Tag Archives: Rothbard

Speculation during the Great Crash of 1929


This 1931 article written in the aftermath of the Great Crash of October 1929 and in the teeth of the Great Depression illustrates the pattern of human emotions in the boom/bust cycle. This should be read alongside Murray Rothbard’s excellent work, America’s Great Depression which analyzes in detail the causes of the depression.

But can speculation be fettered? Are we dealing with human emotions which defy control? Certainly, we cannot fetter speculation by our naïve American tendency immediately to enact a law. Making short selling—a that bête noire of the amateur economist—a crime or attempting to forbid speculation in securities by imposing a heavy tax upon the resale of stock recently purchased, would obviously be impractical as well as futile in a democratic state. So, too, an effort to distort and distend the functions of the Federal Reserve System, by charging it with the power and duty to ration supplies of credit to the stock market, would be an unworkable and paternalistic venture.

A Great Depression_Rothbard



Economic theory demonstrates that only governmental inflation can generate a boom and bust cycle, and that the depression will be prolonged and aggravated by inflationist and other interventionary measures. In contrast to the myth of laissez-faire, we have shown how government intervention generate the unsound boom of the 1920s, and how Hoover’s new departure aggravated the Great Depression by massive measures of interference. The guilt for the Great Depression must, at long last, be lifted from the shoulders of the free market economy, and placed where it properly belongs: at the doors of politicians, bureaucrats, and the mass of “enlightened” economists. And in any other depression, past or future. the story will be the same. (Rothbard, America’s Great Depression p. 295)

Is Sears the Next Berkshire Hathaway?

A good article about not overpaying for assets.

It’s fair to blame Lampert for making what was, in effect, a major real estate investment near the peak of the biggest real estate bubble in American history. But investors frustrated by watching the share price fall by more than 80 percent from its 2007 highs have no one to blame but themselves. Anyone who bought Sears when it traded for nearly $200 per share clearly didn’t do their homework. They instead were hoping to ride Lampert’s coattails while somehow ignoring the value investor’s core principle of maintaining safety by not overpaying for assets.

See: http://sizemoreletter.com/is-sears-the-next-berkshire-hathaway-2/


Another Viewpoint

I abhor guns of any kind and think it is outrageous that Americans should want the right to defend themselves. How dare this woman seek to carry a gun. Doesn’t everyone know that the government will protect us.

Herbalife, Money and Automated Value Investing


…..So Ackman vs. Herbalife has no heroes. Both parties, in their own way, take advantage of the goodwill and trust that underlie capitalism. Herbalife recruits sales people with the knowledge–based on mathematical certainty but undisclosed to its recruits–that the vast majority will lose money. Mr. Ackman, for his part, has gotten rich betting against bad companies. One party is possibly immoral, the other party at best amoral. Who do you cheer for? –Mr. Karlgaard, publisher of Forbes (A Short Seller Takes on a Vitamin Vendor, WSJ Jan 4, 2013)

Ackman vs. Herbalife

I first mentioned this battle here: http://wp.me/p2OaYY-1zj

Yes this battle will be gruesome, bloody and long (perhaps) but our purpose is to understand whether Herbalife which–as of the last filing–sported franchise-like financials of high ROA, ROE and ROIC with growing sales. Copious cash flow. On the surface, the company seems to have a franchise. Why can’t other companies do the same thing. What barriers to entry are there? Product patents, customer captivity, economies of scale and scope, network effects, etc.  This battle will allow us to understand what drove Herbalife’s success. Will it be fleeting or lasting. My bet is that Herbalife does NOT have a lasting competitive advantage.

The quote above by Mr. Karlgaard is disappointing because as a publisher of a business magazine, he should understand Mr. Ackman’s purpose. A good investor should invest in companies that will use owner’s capital wisely  and should not invest or even warn against investing in companies that mis-allocate capital for the long-term.  Short sellers are just as important as having a Warren Buffett in the market. An Ackman does more for future growth than any government program because–like him or not–Mr. Ackman is trying to take capital away from poorly managed, potential frauds, unsustainable businesses while allocating capital to companies that will use his investors’ capital beneficially.  He may be proven wrong but that is for the market to decide.

