The Fundamental Left-Right Divide

In her first formal appearance as head of the United States Federal Reserve, Janet Yellen obliquely suggested the Fed might not raise its mighty “federal funds” rate to tighten the economy until months after its Quantitative Easing bond purchasing ended completely, coyly portending cheap money indefinitely. The market shuddered but soon calmed at the soothing voice of its controller.

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The Marriage of Governments and Banks—For Better or for Worse

Charles Calomiris and Stephen Haber, combining their scholarly command of banking and political institutions, have published a book full of fertile ideas, instructive histories of the evolution of a number of banking systems, and provocative interpretations of the co-dependency between banks and governments.

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Friday Roundup, February 7th

  • February’s Liberty Law Forum engages the questions of what is American liberty and what is required to support it. Lead essay by Ted McAllister with responses from Bradley Thompson, (and upcoming) Steven Grosby, Bill Dennis, and Hans Eicholz.
  • Getting from aid to enterprise: The next Liberty Law Talk discusses with Michael Miller, director of the Acton Institute’s PovertyCure documentary, the conditions that should guide any approach to assist human flourishing in the poor regions of the world. Frequently missing, Miller highlights, in current interventions is an understanding of how crucial the rule of law, property rights, and markets are in the uplift from poverty, and that frequently, these economic and legal orderings are absent in areas of hardship.

When democracy was restored in Spain I was elected to Parliament as a lonely libertarian in a conservative ticket. I was not cut out for the job and did not stay long. Does this mean that I had not understood and digested the lessons of The Prince?

[T]he authors of the Federal Reserve Act could certainly not have even imagined, let alone expected, what their creation has become in a century. They would have been utterly dumbfounded at a Federal Reserve that:

— Is formally committed to, and is producing on purpose, perpetual inflation.

— Has no link of any kind to a gold standard.

— Thinks it is supposed to, and that it is capable of, “managing the economy.”

— Invests vast amounts in, and monetizes, real estate mortgages.

— Has chairmen who achieve media star status, as for example, “The Maestro.”

— Wields the authority of a unitary central bank, centralized in Washington D.C., rather than being a federal system of regional “reserve banks.”

Friday Roundup, October 11th

In a rather facile first chapter, “Burke in Brief: A ‘Philosophical’ Primer,” Maciag goes further, dismissing Burke as a political philosopher by asserting that “whatever ‘philosophy’ Burke expounded was extracted by others from his pamphlets, letters, and orations, which were produced in the heat of political battle.” Minimizing Burke’s explicitly philosophical and aesthetic works, Maciag also eschews engagement with the substantial literature on the philosophical underpinnings of prudence and the commitment to tradition (one need only mention Michael Oakeshott in this context). Thus, Maciag allows himself to forego any search for a deeper consistency when he comes across seemingly contradictory positions in Burke’s work, further allowing himself to treat all of Burke’s interpreters as more or less self-serving or “entrepreneurial.”

  • Nick Rosenkranz on things we shouldn’t forget: James Madison wants the House of Representatives to win the shutdown.

Debt? No Prob

Come tomorrow or whatever, the government may not open. (They’re closing down all “non-essential” offices, such as the Department of State: we’ll be leading from way behind. Any office that doles out money will remain open.) Soon in this theater: the debt ceiling, and more needless contretemps. The easy solution comes (as often) from my buddy Alex Pollock. In this case, he cheerfully concedes that the idea wasn’t his but President Eisenhower’s, way back in 1954:

In order to keep making payments, the Treasury increased its gold certificate deposits at the Federal Reserve, which it could do from its dollar “profits” because the price of gold in dollars had risen. The Fed then credited the Treasury’s account with them, thereby increasing the Treasury’s cash balance. Treasury then spent the money without exceeding the debt limit. By the spring of 1954, Congress had raised the debt ceiling from $275 to $280 billion (2 percent or so of today’s limit), so ordinary debt issuance could continue.

The Secretary of the Treasury still is authorized to issue gold certificates to the Federal Reserve Banks, which will then credit the Treasury’s cash account. This is correctly characterized as monetizing the Treasury’s gold, of which it owns more than 8,000 tons. An old law says this gold is worth 42 and 2/9 dollars per ounce, but we know the actual market value is about 38 times that, at more than $1,600 per ounce.

Do the math: we ought to be okay until at least Thanksgiving. All with a bookkeeping transaction—provided it’s legal.

