Wednesday, December 28, 2022

The Fed Makes Progress on Monetary Inflation, Faces a New Problem

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4 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff provides an exclusive analysis of where the Fed currently stands in its battle against the inflation of its own creation.

(The Economics Correspondent makes no claims to be inside Fed Chair Jerome Powell’s head and the opinions here are strictly his own, but he believes future Fed policy moves will confirm his commentary)

So the Federal Open Market Committee just announced another rate hike in December, this time up fifty basis points to an effective Fed Funds rate of 4.25%-4.50%.

Government reports indicate inflation is moderating, albeit still too high. Year-over-year numbers still hover around seven percent but the more recent month-to-month numbers have been coming down.

So why is the Fed still hiking and increasing the risks of creating a recession?

In the Economics Correspondent’s opinion, the Fed has good reason to still be worried about inflation and, after falling asleep at the wheel and pumping way too much money into the economy even after the Covid-reopening recovery was underway, is now exercising the best of all the bad options it has boxed itself into.

As you can see from the attached St. Louis Federal Reserve charts (below), contrary to popular belief, the last six months of rapid rate hikes *have* been effective at restraining the rate of monetary growth—even reducing it.

So if money is contracting, why aren’t prices falling?

Because of what the Fed has been worried about for the last six months: the prospects of engrained inflation expectations taking hold.

There are signs that the expectation of future inflation is driving consumers and businesses to move their purchases forward and spend their money faster.

It's not guaranteed yet, but the indicators are currently moving in the wrong direction.

The rate of inflation is a function not only of money and real goods and services, but also of monetary velocity or the rate at which dollars are spent.

And the more Americans fear that inflation might be here to stay the faster they spend their money, raising velocity and creating persistent inflation—even if the Fed gets money supply growth under control.

As you can see from the M2 velocity chart, velocity collapsed during the 2020 lockdowns, stayed relatively flat for the next two years, and has insidiously started creeping up the last two quarters.

In fact in the last two quarters velocity has risen from 1.14 to 1.19, an increase of 4.39%. 

If that rate of increase were to persist compounded, velocity alone would produce 9% annual inflation ***even if the Fed held the money supply flat***.

More economic growth—or more goods and services being chased by the same number of dollars—could help offset higher velocity, but an economy the size of the United States simply isn’t going to grow real GDP by 9% a year or even 7% to bring inflation down to the Fed’s 2% target.

And even worse, more and more economists are forecasting recession—ie. negative growth—in 2023 so 7% growth in goods and services won’t be coming to the rescue.

This is the quandary that the Fed has created for itself—with Americans paying the price for their mistake.

The Fed keeping rates too low, and the growth of money too high, both for too long—particularly when the reasons for aggressive loosening had long passed and the economy was back in post-lockdown growth mode—created the highest inflation in forty years. Now Fed officials are worried that inflation is metastasizing into a new, more insidious phase that was also last observed in the 1970’s and early 1980’s.

And that’s why the Fed continues to keep the brakes slammed hard despite an actual decrease in the money supply over the last six months.

The Economics Correspondent believes a recession is now inevitable. Therefore so long as we're destined to eat a slump regardless the least the Fed can do is flatten monetary velocity to make the recession worth the price: by killing inflation for good. The last thing we need is the Fed to not only create a recession, but fail to kill inflation which was the reason it tolerated creating a recession in the first place.

Addendum: On top of all these problems, higher rates are forcing the Fed to pay more and more to banks to stop them from lending the $3 trillion in reserves they currently hold—reserves the Fed rapidly created during the unprecedented Covid-era quantitative easing.

Higher interest payments on reserves wouldn’t be so much a problem if the Fed had not ballooned its balance sheet from $3.5 trillion in late 2019 to $8.5 trillion by mid-2022. 

But it did.

So now the FOMC is scrambling to reduce its balance sheet (ie. drain the banks of excess reserves) so that, although it still has to pay banks a higher rate, it can do so on a smaller reserve base.

Unfortunately they pushed the monetary base up so high that it’s going to take more time to shrink it back down, and at the current $3 trillion level of system reserves the Fed is now paying an annualized rate of $130+ billion in risk-free, zero maturity interest to America’s banks (4.40% x $3 trillion, see chart).

