Re: ECB and world-wide recession

[Clifford Poirot <cpoirot@xxxxxxxxxxx>]

Uh, Barkely, not so fast. You left out the interregnum during which the
First Bank was destroyed.
Labeling Jackson a precursor of the populists is generous-to a fault.
Jackson was not only against Central Banks, he was also against paper money.
Thus Jackson, and his supporters held a position that reduced to little
better than mere idiocy.

On the one hand, the Jacksonians resented the Second Bank due to its
identification with the emergence of "paper money" based on expansion of
bills of exchange backed by gold reserves. At the same time, they resented
the control the Bank had over the system-wanting to free state and local
banks. The Jacksonians believed that once freed from central control, local
and state banks would return to "hard" money. The irony was that Biddle
imposed some semblance of restraint on the system. Jackson neither
understood, nor wanted to understand, the world of Banks and Money and cared
not that his position was ill thought out-or what the potential impact of
his policies might be.

In contrast, the populists, despite all their faults, understood the system
fairly well, and at least as far as money went, had a pretty clear, and
accurate picture of the constraints and solutions. On other issues, the
populists were not so clear headed-to wit, the tendency for populism to
degenerate into nativism and racism.

-----Original Message-----
From: J. Barkley Rosser, Jr. [mailto:rosserjb@xxxxxxx]
Sent: Monday, May 07, 2001 6:04 PM
To: Henry C.K. Liu
Cc: Post Keynesian Thought
Subject: Re: ECB and world-wide recession


Henry,
      The populists wanted silver money.  The Fed
was never set up to have a bimetallism standard.
It is one thing to call for "federal regulation of
the banking system" (which is provided by such
bodies as the Comptroller of the Currency) and
quite another to call for a central bank.
      The older history is that the predecessors of
the populists, the Jacksonian Democrats who were
also rural based, were the opponents of a National
Bank.  It was Alexander Hamilton and the Federalists
who imposed a National Bank.  It was Jackson and
Van Buren who got rid of it and gave us the more or
less "free banking" system that we had until 1913.
Of course, the big money center banks in New York
got control of that system.  The populists wanted
somebody to control them.  But they controlled
the Fed from the beginning.  It was never set up to
satisfy demands by the populists.
      So, you win one on the nature of the DB.  I win
one on the origins of the Fed, :-).
Barkley Rosser
----- Original Message -----
From: "Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>
To: "J. Barkley Rosser, Jr." <rosserjb@xxxxxxx>; <pkt@xxxxxxxxxxxxxxxx>
Sent: Monday, May 07, 2001 5:47 PM
Subject: Re: ECB and world-wide recession


> The founding of the Federal Reserve System were first championed by
populists
> who were ordinary citizens, rather than sophisticated economists or
political
> leaders.  In 1887, a group of desperate farmers in  Lampasas County, Texas
> formed the Knights of Reliance to resist impending ruin by "more speedily
> educating themselves" about the day when "all the balance of labor's
products
> become concentrated into the hands of a few."  It became the Farmers
Alliance
> which by 1890 flowered into the populist movement.  The populist agenda
was a
> major reform source for more than five decades, giving the nation a
progressive
> income tax, federal regulation of railroads, communications and other
public
> utilities, anti-trust regimes, price stabilization and credit programs for
> farmers.
> LBJ was the last president with strong populist roots.
>
> The core issue behind the populist movement was money.  Populists attacked
the
> "money trusts", the gold standard, and the private banking system.
> The spirit of this brief movement was captured by Lawrence Goodwyn in his
book:
> Democratic Promise: The Populist Movement in America.
>
> Falling prices of farm produce were the catalyst of protest.  Falling
prices
> were also inevitably accompanied by usurious interest rates.
> Both flowed from one condition - a scarcity of money.  Most Americans
today do
> not remember what historians call the Great Deflation that lasted three
decades
> between 1866 and 1896.  The Great Deflation worked in reverse of
inflation.
