Wednesday, October 26, 2022

Is the Free Market Really "Survival of the Fittest?"

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The free market?

2 MIN READ - Among the countless progressive clichés the Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff has heard over the years…

“The rich don’t pay their fair share”

"CEO's, business owners, and landlords don't do any work"

“Lower prices for consumers is just a race to the bottom”

“All of history the rich get richer while the poor get poorer”

…two of the most amusing are the depiction of the free enterprise system as “the law of the jungle” and “survival of the fittest.”

Every American has seen the productive achievements of the free market system, even when handtied, mangled and disfigured by literally millions of distortive regulations between the federal and state governments.

And anyone who has seen one nature documentary about insect wars or animals in the jungle can fathom there is no resemblance to the free marketplace.

The late economist Murray Rothbard reminds us how daft those are who equate the market with the jungle.

From his book “Power and Market”:

“To apply the principle of the ‘survival of the fittest’ to both the jungle and the market is to ignore the basic question: Fitness for what?"

"The ‘fit’ in the jungle are those most adept at the exercise of brute force. The ‘fit’ on the market are those most adept in the service of society. The jungle is a brutish place where some seize from others and all live at the starvation level; the market is a peaceful and productive place where all serve themselves and others at the same time and live at infinitely higher levels of consumption...”

“…The free market, in fact, is precisely the diametric opposite of the ‘jungle’ society. The jungle is characterized by the war of all against all. One man gains only at the expense of another, by seizure of the latter's property. With all on a subsistence level, there is a true struggle for survival, with the stronger force crushing the weaker. In the free market, on the other hand, one man gains only through serving another… …It is precisely through the peaceful co-operation of the market that all men gain through the development of the division of labor and capital investment...”

“…In the jungle, some gain only at the expense of others. On the market, everyone gains. It is the market—the contractual society—that wrests order out of chaos, that subdues nature and eradicates the jungle, that permits the ‘weak’ to live productively, or out of gifts from production, in a regal style compared to the life of the ‘strong’ in the jungle.”

-“Back to the Jungle?” (1970)

Correspondent's comment: In the jungle, the weak truly perish—either by starvation or being brutally killed and eaten. 

In the free market the weak drive automobiles, live in climate controlled abodes, surf the Internet on smartphones, shop at Target and Walmart, enjoy closets full of clothes and cosmetics, eat at restaurants, and even fly from coast to coast in a matter of hours—all while locked in constant struggle with obesity.


ps. Over one million federal regulatory restrictions and over five million across the states:

"These estimates are only for state-level restrictions, which are an added layer on top of the words and regulatory restrictions in the CFR [US Code of Federal Regulations]. As of 2019, the CFR contained nearly 103 million words and 1.08 million regulatory restrictions. Researchers are only beginning to understand the causes and effects of the federal regulatory system’s massive size and dramatic growth over the past four decades."

Sunday, October 23, 2022

San Francisco Rent Control: 60,000+ Units Vacant For a City of 850,000

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2 MIN READ - The latest San Francisco self-inflicted absurdity from the Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff.

More bizarre consequences of San Francisco's 43 year-old rent control laws: a reported 60,000+ residential units sit vacant in a city of 850,000 while people struggle to find a place to live.

Story at...

Landlords and investors pay through the nose for their rental properties in the City by the Bay. In a freer market when rents move against them - as they have with an exodus of residents during the pandemic - they still lease out their properties at lower rates because they know they can always raise rents back to profitable levels when the market improves. And during the slump "lower rent" is still better than zero rent.

But not with rent control.

If the landlord leases his unit at a depressed rate now, rent control laws lock in his tenant who then refuses to move out for decades (I know, I'm one of them as are nearly all my neighbors), the landlord only being allowed tiny annual rent increases approved by the rent control board.

Over the last 18 years those increases have averaged 1.1% per year while the market rent on my apartment has more than doubled, even including the recent downturn.

So when rents turn south landlords take their vacant units off the market, waiting for conditions to improve. You don't see tens of thousands of apartments deliberately held vacant in non-rent controlled cities like Dallas, Nashville, or Kansas City.

The economically illiterate local politician in the video, described on the city government website as "the first Democratic Socialist elected to the SF Board of Supervisors in over 40 years," tells landlords they are asking too much and need to lower their rents. 

Thanks to the rent control laws that's exactly what they aren't going to do. 

Once a tenant moves in paying depressed rents the landlord is stuck with that rate for all eternity even as he watches rents skyrocket all around him a few years later.

And to "solve" the problem voters are being asked to pass Proposition M next month which will tax any rental property that lies vacant for more than 182 days at $2,500 to $5,000 per year, with the penalty rising every year to a maximum of $20,000 annually.

Perhaps they should consider dropping rent control and allowing housing construction for once?

ps. The Economics Correspondent has written about the many wacky consequences of San Francisco's rent control law in more detail at...

Saturday, October 22, 2022

Free vs Regulated Banking: The Panic of 1893 Puts One Banker Conspiracy Theory to Rest

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3 MIN READ - A brief critique of a single banking conspiracy theory from the Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff.

