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Source link: http://archive.mises.org/16648/the-old-lady-hasnt-a-clue/

The “Old Lady” Hasn’t a Clue

April 27, 2011 by

A recorded mini lecture and video display purported to explain this mysterious phenomenon (mysterious to the Old Lady of Threadneedle Street, anyway). I knew that I was going to hear either a self-critical explanation or, more likely, some hogwash. Hogwash won, hands down!

FULL ARTICLE by Patrick Barron

{ 28 comments }

P.M.Lawrence April 27, 2011 at 8:37 am

… behind a glass case was a mock-up of a basket of groceries from 1958. The basket included two large, round loaves of unsliced bread, a pound of bacon, a dozen eggs, a pound of butter, and a quart of milk. This basket of groceries cost slightly over twelve shillings — approximately six-tenths of a pound — in 1958. Today a pound costs approximately $1.61, so this rather large basket of wholesome English fare cost around a dollar in 1958!

No. Twelve shillings was precisely six-tenths of a pound, and the 1958 rate of exchange was US$2.80 to the pound, so it cost a little more than US$1.68 in 1958.

… modern day Britons live in wonderfully more prosperous times than their ancestors, who ruled two-fifths of the surface area of the world a hundred years ago.

Considering that about two thirds of the surface area of the world is sea water, owned by nobody, that’s rather more than 100% of the land area. Although I did once hear that when the Common Market (as it then was) considered VAT refund claims for farmland in Sicily, they found that the claims came to rather more than 100% of the total area of Sicily…

Patrick Barron April 27, 2011 at 10:20 am

Ah, a poor choice of words on my part. I was trying to explain what twelve shillings was worth today. The basket of goods cost twelve shillings plus a few pence in 1958, thus the “approximatley” bit. For American readers the point is that the basket of goods cost around a dollar at today’s price level. An English reader informed me that this basket of goods would cost around eleven pounds today!

J. Murray April 27, 2011 at 11:42 am

That’s about $18. If that’s what the entire basket is, I’d put that at around $16 at a Publix or $14 at a Wal-Mart.

Gilbert W. Chapman April 27, 2011 at 9:02 am

Great essay, Mr. Barron ! ! !

Daniel April 27, 2011 at 9:33 am

Greed was invented a ~100 years ago =D

Mike Sproul April 27, 2011 at 11:51 am

The Bank claims that inflation just happens. Barron claims it happens because the quantity of money outruns the quantity of goods. I claim that it happens because the Bank’s issuance of money outruns the Bank’s assets. Barron does a good job of debunking the Bank’s explanation, but he does not even address the backing explanation. We all recognize that the values of stocks, bonds, options, etc. are determined by the assets backing them. Too bad that Barron and others don’t devote a single word to the possibility that the same principle might apply to money.

Jonathan M. F. Catalán April 27, 2011 at 4:23 pm

I claim that it happens because the Bank’s issuance of money outruns the Bank’s assets.

I try not to be rude, but it’s hard when you keep repeating the same story. We don’t take you seriously precisely because of what you claim.

We all recognize that the values of stocks, bonds, options, etc. are determined by the assets backing them.

Value, or money price? Because, if you mean the latter, then I think a lot of people are excluded from the ‘we’ you use.

Mike Sproul April 27, 2011 at 8:34 pm

100 pieces of paper lay claim to assets worth 100 oz. of silver. Each piece of paper will trade in the market for the equivalent of 1 oz. of silver. If things change, so that there are 300 pieces of paper laying claim to assets worth 200 oz., then each piece of paper will be worth 2/3 of an ounce.

Jonathan M. F. Catalán April 28, 2011 at 7:53 pm

Well, apart from a few tweaks here and there, this is the quantity theory of money. It’s not about backing, but the quantity of dollars trading for the quantity of whatever commodity we’re talking about.

Mike Sproul April 29, 2011 at 9:45 am

That’s a lot more than a few tweaks. The backing theory says that the value of currency units is determined by the assets held BY THE ISSUER of the currency. The quantity theory says the value of a currency is determined NOT by the issuer’s assets, but by how many units of goods are produced in the economy as a whole—by how many currency units are chasing how many goods. The quantity theory says MV=Py. Note that the assets of the money issuer do not appear in that equation. The backing theory says (number of currency units)X(value per unit of currency)=(value of assets held as backing by the currency issuer). Note that quantity of goods (y) and velocity of money (V) do not appear in that equation.

The QT implies, for example, that if the area in which some currency were used were to somehow double in extent, the value of the currency would roughly double. The BT says that as long as the issuer’s assets and liabilities were unchanged, there would be no effect on the value of the currency.

panika2008 April 28, 2011 at 5:37 am

“We don’t take you seriously” – and “we” means…?

Dustin S April 27, 2011 at 5:01 pm

I’m stabbing in the dark a bit here, but having read some of your Real Dollar material, I’ll try to address your proposal. The problem with fiat currency as I understand it isn’t what roundabout manner the central bank chooses to manipulate its currency, buying bonds in lieu of simply trucking pallets of greenbacks to the Treasury’s front door (or the electronic equivalent of same). The problem is the imprimatur of legitimacy conferred on those bonds by the “full faith and credit of the United States”, and the capacity for coercive taxation which backs it up. So, yes, these bonds are legitimate assets, inasmuch as one considers taxes on future productivity legitimate. Barron, and others here, simply take as granted that “fiat money” encompasses the pyramiding of paper dollars atop bonds atop future tax revenues.

Perhaps I missed the mark. Let me know.