> Inflation damages the rich and spreads wealth widely, allowing the middle
class
> to grow in size and to enjoy higher standards of living. Deflation
> reconcentrates wealth and reduces the living standard of the middle and
working
> classes.  Borrowers face ballooning nominal debts
> from falling prices and wages.  Deflation make true the American folklore:
the
> rich get richer and the poor gets poorer.
>
> Fernand Braudel  in his epic chronicle of the rise of capitalism showed
that
> cycles of price inflation and deflation were recurring rhythms in the
world's
> economies long before the founding of the USA.  The very discovery of
America
> was a great inflationary development by increase of money supply in Europe
by
> the plundering of Inca gold mines.  The Gold inflation lasted three
centuries
> and was instrumental to the rise of Europe.
>
> The Federal Reserve System was founded to represent the financial interest
of
> all the people.  In its obsessive phobia of inflation, the Fed has
betrayed its
> original mandate.  The chairman of the Fed should be a member of the
common
> folks, not a Wall Street economist who applauds "creative destruction."
>
> That is Greenspan's real conflict of interest.
>
> The creation of the Federal Reserve System was a confluence of political
> pressures.  Fundamental among these pressure was the new awareness, as
Braudel
> hinted, of a heretical proposition that capitalism cannot sustain price
> stability through market forces.  The proof of that proposition is that if
it
> were possible, centuries of experimentation and innovation would have
surely
> devised a monetary system that could provide stability. But none came
forth. It
> was increasingly recognized that the process of capital
> accumulation inherently produces periodic cycles of fluctuating money
value:
> inflationary "easy money" stimulating economic growth, spreading wealth,
> followed by its depressant opposite "tight money" slowing down growth,
> reconcentrating wealth.
> This peculiar nature of capitalism works until the arrival of political
> democracy.  Any government adopting any money system that makes stable
money a
> permanent feature would eventually confront political upheaval. There was
no
> golden means of money value where all economic participants can be treated
> equally and justly.  Technically, capitalism decrees that money that is
fixed in
> perpetual equilibrium  is a formula for permanent stagnation.
>
> The tight money at the beginning of the 20th century was caused by the
> restoration of the full gold standard (the Gold Standard Act of 1900) from
the
> bimetallism that had been used in the US through much of the 19th century.
> Bimetallism had the fault of "bad money driving out good."  (Gresham's
Law)
> Permanent tight money means permanent high interest rates. And the money
supply
> based on the gold standard after 1900 was inflexible for meeting
fluctuating
> demands of the economy.  The resultant illiquidity rendered the financial
system
> inoperative.
> The liquidity squeeze typically started in the the South and West when
farmers
> bring their crops to market and traders and merchants needed short term
loans to
> finance a seasonal ballooning of trade.  Rural banks were forced to turn
to New
> York for funds.  Country bankers and their farm clients learned from
experience
> that life/death decisions over the economy of Kansas, Texas and Tennessee
reside
> in the Wall Street offices of the likes of JP Morgan.  Thus the term
"money
> trusts" was no radical sloganing or activist hysteria.  It was a very
mainstream
> term that everyone in the West and South understood in the 1900s.
>
> The Populists first proposed a solution to the money question in August
1886 at
> Cleborne, Texas where the Framer Alliance held a convention.
>
> The "Cleburne Demand" borrowed from the Greenback Party which in the
previous
> decade had fought the Gold Standard and defended Lincoln's fiat money.
> Among the "radical" demands were federal regulation of the banking system
and a
> gold based national currency.  The Populists distrusted both Wall Street
and
> Washington and wanted an independent institution to carry out this task.
They
> were openly inflationist, and advocated an expanding money supply and
> a federal issue to replace all private bank notes.  Their slogan: "legal
tender
> for all debts, public and private" appears today on Federal  Reserve
bills.
> Orthodox economist of the day scoffed at the proposals.
>
> Henry C.K. Liu
>
> "J. Barkley Rosser, Jr." wrote:
>
> >      "Populist supporters"?  Are you kidding?
