How to make money: James M Buchanan on completing the American Revolution

Economist James M. Buchanan – born: 1919, Nobel Prize: 1986 – should not be called upon or expected to enter the political trenches, to simplify or pretty things up for the masses or for striving politicians, nor to construct elaborately evidenced proofs for skeptics. We can be grateful when, as in his short essay “The Constitutionalization of Money”, he writes with the kind of magisterial abstraction that, if at times difficult, provides the rest of us with new, unexpected work to do on the most fundamental problems of economics and politics.

I got to Buchanan’s essay (h/t to Rex Carruthers) just after finishing Gordon Wood’s The Creation of the American Republic, and my reading of Wood forces me to resist Buchanan’s thinking in one respect.  Buchanan relies explicitly on a Hobbesian – i.e., pre-American – understanding of politics as a social contract between ruler and ruled, in which the latter give up fundamental rights to the former in the interest of general security and stability.  Within this framework, he locates American sovereignty in the Constitution – the law prior to and above all other laws.

This perspective is helpful to Buchanan, and may even have helped to universalize his discussion for the audience of international economists who initially received “The Constitutionalization of Money,” but Wood’s perspective may be more useful.  For Wood, the “American Science of Politics” – a set of ideas that seem to have originated collectively amidst the debates and empirical tests of the Revolutionary Era rather than in any one thinker’s writings – rests on the realization that sovereignty could belong to and perpetually reside with the people as a whole rather than to or with any government, much less any instrument of government.  For the Framers of the Constitution, the goal was not a social contract between “rulers and ruled.” The Constitution would be a contract between equal citizens who never divest themselves of ultimate power:  In the American system, we merely delegate some of our power, in carefully delineated and delimited portions, to our servants in government.

Understanding this aspect of our system and of all “democratic republicanism” may make the eventual implementation of Buchanan’s ideas easier to envision and to justify.  Putting Wood and Buchanan together, we can offer the following hypothesis:  We have not yet fully applied the Framers’ logic to this most basic aspect of our economic lives.  We can also say that the earlier and traditional concept of money – money tied to the value of a precious metal or in the form of precious objects – corresponds to the traditional or classical concept of political sovereignty that Hobbes innovatively explained.   Yet it appears that the modern, fully abstracted concept of money – first propounded by Adam Smith in The Wealth of Nations, in 1776 (coincidentally enough) – has yet to be brought in line with the modern concept of politics.  Instead, we have crept over the course of generations to a full embrace of Smith’s abstraction without bringing its concrete implementation under democratic control.

Buchanan is therefore able to situate us in an extended, uneven, failure-prone, effectively un-guided transition phase between antithetical economic concepts.  In the modern concept, money is what Marx, following Smith, defined as the “universal equivalent”:  It’s not a property of gold or any other particular precious material.  Money is an abstraction, like words or computer code.  All the same, even as an abstract accounting principle that assigns rather than possesses value, money still plays, to say the least, a central, very concrete role in most people’s lives.  “Backing” money with gold or other precious metals therefore also makes intuitive sense, and would have made even more sense to people of the Founders’ era: At the time the word “dollar” was officially adopted for U.S. currency, it referred colloquially to a widely used gold Spanish coin marked with the pillars of Hercules and a scroll – the origin of the “$” symbol.  As society shifted from use of such precious metals to paper bills – a problematic issue during the Revolutionary Era – it made people confident in their transactions to know that, in theory, they could exchange their intrinsically worthless paper for something tangible.  For the same reason, the inability of a government to make good on this pledge was always a sign of crisis – economic and political crisis, a crisis of sovereignty.  Even in normal times, the requirement to maintain sufficient reserves imposed discipline, including material limits on government spending as well as on the availability of money for private transactions.

