President Condemns Price Gougers, Dealers Raided

On one sunny August 16, at a time of high price inflation, government operatives announced the seizure of millions of eggs and 200,000 pounds of sugar. Raids on the larders of other suspected profiteers continued for weeks thereafter … The government was prepared to return these items to their owners once the chastened profiteers agreed to sell them at a “reasonable” price and under the watchful eye of a government officer.

The official in charge of the raids explained thusly: “I am one of those who believe that a large part of the high cost of living is due to the fact that a number of unconscionable men in the ranks of the dealers have taken advantage … If we can make a few conspicuous examples of gougers and give the widest sort of publicity to the fact that such gougers have been and will be punished, in the future there will be little inclination to profiteer in this country.”

Earlier, the President of the Republic had laid the blame for a lesser bout of price inflation squarely at the feet of gouging businessmen: “The high cost of living is arranged by private understanding” is how he put it.

By now you may have guessed that I am talking about present-day Venezuela, its Presidente, and his henchmen. You would have guessed wrong. The year was 1919, Woodrow Wilson was president, and his henchman, quoted above, was Attorney General A. Mitchell Palmer. The high cost of living was a result of Mr. Wilson’s war, which was financed partly by money printing, as well as the absorption of vast quantities of real goods and services by the government for use in fighting the war. The obvious effect of more money chasing a reduced supply of goods and services was price inflation, and that same phenomenon happened in all the warring countries, most notably France.

This episode provides one of many reasons, too numerous to elaborate here, why Woodrow Wilson is properly called a proto-fascist and why he is a serious contender for the dubious honor of worst-ever U.S. president. For more, see Jim Powell’s, “Wilson’s War: How Woodrow Wilson’s Great Blunder Led to Hitler, Lenin, Stalin, and World War II.

The first three paragraphs above are paraphrased from p. 24 of James Grant’s new book, “The Forgotten Depression.” Though I have not finished the book, I couldn’t resist sharing this tidbit. The gist of Grant’s thesis can be seen in its subtitle, “1921: the Crash that Cured Itself.” Highly recommended, so far.

Tamny on Fractional-Reserve Banking: Right Conclusion, Faulty Analysis

John Tamny has posted a long and thought-provoking piece entitled “The Closing of the Austrian School’s Economic Mind.” He begins with a cogent critique of the anti-fractional-reserve stance of certain Austrian economists at the Mises Institute. Unfortunately, he follows that with a discussion of fractional reserves, the money multiplier, and other issues in which he goes badly astray.

As Tamny says, it is only some Austrians who have a problem with fractional-reserve banking. I consider myself an Austrian but I do not share the view of fractional reserves of the Mises Institute contingent, whom I prefer to call hard-money advocates.

The alleged problem, as the hard money people have it, is that under fractional reserves it appears that two people have a claim on the same dollar. This, they say, is fraud. But it is not fraud if the arrangement is disclosed to all parties. There are problems with our present-day fractional-reserve system, which I discuss below, but fraud is not one of them. (Incidentally, Tamny scores a point when he wonders about the hard money people calling in the state to crush the alleged fraud, but I believe most of them are anarchists and would have private protection agencies do the job. Just how this might work is beyond me.)

Tamny recognizes that fractional-reserve banking is the norm in all modern societies but he goes a little too far when he says fractional-reserve banking is a tautology. Modern banks do offer warehousing of money to those few who want it, via safe-deposit boxes. Anybody can rent one and stuff it full of currency or near-money assets like gold coins, and of course pay an annual fee. This is a minor sideline for banks, but it exists, so there is no tautology.

Also, contrary to Tamny, it is possible for a well-run business to fail for lack of money. This can happen if the supply of money in an economy falls short of the demand to hold it. (We must not mistake the demand to hold money with the demand to acquire money for spending. We all want to hold a certain level of cash, enough to cover emergencies or unexpected bargains but not so much as to pass up good opportunities for spending or investing it.) Money supply can get out of balance with money demand when there is a monopoly supplier, as there is in all modern economies, which has no market forces to tell it how much money to issue. There would be such forces in a free banking system, which is a topic for another time.