> >      I don't know, maybe the populists supported
> > creation of the Fed.  I suppose that they did.  But,
> > they did not initiate its establishment.  It was always
> > from Day One a creature of the financial establishment
> > in New York.  After the "Rich Man's Panic" of 1907,
> > J.P. Morgan got tired of playing the role of a central
> > banker and had a committee of leading financial lights
> > appointed to determine what should be done to avoid
> > a repeat.  They came up with the Fed.  No populists on
> > that committee, although they may have succeeded in
> > suckering in the rubes.
> > Barkley Rosser
> > ----- Original Message -----
> > From: "Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>
> > To: <pkt@xxxxxxxxxxxxxxxx>
> > Sent: Sunday, May 06, 2001 8:51 PM
> > Subject: Re: ECB and world-wide recession
> >
> > > William:
> > >
> > > We have gone over this disagreement before and I have submitted
several
> > long
> > > posts on the history of the Fed that outline how the banking interest
> > wrested
> > > control of the Fed from the populists farm interest.  So we will
continue
> > to
> > > disagree.
> > >
> > > As for the ECB, it is a central bank without a government.
Nevertheless,
> > the
> > > German government really set the original rules on the euro which the
ECB
> > is
> > > required by law to follow. Thus the ECB is not "independent" in the
sense
> > that
> > > it is free to set policy to encourage inflation. The Bank of Japan is
> > getting
> > > some apparent separation from MITI and the Ministry of Finance, but
> > everyone in
> > > Japan knows that such cosmetic developments were really just to
appease US
> > > pressure.
> > >
> > > Both Blinder and Rivlin may be competent economists, but that was not
the
> > reason
> > > they were put on the Fed Broad.  The reason was their ideologies
matched
> > those
> > > of the administrations nominating them.  Lindsey was nominated for the
> > same
> > > reason as Taylor is about to be.
> > >
> > > I was not thinking of Bush when I said: "The argument of expertise in
a
> > > democracy ends at the staff level", but rather I was thinking of FDR,
> > Kennedy
> > > and Clinton.  Not Carter, who also had no expertise but thought he
did.
> > >
> > > Anyone who labels the statement: "The core of the Federal Reserve's
> > political
> > > base is the commercial banks." as "nonsense" is beyond reason.  You
might
> > as
> > > well call the Department of Energy a voice of environmental protection
or
> > the
> > > Dept. of Commerce the voice of labor.   I remember you once challenged
the
> > term
> > > "populist" as meaningless despite the fact that it is a well
documented
> > movement
> > > in US history.
> > >
> > > You wrote: "Your lengthy discussion of Volcker and the volatile
interest
> > rate of
> > > the 1980-1982 period was quite off the mark when you said the Fed
engaged
> > in an
> > > "exercise in creative uncertainty to disrupt
> > > the financial markets about interest rate stability."
> > > Well. it so happened that that description came from Volcker himself
in
> > his
> > > presentation to the Open Market Committee on the Fed's new monetarist
> > operating
> > > system, and it is not worded the way you misquoted my post which was:
"an
> > > exercise in "creative uncertainty" to disrupt the financial markets'
> > complacency
> > > about interest rate stability."
> > >
> > > You said: "It is increasingly apparent that your extreme dislike of
the
> > Fed and
> > > its role in monetary policy is getting in the way of a balanced
> > (rational?)
> > > view."
> > >
> > > I am not attacking the Fed for being ideologicl/biased.  I am merely
> > pointing
> > > out that by definition, it is not even intellectually independent in a
> > technical
> > > sense.
> > >
> > > You and I have different views on the Fed, you being apologetic and I
> > critical.