UPDATE: MONEY SUPPLY EXPLOSION--We are now officially in double digit territory for non-seasonally adjusted 13 week annualized money supply (M2) growth. Here is the amazing ascent in growth over recent weeks: 5.1%, 5.6%, 6.6%, 7.1%, 7.5%, 7.8%, 8.2%, 8.4%, 8.7%, 9.0%, 9.3%, 9.6%, 9.9%, 10.7%. It is this growth that is going to fuel the U.S. economy, the U.S. stock market and commodities. www.economicpolicyjournal.com


Investing in Banks

I find investing in global banks like Bank of America or Citibank impossible because I have no way to value or understand their businesses. How much “shadow” banking do these entities engage in? I don’t want to find out the hard way. See the article below

Some four years after the 2008 financial crisis, public trust in banks is as low as ever. Sophisticated investors describe big banks as “black boxes” that may still be concealing enormous risks—the sort that could again take down the economy. A close investigation of a supposedly conservative bank’s financial records uncovers the reason for these fears—and points the way toward urgent reforms.

The financial crisis had many causes—too much borrowing, foolish investments, misguided regulation—but at its core, the panic resulted from a lack of transparency. The reason no one wanted to lend to or trade with the banks during the fall of 2008, when Lehman Brothers collapsed, was that no one could understand the banks’ risks. It was impossible to tell, from looking at a particular bank’s disclosures, whether it might suddenly implode. Red the whole article:


The authors of the above article don’t grasp the true cause of the banking panic. Yes, transparency is a problem, but that would ALWAYS be true under our current fractional reserve banking system–it’s inherently a Ponzi scheme that functions on public gullibility and government edict–banks get to violate private property rights.

PS: can anyone fill in the blanks? All panics arise from excess _______ over and above ___________. Correct answer wins this prize:

Automated Value Investing

Download Toby’s free chapter and read this article on eliminating behavioral errors: http://greenbackd.com/2012/12/26/quantitative-value-a-practitioners-guide-to-automating-intelligent-investment-and-eliminating-behavioral-errors/

A Student’s Guide to Learn about Money from Murray Rothbard

Rothbard and Money by Llewellyn H. Rockwell, Jr.

This was published on January 2, 2013, in Ron Paul’s Monetary Policy Anthology: Materials From the Chairmanship of the Subcommittee on Domestic Monetary Policy and Technology, US House of Representatives, 112th Congress.   All the books mentioned in this article are free on the web, go to www.mises.org and do a book search by title.

The scholarly contributions of Murray N. Rothbard span numerous disciplines, and may be found in dozens of books and thousands of articles. But even if we confine ourselves to the topic of money, the subject of this volume, we still find his contributions copious and significant.

As an American monetary historian Rothbard traced the party politics, the pressure groups, and the academic apologists behind the various national banking schemes throughout American history. As a popularizer of monetary theory and history he showed the public what government was really up to as it took greater and greater control over money. As a business cycle expert he wrote scholarly books on the Panic of 1819 and the Great Depression, finding the roots of both in artificial credit expansion. And while the locus classicus of monetary theory in the tradition of the Austrian School is Ludwig von Mises’ 1912 work The Theory of Money and Credit, the most thorough shorter overview of Austrian monetary theory is surely chapter 10 of Rothbard’s treatise Man, Economy and State.

Rothbard placed great emphasis on the central monetary insight of classical economics, namely that the quantity of money is unimportant to economic progress. There is no need for the money supply to be artificially expanded in order to keep pace with population, economic growth, or any other factor. As long as prices are free to fluctuate, changes in the purchasing power of money can accommodate increases in production, increases in money demand, changes in population, or whatever. If production increases, for example, prices simply fall, and the same amount of money can now facilitate an increased number of transactions commensurate with the greater abundance of goods. Any attempt by “monetary policy” to keep prices from falling, to accommodate an increase in the demand for money, or to establish “price stability,” will yield only instability, entrepreneurial confusion, and the boom-bust cycle. There is no way for central bank policy or any form of artificial credit expansion to improve upon the micro-level adjustments that take place at every moment in the market.

With the exception of the Austrian School of economics, to which Rothbard made so many important contributions throughout his career, professional economists have treated money as a good that must be produced by a monopoly – either the government itself or its authorized central bank. Rothbard, on the other hand, teaches that money is a commodity (albeit one with unique attributes) that can be produced without government involvement. Rothbard’s history of money, in fact, is a history of small steps, the importance of which are often appreciated only in hindsight, by which government insinuated its way into the business of money production.