But don’t blame J.P. Morgan and Bank of America. The fault lies with the one actor and one actor only which uses its Congressionally-bestowed monopoly power to manipulate system reserves, asset prices, and market conditions in general: the Fed.

Thursday, December 22, 2022

Tuesday, December 20, 2022

Free vs Regulated Banking: Canada’s Free Banking Era – Did Canadian Free Banking Have Any Regulations? (Part 2)

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6 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff discusses the Canadian government's early experiments with banking regulation in the latter decades of its lightly regulated "free banking" era.

Odd-denomination private banknote, the unintended
consequence of early Canadian banknote regulations


In Part 1 of Canadian banking regulation we reviewed the handful of provincial rules imposed on colonial banks before Confederation.

When Canada became a self-governed Commonwealth nation in 1867 the new Canadian Parliament took a longer look at the question of banking legislation.

One of Parliament’s seminal regulatory initiatives was the Banking Act of 1871 which imposed federal rules in lieu of provincial ones and also established Parliament would revisit the subject of banking regulation once every decade.

(If only U.S. Congress would wait for a decade before drumming up new bank regulations!)

However the first federal regulations weren’t much different from their predecessors – once again mostly precluding fraud and conflict of interest. 

New federal laws required banks to open their finances to shareholders and the federal government every six months, and banks agreed to comply with surprise government inspector audits (ironically, no surprise audits occurred for decades).

However one new edict in the 1871 Act authorized Canadian Parliament to intervene in the note-issuing business.

Unsurprisingly the results were negative.

First, low denomination private banknotes – which had been banned even in Scotland in 1765 – were not only prohibited in 1871, but Parliament took the further step of getting into the low denomination banknote printing business for itself. 

Private banks were prohibited from issuing notes under four dollars which became the exclusive monopoly domain of the Department of Finance.

The government’s newly dubbed “Dominion notes” had to be backed 20% by gold, but they still served as a major revenue source for Parliament. The federal government could hold, say, $1 million in gold but print $5 million in Dominion notes to pay for its expenses.

The edict led to bizarre albeit not crisis-inducing outcomes. 

Canadians may now have been forced to conduct $1 and $2 transactions using government Dominion notes, but they didn’t always have to use Dominion notes for larger odd payments.

For Canada’s private banks reacted with their own workaround: issuing odd-denomination notes with face values of $4, $6, and $7. 

A consumer could make a $17 purchase and pay with a combination of private $10 and $7 banknotes instead of needing two $1 Dominion government notes.

More illustrations of odd-denomination banknotes can be found in the comments section.

In 1880 the minimum private banknote denomination was raised to $5 and banks were banned from issuing notes in anything but multiples of $5, thus forcing Canadians to use Dominion notes to facilitate all odd payments going forward.

Soon after the establishment of the Bank of Canada in 1935, which marked the end of the free banking era, the private central bank was granted a legal monopoly on all banknote issuance and private banknotes disappeared from circulation (the Bank of Canada was nationalized in 1938). 

Still, the old private odd-denomination notes are sought after by collectors for their numismatic value.


Finally, we reach the two most consequential regulations of the free banking era: greater barriers to entry and capital requirements on note issuance.

In the late 1880’s Parliament began upping the paid-in capital requirements for new banks to receive charters. In 1890 the minimum was raised to $500,000, a significant sum at the time, with a requirement that the entire capital subscription be completed within one year of the charter’s granting (Selgin: 2018).

The government’s objective was clear: to prevent too many new competitors from entering the market.

The long-term effects were also quite predictable: a multi-decade period of bank consolidation with mergers and acquisitions reducing the number of institutions but scant few new entrants to offset the decline.

Many Canadian historians believe there was an unspoken agreement between banks and Parliament: that the government would keep the number of banks relatively small in exchange for increased competition and stability via nationwide branching.

Whether or not that was the intent, the result turned out exactly that way.

By the 1910’s Canada was served by about twenty major banks plus another few dozen thrifts—all for a country of 8 million (about the population of Oregon). Yet despite the smaller number of banks, Canadian consumers enjoyed greater competition, lower interest rates, more access to credit, and far greater banking stability than Americans with 27,000 banks!

The reason was unbridled access to markets via branches. Canadian banks could branch anywhere—and did. In the United States, most towns only had a single unit bank which was granted a monopoly by its state legislature.