> > > I do not harbor "extreme dislike" of the Fed, though it must have
sounded
> > that
> > > way to you when I pointed out that the Fed is not the institutions
that
> > the
> > > original Populists supporters hoped it would be. Yet I am being
critical
> > only on
> > > the inconsistency of the Fed in its own terms.  I have yet to air what
I
> > really
> > > think about the whole notion of central banks and monetary systems for
> > fear that
> > > I be attacked again as a communist propagandist.  Americans have a
right
> > to view
> > > communists as evil, but it is misleading to imply that communists
(which I
> > may
> > > and may not be one, but its nobody's business if I am or not) are not
> > > intelligent or rational.
> > >
> > > I will bypass your description of Volcker's intention as being to
break
> > the
> > > wage-price spiral, except to say that if that was what he was trying
to
> > do, his
> > > judgment as an economist should be questioned, for even Nixon knew
that
> > > wage-price spiral could not be broken by monetary measures, only
> > insitutionist
> > > measures, i.e. wage-price controls.  So much for expertise.
> > >
> > > And you went on to say: "For political cover, Volcker operated under
the
> > > monetarist prescription of controlling the growth rate of the  money
> > supply."
> > > Some independence!
> > >
> > > As for Hoover and Mellon, the Federal Reserve was identified by many
> > historians
> > > as being centrally responsible for the 1929 crash (for letting it
happen)
> > and
> > > its devastating aftermath (for failing to reverse the devastation
> > quickly).  By
> > > your own view, if the Fed were so politically independent, history
would
> > have
> > > been different.  Ben Strong died in October 1928, but three months
before
> > his
> > > death he warned colleagues in July that the banks were engaged in and
> > > encouraging speculation that would end in disaster. He wanted to
tighten
> > credit
> > > and restrain speculative lending.  Yet Adolph Miller and others of the
Fed
> > Board
> > > charged posthumously that Strong had personally engineered the major
> > easing of
> > > credit in the summer of 1927, which Strong did to help the central
banks
> > of
> > > Europe. This generally unpublicized fact was political dynamic: the
idea
> > that
> > > the Fed would secretly serve the needs of international banking at the
> > expense
> > > of domestic interest was beyond the tolerance of the US public even
today,
> > let
> > > along in 1927, even though Strong argued that US assistance to Europe
was
> > > fundamentally a matter of self interest.  As it happened, Strong was
> > technically
> > > flawed.  He was pushing on a credit string in Europe which was in a
severe
> > > liquidity trap and the surplus money flowed instead to the US equity
> > markets,
> > > fueling the bubble that abruptly burst in October 1929.  After the
crash,
> > the
> > > Fed without Strong, failed to flood the market with money, as some
argued
> > that
> > > Strong would have done, allowing the money supply to shrink by
one-third.
> > The
> > > decision not to ease was urged on the Fed by the Federal Advisory
Council,
> > a
> > > commercial bank lobby which enjoyed legal status as official advisor
in
> > secret
> > > sessions.  Its advice was to let nature take its course. Of course, we
all
> > know
> > > that nature had nothing to do with the earlier easy credit that led to
the
> > > crash.
> > >
> > > Henry C.K. Liu
> > >
> > >
> > >
> > >
> > > "William F. Hummel" wrote:
> > >
> > > > Henry Liu wrote:
> > > >
> > > > >James Cumes made a very important point, which has been debated in
the
> > past
> > > > >on pkt.
> > > >
> > > > James Cumes has not clarified what he meant by the "government"
> > > > vis-a-vis setting monetary policy.  Let's let him express his own
> > > > views on this point.
> > > >
> > > > >The Fed is the only central bank that is "independent" the from
> > > > >executive branch of the government.
> > > >
> > > > This is simply untrue.  The central banks of most major economies
> > > > are more or less independent.  The ECB is far more independent
> > > > than the Fed, as was the BUBA before becoming a part of the ESCB.
> > > >
> > > > >Yet the Fed does operate with ideological biases.
> > > >
> > > > What's new?  Show us a government institution (including any
> > > > department of the executive branch) that operates without
> > > > reflecting the biases of its leaders.  I guess when you don't
> > > > agree with their decisions it's ideological, otherwise its
> > > > unbiased.