It was Carl Menger who demonstrated how money could emerge on the free market, and Ludwig von Mises who demonstrated that it had to emerge that way. In this as in so many other areas, Mises broke with the reigning orthodoxy, which in this case held that money was a creation of the state and held its value because of the state’s seal of approval. A corollary of the Austrian view was that fiat paper money could not simply be created ex nihilo by the state and imposed on the public. The fiat paper we use today would have to come about in some other way.

It was one of Rothbard’s great contributions to show, in his classic What Has Government Done to Our Money? and elsewhere, the precise steps by which the fiat money in use throughout the world came into existence. First, a commodity money (for convenience, let’s suppose gold) comes into existence on the market, without central direction, simply because people recognize that the use of a highly valued good as a medium of exchange, as opposed to persisting in barter, will make it easier for them to facilitate their transactions. Second, money substitutes began to be issued, and circulate instead of the gold itself. This satisfies the desires of many people for convenience. They would rather carry paper, redeemable into gold, than the gold itself. Finally, government calls in the gold that backs the paper, keeps the gold, and leaves the people with paper money redeemable into nothing. These steps, in turn, were preceded by the seemingly minor – but in retrospect portentous indeed – government interventions of monopolizing the mint, establishing national names for the money in a particular country (dollars, francs, etc.), and imposing legal tender laws.

Rothbard also brought the Austrian theory of the business cycle to a popular audience. Joseph Salerno, who has been called the best monetary economist working in the Austrian tradition today, was first drawn to the Austrian School by Rothbard’s essay “Economic Depressions: Their Cause and Cure.” There Rothbard laid out the problems that business cycle theory needed to solve. In particular, any theory of the cycle needed to account, first, for why entrepreneurs should make similar errors in a cluster, when these entrepreneurs have been chosen by the market for their skill at forecasting consumer demand. If these are the entrepreneurs who have done the best job of anticipating consumer demand in the past, why should they suddenly do such a poor job, and all at once? And why should these errors be especially clustered in the capital-goods sectors of the economy?

According to Rothbard, competing theories could not answer either of these questions satisfactorily. Certainly any theory that tried to blame the bust on a sudden fall in consumer spending could not explain why consumer-goods industries, as an empirical fact, tended to perform relatively better than capital-goods industries.

Only the Austrian theory of the business cycle adequately accounted for the phenomena we observe during the boom and bust. The cause of the entrepreneurial confusion, according to the Austrians, is the white noise the Federal Reserve introduces into the system by its manipulation of interest rates, which it accomplishes by injecting newly created money into the banking system. The artificially low rates mislead entrepreneurs into a different pattern of production than would have occurred otherwise. This structure of production is not what the free market and its price system would have led entrepreneurs to erect, and it would be sustainable only if the public were willing to defer consumption and provide investment capital to a greater degree than they actually are. With the passage of time this mismatch between consumer wants and the existing structure of production becomes evident, massive losses are suffered, and the process of reallocating resources into a sustainable pattern in the service of consumer demand commences. This latter process is the bust, which is actually the beginning of the economy’s restoration to health.

The concentration of losses in the capital-goods sector can be explained by the same factor: the artificially low-interest rates brought about by the Fed’s intervention into the economy. What Austrians call the higher-order stages of production, the stages farthest removed from finished consumer goods, are more interest-rate sensitive, and will therefore be given disproportionate stimulus by the Fed’s policy of lowering interest rates.

Equipped with this theory, Rothbard wrote America’s Great Depression(1963). There Rothbard did two things. First, he showed that the Great Depression had not been the fault of “unregulated capitalism.” After explaining the Austrian theory of the business cycle and showing why it was superior to rival accounts, Rothbard went on to apply it to the most devastating event in U.S. economic history. In the first part of his exposition, Rothbard focused on showing the extent of the inflation during the 1920s, pointing out that the relatively flat consumer price level was misleading: given the explosion in productivity during the roaring ’20s, prices should have been falling. He also pointed out how bloated the capital-goods sector became vis-a-vis consumer goods production. In other words, the ingredients and characteristics of the Austrian business cycle theory were very much present in the years leading up to the Depression.