President Benjamin Harrison: Authorized the issuance of paper
U.S. "Treasury Notes," died of natural causes in retirement

Two days ago the Economics Correspondent posted the story of the U.S. Panic of 1893, possibly the worst banking crisis in American history after the Great Depression.

Original article at:

The sordid details involve the remonetization of silver at an absurdly overvalued rate against the then gold dollar, authorized by Congress and signed by President Benjamin Harrison in 1890.

But the Panic of 1893’s story also lampoons one of what are many, many conspiracy theories floating around the subject of money and banking in general of which the Economics Correspondent has heard more than his share.

Although a tiny handful of such conspiracy theories are occasionally rooted in truth—such as the famous Jekyll Island, Georgia duck hunting trip story of 1910—most are not.

One of the less legitimate conspiracy stories claims to uncover the assassinations of American presidents by evil, shadowy bankers who demand the exclusive right to print the nation’s money and back it up with political violence.

A linchpin piece of the theory’s evidence is the assassinations of Abraham Lincoln and John F. Kennedy, the only two presidents to authorize the federal government to print its own paper money instead of relying on private commercial banks or the privately owned, but state-privileged, Federal Reserve System.

A kernel of truth in the “evidence” is that Abraham Lincoln did authorize the printing of substantial quantities of government “greenback” notes during the Civil War, something the Economics Correspondent wrote about in a recent entry on the Civil War-era National Banking System.

John F. Kennedy also authorized a limited quantity of “silver certificate” Treasury notes to facilitate the eventual transition to a purely Federal Reserve currency regime. 

Both paid for crossing the bankster star chamber with their lives, or so the story goes.

But aside from the fact that private, decentralized, deregulated banks have historically done a much better job of producing money than governments, one huge problem already exists in the story of the Panic of 1893: namely that President Benjamin Harrison signed the Sherman Silver Purchase Act of 1890 authorizing the Treasury to print vast quantities of notes to serve as circulating money.

For this supposed disobedience Harrison was not assassinated nor was there any attempt on his life.

Other presidents have also authorized the printing of federal paper currency: Chester Arthur and Franklin Roosevelt.

Furthermore, so-called “silver certificates” go back to the Bland-Allison Act of 1878, and such federal government paper currency was repeatedly issued under the presidencies of Rutherford B. Hayes, Grover Cleveland, William McKinley, Theodore Roosevelt, Calvin Coolidge, Herbert Hoover, and Dwight D. Eisenhower.

For numismatists and currency enthusiasts see links below article for images of federal note issuances from 1878, the 1890 Sherman Silver Purchase Act, 1899, 1908, 1923, 1928, 1934, and 1953.

So of the ten presidents outside Lincoln and Kennedy who authorized or oversaw the federal printing of public money, only one was assassinated (McKinley) and amateurish failed attempts were made on the lives of two (Theodore and Franklin Roosevelt). 

That means seven of ten were wholly “allowed” to finish their terms and their natural lives with one dying in office (FDR)—a record hardly consistent with an all-powerful conspiracy of globalist bankers pulling the planet’s strings of political power and eliminating any president who impeded on their currency monopoly.

The Economics Correspondent's verdict: international bankster cartel acquitted.

Links to images of 1878, 1890 Sherman Silver Purchase Act, 1899, 1908, 1923, 1928, 1934, and 1953 U.S. Treasury silver certificate banknotes. See main article for context:


1890 Sherman Silver Purchase Act "Treasury notes"







Thursday, October 20, 2022

Free vs Regulated Banking: The U.S. National Banking System and the Panic of 1893

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7 MIN READ - The Cautious Optimism Correspondent for Economic Affairs (and Other Egghead Stuff) explains how a heap of government regulations and a botched return to a silver standard induced the Panic and Depression of 1893, arguably the second worst economic downturn in U.S. history — or what Americans dubbed “The Great Depression” for a generation before the arrival of the 1930's.

Contemporary portrayal of the Panic of 1893
Although the National Banking System (NBS) of 1863-1914 produced multiple large and incipient banking panics throughout its tenure, one NBS-era crisis stands head and shoulders above the rest.

The Panic of 1893 and resulting depression were so disruptive that Americans called it “The Great Depression” for nearly 40 years. It was only when the 1929 stock market crash morphed into the more famous calamity that the 1930’s disaster inherited that title.

The Panic of 1893’s severity is no coincidence as it was caused by a confluence of regulatory factors that outmatched all financial crises before it: the simultaneous merging of three destabilizing legal regimes that came together to create the mother of all depressions in American history to-date.

First, as we’ve already reviewed in previous chapters, there were the two ever-present problems of state unit banking laws which forbade or severely restricted branch banking, and federal regulations from the Civil War-era National Banking Acts that plagued the industry for a half century until the establishment of the Federal Reserve System in 1914.

