tag:blogger.com,1999:blog-6704573462403312459.post6385780135314182584..comments2024-03-28T06:53:23.473-04:00Comments on Moneyness: Adam Smith's very own Lehman CrisisJP Koninghttp://www.blogger.com/profile/02559687323828006535noreply@blogger.comBlogger11125tag:blogger.com,1999:blog-6704573462403312459.post-59100163418240743922013-06-12T10:35:31.552-04:002013-06-12T10:35:31.552-04:00"With a gold check, this inflation would imme..."With a gold check, this inflation would immediately be cut off,"<br /><br />Sometimes a gold check is more of a suicide pact. Start with a bank that has issued $100, backed by 100 oz. worth of assets, so 1 oz.=$1. If that bank then buys a farmer's bill worth 10 oz., but pays the unreal price of $20 (newly issued) for it, then the bank would have 110 oz of assets backing $120, and each dollar would be worth .916 oz. A gold check of $1=1 oz. would cause a bank run. The first $110 in line would get redeemed for 1 oz each, but the last $10 in line would be worthless, and the community would face a recessionary drop in its money supply. If the bank had suspended convertibility instead, then the dollar would drop to .916 oz without causing nearly as much trouble as a bank run.<br /><br />This is the trouble with Timberlake and Selgin. They think that the real bills doctrine only requires that the farmer's bill be based on real production. They forget that the banker must not overpay for that bill.Mike Sproulhttp://www.csun.edu/~hceco008/realbills.htmnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-67030102898715563262013-06-12T09:46:11.920-04:002013-06-12T09:46:11.920-04:00Great find, will read.Great find, will read.John Snoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-22623471819815735802013-06-12T08:52:51.741-04:002013-06-12T08:52:51.741-04:00According to Rockoff, there was a V-shaped recessi...According to Rockoff, there was a V-shaped recession in 1772 and 1773. See:<br /><br />http://www.nber.org/papers/w15594<br /><br />Whether Ayr set of the recession, or was set off by the recession, or amplified the recession, is difficult to say. Of course you're right that anyone who had their deposits at the incumbent Royal Bank of Scotland or Bank of Scotland did fine. But there does appear to be more than a relative shift going on here.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-58838700119674381842013-06-12T08:15:50.925-04:002013-06-12T08:15:50.925-04:00Thanks, this clears things up quite a bit.
One t...Thanks, this clears things up quite a bit. <br /><br />One thought I had: while Smith's personal experience with Ayr led him to conclude "that the ruin of banks could have far greater consequences than he had earlier assumed," weren't the actual effects of the collapse not terribly serious? At least according to White in "Free Banking in Britain," only a few banks associated with the Ayr bank failed, and it did not seem to lead to "contagion," large deposit losses by the public, or general recession. So perhaps if Smith and members of his social circle had been associated with a different, more prudent bank, Smith might have retained his previous view on bank failures.John Snoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-6792357625641182532013-06-12T07:40:45.531-04:002013-06-12T07:40:45.531-04:00John, glad you liked Murphy's book.
I chose t...John, glad you liked Murphy's book.<br /><br />I chose to call Smith's post-1772 views more nuanced because I don't think his updated position equates to an original statement of the "real bills doctrine".<br /><br />The original real bills doctrine was set out by the Directors of the Bank of England during the period from 1797 - 1821 when Bank of England notes were not convertible into gold. As long as the Bank only discounted on real bills during the Suspension, said the Directors, then it couldn't expand its issue beyond the demand for notes and cause an inflation. But we know that this is false since this ignores the fact that the Bank might discount real bills at unreal prices, thereby setting off an increase in prices. With a gold check, this inflation would immediately be cut off, but without it the inflation could continue unabated.<br /><br />Adam Smith, on the other hand, died in 1790, seven years before the suspension, and therefore his environment dictated that he always theorize under the assumption of gold convertibility. Any excess issuance in a gold standard would almost immediately reflux back to the issuer. Smith felt that banks should hold "real" bills to ensure that they could handle the demands of reflux. Bad bills which funded long term speculative projects or were issued in the name of dubious signatories would not be sufficient to cope with reflux.<br /><br />So long story short, Adam Smith's story is very different from that of the Directors.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-6268050887204565662013-06-12T01:13:28.759-04:002013-06-12T01:13:28.759-04:00Thank you, Mike. I've briefly skimmed your sit...Thank you, Mike. I've briefly skimmed your site before, and when I get a bit more time, I will make an effort to understand your arguments. John Snoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-9828430766541579802013-06-12T00:06:53.915-04:002013-06-12T00:06:53.915-04:00John S:
The real bills doctrine is well worth ser...John S:<br /><br />The real bills doctrine is well worth serious study. It was developed by practical bankers over centuries of experience, and as such is the kind of theory that should command the highest respect from academic economists. The fact that it is widely considered to be misguided is a calamity, but it also makes it that much more interesting. See my paper entitled "Three False Critiques of the Real Bills Doctrine" for an explanation of Thornton's errors. There is also my "Reply to Mr. Timberlake". I have also had several blog debates with George Selgin, mostly at the Free Banking blog. George remains (ahem) unconvinced by my arguments.<br /><br />Most of my real bills papers can be found by clicking my name above, and they can also be found on REPEC.Mike Sproulhttp://www.csun.edu/~hceco008/realbills.htmnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-51050930323576264032013-06-11T22:50:39.200-04:002013-06-11T22:50:39.200-04:00Specifically apaper by Thomas Sargent:
http://www....Specifically apaper by Thomas Sargent:<br />http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=345Don Coffinhttps://www.blogger.com/profile/07198988872512792834noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-29904119012126569622013-06-11T22:48:46.137-04:002013-06-11T22:48:46.137-04:00Googling finds a wide range of material on the rea...Googling finds a wide range of material on the real bills doctrine:<br />https://www.google.com/search?q=real%20bills%20doctrine&ie=utf-8&oe=utf-8&aq=t&rls=org.mozilla:en-US:official&client=firefox-a&channel=np&source=hpDon Coffinhttps://www.blogger.com/profile/07198988872512792834noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-6900790669358273252013-06-11T19:58:33.552-04:002013-06-11T19:58:33.552-04:00Btw, I would really love to a see a post (or serie...Btw, I would really love to a see a post (or series) on the real bills doctrine. I only vaguely understand the broad outlines, but according to Dick Timberlake and White/Selgin, it's had a very negative influence. John Snoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-64161701145698374712013-06-11T19:52:50.463-04:002013-06-11T19:52:50.463-04:00Sorry to nitpick, but I think this post gives a sl...Sorry to nitpick, but I think this post gives a slightly misleading impression of the evolution of Smith's views (at least according to what I recall of Murphy's book). IIRC, Murphy emphasizes that Smith's turnaround on banking's importance in the economy and of paper money in general was a kind of negative backstep in economic thinking. So instead of saying "nuanced," perhaps some other word should be used to describe Smith's latter views, since they led him to embrace misguided ideas like the real bills doctrine.<br /><br />Thanks for the recommendation, I really loved the book. The only disappointment was the last chapter--from snippets on the blogosphere, I feel that there's a lot more depth to Thornton than what was described by Murphy. It was sort of a disappointing climax to the monetary and banking themes from the rest of the book.John Snoreply@blogger.com