Thus Parliament’s higher barriers to entry were hardly an example of laissez-faire and almost certainly unnecessary, but the legislation did not lead to banking crises the same way that American restrictions on branching did.


Lastly we examine the closest thing to a destabilizing regulation during the Canadian free banking period: the paid-in capital requirement for banknote issuance.

In the United States banks were only legally allowed to issue currency if it was backed 111% by U.S. government bonds.

Canadian Parliament placed a similar restriction on its banks, requiring the quantity of banknotes issued to never exceed 100% of the bank’s paid-in capital, a measure to secure the value of the notes should the bank fail.

For the most part the Canadian version of banknote restriction was trouble-free, something we’ll explain in a few paragraphs, but it did produce industry stresses in one year: 1907.

The effects of America's enormous Panic of 1907 were spreading into Canada, but farmers and depositors asking to withdraw cash were, like in the USA, also being told “no cash available” by their bankers since they didn’t have sufficient paid-in capital to legally issue more notes.

For that reason 1907 proved to be the worst year in Canadian history for bank failures. Hold onto your seats…

Three banks failed.

One was acquired by the Bank of Montreal and its customers never noticed any disruption, one paid all its creditors back in full, and only the last failed bank was unable to make good on 100% of its liabilities.

Parliament examined the problem shortly after and simply upped the banknote limit from 100% of paid-in capital to 115%.

The problem never occurred again and, unlike in the United States, 1907 wasn't severe enough to be considered a crisis by anyone then or ever since.

The United States took a radically different course: Congress adopted the Federal Reserve System to take over note-issuance completely and act as lender of last resort.

But the paid-in capital requirement serves as an example of Canada inching towards a financial crisis as it flirted with more and more intrusive bank regulations… just before stepping back from the brink.

Incidentally the Canadian paid-in capital requirement was always less onerous than the American bondholding equivalent, hence why Canada had just one instance of industry duress while the USA suffered six banking panics during the 1863-1914 National Banking era.

Why were U.S. banknote restrictions less flexible?

The quantity of U.S. government bonds required to back private banks’ note issuances was limited by the national debt, debt that was declining during the law's first thirty years and later, even when new bonds were floated, was still inadequate to meet the demands of the public.

But the Canadian paid-in capital requirement was far more flexible. If a Canadian banker noticed customer demand for banknotes was nearing his paid-in capital limit, he could always go to the equity markets and raise more capital to up his note issuance limit. 

A U.S. banker had no such recourse since the supply of U.S. Treasury bonds was under exclusive control of the federal government.

In the next installment we’ll discuss a few criticisms and praises of the free banking system from the handful of academics even aware of its existence.

Friday, December 16, 2022

Ludwig von Mises: Consumers Are the Real Bosses Under Market Systems

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The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff tenders economist Ludwig von Mises' (1881-1973) description of the free market economy.

"The capitalists, the enterprisers, and the farmers are instrumental in the conduct of economic affairs. They are at the helm and steer the ship. But they are not free to shape its course. They are not supreme, they are steersmen only, bound to obey unconditionally the captain's orders. The captain is the consumer."

"The real bosses [under capitalism] are the consumers. They, by their buying and by their abstention from buying, decide who should own the capital and run the plants. They determine what should be produced and in what quantity and quality. Their attitudes result either in profit or in loss for the enterpriser. They make poor men rich and rich men poor. They are no easy bosses. They are full of whims and fancies, changeable and unpredictable. They do not care a whit for past merit. As soon as something is offered to them that they like better or is cheaper, they desert their old purveyors."

-Bureaucracy, "Profit Management," (1944)

CO readers might conclude that we have moved so far from the free enterprise of Ludwig von Mises' early life – now with government interventions, crony government-rent seeking legislation, and literally six-plus million regulations restricting economic exchange to favor some groups at the expense of others – that his narration no longer accurately describes the American economy.

Tuesday, December 13, 2022

Free vs Regulated Banking: Canada’s Free Banking Era – Did Canadian Free Banking Have Any Regulations? (Part 1)

5 MIN READ - After reviewing how Canada’s two centuries of banking have been crisis-free while the United States has experienced at least seventeen banking panics, the Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff explains next why Canada resisted adopting the USA’s awful, destabilizing bank regulations plus what few regulations Canada did enact.