These two problems were enough to precipitate plenty of crises on their own (1873, 1880, 1884, 1907) and links to more details on unit banking laws can be found at:

And the National Banking System at:

However during the early 1890’s Congress and President Benjamin Harrison added a third layer of regulatory dysfunction atop the rest: the remonetization of silver at an absurdly overvalued rate.


Countries that attempted to define their currencies simultaneously as weights of both gold and silver had struggled for centuries to avoid the unwanted effects of Gresham’s Law, the disappearance of one metal from circulation when its value vis-à-vis the other metal falls below the fixed ratios defined by governments.

The Coinage Act of 1792 defined the U.S. dollar as approximately 1/20th of an ounce of gold and approximately 15 times the weight in silver—a 15-to-1 ratio which was nearly identical to the going market ratio between the two metals at the time.

Over the next few decades prodigious output from Latin American mines boosted world silver supplies, lowering the metal’s market value against the more scarce gold. With the U.S. 15-to-1 ratio still in effect, any American would have been a fool to pay for goods and services with undervalued gold dollars which began to disappear from circulation—either being hoarded or shipped overseas where they fetched a more honest price.

In 1834 Congress recognized the need to adjust the ratios and the silver dollar was revalued at 16 times the weight of a gold dollar.

Silver continued to fall steadily in world markets until the California Gold Rush expanded world gold supplies, restablizing the ratio around 16-to-1 again.

But in the 1870’s silver took a global nosedive against gold. The industrialized nations of Europe began to adopt the less complicated monometallic gold standard—Britain having been first going de facto gold in 1717 (also the result of Gresham’s Law) enacted de jure in 1821. The German Empire joined in 1873, followed by the Latin Monetary Union of France, Switzerland, Italy, and Belgium, then Scandinavia and the Netherlands in 1875, with the U.S. joining last in 1879. 

In less than a decade global demand for silver plummeted due to demonetization and its world market value fell to 32-to-1 against gold. It would have fallen even further had China, India, and several Spanish colonies not remained on a silver standard.

America’s own decision to join the international gold standard was controversial from the start, and under it a mild deflation set in with prices falling about 0.5% a year (1879-1900).

By the 1880’s two major political camps were agitating for a return to inflation: western silver miners and debtors who were largely farmers. The former wanted a greater demand for their product and the latter wanted debts that were easier to pay back with less valuable dollars in the future. Together they rallied around their slogan to return the country to "free silver at 16-to-1.”


In the 1880’s the Republican Party was generally pro-silver and pro-inflation while the Democratic Party tended to support the gold standard.

(Their roles completely reversed in the 1896 presidential election between pro-silver populist Democrat William Jennings Bryan and pro-gold Republican William McKinley)

True to partisan form, Republican President Benjamin Harrison signed the Sherman Silver Purchase Act in 1890 which mandated the United States government become the largest silver purchaser in the world; buying up roughly the entire output of the U.S. silver mining industry.

To purchase so much silver the federal government—not a central bank—would print new paper money, unceremoniously dubbed “Treasury Notes” that in turn were redeemable upon demand in either silver or gold (more on that mistake in a moment).

The new government paper notes created the inflation that miners and silver-movement farmers had asked for, but that wasn’t all.

It's important to stress that there’s nothing inherently wrong with returning to silver and bimetallism. But what went horribly wrong in 1893 was Congress making the reckless error of granting an absurdly overvalued silver currency to its constituents in exchange for votes.

In 1890 the world market value of silver vis-à-vis gold was still roughly 32-to-1, reflecting low global demand. Given its low value, the resources required to mine new silver cost more than the value of the silver produced, making it a moneylosing enterprise. So Congress threw an additional political bone to silver miners by valuing the silver dollar at the old 1834 ratio of 16-to-1, a 100% premium over its world market price.

So once again, and more than ever, only a fool would ever pay for anything with gold dollars or ever redeem Treasury Notes in silver. 

Gresham’s Law quickly took hold and gold rapidly disappeared from U.S. circulation with silver dominating the economy.

But most critical of all was the impact of this overvaluation on foreign investment. America’s economic and industrial upsurge of the 1870’s and 1880’s was financed largely by European capital. But the new, unbalanced bimetallic monetary regime produced a major capital flight somewhat like the exodus of foreign investment that affected 1997 Asian Financial Crisis countries that devalued their own currencies.

For a British bank converting gold pounds to dollars to invest in an American enterprise wasn’t thrilled at the prospect of being repaid with the same number of dollars (plus interest) denoted in silver which only fetched half the price in Europe—all because U.S. Congress was foolish enough to overvalue the silver dollar by 100%.

Foreign speculators could also make easy profits by capitalizing on the government-created arbitrage. A European investor could sell one gold ounce for the market price of 32 silver ounces overseas, ship the 32 silver ounces to the United States where, by legal tender decree it could be traded for two gold ounces, and double his money (minus shipping costs). 

The foreseeable consequence of these incentives was a domestic outflow of gold with overvalued silver pouring into the country (aka. Gresham’s Law).

Thus the rapid withdrawal of foreign investment, compounded by unit banking and NBS regulations, produced one of the worst banking panics in American history in 1893. 

