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Source link: http://archive.mises.org/13501/the-austrian-history-of-u-s-money-and-banking/

The Austrian History of U.S. Money and Banking

August 6, 2010 by

Economic history is often portrayed as a battle between a government filled with wisdom and benevolence, and a free market guided by “animal spirits.” Rothbard provides the corrective. FULL ARTICLE by Jonathan M. Finegold Catalan

{ 11 comments }

Sean August 6, 2010 at 9:34 am

re: on the origin of the Federal Reserve

Friedman and Schwartz’s thesis seems so utterly naive. Why is psuedo-economics so popular with the kids? It makes NO sense. How can THAT many people be THAT far asleep?

Ohhh Henry August 6, 2010 at 10:32 am

Possibly because the non-Austrian economic theories are in essence fairy tales, it is easy for people to be lulled into believing them. But it shows how dumb people are that they don’t think it through. Even in fairy tales there is always a catch. Hansel and Gretel’s candy house is a trap set by a witch. Pinocchio’s Pleasure Island is also a trap.

Perhaps evolution and humans’ resulting time preference is the key to this vulnerability. A primitive human who discovers a large and tasty meal, such as a recently killed animal or a tree hanging with ripe fruit, might circle around and check for predators which would attack him in the next five minutes. But there is no practical reason to forgo the meal out of concern that there will be no fruit trees available in 20 years in the cave-man’s golden years (so to speak). To give another example, humans seem to crave short-term calories (sugar) at least as much as long-term calories (protein).

So when Keynesians dangle in front of people a fun-filled four years of college (Pleasure Island), followed by a wonderful (gingerbread) house and luxurious car (golden chariot), most are not equipped by evolution to see through the ruse, because a high time preference has been a positive trait throughout most of human history.

Del Lindley August 6, 2010 at 3:04 pm

Our evolutionary conditioning towards a high time preference had to have been helped by our natural savings mechanism—body fat. While these “savings” are negligible in the context of a modern production structure, they must have played a vital role over the long course of human development and history. The greater fat-carrying capacity Og possessed the lower his need would have been for external plain savings and capital goods. If a new feeding opportunity presented itself the potential to build up of body fat reduces the penalty for immediate consumption. Obviously evolution had to balance this advantage with the survival disadvantage of having to carry around too much of this baggage

Ken August 6, 2010 at 11:09 pm

Possibly because the non-Austrian economic theories are in essence fairy tales, it is easy for people to be lulled into believing them. But it shows how dumb people are that they don’t think it through. Even in fairy tales there is always a catch. Hansel and Gretel’s candy house is a trap set by a witch. Pinocchio’s Pleasure Island is also a trap.

The still small voice speaks, and so few listen. If Nock was right, though, one shouldn’t expect more than a few — a remnant — to listen.

Allen Weingarten August 6, 2010 at 12:13 pm

Although Austrian economics is a science, the reality of economic policy is political. Consequently, the public is pandered to on the basis of what sounds appealing, that has little to do with sound reasoning. How then can there be the development of understanding? This can occur on the basis of values where capitalism is shown to be moral, and on the basis of simplified presentations which are commonsensical. I do not deny the importance of developing and applying science. However, when it comes to political success, it is primarily a matter of reaching the public, in terms of their fundamental values, and their common sense.

Joel August 6, 2010 at 1:49 pm

“Why is psuedo-economics so popular with the kids?”

See Hayek’s “The Pretense of Knowledge”. It has to do with economists wanting to be just like physicists.
http://mises.org/daily/3229

“…their propensity to imitate as closely as possible the procedures of the brilliantly successful physical sciences — an attempt which in our field may lead to outright error. It is an approach which has come to be described as the “scientistic” attitude — an attitude which, as I defined it some thirty years ago, “is decidedly unscientific in the true sense of the word, since it involves a mechanical and uncritical application of habits of thought to fields different from those in which they have been formed.”"

Dennis August 6, 2010 at 2:12 pm

Excellent quote, Joel.

The lure of positivism and its supposed quantitative accuracy has led mainstream economics down a dead end in so far as its ability to understand and explain real world phenomena is concerned. Hopefully, the causal-realist approach championed so effectively by Menger and Mises’s praxeology will eventually rise to prominence.

The_Orlonater August 6, 2010 at 1:45 pm

The last section of the first part of the book on the National Banking Era is rather bad. The only reason Rothbard mentioned was a quote that the pyramiding of reserves was somehow “inflationary” and that caused all of the panics, even though many of those panics were vastly different from each other. Secondly, he could have touched on the the legal restrictions of note issue by banks thanks to the bond collateral requirements of the National Banking Acts. The section isn’t bad, but I just don’t think he examined the National Banking Era that crucially. By the way, there has been other research on this topic by people like Charles Calomiris, Gary Gorton, Elmus Wicker, and I know George Selgin wrote an excellent paper on the beginning of this period as to why State bank notes were taxed out of existence. The point I’m trying to make is that, if you want to read about this period(The National Banking Era), there isn’t really any good book on the matter that I’ve come across. You have to look through journals.

Stephen Grossman August 6, 2010 at 10:09 pm

>Rothbard alleges that there was a union between big-business and government to push through the legislation needed to cartelize the banking industry.

This is an effect of altruism-justified collectivism, not the cause of statist money and banking. See Rand’s “Egalitarianism And Inflation” in The Ayn Rand Letter. And “Gold And Economic Freedom” by the pre-socialist Alan Greenspan(!) in Ayn Rand’s _Capitalism_. Rothbard’s extensive concern with interacting networks of political and economic elites is Marxist nonsense which should be edited out of his otherwise excellent book. Rothbard rarely and dismissively discusses the intellectual/moral justification of statist money and banking. He mistakenly thinks that the economic/political motives of elites is a cause. Statist networks among elites are the effect of the altruism-justified collectivism. The motive to use the state to steal wealth in a sophisticated manner is impotent without the intellectual/moral justification of altruism-justified collectivism. Ideas, not motives, rule man. And man, with his free will, chooses ideas. And the basic ideas are philosophical.

Your comparison between Rothbard and Friedman/Schwartz is illuminating and further evidence that Friedman’s _Free To Choose_ hides his basic socialism of money and banking. And further evidence of the anti-scientific absurdity of positivism’s evasion of causes for immediate effects.

Allen Weingarten August 7, 2010 at 4:19 am

Stephan, you write that “The motive to use the state to steal wealth in a sophisticated manner is impotent without the intellectual/moral justification of altruism-justified collectivism. Ideas, not motives, rule man.” I concur that what is primary in explaining economic policy are the beliefs of the public (which unfortunately are collectivist). However, this does not refute the influence of special interests of businesses and politicians. There is no conflict between ideas and motives, as they work hand in glove. What you have addressed is the difference between the aims of the public (based on their collectivist views) and the aims of businesses & government (based on mercenary considerations).

Your focus on the centrality of ideas is important, but does not require any denial of the role of special interests.

Stephen Grossman August 7, 2010 at 7:57 am

Yes, there is a hierarchy of causes in man’s life. Ideas guide _action_ in all the parts of life, including economics and politics. Ayn Rand extensively discusses the power of “pull” in collectivist cultures ,showing, in, eg, _Atlas Shrugged_, in _Capitalism_, and in “Brothers, You Asked For It” (“Ayn Rand Letter,” on Watergate), the networks of their corruption, similar to Rothbard’s descriptions.

Public ideas start with intellectuals. The corruption of political/economic networks is small relative to the intellectual corruption I experienced as a philosophy student.

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