Inflation, deflation, gold and currencies

[xakzen]

...
I can't speak to anything you quoted; however, I can't substantially disagree with any of the following statements by LaRouche:

<various correct info quotes from the article>

Higgie,

I admire your intellectual integrity by quoting the source for your comparison to the 14th century Florentine Banking crisis to today. My only complaint is that LaRouche is a dangerous man and any attribution to him or his organization should come with a huge disclaimer. He's not stupid by any stretch and providing accurate info in this arena is only (IMO) to give himself credibility in other things (like the brainwashing in the rest of the article). This is also a well know tactic in cults to provide accurate info in areas where the inductee has been lied to by authority figures.

I would have preferred you quoted those accurate parts above with a disclaimer as to the nature of the source. My point is not to attack you or this theory as I have a great deal of respect for you and your research. IMO it is a sign of true intellectual rigor that you can distinguish facts from any source and seek out disparate sources for differing views. Part of any research should include the nature and credibility of the sources though. Incredible sources often have credible info (as is this case), but we should take special note to identify those sources with generally low confidence, i.e. careful checking on all facts from that source, e.g. The LaRouche Movement.

I look forward to hearing more about this research you are doing along with your sources.

[vincecate]

Vince, I'm not 100% positive, but I'm pretty sure it's illegal to mint your own coins. That's why many of the commemorative coins you see advertised are produced in Liberia. Correct me if you've researched it, but I'd hate to see you in trouble for doing the prudent thing.

I should not call them coins. A coin is, by definition, something authorized by a government that is used as money. Mine can be called, tokens, medallions, rounds, souvenir gold, etc, but it is not accurate to call them "coins". Also, just having them look like a government coin, with a number in the middle and ridges on the edges etc can get you into trouble. So mine do not look at all like any government coin. I have talked to 3 lawyers and read the relevant laws and I think I am ok. I am in Aguilla, not the US, by the way. So the laws in a country with 13,000 people that had their revolution in 1967 just are not as complicated as in the US. But even in the US and other complicated countries there are private mints making "rounds".

[Higgenbotham]

...the source for your comparison to the 14th century Florentine Banking crisis to today...

I look forward to hearing more about this research you are doing along with your sources.

I should also mention that my first introduction to this topic was from Money, Bank Credit, and Economic Cycles by Huetra De Soto, which is an exhaustive treatment of these subjects from an Austrian perspective.

http://mises.org/store/Money-Bank-Credi ... px?AFID=14

I noticed from the reviews that it seems to have been "discovered" more recently. It was translated from Spanish somewhere around 2006 and is available as a free download here:

http://mises.org/books/desoto.pdf

From pages 70-71 (what constitutes "fraudulent" is a matter of the author's opinion - while the book is a broad historical overview that appears to be one of a kind, it is also heavily biased against fractional-reserve banking),

BANKING IN FLORENCE IN THE FOURTEENTH CENTURY
Around the end of the twelfth and beginning of the thirteenth
centuries, Florence was the site of an incipient banking
industry which gained great importance in the fourteenth century.
The following families owned many of the most important
banks: The Acciaiuolis, the Bonaccorsis, the Cocchis, the
Antellesis, the Corsinis, the Uzzanos, the Perendolis, the
Peruzzis, and the Bardis. Evidence shows that from the beginning
of the fourteenth century bankers gradually began to
make fraudulent use of a portion of the money on demand
deposit, creating out of nowhere a significant amount of
expansionary credit.53 Therefore, it is not surprising that an
increase in the money supply (in the form of credit expansion)
caused an artificial economic boom followed by a profound,
inevitable recession. This recession was triggered not only by
Neapolitan princes’ massive withdrawal of funds, but also by
England’s inability to repay its loans and the drastic fall in the
price of Florentine government bonds. In Florence, public
debt had been financed by speculative new loans created out
of nowhere by Florentine banks. A general crisis of confidence
occurred, causing all of the above banks to fail between 1341
and 1346. As could be expected, these bank failures were
detrimental to all deposit-holders, who, after a prolonged
period, received half, a third, or even a fifth of their deposits
at most.54 Fortunately, Villani recorded the economic and
financial events of this period in a chronicle that Carlo M.
Cipolla has resurrected. According to Villani, the recession
was accompanied by a tremendous tightening of credit
(referred to descriptively as a mancamento della credenza, or
“credit shortage”), which further worsened economic conditions
and brought about a deluge of industry, workshop, and
business failures. Cipolla has studied this economic recession
in depth and graphically describes the transition from economic
boom to crisis and recession in this way: “The age of
‘The Canticle of the Sun’ gave way to the age of the Danse
macabre.”55 In fact, according to Cipolla, the recession lasted
until, “thanks” to the devastating effects of the plague, which
radically diminished the population, the supply of cash and
credit money per capita approached its pre-crisis level and
laid the foundation for a subsequent recovery.56