Second, Rothbard showed that the persistence of the Depression was attributable to government policy. Herbert Hoover, far from a supporter of laissez-faire, had sought to prop up wages during a business depression, spent huge sums on public works, bailed out banks and railroads, increased the government’s role in agriculture, impaired the international division of labor via the Smoot-Hawley Tariff, attacked short sellers, and raised taxes, to mention just a portion of the Hoover program.

Rothbard had been interested in business cycles since his days as a graduate student. He had intended to work on a history of American business cycles for his Ph.D. dissertation under Joseph Dorfman at Columbia University, but he found out that the first major cycle in American history, the Panic of 1819, provided ample material for study in itself. That dissertation eventually appeared as a book, via Columbia University Press, called The Panic of 1819: Reactions and Policies (1962). In that book, which the scholarly journals have declared to be the definitive study, Rothbard found that a great many contemporaries identified the Bank of the United States – which was supposed to be a source of stability – as the primary culprit in that period of boom and bust. American statesmen who had once favored such banks, and who thought paper money inflation could be a source of economic progress, converted to hard money on the spot, and proposals for 100-percent specie banking proliferated.

In A History of Money and Banking: The Colonial Era to World War II, a collection of Rothbard’s historical writings published after the author’s death, Rothbard traced the history of money in the United States and came up with some unconventional findings. The most stable period of the nineteenth century from a monetary standpoint turns out to be the period of the Independent Treasury, the time when the banking system was burdened with the least government involvement. What’s more, the various economic cycles of the nineteenth century were consistently tied to artificial credit expansion, either participated in or connived at by government and its privileged banks. Rothbard further showed that the traditional tale of the 1870s, when the United States was supposed to have been in the middle of the “Long Depression,” was all wrong. This was actually a period of great prosperity, Rothbard said. Years later, economic historians have since concluded that Rothbard’s position had been the correct one.

Rothbard’s treatment of the Federal Reserve System itself, which he dealt with in numerous other works, involved the same kind of analysis that historians like Gabriel Kolko and Robert Wiebe applied to other fruits of the Progressive Era. The conventional wisdom, as conveyed in the textbooks, is that the Progressives were enlightened intellectuals who sought to employ the federal regulatory apparatus in the service of the public good. The wicked, grasping private sector was to be brought to heel at last by these advocates of social justice.

New Left revisionists demonstrated that this version of the Progressive Era was nothing but a caricature. The dominant theme in Progressive thought was expert control over various aspects of society and the economy. The Progressives were not populists. They placed their confidence in a technocratic elite administering federal agencies removed from regular public oversight. What’s more, the resulting regulatory apparatus tended to favor the dominant firms in the market, which is why the forces of big business were in sympathy with, rather than irreconcilably opposed to, the Progressive program. “With such powerful interests as the Morgans, the Rockefellers, and Kuhn, Loeb in basic agreement on a new central bank,” Rothbard wrote, “who could prevail against it?”

It is with these insights in mind that Rothbard scrutinized the Federal Reserve. He would have none of the idea that the Fed was the creation of far-seeing public officials who sought to subject the banking system to wise regulation for the sake of the people’s well-being. The Fed was created not to punish the banking system, but to make its fractional-reserve lending operate more smoothly. In The Case Against the Fed, What Has Government Done to Our Money?, and The Mystery of Banking, Rothbard took the reader through the step-by-step process by which the banks engaged in credit expansion, earning a return by lending money created out of thin air. Without a central bank to coordinate this process, Rothbard showed, the banks’ position was precarious. If one bank inflated more than others, those others would seek to redeem those notes for specie and the issuing bank would be unable to honor all the redemption claims coming in.

The primary purpose of the central bank, therefore, in addition to propping up the banks through its various liquidity injections and its position as the lender of last resort, is to coordinate the inflationary process. When faced with the creation of new money by the Fed, the banks will inflate on top of this new money at the same rate (as determined by the Fed’s reserve requirement for banks). Therefore, the various redemptions will tend, on net, to cancel each other out. This is what Rothbard meant when he said the central bank made it possible to “inflate the currency in a smooth, controlled, and uniform manner throughout the nation.”

Although Rothbard distinguished himself as a monetary theorist and as a monetary historian, he did not confine himself to theory or history. He devoted plenty of attention to the here and now – to critiques of Federal Reserve policy, for example, or to criticisms of government responses to the various fiascoes, the Savings and Loan bailout among them, to which our financial system is especially prone. He likewise looked beyond the present system to a regime of sound money, and in The Case for a 100 Percent Gold Dollar and The Mystery of Banking laid out a practical, step-by-step plan to get there from here.