John Richardson, M.P. J.P.
-"Father of Canadian Banking"
-Bank of Montreal cofounder
-Scotsman from Banffshire

In our previous columns we reviewed how Canada has avoided even a single financial crisis during its 205 years of commercial banking, despite having the industrialized world’s most unregulated banking system from 1845 to 1935 and the second most unregulated system (after Scotland) from 1817 to 1845.

We also contrasted Canada to the United States, which had the industrialized world’s most regulated banking system from 1863 to 1933, and was neck and neck with England for most regulated from 1784 to 1862. 

During those 149 years the United States suffered from fifteen systemic banking panics.

If you missed that column it's right here:

The case for the superiority of Canada’s “free banking” system over America’s badly regulated one is strong, but a logical question readers may ask is: “From 1817 to 1935 were there literally no bank regulations in Canada at all?”

The answer is a decisive no. There are no cases in history of 100% laissez-faire banking going back to at least the Scottish Enlightenment. 


But there are cases of “almost laissez-faire” systems such as Scotland: (1716-1845) and “very lightly regulated” Canada (1817-1935).

In fact, it’s no coincidence that Canada’s embryonic banking industry developed along such deregulated lines starting with the Bank of Montreal’s opening in 1817. Because early 19th century Canada was a period of massive Scottish immigration.

Hence when the Bank of Montreal’s original nine founders—five of whom were Scottish including John Richardson, named “the father of Canadian banking”—opened for business they relied heavily on Scottish banking as their model, just as the founders of other early Canadian banks did. 

Being Scottish settlers, the harebrained regulations being enacted in the United States—like making bank branching illegal, establishing privileged monopoly central banks, or forcing banks to back their paper note issuances with lousy state government bonds or scarce federal government bonds—never crossed their minds.

Incidentally, if you doubt the impact of Scottish immigration on Canada’s development, just look at all the “Mc” and “Mac” figures in Canadian history. 

-John Macdonald, Canada’s first Prime Minister.
-Alexander Mackenzie, Canada’s second Prime Minister.
-James McGill, founder of Canada’s prestigious McGill University.
-George Stephen, first President of the Canadian Pacific Railway.
-William Lyon Mackenzie King, Canadian Prime Minister for 21 years including during the critical periods of the Great Depression nd World War II.
-Sarah McLachlan: Pop singer and founder of Lilith Fair.

OK, the Economics Correspondent will strike Sarah McLachlan off the list of historically important Canucks. But the point is Scots and Scottish heritage are still prevalent in Canada even today. Go through any record of Canadian history and you’ll lose track of all the Mc’s and Mac’s although admittedly a small number of them are Irish.

But back to the Scottish model.

Not only was Scotland operating under its own free banking system in the early 19th century, but 1800-1845 is also considered the golden age of Scottish free banking, a time when Scottish banks were large, publicly traded, heavily capitalized, and had already established nationwide branch networks.

So sound were Scottish banks that in the 1820’s British Parliament was urging reform of the English banking system — which had suffered from ten crises in the previous 130 years — along the Scottish model which had experienced none.

However, there is one key difference between Scottish and Canadian free banking.

The Canadian free banking period (1817-1935) took place about a century later than Scotland’s, and by the turn of the 20th century western governments everywhere were imposing more progressive and interventionist measures on their economies. 

So Canada’s free system — lightly controlled as it may have been — was still a product of the times and subject to a handful more regulations.

We’ll examine the most important few here.


Even in the earliest days of Canadian banking there were still a few regulations common to the various provinces. However they virtually all involved policing fraud and insider conflicts of interest.

Few were outright edicts of government but usually conditions of receiving a charter.

And none of them mirrored the foolhardy U.S. regulations that prohibited branching, forced banks to buy lousy government bonds for permission to issue currency, or established central banks that blew multiple asset bubbles which ultimately crashed into financial panics.

For example, in exchange for a charter Canadian banks had to agree to open their finances to their shareholders.

Also limits were placed on the size of loans banks could make to their own directors, and banks were prohibited from using shares of their own stock as borrowing collateral.

The Bank of Montreal’s charter established “double liability” for its owners in the event of failure. The system seems to have worked, still providing painful enough consequences for insolvency to focus on sound credit quality, but not unlimited to the point of bankrupting all the owners.