600 banks failed in 1893 alone with hundreds more avoiding failure only by suspending redemption of cash into metallic coin. About 75 bank clearinghouses also suspended operations and 16,000 businesses failed that same year.

Unemployment reached 18.4% in 1894 (Lebergott) before improving in 1895, but spiked again when another incipient panic struck in 1896 pushing joblessness back up to 14.5% in 1897. 

It wasn’t until 1900 that the country finally achieved full employment of 5.0%, the same year that the Gold Standard Act of 1900 was passed, placing the dollar on the unambiguous monometallic gold standard.

And as remains the case to this day without exception, there was no financial crisis in Canada, although Canada did contract the effects of recession from its larger neighbor.


President Grover Cleveland, the last Democratic president to ever embrace anything resembling laissez-faire capitalism, was inaugurated only a few months before the Panic of 1893 struck. He (correctly) blamed the Sherman Silver Purchase Act for the crisis. Congress successfully repealed the law in 1893 and the issuance of new Treasury Notes was halted.

However Cleveland faced another crisis in 1895 due to a lingering byproduct of the 1890 Act: the near bankruptcy of the U.S. Treasury itself.

With silver so absurdly overvalued, no one in their right mind would redeem the Treasury’s previously issued notes in silver and always demanded gold. Hence by 1895 the Treasury’s own gold stocks were running low and noteholders the world over were losing confidence in the United States government’s ability to keep the pledge written on its own money.

Banker J.P. Morgan was aware of the Treasury’s plight and organized a cabal of bankers to offer a gold loan to the government. However, Cleveland believed in separation of economy and state and wanted to solve the problem without private help.

But the writing was on the wall. The Treasury’s mistake was too grand and without help the government was headed towards bankruptcy.

Morgan secretly took a train to Washington D.C. and waited for the president’s inevitable call from a friend’s house—away from the prying eyes of journalists. Several days passed before the White House, in desperate straits with the Treasury literally one day away from running out of gold, called on Morgan and reluctantly agreed to the $65 million gold loan.

The gold drain stopped as confidence resumed, and the Treasury bought the time it needed to replenish its gold stocks with tax payments. 

But among all the rightful complaints today about the federal government bailing out private banks, few Americans are aware that J.P. Morgan and the private banking industry bailed out the federal government in 1895.

Sunday, October 16, 2022

Thursday, October 13, 2022

Free vs Regulated Banking: The U.S. National Banking System of 1863-1914 (Part 2 of 2)

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7 MIN READ - The Cautious Optimism Correspondent for Economic Affairs (and other Egghead Stuff) concludes his analysis of the dysfunctional U.S. National Banking System of 1863-1914, discussing more backwards regulations that bred multiple financial crises—ultimately leading to the Congressional horse trading that replaced the NBS with the Federal Reserve System.

As we discussed in the last chapter, America’s National Banking System (NBS: 1863-1914) regulations prohibited federally chartered banks from issuing paper currency unless backed 111% by U.S. government bonds. 

As the Civil War national debt was paid down, banks found it impossible to acquire the bonds needed to issue cash and farmers demanded gold coin withdrawal instead to pay harvest season workers, precipitating several credit crunches and general monetary panics.

Combined with state-level unit banking laws that had already weakened American banks going back to the nation’s founding, National Banking System regulations precipitated severe banking panics in 1873, 1893, and 1907 with incipient panics in 1884, 1890, and 1896.

To go back and read Part 1 of the National Banking System, visit the Economics Correspondent’s preceding article at:


But there was another destabilizing provision within the National Banking Acts that not only made financial crises worse and more frequent, but also entrenched the system politically making it harder to reform.

In the pre-NBS era of 1837-1862, state-chartered banks issued banknotes and deposits backed by their own gold and silver coin reserves and (problematically) state government bonds.

Under the NBS, federally chartered banks were no longer required to hold as large a gold or silver reserve. For reasons we’ll discuss in a moment, the National Banking Acts divided banks up into three tiers and loosened the reserve requirements for them all.

The three tiers, from smallest to largest, were:

Country banks: Thousands of tiny banks, usually unit banks with no branches, that were scattered throughout rural areas.

Reserve city banks: Larger banks in regional metro centers like Chicago, St. Louis, or Atlanta.

Central reserve city banks: A handful of large Wall Street banks.

Whereas prior to the NBS *all* banks’ reserves were comprised of gold and silver coin, the new system significantly expanded the list of what qualified as a reserve holding.

1) Country banks’ legal reserves were changed to smaller gold and silver holdings, U.S. Treasury greenbacks—which were essentially unbacked paper money—and most notably deposit accounts at reserve city banks.

2) Reserve city banks’ reserves were reduced under similar terms, the only difference being the amount of gold, silver, and greenbacks they were required to hold was even smaller than the country banks, and a larger share of their reserves were deposit accounts at central reserve city (ie. Wall Street) banks.

3) Finally central reserve city (ie. Wall Street) banks were also allowed to reduce their gold and silver holdings and back their obligations with greenbacks.