In his work on monetary theory and history, as in his work in so many other areas, Rothbard showed from both an economic and a moral point of view why a system of liberty was preferable to a system of government control. At a time when the political class and the banking establishment are being subjected to more scrutiny than ever, the message of Rothbard takes on a special urgency.

For that reason we should all be grateful that his monetary work, and that of the other great Austrian economists, is being carried on by Murray Rothbard’s friend and colleague Ron Paul. By my reckoning, no one in history has brought true monetary theory and history to a larger audience.

January 3, 2013

Copyright © 2013 by LewRockwell.com. Permission to reprint in whole or in part is gladly granted, provided full credit is given.


James Grant’s Speech to the Fed and More

James Grant argued for a return to the classical gold standard at the New York Federal Reserve. Note Grant’s command of financial and economic history. He references several books which you might find of interest. The beauty and purpose of the gold standard is that it takes monetary policy out of the control of moneyed elites and allows the market to work.  Critics will say that the nation had recurring booms and busts while on the classical gold standard, but they may be confusing the chaos of fractional reserve banking (being able to pyramid loans on top of deposits with fiduciary media) with the classical gold standard (the citizenry is able to convert currency into a fixed amount of gold).

Grant’s Speech to the New York Federal Reserve

My annotated copy is here:James Grant Speech on Gold and the FED April 2012

Robert Wenzel Speech

Another excellent critique of the Federal Reserve is Robert Wenzel’s speech on April 25th, 2012 http://www.mises.org/daily/6028/New-York-Fed-Leave-the-Building.

An excerpt: I simply do not understand most of the thinking that goes on here at the Fed, and I do not understand how this thinking can go on when in my view it smacks up against reality.

Please allow me to begin with methodology. I hold the view developed by such great economic thinkers as Ludwig von Mises, Friedrich Hayek, and Murray Rothbard that there are no constants in the science of economics similar to those in the physical sciences.

In the science of physics, we know that water freezes at 32 degrees. We can predict with immense accuracy exactly how far a rocket ship will travel filled with 500 gallons of fuel. There is preciseness because there are constants, which do not change and upon which equations can be constructed.

There are no such constants in the field of economics, because the science of economics deals with human action, which can change at any time. If potato prices remain the same for 10 weeks, it does not mean they will be the same the following day. I defy anyone in this room to provide me with a constant in the field of economics that has the same unchanging constancy that exists in the fields of physics or chemistry.

And yet, in paper after paper here at the Federal Reserve, I see equations built as though constants do exist. It is as if one were to assume a constant relationship existed between interest rates here and in Russia and throughout the world, and create equations based on this belief and then attempt to trade based on these equations. That was tried and the result was the blow up of the fund Long Term Capital Management — a blow up that resulted in high-level meetings in this very building.

It is as if traders assumed a given default rate was constant for subprime mortgage paper and traded on that belief. Only to see it blow up in their faces, as it did, again, with intense meetings being held in this very building.

Yet, the equations, assuming constants, continue to be published in papers throughout the Fed system. I scratch my head.

Origin of the Federal Reserve

The Origins of the Federal Reserve by Murray N. Rothbard (128 pages) http://library.mises.org/books/Murray%20N%20Rothbard/The%20Origins%20of%20the%20Federal%20Reserve.pdf


If you read and understand the above articles and book, you will have a good inkling of why the rich become richer and the poor become poorer.

Investing in Banks

A Lesson in Punctuation

An English professor wrote the words, “a woman without her man is nothing” on the blackboard and directed the students to punctuate it correctly.

The men wrote: “A woman, without her man, is nothing.”

The women wrote: “A woman: without her, man is nothing.”

A reader has asked me a question about investing in banks. Unfortunately I avoid banks because I believe banks are a speculation on a bank management’s ability to make prudent, rational lending decisions combined with the whims of Federal Reserve policy. You have the risks of “bank runs” due to fractional reserve banking. (I can’t value the bank or normalize earnings or ROIC so I do what a pretty girl at a bar would do–just say, NO!) However, understanding how the banking system works is critical to understanding economic booms and busts.  My suggestion is to begin reading the books mentioned below as a starting point before venturing to banks’ financial statements.