Such conditions would offend few aside from the most purist libertarians, and if anyone were to propose they become today's new U.S. banking regulatory regime we would surely hear cries of “irresponsible laissez-faire!” from all corners of government, academia, and the media.

There was also a common clause that chartered banks must accept the notes of other chartered banks at par to keep the currency uniform, but this requirement quickly proved unnecessary as nationwide branch banking and the establishment of private clearinghouses made accepting, verifying, and redeeming competing banks’ notes at par universal and virtually effortless.

Nevertheless, Canadian banking was an infantile industry in the 1820’s and 1830’s and, not having yet accrued vast experience, there were initially several isolated bank failures, something that became much rarer around the time of Confederation.

In fact the closest thing Canada ever had to a systemic banking panic was also in its early days: the 1837-1839 period. 

During this time, the effects of two panics in the United States had spread to Canada (the Panics of 1837 and 1839), but compounding matters were two major insurrections known as the Patriot War (1837-38) and the Canada Rebellions (1837-38).

Some historians liken these two rebellions to bordering on civil war (that may be a slight exaggeration), but chaos, violence, and civil unrest did force a handful of Ontario banks to suspend specie payment and one notable bank actually failed.

Still, even the 1837-1839 period is not considered by any monetary historian to be a systemic banking panic, even enduring the strain of two major financial crises in the larger, neighboring USA while converging with two domestic rebellions. 

To produce only one bank failure under such duress, while hundreds of banks were failing in the older, more mature and more developed United States market, illustrates how resilient the Canadian system was even in its infancy. 

Part 2 on Canadian regulations after Confederation to follow shortly.

Wednesday, December 7, 2022

Free vs Regulated Banking: Canada’s Free Banking Era – Deregulation and Stability

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7 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff continues with his analysis of Canada’s remarkably stable 205 years of commercial banking. This time we examine the greatest single reason for its success: U.S. regulations that Canadians never adopted.


Consolidation of market share into a few large banks has been a hallmark of the Canadian banking industry for over 140 years (more on why in the next column). 

Today Canada’s banking sector is dominated by the “Big Five” of RBC, Toronto-Dominion, Scotiabank, Bank of Montreal, and CIBC who collectively control over 80% of the country’s banking assets. 

That’s far more concentration than the USA’s “Big Four” of J.P. Morgan, Bank of America, Citigroup, and Wells Fargo who control closer to 45%.

Yet politicians tell us “too big to fail” is an unacceptable risk to the U.S. banking system – just tempting another financial crisis shoe to drop – and that large American banks simply must be broken up for the good of the country.

But Canada has had “much too bigger to fail” for over a century and never experienced a banking panic, including for the last 65 years of its largely deregulated “free banking era” (1870-1935) when the industry was also highly concentrated.

How on the one hand can politicians say America’s few large banks are a recipe for disaster while the far more concentrated banking industry of Canada has never experienced a single financial crisis?

The answer is Canada’s lack of onerous, perverse, and I shall include “dumb” regulations that have plagued the United States since its founding. 


Market share, concentration, and deregulation have never been the problem in the United States; bad regulations have.

The first, which we’ve touched on previously, is unit banking. 

During the 19th and early 20th centuries most American state governments legally prohibited their banks from branching, leaving the country dotted with thousands of tiny banks that were often just single buildings in a town or countryside acting as localized government-created monopolies. 

Unit banking made it impossible for American banks to diversify their loan portfolios, diversify their depositors, move capital from one region of the country to another, equalize interstate interest rates, or cooperate during times of financial stress.

But Canada never had any branching restrictions and its banks rapidly spread across the country. Once Canadian banking had matured shortly after Confederation (1867) most Canadian banks were large, well-capitalized, and competing fiercely in nearly every township.

By comparison, in 1914 the USA had over 27,000 banks, 95% of which had no branches (!) and the remaining 5% of which had an average of only five branches.

Around that same time Canada had roughly twenty large banks, each well-capitalized with several hundred branches, a few dozen more thrifts, and even a handful of credit unions. Even the average tiny township of 900 people in western provinces like Alberta or Saskatchewan averaged two branches from competing banks—more than most Americans got.

