Typography

John Maynard Keynes and Harry Dexter White, who contributed to the design of the Bretton Woods system David Glasner's piece on the gold standard got me thinking about the Bretton Woods system, the monetary system that prevailed after WWII up until the early 1970s. There are many differences between Bretton Woods and the classical gold standard of the 1800s. My claim is that despite these differences, for a short period of time the Bretton Woods system did everything that the classical gold standard did. I'm using David's definition of a gold standard whereby the monetary unit, the dollar, is tied to a set amount of gold. This linkage ensures that there can never be an excess quantity of monetary liabilities in circulation—unwanted notes will simply reflux back to the issuer in return for gold. When most people criticize Bretton Woods, they say that it lacked such a linkage. A narrowing redemption mechanism For a gold standard to be in effect, a central bank's notes and...

One of the coining press rooms in the Tower of London, c.1809 [ link ] [This is a guest post by Mike Sproul .] The law of reflux thus assures the impossibility of inflation produced by overexpansion of bank credit. (Blaug, 1978, p. 202.). It is the reflux that is the great regulating principle of the internal currency; and it was by the preservation of the reflux, throughout all the perils and temptations of the period of the restriction, that the monetary system of these kingdoms was saved from the utter wreck and degradation which overwhelmed every paper-issuing state on the Continent… (Fullarton, 1845, p. 68.) If you want to understand the law of reflux (and you should), then think of silver spoons. The silversmith shown in figure 1 can stamp 1 oz. of silver into a spoon. If the world needs more spoons, then silversmiths will find it profitable to stamp silver into spoons. If the world has too many spoons, then people will find it profitable to melt silver spoons. Unwanted spoons wi...

It's the Roe v Wade of the blogosphere, a battle that never quite gets resolved. Nick Rowe and David Glasner have been having one of their bi-annual debates over the ability of private bankers to create excess deposits. See here , here , and here . The nub of their conflict seems to resolve revolve around the following points: if we assume that 1) bank deposits and cash are imperfect substitutes for each other, and that 2) bankers simultaneously raise the rate on deposits and increase the quantity of deposits, then 3) an excess supply of deposits and cash will emerge. Nick argues for the last point while David argues against it. At the risk of only adding noise to what is always an interesting debate, I'm going to chime in. I'm going to focus on the step-by-step process by which events play themselves out, the bricks & mortar if you will. Given the complexity of this process there will no doubt be errors in this post, hopefully readers will flag them. The thought expe...

Elijah and the Widow of Zarephath James Tobin wrote a paper back in 1963 called Commercial Banks as Creators of Money in which he pointed out that banks don't possess a widow's cruse . There has been a bit of a blog uproar over Tobin's paper (See Paul Krugman , Winterspeak , JKH , L. Randall Wray , Nick Rowe , Cullen Roche , Ramanan , Roger Sparks , and Steve Randy Waldman ). My two bits will hone in on the widow's cruse aspect of the debate. The phrase widow's cruse is defined as "an inexhaustible supply of something," which in turn is a reference to an obscure Bible story. Flip to I Kings 17:7–16 and there is a short passage in which the prophet Elijah asks a destitute widow to make him a loaf of bread. The Lord blesses the widow saying that the "jar of flour will not be used up and the jug of oil will not run dry until the day the Lord sends rain on the land." What Tobin was referring to in his paper is that unlike the widow and her jug of o...

In the comments section of my post on Adam Smith and the Ayr Bank , frequent commenter John S. brought up the real bills doctrine . The phrase real bills doctrine gets thrown around a lot on the internet. To muddy the waters, there are several versions of the doctrine. In this post I hope to dehomogenize the various versions in order to add some clarity. 1. Lloyd Mints's version We may as well start with Lloyd Mints's version, since he coined the phrase real bills doctrine back in 1945 on his way to denouncing the doctrine. Mints taught at the University of Chicago and mentored Milton Friedman. [1] Here is Mints: The real-bills doctrine runs to the effect that restriction of bank earning assets to real bills of exchange will automatically limit, in the most desirable manner, the quantity of bank liabilities; it will cause them to vary in quantity in accordance with the "needs of business"; and it will mean that the bank's assets will be of such a nature that they...

Dreaming of Immortality in a Thatched Cottage - 1500s Exogenous/endogenous money , reflux , hot potato money , helicopter money , inelastic vs elastic currency. These are all part of the colourful lexicon developed by monetary economists over the centuries to outline a general set of problems: how does money get emitted from source, and when, if at all, does it return to source? We usually describe money as exogenous, hot potato, helicopter, or inelastic if it is emitted at the initiative of the issuer, and the issuer doesn't allow the public to exercise any initiative in returning this money back to source. Once it has been air-dropped into circulation from a helicopter, this kind of money becomes immortal, passing like a hot potato from person to person forever. We describe money as elastic or endogenous when the money-using public exercises its own initiative in both drawing money out from an issuing source and pushing (refluxing) this money back to the source. This sort of mo...

The Rowe/Glasner/Sproul debate continues over hot potato-ish-ness of money. Here is Nick Rowe: The hot potatoes simply pass from one hand to another. Unless they sell it back to the banks, to buy IOUs. But why would they want to do that? If I have opals I want to get rid of I will probably sell them at the specialised opal dealer, who will probably give me the best deal. If I have money I want to get rid of....well, everyone I deal with is a dealer in money. The bank is just one in a thousand. Why would we assume that the bank will always give me a better deal than the other 999? Mike Sproul jumps in, but David doesn't, so instead I left a comment trying to anticipate what David would say: Why would people want to return hot potatoes to the bank? David explicitly sets his illustration of reflux in a world characterized by fixed convertibility. Say the central bank promises to convert deposits into x gold ounces and vice versa. If there are too many deposits being created, people s...

I had a few comments on a recent David Glasner post. Basically, I was trying to understand the way he reconciles various aspects of the monetary system, namely, inside and outside money, the arbitrage mechanism that links these two assets, and the price level. David responded to me- Inside money cannot trade at a discount relative to outside money because inside money is issued on the condition of its being convertible into outside money, so they always are exchangeable at par. If too much inside money is created (i.e., more than the public desires to hold given the relative attractiveness of holding inside money relative to alternatives including outside money) it refluxes back to the issuing banks.  David says that excess inside money (say convertible bank notes) will reflux back to an issuing bank. But the only way this can happen, as far as I can see, is if somehow that bank's inside money trades at a slight discount to outside money (gold). David in his first sentence above s...