Excellent Blog: http://variantperceptions.wordpress.com/

To learn more about banks you can read American Banker: http://www.americanbanker.com/ and S&P industry reports on banking. Also, the Wall Street Transcript has articles on banks and the banking industry here: http://www.twst.com/

The History of Banking: www.mises.org/books/historyofmoney.pdf

How banking Works: www.mises.org/books/mysteryofbanking.pdf

Money, Banking and Credit Cycles: www.mises.org/books/desoto.pdf

Warren Buffett plugs Jamie Dimon, The CEO of JP Morgan as a good banker and suggests reading his shareholder letters.

Jamie Dimon’s 2010 Letter to Shareholders: http://files.shareholder.com/downloads/ONE/1713791083x0x458384/6832cb35-0cdb-47fe-8ae4-1183aeceb7fa/2010_JPMC_AR_letter_.pdf

2009 Letter: http://files.shareholder.com/downloads/ONE/1713793272x0x362440/1ce6e503-25c6-4b7b-8c2e-8cb1df167411/2009AR_Letter_to_shareholders.pdf

A reader, generously contributed this: http://www.scribd.com/doc/83007803/Banking-101-for-Large-Cap-Banks-May-2011

A Handbook on Analyzing Banks: http://www.amazon.com/Bank-Analysts-Handbook-Conjuring-Tricks/dp/0470091185/ref=cm_cr_pr_product_top

Review of the above book:

Great introduction, some conceptual/structural flaws,October 27, 2009

By Brad Barlow (Cave City, KY) – See all my reviews

This review is from: The Bank Analyst’s Handbook: Money, Risk and Conjuring Tricks (Hardcover)

Frost’s book gets 4 stars based on its strength and accessibility as an introduction, it’s clarity (for the most part), and the breadth of topics that he covers related to banks and the banking industry.

Unfortunately, Frost’s understanding of economics is poor, leading to a relatively shallow (but certainly textbook these days) discussion of central banking and the regulatory framework in general. He, like so many other modern writers in finance and economics, would benefit greatly from actually reading a sound economic theorist, like Henry Hazlitt or Ludwig von Mises, rather than sporadically quoting JK Galbraith and Adam Smith. This lack of understanding on his part at times undermines the conceptual framework of the book, detracting from its clarity.

A few final praises and quibbles: His use of clear examples to illustrate important points is very welcome, but there are a few cases where he could give a fuller explanation (e.g., the 20-yr mortgage example). I like the diagrams showing flows of funds and parties to common transactions, but he could have picked a better font, as the small cursive script is not always easy to read. Finally, what’s with the front cover art, seriously?

Overall, I’m quite satisfied and thankful for the book. Definitely buy it if you are in the industry.

Avoid banks and seek other ideas.

You can look here: http://www.crossingwallstreet.com/buylist


The key to doing well on Wall Street is actually very simple: Buy and hold shares of outstanding companies. But too many investors never learn this valuable lesson. Or if they do learn it, they learn it the hard way. That’s where I come in. I want to help investors avoid the mistakes that separate successful investors from those who always find themselves spinning their wheels.

Without a Central Bank

A reader, Taylor, mentioned the distortions caused by central banks. What would happen if we did not have central banks?

Life without a central bank (Panama) http://mises.org/daily/2533

In this modern, post-–Bretton Woods world of “monetary order” and coordinated central-bank inflation, many who are otherwise sympathetic to the arguments against central banks believe that the elimination of central banking is an unattainable, utopian dream.

For a real-world example of how a system of market-chosen monetary policy would work in the absence of a central bank, one need not look to the past; the example exists in present-day Central America, in the Republic of Panama, a country that has lived without a central bank since its independence, with a very successful and stable macroeconomic environment.

The absence of a central bank in Panama has created a completely market-driven money supply. Panama’s market has also chosen the US dollar as its de facto currency. The country must buy or obtain their dollars by producing or exporting real goods or services; it cannot create money out of thin air. In this way, at least, the system is similar to the old gold standard. Annual inflation in the past 20 years has averaged 1% and there have been years with price deflation, as well: 1986, 1989, and 2003.

Panamanian inflation is usually between 1 and 3 points lower than US inflation; it is caused mostly by the Federal Reserve’s effect on world prices. This market-driven system has created an extremely stable macroeconomic environment. Panama is the only country in Latin America that has not experienced a financial collapse or a currency crisis since its independence.