The NBS multi-tier system designed the entire industry to inflate more credit and paper money upon the same base of gold and silver reserves, replacing hard money with paper greenbacks and IOU’s from banks in larger cities.

This was the whole idea, after all, as the Union was seeking inflation and bank credit to finance the war effort.

And state banks that didn't wish to join the NBS were taxed out of existence in 1864 with a 10% federal tax on every private banknote issued.

Which brings us at last to the destabilizing element.

When the system was stressed by farmers withdrawing gold coin from their country banks, the highly inflated system collapsed on itself, exacerbating the crisis.

When farmers asked their country banks for gold coin to pay their hired hands, not only did the country banks lose reserves, contract credit and raise interest rates, they also had to tell their customers (in technical parlance)...

“Actually we don’t have enough gold physically in the vaults. We have to go get it from our reserve city bank in St. Louis.”

As thousands of regional country banks descended upon reserve banks like St. Louis for gold coin, the reserve city banks responded:

“Actually we don’t have enough gold physically in our vaults. We have to go get it from our central reserve city bank in New York.”

And as reserve city banks from across the country descended upon a handful of Wall Street central reserve city banks for gold coin, Wall Street banks responded:

“Actually we don’t have enough gold physically in our vaults. We can’t pay.” 

And there was no higher tier for Wall Street banks to petition for help. They were the last level of reserve bank.

Thus in each panic what started as withdrawals from small rural banks quickly grew into systemwide bank runs which produced widespread failures and nationwide suspension of gold payments.


After the enormous Panic of 1907 America’s financial system was so shaken that Congress acknowledged the need for reform.

The National Monetary Commission was established in 1908 to study alternative systems, headed by powerful Senate Finance Committee Chairman Nelson W. Aldrich (R-RI).

Two lobbying camps quickly assembled and attempted to exert their influence on the commission.

The first was a bona fide “free banking” lobby that wished to replicate the Canadian banking system. 

Canada was already known for experiencing no banking panics in the near-century since its first commercial bank, the Bank of Montreal, had opened its doors while the United States had already endured twelve panics since the days of George Washington.

To both the free banking lobby and Canadian bankers themselves, the key to Canada’s soundness was no secret. 

Canada had no central bank to stir up asset bubbles and crises as the First Bank of the United States and Second Bank of the United States had done during the Panics of 1792, 1797, and 1819. 

Canada also had no government bondholding mandate that prevented banks from issuing currency as the National Banking System had required since 1863.

And Canada never had any unit banking laws that made branching illegal. From the very beginning Canada’s banks branched nationwide and were allowed to hold diversified loans from all corners and industries of the country. 

As Charles Calomiris of Columbia University points out, Canadian bankers at the turn of the century were literally laughing at the stupidity of the American system.

But the free banking lobby was opposed by a more powerful alliance of special interests who comprised the “central banking” lobby. 

State governments, small unit banks, Wall Street banks, and Senator Aldrich himself didn’t want to see the restrictions lifted since they had vested interests in seeing the NBS system preserved.

State governments and their unit banks didn’t want to see unit banking ended because they feared competition—both intrastate and interstate—would water down their monopoly profits, profits that state legislatures often reaped as shareholders in unit banks themselves.

Wall Street banks didn’t want to see the multi-tiered National Banking System ended. Even though it precipitated bank runs, crises, and suspensions, it was also good business as banks from all over the country brought more of their reserves to New York City.

And Nelson Aldrich himself was seduced by the panacea of central banking. Aldrich had toured Europe on a National Monetary Commission assignment to study other banking systems and was highly impressed; not only by what he viewed as the sophisticated operations of institutions like the Bank of England and Bank of France, but also by the elevated culture, architecture, and artistic taste of the European capitals in contrast to the provincial backwardness of the young United States.


Hence Aldrich returned to America with his mind already made up. The National Monetary Commission would “search” for a solution that it had already chosen, the “inquiry” simply being a staged façade to recommend its own predetermined conclusion.

In the end, instead of allowing banks to branch unrestricted throughout their states and throughout the country, and instead of ending the system of centralization of gold reserves at large regional reserve banks, the lousy National Banking System was mostly preserved with all its flaws, only now with a central bank—the Federal Reserve System—placed atop it.

For as the Commission stated repeatedly, the American banking industry was hampered by an “inelastic currency.” Never mind the inelasticity was the direct result of federal regulations that had governed the industry for the previous half century.

The Federal Reserve Act was passed on a near party-line vote—Democrats for, Republicans against—in both houses of Congress and signed into law by President Woodrow Wilson on the evening of December 23, 1913.

Aside from preserving unit banking and most National Banking System provisions there were only a few superficial changes:

-Gold reserves would be held mostly at twelve regional Federal Reserve banks.

-To solve the ”inelastic currency” problem the Federal Reserve would become monopoly issuer of paper currency, replacing private banks of issue.

-Most importantly for the special interests, if systemic liquidity stresses occurred the regional Federal Reserve banks would act as “lender of last resort” and make short term cash loans to solvent private banks on good collateral.

