If since the USA was founded they had required banks to sell 10 year bonds to get the cash to use for 10 year loans (banks can't use demand deposits, must have matched duration bonds and loans, so no fractional reserve banking or "bank made money") and never went off a gold/silver coin money (no paper money or central bank) then I think that there would not have been anywhere near the number of inflations/booms/busts/deflations/financial-crises between then and now. If regular banks and central banks can increase or decrease the money supply, then the money supply is not stable, and you get booms and busts and crisis after crisis.
This is sort of my version of the Austrian Business Cycle Theory. I think it is easier to think about in terms of central bank made money and private bank made money not being stable, so nothing is. Fractional reserve banking is the core cause of financial crises and the reason people think they need a central bank to act as a lender of last resort. If you did not have fractional reserve banking, then you would not need a central bank and could have a much more stable money supply and financial system.
For more than 2,000 years an ounce of gold has been about the value of a nice suit, shoes, and belt. This is amazing stability. The median life expectancy for defunct paper currencies is only 15 years. Even in the big stable countries paper money loses more than 90% of its value in under 100 years. In the 1950s a silver dime was about the value of a gallon of gas and 1/10th of an ounce of silver is still around the value of a gallon of gas but the US dollar does not buy anywhere near as much gas it could 60 years ago. Paper money does not come close to the stability of gold and silver. Paper money and fractional reserve banking together is a recipe for financial disaster.
Keynesians think that if we just make more money we could avoid the pain of the bust. However, this can lead to hyperinflation and far more pain. I think it is much better to understand the cause for the boom and bust and how to avoid these.
This post comes from a conversation with Tom that deserves its own post and thread.
Monday, February 3, 2014
There is a good article in Forbes about the Phillips curve fallacy that most economists seem to operate under.
Phillips studied wages under a gold standard and found that when labor was in tight supply that wages went up. This is just saying that when supply is tight the price goes up. This is basic economics and common sense.
But most modern economists take this study and think that if they print money that employment will go up. This study does not show that at all.