53Various articles have been written on this topic. See the interesting one
by Reinhold C. Mueller, “The Role of Bank Money in Venice,
1300–1500,” in Studi Veneziani n.s. 3 (1979): 47–96, and chapter 5 of his
book, The Venetian Money Market. Carlo M. Cipolla, in his notable publication,
The Monetary Policy of Fourteenth-Century Florence (Berkeley: University
of California Press, 1982), p. 13, also affirms: “The banks of that
time had already developed to the point of creating money besides
increasing its velocity of circulation.”

I noted a later work by Mueller.

As an aside, this was another instance where precious metals based coins were used. My recollection, though, is that it was a bit more complicated than just that. Some of the city-states, or classes of people (I can't remember which) were using primarily silver coins and some primarily gold coins. It seems like there were speculative attacks on silver based coinage, which caused wild fluctuations (both in asset prices and the price of silver relative to gold). I would have to review this nuance again to get it all straight, but that's a start.

From page 480,

Cipolla points out that the crisis resulted in the
destruction of a great stock of wealth, and real estate
prices, which had skyrocketed, plummeted to half
their former value, and even such a reduction in price
was insufficient to attract enough buyers. According
to Cipolla, it took thirty years (from 1349 to 1379) for
a recovery to begin.

[OLD1953]

Hyperinflations are never rational responses to market conditions, they are panics and must be examined as panics, not as a normal market response. They are a bubble in a sense, a bubble of "the money isn't worth anything" irrationality.

If the market was perfectly rational, then doubling the quantity of money in circulation over a given period of time would cause prices in that currency to double, less any production increases over that period. That's obvious.

Markets are often irrational. And irrational markets go to bubbles or panics.

Germany's national debt was 288 billion marks in October 1920. Had the Weimar printed that many marks and paid off all debts, there would still have been insufficient marks in circulation to justify a collapse of billions to one.

I have never found any series of numbers that supported the claims that Germany created billions of marks for each mark formerly in existance BEFORE the hyperinflation started. How can something cause an effect before the action? That's as absurd as the claims that protectionist laws caused the drop in foreign trade that occured two years previously.

Effect does not precede cause in the universe I inhabit. Apparently economists live somewhere else, given the number of claims that I've encountered that do have effect preceding cause.

[vincecate]

Hyperinflations are never rational responses to market conditions, they are panics and must be examined as panics, not as a normal market response. They are a bubble in a sense, a bubble of "the money isn't worth anything" irrationality.

If the market was perfectly rational, then doubling the quantity of money in circulation over a given period of time would cause prices in that currency to double, less any production increases over that period. That's obvious.

Markets are often irrational. And irrational markets go to bubbles or panics.

Germany's national debt was 288 billion marks in October 1920. Had the Weimar printed that many marks and paid off all debts, there would still have been insufficient marks in circulation to justify a collapse of billions to one.

I have never found any series of numbers that supported the claims that Germany created billions of marks for each mark formerly in existance BEFORE the hyperinflation started. How can something cause an effect before the action? That's as absurd as the claims that protectionist laws caused the drop in foreign trade that occured two years previously.

Effect does not precede cause in the universe I inhabit. Apparently economists live somewhere else, given the number of claims that I've encountered that do have effect preceding cause.

Look at the Diagram I to Diagram IV in this:
http://www.gold-eagle.com/gold_digest_0 ... 41707.html

They started printing money and then prices started going up. The cause did precede the effect.

How else could people have wheelbarrels full of money? Or how do I have a Zimbabwe $100 trillion dollar note?

As the central bank prints more money it steals value from all the holders of money. This is the "inflation tax". When the government can't cut their budget, can't increase taxes, and can't borrow enough to get cash going out to match cash coming in they are forced to print money. Once that starts people don't want to loan money to the government, paying last years taxes with inflated dollars means taxes don't work so well, so the government gets stuck with getting more and more of their money from the "inflation tax".

Now as people realize what is going on and all rush to get rid of their cash holdings there is a panic. Mises called this the "crack up boom". All of the sudden people rush to convert their savings into tangible things before the money becomes worthless. People will be in a panic then but the talking heads will no doubt be talking about how sales are up.