And as history has recorded, the establishment of the Federal Reserve hardly quelled banking panics. 

The greatest financial crisis in American history, the Great Depression Panics of 1930, 1931, and 1933, occurred under the watch of the Fed just sixteen years after its founding. Only with the introduction of federal deposit insurance in 1934 did the U.S. system finally find some semblance of stability.

Incidentally, Canada didn’t have deposit insurance either as its far less regulated and far more stable system had never experienced a crisis and therefore never needed it.

However Canada finally adopted deposit insurance in 1967.

Tuesday, October 11, 2022

Ben Bernanke's Nobel Prize Divides Economists and Bankers

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Former Federal Reserve Chair Ben Bernanke

Having written previously on the Federal Reserve's creation of America's giant stock market and real estate bubbles during the late 1920's, the Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff is partial to this French banker's criticism of former Fed Chair Ben Bernanke's now-Nobel Prize winning work:

"In Bernanke's Nobel Prize winning analysis of the Great Depression, what was wholly absent was any analysis of the role of the credit bubble in the late 1920s in causing the bust. No wonder then that he was negligent in allowing the credit bubble preceding the 2008 GFC."

-Albert Edwards, Societe Generale

ps. The loudest opposition to the Fed's 1927 policy of massive credit expansion came from Bank of France Governor Emile Moreau and Deputy Governor Charles Rist.

pps. For those interested in how the Federal Reserve inflated the massive credit bubbles of the late 1920's which led to the 1929 stock market crash and the Great Depression, go to...

Friday, October 7, 2022

Free vs Regulated Banking: The U.S. National Banking System of 1863-1914 (Part 1 of 2)

Click here to read the original Cautious Optimism Facebook post with comments

7 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff continues his series on American banking history with an analysis of the pivotal National Banking System of 1863-1914, a regime of federal codes and rules that inflicted sufficient pain and agony on the American financial system for the country to acquiesce to the adoption of the Federal Reserve System.

As everyone knows the U.S. Civil War broke out in 1861. After 25 years of federal non-intervention in banking the Union government found itself pitted against the Confederacy.

And just like the War of 1812, Washington DC found itself with an expensive conflict to pay for but no central bank to finance it.

Thus the Lincoln administration decided to fund the war effort in three ways: a new income tax (later struck down by the Supreme Court), the issuance of U.S. Treasury “greenback” paper notes, and an expansion of credit under the establishment of the National Banking System (NBS).

Greenbacks are an easy concept to grasp. In 1862 the Treasury simply began printing its own money. Green ink was used because black and white photography had newly arrived and the Treasury chose color ink to hinder counterfeiting.

Greenbacks were not redeemable in gold or silver, but the Treasury made a vague promise to do so at some unspecified date after war’s end, a promise that the federal government ultimately kept beginning in 1879. They were also declared legal tender, but several western states defied the mandate so greenbacks depreciated against gold and silver-backed money wherever the edict was challenged.


The National Banking System was somewhat more complicated, and its creation would drag the United States into a half century of larger, increasingly frequent, and more destructive banking panics.

Prior to the Civil War all private banks, with the exceptions of the Bank of the United States and Second Bank of the United States, were chartered by state governments and required to comply with state regulations to open and remain in business.

In 1863 the federal government decided to create a parallel system for chartering national banks that would abide by federal rules.

Nationally chartered banks would issue uniform currency and each would be legally compelled to accept notes from every other.

But insidiously, and in a manner eerily similar to the previous “free banking” era of 1837-1862, national banks were only allowed to issue paper currency if backed 111% by U.S. government bonds.

Once again a government—this time the federal government—forced banks to lend generously to its treasury for the right to issue paper currency.

Surveying the National Banking System and all its restrictions, most banks said “no thank you” and remained state chartered.

So in 1864 Congress added more incentives to join the National System by slapping every state-chartered bank with a 10% tax against the face value of all banknotes issued, effectively taxing them out of existence. State banks were forced to either join the National Banking System (which most did) or give up their lucrative note-issuing operations and consolidate into banks of deposit only.

And the Economics Correspondent would like to remind readers that liberal economists and writers at America’s major newspapers refer to the last half of the 19th century’s banking industry as “deregulated” and “laissez-faire.”


As of 1864 America found itself with a radically different banking structure. All paper money was now issued exclusively by nationally chartered banks which were forced to hold one dollar in U.S. government bonds for every 90 cents of private currency they issued (111% backing).

Clearly this was a revenue measure to finance the Civil War and it worked for a while, performing far better than the Confederacy’s direct issuance of government “grayback” currency. While prices roughly doubled in the Union during the course of the war, the South was wrecked by hyperinflation.

However major problems began to appear after the war, problems that generated larger and more frequent financial crises than any time before.

In the years after the war successive Republican administrations frequently ran fiscal budget surpluses and (brace yourselves for a shock) steadily paid down the national war debt. 