I promised to mention problems with fractional-reserve banking. The first is that government control of the banking system has short-circuited market forces that would signal to bank managers the amount of reserves they ought to keep on hand. If managers keep too little in reserves, they risk a liquidity crisis, or short of that, fear of a crisis on the part of depositors or would-be depositors. If they keep too much, they pass up profit opportunities and dis-serve their shareholders. The safety of a fractional-reserve bank depends critically on its reputation for prudence in lending. Without government interference in the forms of both controls (among them reserve requirements, capital requirements, and asset restrictions) and support (two that come to mind are Federal deposit insurance and the privilege of borrowing from the Federal Reserve), managers would very likely be more prudent about lending, and even more, about maintaining their reputation for prudent lending. Depositors would come to understand banks as something more like a mutual fund than a piggy bank.

This first point is not a strike against fractional reserves, but the government’s failure to let a free-market fractional-reserve system work honestly and efficiently.

The second problem is the flip side of the first. Federal Deposit Insurance relieves depositors of any incentive to question the soundness of their bank’s lending process. Depositors have no reason to look beyond the FDIC sticker in the window. Such is not the case with mutual funds which bear some resemblance to fractional-reserve banks. Most fund investors look carefully at ratings before investing. FDIC insurance does not eliminate risk, it socializes it, wreaking all sorts of distortions in the process.

I agree with Rothbard that occasional bank failures, leaving depositors and shareholders as well as other bank creditors empty-handed, should be welcomed because they put the fear of God into managers and depositors alike.

An advantage of a fractional reserve system over a 100% gold-backed system is that the latter would suck almost all the world’s supply of gold into underground vaults leaving very little for industrial or ornamental uses. Fractional reserves free up a lot of that gold for these uses, more so over time as the reserve levels needed to maintain confidence in the system fall as the system works well and confidence increases.

Tamny next takes up the money multiplier, and in so doing goes wildly off the rails. He cites the textbook example:

  • Someone deposits $1,000 cash in bank A
  • Bank A lends out $900 and keeps $100 cash as reserves
  • The recipient of the $900 deposits it in bank B which loans out $810 and keeps $90 cash as reserves
  • The $810 is deposited in bank C, and on it goes.

Textbooks use this example to show how money is created by fractional-reserve banks via a multiplier which approaches 1/r where r is the fraction of deposits maintained as reserves by each bank, 1/0.1=10 in the example. The new money is categorized as M1, which includes currency and travelers’ checks in addition to demand deposits (checking account balances).

So is M1 really money? Most definitely, because it fits the definition perfectly: a generally accepted medium of exchange. Is there anyone reading this piece who does not keep much more of his money in a checking account than in cash? How often do we pay cash these days? We use our debit cards, paper checks, or on-line transfers instead of currency. Or we use credit cards which we pay off by on-line transfer or check. All this is M1 money, all created by private banks under the aegis of fractional reserve banking. Notwithstanding the problems cited above, it all works rather well.

Tamny will have none of it. He goes through the same textbook exercise, imagining a group of friends in a room instead of a sequence of banks. He is wrong to say that no money is created in the process. To be sure, the amount of currency in circulation has not increased but he fails to notice that M1 money has increased. That’s because each loan recipient has, in addition to some currency, a bank balance that he correctly believes he can spend without ever converting it into currency: M1 money. Tamny could give each borrower in his thought experiment an old-fashioned bank book as evidence of the new money. We have here the nub of Tamny’s problem: his failure to recognize that M1 money (or rather the demand deposits that dominate that category) is real spendable money.

Tamny says money doesn’t grow on trees, but he’s wrong. The Fed creates base money out of thin air, as I’m sure Tamny agrees, but most money creation is done by private banks via the multiplier. And in truth, a fractional reserve system does create real wealth in the long run relative to a 100% reserve system because it increases the efficiency of the money and banking system, freeing up resources for alternate productive uses.

Is the fractional-reserve system inflationary? Yes, when currency flows into banks and is multiplied, it is. The reverse process is deflationary. But if overall bank reserve levels hold steady no price inflation is triggered, other things being equal.

Tamny’s use of NetJets as an analogy to fractional-reserve banking is flawed. The same jet plane cannot be in two different places at the same time. But two dollars of checking account money, each having its origin in the same dollar of currency deposited, can both be spent. Yes, money does grow on fractional-reserve trees. No, real wealth does not.