And in anticipating future money printing, and getting cash out of their hand, it is possible that the prices will go up more than the current money supply would indicate. But anticipating the future is not irrational.

http://whiskeyandgunpowder.com/the-worl ... k-up-boom/

[vincecate]

From pages 70-71 (what constitutes "fraudulent" is a matter of the author's opinion - while the book is a broad historical overview that appears to be one of a kind, it is also heavily biased against fractional-reserve banking),

There is a fraud in taking demand deposits and loaning them out long term while just keeping a fraction of the amount that could be demanded at any time on hand. On any given day if too many people demand their money back the bank can fail, unless there is a "lender of last resort" than can print any amount of money when needed and loan it to the bank.

If a bank only made 5 year loans after it raised the cash selling 5 year bonds of matching amount there would not be any fraud or risk of bank runs. Also, banks would not be "creating money". Right now the cash from a demand deposit can be loaned out and both the demand deposit and the cash loaned out are counted as part of the money supply. Both parties think they can spend the money and yes this can repeat. But if someone buys a 5 year bond from the bank the bond they are holding is not part of the money supply so the money supply is not increased.

http://pair.offshore.ai/38yearcycle/#banks

[Higgenbotham]

From pages 70-71 (what constitutes "fraudulent" is a matter of the author's opinion - while the book is a broad historical overview that appears to be one of a kind, it is also heavily biased against fractional-reserve banking),

There is a fraud in taking demand deposits and loaning them out long term while just keeping a fraction of the amount that could be demanded at any time on hand.

Legally, it's well established that fractional-reserve banking is not fraudulent. From pages 124-125 (similarly, as de Soto shows that Anglo-Saxon law has found that no fraud occurred with the loaning of demand deposits, what constitutes "mistaken" or "erroneous" is also a matter of the author's opinion).

THE MISTAKEN DOCTRINE OF COMMON LAW
The doctrine equating the monetary irregular-deposit contract
with the loan or mutuum contract has also prevailed in
Anglo-Saxon common law, via the creation of law in the binding
case system. At the end of the eighteenth century and
throughout the first half of the nineteenth, various lawsuits
were filed by which depositors, upon finding they could not
secure the repayment of their deposits, sued their bankers for
misappropriation and fraud in the exercise of their safekeeping
obligations. Unfortunately, however, British case-law
judgments fell prey to pressures exerted by bankers, banking
customs, and even the government, and it was ruled that the
monetary irregular-deposit contract was no different from the
loan contract, and therefore that bankers making self-interested
use of their depositors’ money did not commit misappropriation.
9 Of all of these court rulings, it is worthwhile to
consider Judge Lord Cottenham’s decision in Foley v. Hill and
others in 1848. Here the judge arrives at the erroneous conclusion
that

the money placed in the custody of a banker is, to all intents
and purposes, the money of the banker, to do with it as he
pleases. He is guilty of no breach of trust in employing it. He
is not answerable to the principal if he puts it into jeopardy,
if he engages in a haphazardous speculation; he is not
bound to keep it or deal with it as the property of his principal,
but he is, of course, answerable for the amount,
because he has contracted, having received that money, to
repay to the principal, when demanded, a sum equivalent to
that paid into his hands.10

I happen to agree with the judge. It's my opinion that it should be well understood by anyone making a demand deposit that a banker can't hold the money in perfect safe keeping and pay interest on it at the same time. A depositor is risking his money to the expertise of the banker to properly employ it in return for a cut of the profit. If a depositor wants perfect safe keeping, that's what safe deposit boxes or home safes are for. The banker has an obligation to fully disclose how that money is being employed (generally not being done today). The government has an obligation to ensure that full disclosure is being met and to shut down any fraudulent operations (not being done today). The depositor has an obligation to carefully review the records of the bank and make a determination as to whether he/she wants to continue to bear the risk that is inherent in giving a banker money in exchange for the service of employing it and being paid part of the proceeds in interest (not being done today because the FDIC has stepped into the picture and everyone assumes their money is safe, thus, the obligation of due diligence by the depositor has been abdicated, which allows the other obligations listed above to be more easily abdicated - in my opinion, the FDIC is a fraud!).

[vincecate]

It's my opinion that it should be well understood by anyone making a demand deposit that a banker can't hold the money in perfect safe keeping and pay interest on it at the same time.

Imagine that I sell 10 year bonds and then make 10 year loans to home owners but only up to 50% equity. Then I can pay interest, but be far safer than existing banks. There is no danger of people taking their money out at a random time and causing my system to collapse.