From 1865 to 1893 the national debt fell from $2.8 billion to $1.5 billion, and as a share of the economy it fell even faster from 33% of GDP to just 10%. 

But the National Banking System regulations didn’t change. Banks were still required to back their currency 111% by U.S. government bonds, bonds that were disappearing as the Treasury retired them one after another.

So even as the U.S. economy boomed during the Gilded Age, the nation’s stock of cash was shrinking. For half a century outdated wartime regulations handtied banks’ ability to issue cash in a rapidly growing economy, and the scarcity of banknotes increasingly translated into outright crisis when demand for cash rose—namely during harvest seasons.

Hence we reach the primary, although not exclusive, NBS mechanism that triggered major financial crises in 1873, 1893, and 1907 with incipient crises in 1884, 1890, and 1896.

When farmers paid hired hands to help with harvests, they needed cash (farm laborers didn’t have checking accounts in those days) and went to their local banks to convert some of their deposit balances to banknotes.

But in the late 1800’s many banks were legally forced to refuse their customers with  “I’m sorry, there aren’t enough federal bonds available for me to issue notes. I’m not allowed to give you any cash.”

Given that farmers had to pay their hired hands with some tangible hand-to-hand instrument, they demanded the only other option available to them and withdrew gold coin.

Thus, when gold was withdrawn from the banking system in large amounts, banks lost reserves and were forced to contract credit. They abruptly stopped lending, they called in loans, and interest rates surged.

Further illustrating this mechanism, the Economics Correspondent recently read a 1965 biography on the life of J.P. Morgan describing the famous Panic of 1907. Of the Panic the author wrote:

“It was the usual problem: the shortage of cash in the marketplace with the Western harvests in progress and much cash needed.”

The author didn’t explain in detail why there were frequent shortages of cash, but now CO Nation knows: the bondholding requirement mandated by the National Banking System which in turn provided the primary regulatory trigger that destabilized the financial system.

All it took was a slightly disruptive event to occur anywhere in the world and, combined with NBS-inspired gold withdrawals, the U.S. found itself in full blown panic—again and again.

It's no coincidence that of the six panics recorded during the 1862-1913 National Banking Era—1873, 1884, 1890, 1893, 1896, 1907—and possibly a seventh smaller one, the Northern Securities Crisis of 1901—all but one occurred in the autumn months.


The Economics Correspondent has provided a visual aid (attached) that illustrates the regulatory kneecapping of American banks’ ability to issue paper currency.

In the chart we see the quantity of banknotes circulating—not the entire money supply, just the cash component—in both the regulated United States and much more deregulated Canada.

The American line is smooth and steadily declining for the first dozen years or so. The jagged, sawtooth Canadian line steadily rises for three decades.

USA: Already we see one major problem in the U.S. graph. Currency is falling by nearly 50% during the most rapid period of economic growth in the nation’s history, a completely upside-down correlation that was forced upon the country by the Treasury bond deposit mandates of the National Banking System.

By the early 1890’s Congress recognized there was a problem and issued more bonds, but it wasn’t enough as banknotes outstanding only increased by 100% from 1880 to 1910 whereas nominal GDP grew by 223% in the same period.

CANADA: The Canadian supply of banknotes rises and falls in a sawtooth pattern reflecting seasonal demands for cash. Banknotes in circulation expands reliably every fall and declines by winter as paid hands spend their cash, merchants deposit the cash back into the banking system, and notes are converted back into deposit balances.

Unlike the United States, the deregulated Canadian banks were allowed to accommodate the market’s seasonal demands for cash. American cash balances were held rigid and inflexible by National Banking System rules.

Hence during the Gilded Age while the United States suffered from at least six banking panics, three of them enormous, Canada experienced none.

The American graph reflects the so-called "inelastic currency" that modern-day economists accuse the pre-Fed banking system of, and hail the newly formed Federal Reserve System for fixing. They're correct to call the pre-Fed currency inelastic, but what they nearly always fail to mention is the inelasticity was imposed completely by federal banking regulations that the Federal Reserve was not bound to.

A final note: As monetary economist George Selgin has pointed out, if you show the Canadian graph to today’s typical liberal or Keynesian economist they will likely applaud “Look at banks issuing cash in accordance with the seasonal demands of the economy!”

Followed by: “What omniscient central banker was managing currency so effectively all those years?”

They might be shocked at the answer. "None."

Canada didn’t have a central bank until 1935. In fact, with a few small exceptions Canada imposed virtually no regulations on its banks at all. 

From 1845 to 1935 Canada possessed the industrialized world’s most deregulated banking system, one that would horrify today’s Keynesians who would howl "laissez-faire” were anyone to suggest resurrecting it today.

But the “omniscient central banker” of 19th century Canada was in fact the free market: every private bank satisfying the cash demands of its customers, unimpeded by the perverse government regulations that afflicted the United States.

Stay tuned for Part 2 where we’ll discuss even more crisis-breeding provisions of the National Banking System and the decision to seek resolution with the Federal Reserve. 