Tamny asks, if banks can multiply money, why can’t the same be done by “enterprising entrepreneurs eager to quickly turn $1,000 into $10,000 without doing anything?” They can actually, but they must do a lot of work first, like raising capital, setting up an office and web site, rounding up depositors and borrowers. To see details, go to The barriers to entry caused by licensing and such are actually rather modest.

Incidentally, the failure to recognize demand deposits as money goes back at least to the Currency School in 1840’s England. This school of thought held that bank notes should be backed 100% by gold but failed to understand that checks payable on demand were also money and required backing.

“Credit is not money,” says Tamny. What is it, then? “Credit is real resources.” But this is a wide departure from the accepted meaning of the term and one that leads to all sorts of confusion. The common definition of credit is a willingness or commitment of lenders to provide loans to certain parties under certain conditions. Businesses often carry lines of credit with banks. Individuals have credit limits on their credit card accounts. No, credit is not money, but it comes close. We feel reassured by credit commitments which we can tap into when needed. Credit is a way to buy stuff, not the stuff itself. I should add that later in the same paragraph Tamny calls credit access to real resources (my emphasis). This is closer to the mark but is not the defining characteristic of credit. Stuff can be bought on credit or with currency or barter. Again, credit is the willingness or commitments of lenders to loan money. But later in the piece Tamny flips back to credit as “resources in the real economy.”

At one point he says true inflation is “devaluation of the dollar.” No, devaluation refers to a drop in exchange rates for a particular currency relative to other currencies. Devaluation is often but not always accompanied by inflation. I’ll give him a pass on this and assume he means true inflation is a drop in the dollar’s purchasing power.

Elsewhere he denies any role for Fed-induced “easy credit” in the housing bubble. It may not have been the dominant factor, and it may have been overpowered by countervailing factors in the examples he cites, but can there be any doubt that lower interest rates stimulate the quantity of housing demanded, other things being equal? Don’t mortgage payments consist almost entirely of interest in the early years? Exercise for the reader: how much more house can you afford given $3,000 per month to spend on a 30-year mortgage if the rate drops from 5% to 4%? Answer: a lot more.

Another Tamny claim is that a growing economy always needs more money. This seems right, since growth generally means more of everything. But as clearing and payment system efficiencies increase, as we turn more to debit cards, credit cards, PayPal, and whatever comes next, our desire to hold money declines. This countervailing tendency could cancel out most or all of the effects of growth on money demand.

Tamny calls government oversight of money “horrid” and wishes for abolition of the Fed. Amen to both, but how can he be sure that, as he claims, credit would soar as a result? It probably would in the long run as sound money prompted increased confidence, but in the short run there could be liquidation of mal-investments and a general hesitation to save and invest pending clarification about where things were headed under the new setup.

John Tamny is correct: the anti-fractional-reserve crusade of the hard-money people is misguided. That case has been made repeatedly, deftly, and at length by Larry White and George Selgin, two of the best contemporary monetary economists. Sad to say, Tamny’s analysis, riddled as it is with errors and confusions, falls far short of their work.


In 1953 I was just old enough to have some sense of what was going on in the world.  Have things gotten better since then or worse?  On the whole, better, I’d say.  Herewith, two lists to which many more items could be added.

Ten things that were better then:

  1. Clean entertainment, tuneful music
  2. Safe streets
  3. Good schools
  4. Low rate of illegitimate birth
  5. Predominance of two-parent families, most mothers staying at home
  6. Stable neighborhoods
  7. High standards of dress and deportment
  8. Less intrusive government
  9. Lower tax burden
  10. Korean war ending, cold war not yet ramped up


  • That great scourge of western civilization, rock-and-roll “music,” was still over the horizon.
  • The best schools were not as good as today’s best schools: no AP programs, limited facilities.  The worst schools were far better than today’s worst schools.  On average, I would say schools were better.
  • The top marginal income tax rate was very high but hardly anyone paid that rate.  In Ohio, there was no state income tax and the state sales tax was 3%.