Friday Roundup, September 6th

  • The Legal Historian as Entomologist” is this week’s review essay of David Rabban’s Law’s History: American Legal Thought and the Transatlantic Turn to History. John McGinnis’ essay concludes that legal history’s real work is

in probing the historical meaning of fixed texts rather than charting the history of the evolution of the common law. Insofar as originalism continues to gain currency, it makes history directly relevant to current law. But rather than to trace a concept through the hedges and byways of case law, this kind of legal history would seek to capture the meaning of words, concepts and legal practices at the particular time at which an important legal document, like the Constitution, was written. Thus, the legal historian of tomorrow may contribute to the making of contemporary law not so much as an embryologist who studies the development of legal concepts but rather as an entomologist who pins down the historical meaning of text, preserving the butterfly in its various shades of brilliant color for all to see.

Friday Roundup, April 26th

Before Super PACs, McCain-Feingold, “soft money,” and the Keating 5; before Watergate, and even before Teapot Dome, there was the Michigan Senate race of 1918. . . . one of the nation’s most contested elections and earliest campaign finance “scandals. . . . Unlike the typical political saga, however, Baker presents the story not as a morality tale of honest government corrupted by big money, but rather as a cautionary story about big government regulation of honest money and the political choices of the electorate.

  • Intervention like its 1820: Featured on Liberty Fund’s Online Library of Liberty is John Taylor of Caroline’s thoughts on freedom, property, and early efforts by the feds to direct the economy.
  • So how is this representative government? They don’t read the legislation they pass, which can’t even really be called law. They don’t appropriate the money to pay for it and, apparently, exempt themselves from its consequences.

But where does the Treasury get its money? Well, to a very significant extent, it gets it from the Federal Reserve, which has so far amassed more than $1.8 trillion of Treasury debt, and keeps on buying — again at the top of the market. This all makes a most interesting triangle of government finance, as shown in Figure 1. Thinking about it, my brother, a Swiss private banker, observed, “Just about what John Law built in France in 1716-1720” — referring to the notorious paper money theorist and government banking practitioner, who inflated the infamous “Mississippi Bubble” of his day.


The Fed, by buying long-term MBS and long-term Treasury debt, especially by buying them at the top of the market — a top which its own purchasing pressure is intentionally creating — is concentrating massive interest rate risk on its own balance sheet. By “the Fed’s” balance sheet, we actually mean the aggregate balance sheet of the 12 Federal Reserve Banks. This consolidated balance sheet has $3.3 trillion in total assets and $55 billion in equity, for leverage of a heady 60 times and a capital ratio of a paltry 1.7 percent.

Pollock notes that the accounting rules are different for the Fed when it comes to stating its losses. So you won’t even be able to believe your lying eyes. Better stated: it made up the rules.

The Fed controls its own accounting standards and, in 2011, changed its accounting so that even with a net loss of $55 billion, its capital would still be reported as $55 billion. If it lost $100 billion, its capital would still be $55 billion. If it lost $200 or $300 billion, its capital would still be $55 billion. Get it?

When Government Goes Into Business

The sequester is kicking in, and the consequences are upon us: airplanes are falling out of the sky, furloughed FBI agents commiserate over donuts, sea levels keep rising. Help, however, is on the way. Increasingly, federal agencies are funding themselves from sources other than appropriations. Not a few have turned into profit centers for the Congress.

Just last week, the Federal Reserve proposed a fee schedule for its banking oversight “services,” pursuant to section 318 of Dodd-Frank and to the tune of $440 million. (That’s what the exercise supposedly costs the government. What it costs the banks and the economy, no one knows.) Not everyone is happy with the NPR—see here.

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Alexander Hamilton’s Legacy in Banking and Finance

We come now to the final and perhaps most important part of McCraw’s Founders and Finance: the practical effects of Hamilton’s political economy. Here is where Hamilton’s ultimate legacy is often said to be. The precedent of the idea of a national bank or ultimate regulatory authority over money became, at this point in time, inextricably part of American politics. This is not to say that the idea of national banking was inextricable institutionally. Andrew Jackson ended the second Bank of the United States, and the idea of the Independent Treasury held sway until the National Bank Acts of the Civil War. But Hamilton had established the first political precedent of national involvement in money and finance. That history and its supposed success would be continually asserted to pave the way, at least in part, for the Federal Reserve System in the early twentieth century.

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