Without such limits, or whenever we begin to step beyond them – as frequently during the days when the gold standard was still nominally in effect – we are plunged into the initially uncontrollable and unaccountable play of abstractions.  Buchanan calls this condition “financial anarchy,” which among other things allows politicians, agencies, and the banking system itself – independently or together – to create monetary unpredictability, the potential at almost any time for an unexpected, unwanted aggregate re-valuing of everyone’s wealth.  To illustrate how vastly deleterious for economic life the consequences can be, Buchanan points both to the Great Depression and to the Financial Crisis of 2008.  Taking an even longer view, we can begin to understand the vulnerability of the American economic system, from the earliest days to the present, to panics, depressions, bank runs, and other crises and imbalances.

In short, our gradual movement away from the gold standard has been accomplished with only an incomplete, conceptually flawed, and anarchistic replacement for it at hand.  By now, in a familiar historical irony, we have reacted to the regular succession of financial crises by further institutionalizing their causes.  We have attacked periodic crises by instituting a permanent deeper crisis.

In a manner that, once you penetrate the abstractions, tells a familiar story, Buchanan explains how the basic processes of our banking system allow for an unjustifiable and unnecessary multi-layered leveraging of value that affects everyone’s lives – “generates changes in real values” – yet escapes sovereign control.  He then sums up the “modern dilemma”:

[W]e are left with a massive resource-using, financial-banking structure that has a functional purpose quite different from that which is widely accepted. The system in existence emerged from a historical process, the characteristics of which were partially appropriate for a monetary standard defined in terms of some commodity base, but which, ultimately, make no sense under a fiat system.

What he proposes to solve this problem is a constitutional amendment empowering an independent agency to guard the value of money:

Clearly some defined process and institutional structure must be established, with genuine constitutional authority, over and beyond that of democratic majoritarian politics. Something analogous to the independent judiciary, under the Supreme Court, seems required—a monetary authority that is independent of politics, but which remains itself bound by the parameters set out in the constitution itself.

This result would be a system in which a constitutionally empowered agent in effect took the place of commodity backing.  The monetary system would still benefit from the logic of the fiat system, but would also benefit from the virtues of the commodity-backed system:  Orderly and predictable values constrained not by material gold or other reserves, but by the (effectively) irrevocable rulings of an agency placed beyond and before politics – that is, on the constitutional level.

The elegance of Buchanan’s solution goes back to a basic American understanding – the primacy of the Constitution.  For Americans, constitutionalization is approximately as real as gold, in some respects more real because without it there is no system, and without the system, we’re in some variant of the Hobbesian state of nature.  At the same time, Buchanan also shows us how, on this issue, the work of the Framers can and needs to be completed, for we are in this crucial sense still in the post-Revolutionary “Critical Period” of increasing doubt about the entire enterprise.  In this light, Buchanan’s proposal for amending the Constitution seems even more fitting.

Yet we can see with Wood that the problem goes even deeper than the Constitution.  Constitutionalization happens to be how the abstract American national idea concretizes itself, but it is not that concept – the Constitution is not America.  As Woodrow Wilson put it, in a widely misused observation, “Justly revered as our great Constitution is, it could be stripped off and thrown aside like a garment, and the nation would still stand forth in the living vestment of flesh and sinew… ready to recreate constitutions and laws.” Extending our control over the basis of our economic system is critical, and the Constitution is arguably the best means for achieving it, but the problem with our hybrid monetary system isn’t that it escapes the Constitution:  It’s that it escapes us.

Just as the Framers did not merely negate or invert Hobbes, but synthesized his insights on “classical politics” in a modern way (in a way that arguably defines modern politics), Buchanan’s proposal also connects and synthesizes the seemingly incommensurable rationalities of abstract and concrete money.  But the issue isn’t improvement of the Constitution or expansion of its sovereignty.  The issue is, as it’s always been in America, of the people asserting control over their own political and economic destiny.