Ten things that weren’t so good

  1. Polio
  2. Crummy cars
  3. Three TV channels, primitive receivers
  4. Expensive monopoly telephone service
  5. De facto segregation, marginalization of women
  6. Air and water pollution
  7. Primitive medicine and dentistry
  8. The military draft
  9. Atmospheric nuclear weapons tests
  10. CIA overthrow of elected leaders in Guatemala and Iran


  • Polio was a crippling and and contagious disease.  Our municipal swimming pool was closed during the summer of 1953 because of fears of polio.  The Salk vaccine was just over the horizon.
  • Car fenders would begin to rust through after a couple of years because of road salt.  It was common to have to grind the valves at 35,000 miles or so.  A 60,000-mile car was ready for the junk pile.
  • Air quality had improved somewhat due to the post-war switch from coal-fired furnaces to natural gas.  But if you painted your house white it would gradually take on a reddish tinge due to emissions from factories and foundries.  Lake Erie was unsafe for swimming within 50 miles either side of Cleveland.
  • If you were black, you couldn’t buy a house or rent an apartment in suburbs like Cleveland Heights where I lived.  There were no legal barriers, just an understanding among sellers and landlords.
  • The detrimental effects of ionizing radiation were not well recognized, not just with regard to weapons tests.  Dental X-rays inflicted 50 times as much radiation as they do now.  When my mother took me shopping for shoes, I stuck my feet into slots at the bottom of a machine called a fluoroscope with three viewing ports on top that showed X-ray images of my feet, to show whether a candidate pair of shoes fit well.  One such exposure probably didn’t hurt me, but the cumulative effect of many such exposures might have.
  • Opportunities for women were beginning to spread beyond the traditional fields of nursing, teaching, clerking and a few others.  Professions weren’t closed to women, but there were hurdles.

Liberalism Unrelinquished: Some Tactical Thoughts

Today is #LiberalismDay. My friend Dan Klein of George Mason University along with his colleague Kevin Frei have launched a project called “Liberalism Unrelinquished.” An impressive list of economists and others have signed their petition which declares that they “affirm the original arc of liberalism, and the intention not to relinquish the term liberal to the trends, semantic and institutional, toward the governmentalization of social affairs.”

Other bloggers will presumably rehearse the tale of how that storied term lost its original meaning, at least in the U.S., as it has been appropriated, since at least the 1930’s, by statists.  (Example: George Leef’s fine piece). I just offer a few thoughts on some tactics that may be appropriate to this battle.

  • We must stop using the word liberal to denote present-day statists. This should be easy since they themselves have largely abandoned the term in favor of “progressives.” (Note that modern progressives hate progress of the material sort more than anything. That’s an issue for another time.) I have nothing better than “progressives” to denote these folks except perhaps a qualified “so-called progressives.” I hope “governmentalists” doesn’t get started. That would be too big a mouthful.
  • Speaking of which, there must be a better term than “governmentalization,” another mouthful. Perhaps just “government takeover” which is more forceful and easier to say.
  • “Liberalism unrelinquished” doesn’t exactly roll off the tongue either. How about “liberalism restored?”
  • Our task will often be easier if we say “classical liberal” rather than just liberal.
  • The term libertarian has entered the mainstream of U.S. politics. We should take advantage of this progress. We can use phrases like “the libertarian position, or as I like to call it, the classical liberal position …”
  • We must understand the price we pay when we call ourselves or our positions “liberal” or “classical liberal.” The price consists in the time and energy required to make clear to our audience what we mean when we use the term. Whether the price is worth paying depends on circumstances.
  • In academic writing, speaking, or debating there is usually sufficient time to preface our arguments by explanations. Attention spans are long enough that the price paid for explaining why we say “liberal” will not be significant.
  • The last place to take this fight would be political campaigns or debates. Attention spans are minute, audiences are unsophisticated, and we will just confuse people by using the term in its classical meaning prematurely. We can, however, try to disavow the tired old “liberal-conservative” spectrum that is currently entrenched in the media. “I’m aTime permitting, we could say classical liberal, and that means I agree with conservatives on some issues and with progressives on others. All my positions are grounded in the notion of liberty.”
  • In letters to the editor where every word counts we can say “libertarian (or classical liberal)” or the other way around.

I congratulate Dan and Kevin on the response they’ve gotten so far and I hope the momentum continues.