Tuesday, October 4, 2022

A Brief History of the British Pound's Decline

Click here to read the original Cautious Optimism Facebook post with comments

One liter Coca-Cola bottles on special for £1

4 MIN READ - The Cautious Optimism Correspondent for Economic Affairs (and Other Egghead Stuff) has been perusing through news stories on UK inflation and keeps seeing photos of shoppers at British grocery stores.

What stands out is all the giant promotional “sale” signs hawking customers to buy “£1” specials, not unlike $1 specials in the USA.

In the attached photo you can buy what looks like a one liter bottle of Coca-Cola for £1.

Which brings forefront to the Correspondent’s mind: Does anyone know the origins of the British pound?

Here's a hint. Some Brits still refer to it as “pound sterling” or “sterling.”

Yes the “pound,” when it was introduced in the 8th century, was literally one pound of sterling silver, although the weight unit used back then was the troy pound (349.9 grams or about 12.3 ounces today).

Since there was no central bank or printing press in medieval times, monarchs who needed price inflation to renege on their debts more commonly juggled currency standards of weight. In 1158 King Henry II reduced the “pound” from 349.9 grams to 323.7 grams, inflating the number of “pounds” that could be produced from the same quantity of silver and raising his pound-denominated tax revenues.

Edward III further reduced the pound sterling to 258.9 grams in 1351.

And on and on it went. Whenever a monarch got over his head in debt, he either defaulted or the “pound” was adjusted to a lower unit weight of silver, but never higher.

By 1717 Britain was accidentally converted to a gold standard by way of Gresham’s Law, and the pound became equivalent to a little under one-quarter ounce of gold (0.235). Given the world market price of silver at the time that translated to 111 grams of silver, down 68.2% from 349.9 grams during the pound sterling’s introduction.

The pound actually held up quite well through two centuries of the gold standard era. Even in 1931 when the Bank of England suspended the gold-exchange standard, the pound was still just under one-quarter ounce of gold.

But after World War II the British government resumed a series of devaluations, the pound falling to about $2.50 by the end of the Bretton-Woods international monetary standard in 1971.

Given that the US dollar was pegged at $35/oz. at the time, the pound had declined to 7/100ths of an ounce of gold, down from about one-quarter in 1931. In the London market it went for roughly £16/oz. of gold, or the pound buying closer to 6/100ths of an ounce.

But centuries of debasements were nothing compared to post-1971 when the pound floated on a purely fiat standard, subject to whatever inflation British Parliament and the Bank of England saw fit to impose on the public.

Since 1971 the pound sterling has lost another 91.1% of its value, depreciating at a rate far outpacing any of the devaluations that occurred in the preceding twelve centuries.

With all the transitions back and forth between gold, silver, and fiat, the Economics Correspondent estimates the pound sterling has lost about 99.5% of its value since its introduction in medieval times, the proceeds of metallic debasement and the printing press being divided as a free gift to debtors—a long list of British monarchs and parliamentary governments being the largest among them.

And that’s reflected in the current price of silver. Today you have to pay 17.34 pounds to buy one ounce of silver. 

Paying “17.34 pounds of sterling” to own “one ounce of sterling silver” has a bizarre ring to it—which simply reflects how much government inflation has distorted the original definition of the pound sterling.

But wait, we’re not quite done yet. 

The pound’s ability to purchase physical silver has also been boosted over many years by outside factors such as: 

1) The western world’s demonetization of silver during the 1870’s transition to the gold standard which pummeled demand for the metal. Silver's world market value fell by over 50% in just a few short years.

2) Centuries of improvements in silver mining/refining efficiencies, lowering unit production costs and accelerating the growth of silver supplies.

So the Economics Correspondent’s calculation of the pound’s purchasing power over the centuries is too generous, something confirmed by the Bank of England’s own inflation calculator.

Although it only goes back to 1209, the central bank officially estimates the pound has lost not 99.5%, but 99.94% of its value since 1209.

Or what would have cost you £1 in 1209 would cost £1,570 today.

Put in less shocking terms that better translate into many present-day people’s lifetimes, what cost £1 in 1971 would cost £11.29 today.

And going back to the end of the British classical gold standard in 1914, what cost £1 in 1914 would cost £88.94 today, a near one-hundred fold increase in prices in a little over a century.

That decline beats the Fed-debased dollar. What cost $1 in 1914 would cost “only” $28 today.

In contrast to all this inflationary debasement, during the two centuries-long British classical gold standard period what cost £1 in 1710 would cost £1.38 in 1900, nearly 200 years later.

Finally, ditching all these calculations and returning to the simpler analogy using physical silver, the average British consumer can more easily understand the effects of inflation with a simple question.

Q. The pound will buy you a one-liter bottle of Coca-Cola on sale. How many bottles of Coca-Cola do you think you could buy with one troy pound of silver?

ps. UK Labour Party apologists might pin blame for needing what used to be a pound of silver to buy a bottle of Coca-Cola on new conservative Prime Minister Liz Truss’ recent exchange-rate sapping budget proposal. 

Sorry guys, the photo was taken in 2020.