to explain what it is doing, but it can’t quite explain it because the rules aren’t really clear. So Wall Street tries to anticipate what the Fed means in the absence of real rules. The Wall Street Journal’s Victoria McGrane has noted: “The Federal Reserve has...
We are pleased to announce the publication of– Money, Markets, and Government: The Next 30 Years.
The articles in Money, Markets, and Government were first presented at the Cato Institute’s 30th Annual Monetary Conference, held on November 15, 2012. The 2008-09 financial crisis and Great Recession have vastly increased the power...