Mike Sproul April 27, 2011 at 8:28 pm

The real problem with fiat money is that there is no such thing. (Fiat money is understood to be money without backing, which has value only because it is limited in quantity, and people demand it for liquidity purposes.) Fiat money gives a free lunch to its issuer. Rivals would issue their own money to get a piece of that free lunch, and the demand for the original fiat money would fall, thus reducing its value, with no stable solution short of zero. If fiat money were possible, then the issuer’s assets wouldn’t matter to its value, so we should see lots of central banks that hold no assets against their money. In fact, we see no such banks.

Also, given that dollars are backed by bonds, which are backed by taxes, it makes no difference if the Fed simply trucks greenbacks to the Treasury’s door. The dollars would simply be backed by taxes directly, rather than having bonds as an intermediate step.

nate-m April 27, 2011 at 8:45 pm

The real problem with fiat money is that there is no such thing. (Fiat money is understood to be money without backing, which has value only because it is limited in quantity, and people demand it for liquidity purposes.)

Hrm?

Fiat money gives a free lunch to its issuer.

Yeah. That’s why the Fed and our government loves it so much.

Rivals would issue their own money to get a piece of that free lunch, and the demand for the original fiat money would fall, thus reducing its value, with no stable solution short of zero.

No they won’t, because if they do that then you would send armed men to their places of business and homes and take them and throw them into concrete cages. You would seize their assets, destroy their carreers, sell their belongings, take them away from their families, etc etc,

Which is a typical power that governments possess. Which is also exactly what would end up happening with you if you try to compete against the Fed with your own money.

panika2008 April 28, 2011 at 5:42 am

The threat of use of force against tax evaders is what ultimately backs all of “fiat” currencies. So yes, they are backed very well, and it is what I understand Mike Sproul tries to communicate.

Beefcake the Mighty April 28, 2011 at 5:47 am

You mean this threat is what “backs” fiat currency. Why am I not surprised to find you expressing sympathy for Mike Sproul?

panika2008 April 28, 2011 at 5:52 am

Beefcake, no, I mean the threat of/and use of force against tax evaders is what really backs the currencies. There is a lot more that “backs” them, like fx reserves (including gold) that are from time to time mobilized to manipulate (and yes, sometimes even lift) their values.

And now that I think of it, there is no way to escape the backing, just as Mike Sproul says. What tax enforcement essentially amounts to is a very flexible partial backing of the currency by the state’s subjects’ real assets that can and routinely are confiscated.

Beefcake the Mighty April 28, 2011 at 8:49 am

Sorry, this is just wordplay here.

Inquisitor April 28, 2011 at 9:36 am

The fact that it is backed by force is also precisely why it is not, in any way, a value-productive proposition.

panika2008 April 28, 2011 at 11:46 am

Inquisitor, you are obviously wrong. As cruel as it may sound, it’s hard to deny that slave labor was actually quite productive. A slave’s NPV cannot fall below zero, while his produce would generally make the general society more wealthy.

panika2008 April 28, 2011 at 5:39 am

Actually Barron makes a somewhat obfuscated concession to your viewpoint by noting that “this monopoly also immunizes the bank from commercial law by allowing it to suspend specie redemption without turning its assets over to its creditors”, which captures the essence of the problem rather precisely.

Mike Sproul April 28, 2011 at 1:06 pm

Panika:

Exactly right on the concept of tax backing. (No comment on the morality of taxation.) I’d add that suspension of convertibility often serves the useful purpose of preventing bank runs. If a bank should become insolvent, then the bank can either maintain convertibility and face a run, or suspend convertibility and watch its currency fall to the point where it accurately reflects the diminished value of the bank’s assets.

Grammy Moon April 28, 2011 at 3:47 am

First of all, here is the good news: admission to the museum is free…

No it isn’t. You just pay for it through your tax-bill, instead of paying at the door.

Dick Fox April 28, 2011 at 10:39 am

This article repeats an unfounded myth perpetuated by the ultra-libertarians that there is some connection between war and the central bank. There is actually no link between war and the central bank. Wars were going on long before central banks existed. Not only that in the 19th Century the pound sterling remained stable with both a central bank and numerous wars.

Patrick Barron April 28, 2011 at 1:49 pm

I have grown interested in the demise of gold as money and the rise of unlimited war. Yes, wars have been going on since time immemorial, but the trend up through the nineteenth century was for them to become more engagements between competing armies, while the civilians sat on the sidelines, waiting to find out who would be their new king. The sacking and pillaging of cities became less frequent, because the new king wanted the taxes from these newly gained territories. Then all the major powers destroyed gold as money, which allowed them to confiscate more resources. The twentieth century was a bloodbath, with entire cities reduced to rubble, and millions upon millions of civilians killed wantonly. It may be just a correlation, but it is an interesting one, wouldn’t you say?

Mike Sproul April 28, 2011 at 3:34 pm

Inconvertible paper money has been around for centuries, and wars have been financed with paper money for centuries. It financed wars in the days of the American colonies, the American Revolution, the French revolution, the American Civil war, to name a few.

panika2008 April 29, 2011 at 2:22 am

That’s my take too. After all, as Mao said, every political power (including the power to establish monetary regimes) grows out of the barrel of the gun, not the other way round.

panika2008 April 29, 2011 at 2:19 am

The link between the demise of gold money and enhanced pillaging of resources DURING A WAR is rather dubious. After all, a war is a war, you don’t annex countries with financial engineering, but just invade them with machines and sow the land with explosives, intimidating population to subversion.

What I think really happened is a coincidence – a technological “acceleration” caused the wars to be more brutal as it became more important to secure factories, machinery and rolling stock than subject citizens. This acceleration also propelled states to reject gold standard – that was carefully designed to balance human interests – and opt for a system that allows them to better control their populations, that as a whole became less and less important, with the top industrial elites and their capital more and more important.

That’s my theory.

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