bailout reader

The events taking place in the financial market offer an illustration of the soundness of the Austrian theory of money, banking, and credit cycles, and Mises.org is your source not only for analysis of these events but also the economic theory that helps explain what is happening and what to do about it. There are many thousands of articles available, and also the full text of thousands of books as well as journal articles. It is impossible to draw attention to the full range of literature one can use to understand the crisis.

However, below we offer a brief look into the topics most discussed in these times, with extended treatments of each in the sidebar. Mises.org also offers both a blog and a community forum for reading and discussing them all.

It’s never been more important to spread a sound view of money and banking, not only as a protection against the fallacies of “stabilization” and “reflation” but also as way to see what kind of reforms are essential now.

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3 Responses to bailout reader

  1. Jeff Molby says:

    Can you help me understand something?

    In Our Financial House of Cards, the author suggests that we could provide additional capital to our banking system by declaring the Fed’s gold reserves to be worth $13k/oz. How is that any less laughable than declaring the Fed’s supply of paper clips to be worth $1 each?

    Isn’t he talking about inflicting decades worth of inflation with the stroke of a pen?

  2. bkmarcus says:

    Jeff Molby, your question deserves a real answer, but I can’t find the time to write one now, so instead I’m just going to quote myself from an earlier correspondence with someone on a similar issue. He made this problematic claim:

    The main problem underlying a government-mandated gold standard is that it necessarily requires a central board to artificially peg gold at a certain price, which would lead to all of the same problems every attempt at price fixing has.

    I replied

    I see why that’s true under a system with central banking or fractional reserve, where the quantity of dollars and gold can fluctuate independently, but I don’t think a government-mandated gold standard with 100% reserves (however unlikely that is) would be a form of price fixing. It would just be a legal definition of the word “dollar,” not a “peg.”
    What you are addressing isn’t a 100%-reserve gold standard, but a fractional-reserve gold-exchange standard.
    For something to be price fixing, the thing fixed must be a price, and a price is an exchange ratio between two goods that can fluctuate independently in supply and demand. The problem with a “peg” or a fixed price is that it fails to represent those independent fluctuations.
    But a 100%-reserve gold standard of the sort that Misesians call for (whether government managed or not, preferably not) is not an exchange ratio between two independent goods, but rather a definition of the relationship between a good and its substitute.
    If I write you an IOU for 100 widgets, there’s no need to establish the “widget price” of that IOU. The IOU doesn’t have a “price” of 100 widgets; it is simply a promise for that number.
    Similarly, if the government were to define a dollar as, e.g., a gram of gold and disallow fractional-reserve banking, then that would not be a fixing of a price, because the 1-gram definition of the dollar wouldn’t be a price, any more than the dollar definition of a 1-cent coin is a price.
    This is why it’s dangerous to use a term like “gold standard” without explicitly defining the term. Detractors will point to the failings of the historical gold-exchange standard, which was falsely called the gold standard. They’re not talking about the same thing advocates are talking about.

    I hope that helps. I’ll try to write a more specific reply soon.

  3. Jeff Molby says:

    Thanks, BK. Take your time. Given the current political climate, it’s a purely academic question, so just let me know whenever you get around to it.

    As a clarification: I understand the concept of 100% reserve gold standard. I’m far from fully educated on the matter, but I do lean towards supporting it.

    What confuses me about that article is the number that the author chose. A dollar is currently worth 1/900th of an ounce of gold. Yet he proposes that we declare a dollar to be worth 1/13000th of an ounce of gold.

    That seems like it would amount to a drastic and immediate devaluation of the dollar.

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