As with most countries in the Americas, Panama’s currency in the 19th century was based on gold and silver, with a variety of silver coins and gold-based currencies in circulation. The Silver Peso was the currency of choice; however, the US greenback had also been partially in circulation, because of the isthmian railroad — the first railroad to connect the Atlantic to the Pacific — that was built by a US company in 1855. Panama originally became independent from Spain in 1826, but integrated with Colombia; however, being a small state, it was not able to immediately secede from Colombia, as Venezuela and Ecuador had done. In 1886 the Colombian government introduced several decrees forcing the acceptance of government fiat paper notes. Panama’s open economy, being based on transport and trade, plainly could not benefit from this; an 1886 editorial of its main newspaper read:

“there is no country on the globe, certainly no commercial center, in which the disastrous consequences of the introduction of an irredeemable currency would be felt as in Panama. Everything we consume here is imported. We have no products and can only send money in exchange for what is imported.”

In 1903, the country became independent, supported by the United States because of its interest in building a Canal through Panama. The citizens of the new country, in distrust of the 1886 experiment of forced fiat Colombian paper notes, decided to include article 114 in the 1904 constitution, which reads,

“There will be no forced fiat paper currency in the Republic. Thus, any individual can reject any note that he may deem untrustworthy.”

With this article, any currency in circulation would be de facto and market driven. In 1904 the Government of Panama signed a monetary agreement to allow the US dollar to become legal tender. At first, Panamanians did not accept the greenback; they viewed it with mistrust, preferring to utilize the silver peso. Gresham’s Law, however, drove the silver coins out of circulation.[1]

In 1971 the government passed a banking law that allowed for a very liberal and open banking system, without any government agency of consolidated banking supervision, and confirmed that no taxes could be exacted from interest or transactions generated in the financial system. The number of banks jumped from 23 in 1970 to 125 in 1983, most of them being international banks. The banking law promoted international lending, and because Panama has a territorial tax system, profits from loans or transactions made offshore are tax free.

This, and the presence of numerous foreign banks, allows for international integration of the system. Unlike other Latin American countries, Panama has no capital controls. Therefore, when international capital floods the system, the banks lend the excess capital offshore, avoiding the common ills, imbalances, and high inflation that other countries face when receiving huge influxes of capital.

Fiscal policy has little room to maneuver since the treasury cannot monetize its deficit. Plus, fiscal policy does not influence the money supply; if the government tries to raise the money supply during a contraction period by obtaining debt in international markets and pumping it into the system, the banks compensate and take the excess money out of circulation by sending it offshore.

Banks cannot coordinate inflation due to ample competition and the fact that (unlike even the United States banking system prior to the Federal Reserve) they do not issue bank notes. The panics and general bank runs that were so common in the US banking system in the 19th century have not occurred in Panama, and bank failures do not spread to other banks. Several banks in trouble have been bought — before any runs ensue — by larger banks, attracted by the profits that can be made from obtaining assets at a discount.

There is no deposit insurance and no lender of last resort, so banks have to act in a responsible manner. Any bad loans will be paid by the stockholders; no one will bail these banks out if they get into trouble.

After several years of accumulation of malinvestments during the booms, banks begin the necessary liquidation of bad credit. Since there is no central bank that can step in to provide cheap credit, the recession begins without any hampering by monetary policy. Banks thus create the necessary contraction by obeying market forces. Panama’s recessions commonly create deflation, which mollifies consumers and also facilitates the recovery process by reducing business costs.

Only the fact that the law does not allow for the downward flexibility of wages makes recessions longer than they would otherwise be.

Deflation happens without the terrible consequences that Keynesian economists predict; and the country, now under democratic rule, is experiencing its 4th year of market economic growth well above 7%. So the policy makers who have said that abolition of the central bank is unfeasible need only look to Panama’s macroeconomic environment, which has been favorable for over 100 years, to realize that it is, in fact, not only possible, but very beneficial. Clearly no government-forced fiat currency, no central bank, and the absence of high inflation are working quite well in this small country. Who can argue that these policies would not work in larger economies?

What has the Government Done to our Money?


Once again it’s time to review basic economics. When we invest in equity, we take a dollar from current consumption to gain title to capital goods (a company) which will pay out dividends and/or our investment will eventually be sold for dollars for future consumption.

If you do not understand money in a free society and how government came to meddle with money, you will not understand our ponzi financial system.