Note: If twenty banks doesn’t sound like many, keep in mind that in 1914 Canada’s population was about 8 million or roughly the size of Oregon. If twenty banks and several dozen thrifts, all competing in every city and town in Oregon with even tiny townships of 900 people getting two bank branches, sounds competitive enough it’s because it was. Twenty Canadian banks free to go anywhere was also a far more competitive system than America’s 27,000 mostly local monopoly unit banks.

This fatal flaw in the U.S. system had long been recognized by Canadian bankers. Canadian Bank of Commerce superintendent E.L Patterson wrote in 1917 that:

“Practically every country in the world except the United States has recognized the utility, if not the absolute necessity, of the branch system of banking in handling commodities as liquid as money or credit. A bank system without branches is on par with a city without waterworks or a country without a railroad so far as an equable distribution of credit is concerned.”

-Banking Principles and Practice

One more point about branches: During the Great Depression nearly 10,000 American banks failed in the years 1929 to 1933. 

In Canada zero banks failed.

The Federal Reserve System played a large role in the American banking disaster, but so did unit banking. Well over 90% of American banks were still unbranched in the 1930’s, leaving their loan portfolios completely undiversified and vulnerable to failure with the downturn of a single crop, local factory, or the local economy.

While over 90% of U.S. banks had zero branches, Canada—which by 1930 had grown to 10 million people, about the population of North Carolina—employed large branch networks:

-Royal Bank of Canada: 600+ branches (1938)
-Bank of Montreal: 672 branches (1930)
-Bank of Nova Scotia: 322 branches (1932)
-Canadian Bank of Commerce: 800 branches (1929)

Note: The Economics Correspondent could not find Great Depression-era branch counts for the Bank of Toronto and Dominion Bank, only that the former had 161 branches by 1920—still far more than 99% of American banks had in the 1930’s or even by the 1950’s.

In most respects Canada was hit harder by the Great Depression than the United States. Yet Canada’s banking system—with no central bank until 1935 and no deposit insurance until 1967, but unhampered by onerous regulations and allowed to diversify assets, deposits, and customers—held  up.

In fact during the global crisis years of the early 1930’s, the freest, most unregulated banking system in the industrialized world also proved the best-performing and most resilient.


For half a century after the Civil War (1863-1913) American banks were governed by another set of pernicious regulations, this time from Washington, DC: the National Banking Acts.

The National Banking System’s regulations were many and gruesome, but a simplified explanation is its rules made it illegal for commercial banks to issue paper currency unless they secured their note issuances by U.S. government bonds.

This may not have been so problematic if not for the fact that after the Civil War government bonds began to disappear as the federal debt was paid down, so the law in effect made it illegal to issue paper currency at a time when commercial banks were the country’s only source of paper currency.

One can imagine the havoc wreaked upon a rapidly growing economy when its banks aren’t allowed to provide cash, and the problem frequently manifested itself as a credit crunch during fall harvest season.

When farmers asked banks to convert some of their bank account balances to cash to pay hired hands, banks were forced by regulation to say no. Thus farmers withdrew gold coin (ie. bank reserves in the days of the gold standard) forcing banks to contract credit and raise interest rates. This system produced major banking panics in 1873, 1893, and 1907 with incipient panics in 1884, 1890, and 1896.

By the early 20th century proponents of central banking were accusing the private banking system of failing the country due to an “inelastic currency.” 

But in fact it was bad regulations that made the currency inelastic.

Across the border the deregulated Canadian banks were free to issue currency without any government bond holding requirement (more detail on that in the next chapter). So during the 50-year U.S. National Banking Era Canadian banks operated crisis-free while America endured a crisis roughly every seven years.

Modern day Fed apologists make similar claims about the Gilded Age’s banking failures: that before the Federal Reserve’s establishment the country experienced frequent shortages of cash and repeated banking panics that finally ended when the Fed came along to fix things.

(that’s actually false, the panics got even worse for the first quarter-century after the Fed’s establishment) 

Of course, Fed officials and their allies say nothing about the regulations that caused the pre-Fed cash shortages and panics to begin with, leaving it to the reader to fill in the blanks with assumptions that it must have been laissez-faire’s fault or yet another “market failure.” 

If only the market had really been allowed to work, America would have avoided many of the NBS-era panics although unit banking was still a lingering problem.

For those who wish to know more gory details about the backwards National Banking System, you can go to:


There is one regulatory exception in the modern era: central banks. 