> > > >
> > > > >Its governors are not nominated on expertise merit but
> > > > >are nominated by the banking industry and politically appointed.
> > > >
> > > > Sweeping generalizations will usually get you in trouble.  Were
> > > > Blinder or Rivlin nominated by the banking industry?  Did they
> > > > lack expertise?
> > > >
> > > > >The argument of expertise in a democracy ends at the staff level.
> > > >
> > > > If true, then we are in trouble.  Maybe you were thinking of Bush
> > > > when you said this.
> > > >
> > > > >Decisions
> > > > >making in a true democracy reflects the will of the people, with
expert
> > > > >staff advice to prevent counter productiveness.
> > > >
> > > > Thus implying the bureaucracy is infallible and "unbiased".
> > > > Where can we find such people?
> > > > >
> > > > >The administration, on the other hand, is popularly elected, as
least
> > > > >supposed to be so.  Thus the President's cabinet, including the
> > Secretaries
> > > > >of commerce, Labor and treasury should really determine monetary
> > policy.
> > > >
> > > > Let's remember that the president appoints the Board of Governors
> > > > of the Fed as well as the cabinet heads.  Both groups are subject
> > > > to approval of the Senate.  Thus both groups reflect the will of
> > > > the people's elected representatives.  Your suggestion that the
> > > > President's cabinet should determine monetary policy would simply
> > > > shift the focus from economic to political.  I am convinced it
> > > > would also be a serious mistake.
> > > >
> > > > Cabinet officers are highly political.  There primary allegiance
> > > > is to the president.  They don't last if they stray from the
> > > > president's line.  Some have even been put in charge of the
> > > > president's re-election.  And remember Treasury Secretary
> > > > Mellon's advice to Herbert Hoover after the 1929 stock market
> > > > crash.
> > > >
> > > > There is no question the BOG has at times made a mess with its
> > > > monetary policy decisions.  But that is not sufficient reason to
> > > > turn monetary policy over to the politicians.  The selection of
> > > > highly qualified and principled candidates for the BOG is
> > > > responsibility of the politicians.  If they can't or don't do so,
> > > > why should we assume the situation would improve if the
> > > > politicians took direct control?  That smacks of the greener
> > > > pasture syndrome.
> > > >
> > > > It is important that the BOG be fairly well insulated from the
> > > > political fortunes of the elected officials.  For much the same
> > > > reason, Federal court officials should be fairly well insulated
> > > > from the political arena.  The fact that they both are is a real
> > > > strength of the US system.
> > > >
> > > > >The core of the Federal Reserve's political base is the commercial
> > > > >banks.
> > > >
> > > > This is nonsense.  If the seven members of the BOG, including the
> > > > chairman, have a political constituency, it is to those who
> > > > appoint and confirm them.  Ultimately it is to the Congress that
> > > > created the Fed and who the BOG must report to.  Yes, commercial
> > > > banks have the ear of the presidents of the Fed banks.  But those
> > > > presidents do not speak with one voice, nor are they the primary
> > > > policy makers of the Fed.
> > > >
> > > > Your lengthy discussion of Volcker and the volatile interest rate
> > > > of the 1980-1982 period was quite off the mark when you said the
> > > > Fed engaged in an "exercise in creative uncertainty to disrupt
> > > > the financial markets about interest rate stability."  It is
> > > > increasingly apparent that your extreme dislike of the Fed and
> > > > its role in monetary policy is getting in the way of a balanced
> > > > (rational?) view.
> > > >
> > > > Volcker's objective was to break the back of the wage-price
> > > > spiral that had been building throughout the 1970s.  That could
> > > > be done by with a big increase in interest rates alone.  It
> > > > didn't require high volatility in rates.  For political cover,
> > > > Volcker operated under the monetarist prescription of controlling
> > > > the growth rate of the  money supply.  Of course that was
> > > > impossible, and the volatility in the Fed funds rate was a
> > > > natural result.
> > > >
> > > > William F Hummel
> > >
> > >
>
>