A short, clear book on money by Murray Rothbard is excellent. http://mises.org/books/whathasgovernmentdone.pdf

If you read any book to understand our current situation read that one. To understand more about money, banking, and monetary history read the following:

  1. http://mises.org/books/mysteryofbanking.pdf  How fractional reserve banking works.
  2. http://mises.org/books/historyofmoney.pdf  The history of American Banking
  3. http://mises.org/Rothbard/AGD.pdf   The definitive study of the the cause of the Great Depression

Investors discussing the dangers of inflation in today’s investment environment

Julian Robertson Part 1: http://video.cnbc.com/gallery/?video=3000062558

Part 2: http://video.cnbc.com/gallery/?video=3000062485

Kyle Bass: part 1: http://watch.bnn.ca/library/#clip584881

Part 2: http://watch.bnn.ca/the-street/december-2011/the-street-december-13-2011/#clip584882

Economic ignorance Refuted

Here is an article by an investing pundit that is riddled with nonsense and ignorance. No wonder the writer blew up his clients as a securities analyst in the late 1990’s and early 2000’s. http://www.businessinsider.com/keynes-was-right-2011-12

A reply to the above article and an excellent blog: http://finance.townhall.com/columnists/jeffcarter/2011/12/18/obama_and_the_keynesians_total_fail/page/full/

If you read the above recommended books, you will have an excellent grasp of our current monetary chaos, possible solutions and the consequences of our nation’s current course of action. Ignorance is not an excuse.

Value Investing Newsletters

Value Investing Newsletters

An excerpt from the Fall 2011 issue:

This issue features a trio of legendary value investors, who honored us with their time and sage advice. One thing became crystal clear: there is no single “right” way to practice value investing. Each successful value investor adapts the practice to his or her own style, although Graham & Dodd and their famous disciples remain an inspiration to so many of us.

We start off this issue with Lee Cooperman ’67, founder, Chairman and CEO of Omega Advisors, Inc. Mr. Cooperman reflects on the path of his incredibly successful career, describes how his firm constructs its portfolio, and outlines the theses behind a few of his top investment ideas.

We also had the privilege of speaking with Gabelli Asset Management (GAMCO Investors) founder, Chairman and CEO Mario Gabelli, well-known value investor and alum of Columbia Business School‘s class of 1967. Mr. Gabelli provides his approach to security analysis and discusses his interest in BEAM, National Fuel Gas and The Madison Square Garden Company.

Our third interview is with veteran value investor Marty Whitman, Third Avenue Management’s Chairman and Portfolio Manager, and an Adjunct Professor of Distress Value Investing at Columbia Business School. Mr. Whitman shares his thoughts on some compelling areas of investment opportunity, discusses his approach to company valuation and describes some of his firm‘s most successful investments.


For past issues and a good blog: http://www.grahamanddoddsville.net/

Video Lecture

The Birth of the Federal Reserve by Murray Rothbard–a devastating indictment of the Fed.


Economic Depressions: Their Cause and Cure

Banks would never be able to expand credit in concert were it not for the intervention and encouragement of government.   –Murray N. Rothbard

We investors live in the present and try to imagine the future, but we’d be wiser and richer if we had a better grounding in the past. In science, progress is cumulative; we stand on the shoulders of giants. In finance, however, progress is cyclical; we take one step forward, another back. Some of the best ideas about money and banking are the ones we’ve forgotten. I mean to revive them. –James Grant**

Murray N. Rothbard, the American Dean of the Austrian School, has an essay on what causes booms and busts. The 52 page book is here:

http://mises.org/Books/economic_depressions_rothbard.pdf  This essay is an easy read for readers who want to dip their toe into this subject.

**Grant’s Interest Rate Observer, October 21, 2011 (Vol. 29, No. 20).

I mentioned the value of reading Grant’s here: http://csinvesting.org/2011/09/08/welcome-to-csinvesting-org/

At Grant’s Interest Rate Observer http://www.grantspub.com/ you could download and study all past issues since 1982 while learning how a thoughtful, articulate Graham and Dodd investor approached various market cycles through specific investments. Of course, as an ambitious student you would download the financials from the SEC’s website to look at the various companies Grant’s mentions as well as reading many of the books he suggests. Now I admit the person who applies himself to such a project would not be your typical person, but I am suggesting one way to learn.