The United States twice attempted to establish central banks in its early days: the First Bank of the United States (BUS: 1791-1811) and Second Bank of the United States (SBUS: 1816-1836).

Canada had no central bank until 1935.

The American BUS and SBUS both engaged in cheap money policies that inflated national asset bubbles (one in Treasury securities, one in land and transportation companies, and another in land and stocks) which burst and launched the Panics of 1792, 1797, and 1819. 

Later the Federal Reserve System deliberately inflated the asset bubbles of the late Roaring Twenties leading to the Recession of 1929. The Fed then transformed that recession into the Great Depression in the early 1930’s.

(Several links to America’s central bank policy failures at end of the article)

In Canada there was no central bank at all during its free banking era of 1817-1935. 

Modern day left-leaning economists tell us without a central bank a country’s financial system will be vulnerable to shocks and powerless to prevent frequent and devastating banking crises. Yet the experience of Canada proved the precise opposite: no central bank corresponded to no crises, while the USA’s experience also proved the precise opposite: central banks corresponded to (indeed caused) many crises.

The same dichotomy existed in 18th and 19th century Great Britain. The Bank of England monopoly produced seventeen banking crises in two centuries. Scotland, with no central bank, suffered no crises during its 129 years of free banking.

So what’s Canada's central bank “exception?”

Even after the establishment of the Bank of Canada in 1935, Canada has still avoided any bank panics for 87 years up to present day. And the Economics Correspondent will explain the reasons behind Canadian banking’s exceptional performance—even with a monopoly central bank—in an upcoming column.

Details on America’s central bank-induced panics and policy failures available at:

The BUS and Panic of 1792

The BUS and Panic of 1797

The SBUS and Panic of 1819

The Federal Reserve inflates the Roaring Twenties asset bubbles

The 1930's Federal Reserve fails to expand the monetary base

The 1930's Federal Reserve fails as lender of last resort

Thursday, December 1, 2022

Janet Yellen Blames American Public for Inflation

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An undergraduate level macroeconomics reminder to Treasury Secretary Janet Yellen from the Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff.

As some CO Rockers may have already read Janet Yellen recently blamed consumer “splurging” for the same price inflation she insisted was transitory and would go away by itself in 2021.

From her recent Colbert Show interview:

“They [Americans] were in their homes for a year or more, they wanted to buy grills and office furniture, they were working from home, they suddenly started splurging on goods, buying technology.”

Well the Economics Correspondent has two macroeconomic reminders for Yellen who, after all, chaired the Federal Reserve System from 2014 to 2018, served as Vice Chair from 2010 to 2014 and San Francisco Federal Reserve President from 2004 to 2010.

1) If consumer “spending” is to blame, why is government spending not also to blame? Absent from her scapegoats was any mention of the $3.5 trillion in deficit spending the White House and Democratically controlled Congress have "splurged" on since her boss took over just 22 months ago.

2) Since she earned her Yale economics Ph.D 51 years ago, she may have forgotten some undergraduate macroeconomics 101:

Spending in the aggregate, what economics call "aggregate demand," is defined as MV or (money supply) x (velocity).

If Yellen thinks Americans are spending too much, then either a rapidly growing money supply, rapidly rising velocity, or both necessarily must be fueling Americans' ability to overspend.

How have both changed since her boss entered the White House?

-After plunging nearly 20% in 2020, M2 velocity stabilized remarkably in 2021 and early 2022. From Joe Biden's inauguration to the day the Federal Reserve finally woke up and started tightening monetary policy (April 2022), M2 velocity has risen just 2.5%.

-In that same period, the money supply as measured by M2 has risen 13.3%.

(data sources in comments)

Actually Yellen already knows all this, which means she knows that if consumers are spending too much then it's the Fed’s 13.3% inflation of the money supply in 15 months that is really the culprit.

But blame the victim, not the perp. Blame the effect, not the cause.

“Inflation. Consumers don’t produce it. Producers don’t produce it. Trade unions don’t produce it, foreign sheiks don’t produce it, oil imports don’t produce it...what produces it is too much government spending and too much creation of money, and nothing else.”

-Milton Friedman

St. Louis Federal Reserve data sources:

1) Federal deficits, Biden era

2) M2 velocity: Jan 2021 to April 2022

3) M2 growth: Jan 2021 to April 2022