In my system people who wanted to be able to spend their money in 3 months would buy 3 month bonds and those that were ok for 2 years would buy 2 year bonds. My loan durations would match up to by deposit durations (really bond sales). If there was nobody willing to buy 30 year bonds at 4% then I would not make 30 year loans at 4% even if 3 month interest rates were less than that.

With demand deposits and long term loans there is some chance on any given day that too many people want their money and too much is locked up in long term loans. The banker is telling all the customers they can take their money out at any time, but it is not true as he has most of it loaned out and could not pay if too many people demand their money back. It is a fraud. It is a system designed to fail and it regularly does fail.

Another way fractional reserve banking can fail is if money is loaned out long term at fixed rate, say 30 years at 4% and then interest rates on demand deposits go up higher than this, say 10%. Now the money is out at 4% and can't be pulled back in, but to keep deposits the bank would need to pay 10%, but it can not afford to since it is only earning 4%. Fail.

If it is loaned out at a variable rate but people with the loans can only pay the starting rate, say 4%, and all default if the interest gets up to 10%, then it also fails.

Now just because it is legal does not mean it is not fraud. For many years WorldCom and Enron were legal too. That people do it does not make it a good or honorable system. It is dishonest to tell all the depositors they can take their money out at any time when it is not true. It is a broken system and having the FDIC insuring it or the Fed printing money to backstop the banks is just a patch on a broken system.

I think at some time in the future most people will not put their money into any bank operating under a "fractional reserve system".

[Higgenbotham]

Now just because it is legal does not mean it is not fraud. For many years WorldCom and Enron were legal too. That people do it does not make it a good or honorable system. It is dishonest to tell all the depositors they can take their money out at any time when it is not true. It is a broken system and having the FDIC insuring it or the Fed printing money to backstop the banks is just a patch on a broken system.

The only obligation a specific legal entity such as a corporation has with regard to fraud is to comply with the legal definition. If a bank takes in demand deposits and issues the legally required disclosures to their depositors and loans those deposits in compliance with the law, then the bank has not engaged in fraud.

When discussion of the overall system is undertaken, it can be reasonable to use the generic definition of fraud and have the opinion that a fractional reserve system is fraudulent. However, I don't share the opinion that a fractional reserve system is fraudulent for the reason that it is never explicitly guaranteed that all depositors can simultaneously withdraw their money. The stipulation is made on an individual basis and any depositor who believes that it's possible to receive risk free interest or that all depositors can simultaneously withdraw their money deserves to lose their money if they're that uninformed. Going beyond that, it's my belief that a fractional reserve banking system is an overall benefit to society because it helps it to progress at a faster rate than would otherwise be possible. However, there need to be limits and those limits have been vastly exceeded, with the result that a system which could have been beneficial has been abused and turned into a negative.

In my opinion, the FDIC may have been a band-aid for a time during certain generational alignments, but it was a band-aid that never allowed the wound to heal and turned the wound into a gaping hole during this unravelling/crisis era. The FDIC created the illusion of risk free demand deposits and allowed depositors to ignore safety and chase high yields only. Once that dynamic got established as the generations who lived through the Depression died off, then all the banks were forced to engage in riskier and riskier behavior to satisfy the demand for high interest deposits. This meant that many banks who kept large cash reserves on their balance sheets were devoured by riskier banks and coverted to their models. I watched this happen in my local area. By 2003, there were no banks within 100 miles that met the criteria I had established for safety. And the devouring of less risky banks is also what happened in the lead up to the 14th Century financial collapse.

[OLD1953]

Those graphs do not show a rational relationship of cause and effect. They seem to show what I said I had seen in all the figures I've tracked down in the past, that inflation did not follow a rational path during this period. IOW, there was a panic.

As nearly as I can determine what actually happened, Germany did manage to keep price inflation down for several years. Had it been allowed to go to its natural level (as he said a 400% inflation over several years) it would have been messy, but very likely they'd not have collapsed as quickly. The French with their insistence that Germany must die forever, didn't help matters by demanding payment of "war debts" sans inflation.

When the inflation finally exploded under them, they didn't raise taxes at once, they started putting everything on the cuff. Then they took certainty out of the taxes by trying to index them to inflation. Nobody knew what their taxes would be, nobody knew what their savings were worth, etc.

The combined stresses reduced the public confidence in the financial and governmental system to zero, and they started treating marks as wastepaper, fleeing to other currencies whenever possible.

After that, the crazy issuances of huge notes, the RentenMark and so forth, started. The time line just doesn't seem to support the idea of worthlessness coming along so rapidly, IF the market was logical.

The interesting part of all this to me, is that it was actually beneficial in the long term, as it reset all the books to zero and removed overhangs of bad debt.