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57 comments on “How to make money: James M Buchanan on completing the American Revolution

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  1. In my lifetime,!00% Silver Dollars were commonly used,.50 cent pieces were 100%Silver,quarters were 100%Silver,Nickels were !00% Nickel,and Pennys were !00%Copper. We also had Mills that were plastic,A Red Mill was 1/10th of a penny,a green Mill was 5/10ths of a penny,mills were used to pay sales tax,that is how valued our money was,does anyone think it’s a bad thing to have 100% Silver coinage? Why would that be a problem? In my Father’s time,there was all kinds of Gold Coins used for everyday transactions,and paper money was a Gold or Silver Certificate,again,what is wrong with having that kind of money.
    The constitution says coin money and maintain its value,what happened to that Silver Dollar?

  2. Is it to the Republicans’ advantage to attack Obama on the basis that he is using Deception of every sort to claim an unemployment rate of 9.5%,when it appears to be much higher,or do they feel that a high unemployment rate makes them look bad,or whatever? Anyway,the unemployment rate is much higher than 9.5,it is Depression high,and here are two articles on this:

    http://www.investors.com/NewsAndAnalysis/Article/540390/201007141854/Real-Joblessness-Grimmer-Than-Govt-Stats.aspx

    http://www.dailyfinance.com/story/careers/what-is-the-real-unemployment-rate/19556146/

  3. @ Rex Caruthers:
    Is it the number that matters or the socio-economic effect? Is being unemployed today the same, worse, or better than being unemployed in a prior epoch?

    I think the Republicans are “happy” with the number as is – for short-term political purposes – and don’t appear to have any good idea about coping with the underlying problem, however you measure it. They may hope that they can enact some consensual/coalition-acceptable economic program that looks like Reaganism (or what people think Reaganism was), then hope that they catch a cyclical wave. Or, if such a wave is coming, it may come soon enough to rescue Obama. Either way, we may not see any fundamental changes in economic policy, including how we measure and discuss the economy, until the next major crisis, or until the lack of restored employment growth becomes an inescapable reality.

  4. Ck, we are no where near 9.5 %, check U6 for one indicator, now this maybe systemic like the grim 70s, but until we have policies are remotely positive, it’s hard to see things changing, and we’re in the crisis now, you can see it everywhere you turn

  5. AMEN

    Lexington
    Where has all the greatness gone?

    THIS column wishes respectfully to propose a temporary ban on references in political debate to both American greatness and American exceptionalism. This is not because Lexington denies that America is great and exceptional. It is. The case for the ban is that both terms have been emptied of serious meaning, converted into slogans and pressed into service, especially by the right, as a club with which to bludgeon political opponents. They should be put aside at least until America emerges from its present economic crisis, and perhaps for longer.
    Implementing this ban will not be easy. Greatness is part of America’s birthright and lexicon. Its 18th-century founders had no doubt that they were embarking on a daring experiment inspired by the highest ideals of the Enlightenment. In the 19th century came Manifest Destiny, great migrations and the push to the West, civil war and the end of slavery. The 20th brought titanic struggles and famous victories against fascism and communism.
    Even today, battered by recession, deep in debt, mired in war, Americans remain proud of their country, and justly so. America still towers over rivals in scientific virtuosity, military power, the vitality of democracy and much else. Polls show that Americans are still among the most patriotic people in the world. This summer 83% told Pew that they were “extremely” or “very” proud to be American.
    But taking pride in one’s country and wittering on about its greatness are different things. Glenn Beck, a conservative broadcaster, ended a recent interview thus: “Do you think this is a country of divine providence? A country of American exceptionalism? If you believe those two things to be true, that means God has a special purpose for this land and freedom.”
    Talk like this is tiresome. Mr Beck is not advocating piety so much as claiming a divine imprimatur for his own prejudice against big government. Just think what a relief it will be, once Lexington’s ban comes into force, to be able to debate the role of government on its merits, without bringing providence into it.
    The ban will also liberate America’s politicians to speak like normal people. At present, failing to lard their speeches with God and greatness can get them into serious trouble
    http://www.economist.com/node/16591267