Another Preposterous Attempt to Punish Evil Foreign Regimes

Today’s Wall Street Journal carried a piece headlined “Gold from North Korea Stymies U.S. Firms.” It seems that U.S. firms that use various minerals, not just gold but also tungsten, tantalum and tin, are required by U.S. law to ask their suppliers whether any of these materials are so-called “conflict minerals.” Up to now this provision has mainly covered minerals sourced from areas of the Congo which are embroiled in warfare. Now it seems firms must also find out whether any of the gold they use in their products came from North Korea.

It’s not so simple as asking each supplier, because those suppliers may in turn have obtained their supplies from a variety of sources, all of which may have gotten mixed in together in their inventory. And of course it’s an open question as to whether suppliers can document their sources; presumably their say-so won’t suffice. They might also raise their asking prices to cover the costs of time-consuming compliance exercises.

The article says the North Korean central bank refined gold into bars that were certified by the London Bullion Market Association up until 2006. It is believed that they have continued to produce gold bars.

Gold is highly marketable. It’s uniform, nearly indestructible, and traded internationally. It’s unlikely the North Koreans would be stamp any of the bars they refine “made in the DPRK.” The North Koreans are known to be experts at counterfeiting U.S. currency, so how easy would it be for them to stamp a fake refinery mark on their gold bars?

What’s the point of this requirement? As with all political actions, this one has both an ostensible and a real (“public choice”) goal. The ostensible reason is to harm the evil North Korean regime by reducing the revenue they get from gold sales. The likely real reason is to make politicians and bureaucrats look good. None of this is to downplay the horror that is the North Korean regime. I only want to consider who will benefit and who will be hurt by this program.

All right, so who bears the costs? The requirement is an obvious expense for the firms involved. They will pass on as much of the compliance costs to customers as they can, but they will find little ability to do so if they face foreign competitors who suffer from no such regulatory burden. I won’t attempt to estimate elasticities here, just guess that costs will be borne primarily by shareholders and employees of gold-using firms and not so much by customers. These firms will become a little bit less competitive. To some extent suppliers will be burdened as well, but they probably have options like shifting to other customers or getting another intermediary in between them and their U.S. customers.

Lastly, how likely is this measure to succeed? The answer depends on which goal we’re thinking of. If it’s the political goal, politicians and bureaucrats will probably accrue a little bit of credit. If it’s the ostensible goal, hurting the North Korean regime, the answer is: no chance whatsoever. The only harm the North Koreans might endure would be busting a gut from laughing. In the unlikely event they find some of their customers have withdrawn, they can easily and with almost total anonymity dispose of their gold through international markets.

The effects of this requirement will be minor for a huge firm like Hewlett Packard. But U.S. industries are dying from a thousand cuts like this, and as they gradually lose out to foreign competitors, we wonder why.

You will notice I have not invoked any libertarian ideology in this humble piece. It’s just a matter of tracing consequences a little further and looking for public choice explanations of behavior. Hooray for the San Jose State University graduate program that helped me learn these skills.

My Summer of ’63: Bureaucracy, Sex and Alternating Current

Brandon’s comment about just finishing The Fountainhead reminded me of the summer of 1963, a pivotal time in my life. I can’t imagine why anyone but me would care about such personal stuff, but here goes.

I had the good fortune to attend a fine private engineering school, Case Institute of Technology (now part of Case Western Reserve University). Tuition was modest by today’s standards, even if adjusted for inflation – something like $1,400 per year, but still substantial. There were no student loans and my parents were just a little too well off for scholarships. They and my grandparents provided more than half my tuition and I used my own savings and job earnings to cover the rest. I didn’t work during the school year because the engineering curriculum demanded all my time and energy.

Toward the end of my sophomore year as a civil engineering major, I began to look for a summer job. An opening advertised in the administration building seemed like it would offer good experience and good pay for the time: $295 per month. I applied and got the job, little knowing that three huge life lessons were coming my way. The value of those lessons, in the long run, overwhelmed the monetary reward.

