Under a true gold standard, moreover, the Fed would have little ability to act as a lender of last resort to the banking and financial system. The kind of liquidity injections it made to prevent the financial system from collapsing in the autumn of 2008 would become impossible because it could provide additional credit only if it somehow came into possession of additional gold. Given the fragility of banks and financial markets, this would seem a recipe for disaster. Its proponents paint the gold standard as a guarantee of financial stability; in practice, it would be precisely the opposite.
Briefly, the classical conception of the “lender of last resort,” spelled out by the English journalist and banking historian Walter Bagehot (1871) during the classical international gold standard era, is an institution that lends reserves to illiquid (but solvent) commercial banks in a period of peak demand for currency or bank reserves, in the extreme during a period of bank runs. Its aims are to prevent regrettable bank insolvencies due to hasty asset liquidations, and to satisfy the public’s demand for currency or reserve money so that the runs cease and the market calms. This seems to be the notion that Eichengreen has in mind.
Assuming that the Federal Reserve exists and is the agency to which the role is assigned, Professor Eichengreen takes a true gold standard to imply that “it could provide additional credit only if it somehow came into possession of additional gold.” That is, the gold standard is not “true” unless it imposes a 100 percent gold marginal reserve requirement on central bank liabilities. This is a highly idiosyncratic understanding of a true gold standard. Peel’s Act of 1844 did impose a 100 percent marginal gold reserve requirement on expansion on the Bank of England’s note-issues, but the Bank could still provide additional credit by expanding its deposit liabilities. Indeed the Bank is generally understood to have acted as a lender of last resort during the Baring Crisis in 1890, while Peel’s Act was still in place.
A 100 percent gold marginal reserve requirement on all central bank liabilities would constrain last-resort lending. But imposing such a rule on the central bank is not required to have a true gold standard, and indeed having a central bank is not even required. A gold standard, again, is generically defined by gold serving as the medium of redemption and medium of account, not by any reserve requirement imposed on a central bank. The United States was on the classical gold standard without a central bank from 1879 to 1914. During that period, private clearinghouse associations acted as lenders of last resort to their member banks (Timberlake 1984). So a central bank is not even necessary to have a lender of last resort.
Eichengreen (2011) argues that “confidence problems are intrinsic to fractional-reserve banking and why an economy with a modern banking system needs a lender of last resort.” But as noted in Section 6 above, confidence problems are minimal if no legal restrictions prevent banks from adequately capitalizing and diversifying themselves.
Will America start prospering again — as it has not prospered for over a decade? Likely yes. But not without a fight. Now that Jim DeMint has raided Steve Moore from the Wall Street Journal that card might be Heritage Foundation vs. the White House. Could be big.
John Holdren, now Obama’s White House science advisor, 40 years ago termed America “overdeveloped.” Holdren co-authored a 1993 book, Human Ecology: Problems and Solutions, with Anne and Paul Ehrlich reportedly saying that, “A massive campaign must be launched to restore a high-quality environment in North America and to de-develop the United States….” (Emphasis supplied.)
As a soldier of France, no one knew better than Professor Jacques Rueff, the famous French central banker, that World War I had brought to an end the preeminence of the classical European states system and its monetary regime, the classical gold standard. World War I had decimated the flower of European youth; it had destroyed the European continent’s industrial primacy. No less ominously, the historic monetary standard of commercial civilization had collapsed into the ruins occasioned by the Great War. The international gold standard -- the gyroscope of the Industrial Revolution, the common currency of the world trading system, the guarantor of more than one-hundred years of a stable monetary system, the balance wheel of unprecedented economic growth -- all this was brushed aside by the belligerents.
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
A Rueffian Synthesis
LBMC’s integrated approach to economic forecasting can fairly be called “the Rueffian synthesis.” It would be more modest to call it “a” Rueffian synthesis, since that would allow for other Rueffians who might conceivably quibble about our application of Rueff’s ideas. But it appears that, apart from LBMC, there are no other Rueffians in the world – even in Rueff’s native France – using Rueff’s ideas as a basis for economic prediction.
"Commercial banking grew out of the desire (inspired by the profit motive) to conserve cash (gold) and by means of credit to provide financial elasticity and growth in the commercial process of exchange. That is, all producers (sellers) who desired true money (gold), instead of the short-term secured credit bills – promissory notes of their customers (the buyers) – could, through the mediation of goldsmiths-turned-bankers and bill-merchants-turned-bankers, obtain real money by discounting their bills of exchange for gold with the emerging commercial bankers of early modern Europe. The combined institutions of stable money and secured credit enabled commercial civilization to make of the entire world the only closed economy."
Argentina is floundering. Brazil is struggling. Colombia is growing. Colombia is now the third largest economy in Latin America, according to Capital Economics. The Wall Street Journal’s Darcy Crowe and Taos Turner wrote recently: “After Argentina’s economy dwarfed Colombia’s for decades, economists say the trend reversed in January as the...
One of the themes for the Akan gold counterweights is the electric mudfish.
Image courtesy of AfricanMasks.info
Spark From The Deep by William Turkel has this to say about the fish upon which this counterweight is modeled:
The electric catfish also played an important role in the west African kingdom of Benin, which...