Greatest Trades Ever; Monetizing Debt

Best-Trades-Of-All-Time

Monetizing Government Debt

In the nineteenth century, the monetary theorist and gold standard advocate Henry Dunning MacLeod, graphically drew attention to the similarity between Law’s plan and the standard practice of the Bank of England (and of modern central banks) of ‘monetizing government debt.” With reference to the latter procedure, MacLeod wrote:

…it is perfectly clear that its principle is utterly vicious. There is nothing so wild or absurd in John Law’s Theory of Money as this. His scheme of basing a paper currency upon land is sober sense compared to it. If for every debt the government incurs an equal amount of money is to be created, why, here we have the philosopher’s stone at once… But let us coolly consider the principle involved in this plan of issuing notes upon the security of the public debts. Stated in simple language, it is this: That the way to CREATE money is for the Government to BORROW money. That is to say, A lends B money on mortgage, and, on the security of the mortgage is allowed to create an equal amount of money to what he has already lent!! Granting that to an extent this may be done without any practical mischief, yet, as a general principle, what can be more palpably absurd.

Today, instead of manipulating the supply of money by printing up and exchanging notes for lands and mortgages, the Federal Reserve System, for example, creates additional bank reserves and check-able deposits in the economy by purchasing Treasury and mortgage securities from the public and the banks.

4 responses to “Greatest Trades Ever; Monetizing Debt

  1. Vishnu V Pillai

    Mr. Chew, forgive my naive question- but the recent speculations among economists of various factions seem to fundamentally misjudge the power of economics.

    If there was one specific action that a Fed or Govt could do why are they not doing it? Is it because there is none!!

    Should Fed stop QE and lend a shock to economy and then catch up from there? Should it continue to encourage speculations in stock markets by punishing bank and fixed interest investments?

    It is rather presumptuous for us to think that we can formulate a strategy where even Max Planck was defeated, but it wouldn’t kill to think, right?

    • Dear Vishnu:

      There are no naive questions. I guess you are describing the Fatal Conceit of central planning.

      Ask yourself if central planning “works?” How can planners allocate trillions of transactions a day better than billions of people interacting freely within a rule of property rights? If they can’t, then the FED should be shut down yesterday.

      Study the Austrian Business Cycle Theory at http://www.mises.org or google it. You see the punishment of savers but you don’t realize the REAL damage00the misallocation of capital that can’t be used properly. Why else abandoned housing complexes in the Las Vegas desert.

      Read these:
      http://mises.org/document/3430/The-Case-Against-the-Fed
      http://mises.org/books/socialism/contents.aspx

      Then go google the Federal Reserve website and read their working papers.

      Which reality do you wish to follow?

  2. Thanks for the links and documents. Being a student and new to concepts other than state sponsored propaganda economics in India it will take some time for me to understand them.

    However I consider myself a supporter of a case against Fed and central planning. I just had to compare North vs. South Korea. How can two countries with same genetically and cultural pasts look so different in 50 years- answer is the economic realities. One survives by selling ginseng roots while another is an economic power house!

    I would like your comments on the method of raising interest rates adopted by Raghuram Rajan in India vs. lowering it at US and else where.

    Where do you think it heads to?

    • Go here for a free beginner to graduate level course in how the world works–human action.

      http://www.libertyclassroom.com/learn-austrian-economics/

      I don’t know the situation in India. If raising interest rates brings them more in line with natural interest rates (time preferences) from artificially depressed, then better. But still, how can a politician know the “proper, correct” rate for an ENTIRE economy of over billion people? Let the free interactions of people within a rule of law and property rights decide.

      North Korea vs. South Korea or how about Cuba vs. Miami Cubans. Singapore vs. Cuba

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