The first benefit was to learn meticulous work. I was an assistant in the Bridge Department of the City of Cleveland. No technology of any kind, beyond dial telephones and possibly an electric typewriter (more likely manual) had penetrated the department. The engineers drew their plans in pencil on large sheets of paper mounted on drafting tables. It was my job to make archival copies of final plans.
Think about how we make copies these days. It’s pretty much a quick “save as” operation, or, in a throwback to past times, people still make photocopies. Although Xerox copiers were available by 1963 (Case had at least one), they were nowhere to be seen at City Hall. Typists made copies using carbon paper (look it up). I made copies of drawings by mounting the original on my board, placing a special sheet of linen over it, and tracing the drawing using india ink. Every line had to be duplicated at the proper width and every character of text carefully drawn by hand. Erasers? No such thing. A tiny slip could be scraped off with a knife but otherwise the only resort was to start over.

Astoundingly, a technological advance that had become universal more than seventy years previously – alternating current – was absent from City Hall. The whole building ran on direct current, a legacy of the Municipal Power authority that was launched early in the century to undercut the monopoly Cleveland Electric Illuminating Company. Fluorescent lights were out of the question as, I presume, were were any motor-driven devices like electric typewriters.
My second benefit was to learn some realities of bureaucratic life. There were six engineers on staff of whom three actually worked. Mr. Sevcik, who sat in front of me, had the same drawing on his table for the whole three months I was there. He appeared to put himself into a state of suspended animation. Somehow he could sit there motionless all day without falling off his stool. His wall calendar was blank except for every other Friday where he wrote “haircut.” Another fellow was constantly out of the office. Nobody seemed to know where he went or why.

One of the actual workers took me under his wing. He trained me in my job but also explained the facts of bureaucracy. All that could be done about the slackers was to keep them out of the way. They couldn’t be fired.

The third and most important benefit – actually two benefits – I got from Sam. Sam was a girl; I never did learn her real name. I say “girl” advisedly because in those days adult women in the workforce were typically, and without malice, called girls. She was a technician of some sort, not an engineer, and she was a worker. Her nickname may have reflected the fact that she was something of an intruder in this man’s world.

Slacks for women were gaining more acceptance by then but generally not in the workplace. I remember her wearing only skirts, and shorter skirts were coming into fashion then. So when Sam sat on her stool at her board, her skirt invariably rode up.  I mean, all the way up to there! Sometimes I would get to sit next to her to consult on some work issue. Needless to say I found it difficult to concentrate.
I made no attempt to hit on Sam. She was probably five years older than me and was clearly savvy about many things beyond her years. I was a nerd and unsavvy to say the least. It just wasn’t in the cards.
Sam was perfectly well aware of her effect on me and she charitably deflected my energy by taking it upon herself to educate me a bit in the ways of the world. After work we would usually walk together to the Terminal Tower to catch our trains. She would tell me about her boy friends – what attracted her to them and how she liked to be treated. She said nothing about her sex life and I didn’t ask. Open and frank talk about sex was still in the future.

One day Sam mentioned a novel she had just finished – The Fountainhead. “I think you’d like it,” she said. I don’t think I read it before leaving my summer job, but I soon did and I found it transformative. The character of Howard Roark was electrifying but it was many years before I understood Dominique. At that time I was trying to figure out who I was and what I stood for, and Rand got me started on my libertarian path. Later in the sixties I had read all her work and took tape-transcribed courses on objectivism from the Nathanial Branden Institute. Fortunately I never became groupie and in hindsight I see many shortcomings, as well as strengths, in Rand’s objectivism.

Not knowing Sam’s real name, I have no way to trace her. If she’s around, she’s well into her seventies. I hope her life has been good. She deserved it.

Dragging the Poor Slobs Into War

Hermann Goering, speaking at the Nuremberg trials following World War II:

Why of course the people don’t want war. Why should some poor slob on a farm want to risk his life in a war when the best he can get out of it is to come back to his farm in one piece? Naturally, the common people don’t want war; neither in Russia, nor in England, nor for that matter in Germany. That is understood. But, after all, it is the leaders of the country who determine the policy and it is always a simple matter to drag the people along, whether it is a democracy, or a fascist dictatorship, or a parliament, or a communist dictatorship. Voice or no voice, the people can always be brought to the bidding of the leaders. All you have to do is tell them they are being attacked, and denounce the peacemakers for lack of patriotism and exposing the country to danger. It works the same in any country.

Quoted in Ron Paul’s A Foreign Policy of Freedom