  6. Perfidious Albion is dying sadly, that doesn’t excuse Bagehot’s publication from making it an assisted suicide, in the Cameron era, then again may be they haven’t quite digested the 1776 thing just yet, cables being what they are nowadays, sarc

  7. JB understands the following but is too much a gentleman to discuss it. The devaluing of our currency created a large predator class that was no longer particularly interested in the prosperty of their nation,because all nations became their nation of eternal fiscal transactions. However,a byproduct of this process,was,by historical standards,the predator class became much stupider. The predators assumed that 0 interest loans presented little risk,for three reasons(1)They could get up to 18% or more on their 0% debt,and (2)Inflation would eat up any additional risk,and(3)the dollar continued to devalue. But Three unexpected things occured(1)The Japanese carry trade was interrupted for over a year(2)Lack of Liquidity Deflated their obligations,and the Sheep(Debtors)started defaulting. Part of #3was due to an unintended effect of the new bankruptcy laws the banks wanted so badly,and got(Don’t Wish),which was the inability of millions of high earners to declare bankruptcy and thus proceed into a new round of profitable/high interest new debt. This was one of the important ways that we escaped recession in the past,now cut off.
    JB understands that “Consistent High Value”currency is not something that the Capitalists can just throw around say in Toxic Derivatives that they don’t even understand. Cheao,unstable money is what allows the kind of Crap investments we have seen for decades. What you do with Valuable stable money is put it in long term investments like new corporations that grow,and make one rich for a lifetime,not a few years or months.

  8. @ Rex Caruthers:

    What you do with Valuable stable money is put it in long term investments like new corporations that grow,and make one rich for a lifetime,not a few years or months.

    Like tulips or cornering the gold market?

    Predation is fundamental to all ecconomic activity, and certainly the free market.

    I don’t pretend to understand how all this is supposed to work, but my gut tells me you are promising way too much here.

    Selfishness and altruism are both necessary, but each is not sufficient alone. If you want to argue that this proposal produces the right mix of the two impulses, let’s hear it.

    You also seem to be saying this proposal will turn back the clock on globalization. I just don’t see that as possible.

  9. bob wrote:

    If you want to argue that this proposal produces the right mix of the two impulses, let’s hear it.

    You also seem to be saying this proposal will turn back the clock on globalization. I just don’t see that as possible.

    Since Rex is unaccountably absent from his usual battle-station, I’ll horn in on the action and say in my opinion he favors a set-up in which the eternal play of selfishness and altruism is more to our long-term benefit than one in which the the incentives are mainly in the other direction.

  10. bob wrote:
    @ Rex Caruthers:
    What you do with Valuable stable money is put it in long term investments like new corporations that grow,and make one rich for a lifetime,not a few years or months.
    Like tulips or cornering the gold market

    A dollar should have the same purchasing power tommorow,next month,next year,or in a hundred years,just stable predictable money;is that in any way controversial?

  11. @ Rex Caruthers:
    I don’t think we should underestimate though how radical Buchanan’s analysis is. He appears to be saying that there’s no real justification for any kind of leverage via the banking system in a fiat system. Doesn’t that mean that the entire magical mysterious process by which we “create” money, including letting the banks maintain a fractional reserve relative to what they disburse in lending, is a relic of the past – that eventually we should have a situation where what we pass around is what we pass around, you can’t lend it if you can’t get it, you can’t get it if it’s not there, and it won’t be there unless the Constitutional Value Squad says it’s there?

    What he leads me to envision is that the CVS would say that this is how many dollars there are and what a dollar is worth – say, 1/200,000,000,000,000th of the total value of all publically and privately held property in the U.S. on some particular date, and, the total amount made available to the financial system on all levels would be adjusted to retain that value relative to actual fluctuations in the economic system and market forces – I presume the dollar would still be traded. How the reserve system functioned might still be outwardly similar in some respects.

  12. The title of JB’s article should have been”The reconstitutionalization of money.” As long as our quarters were 100% Silver,we were operating within the Constitution,when the market price for the Silver in a quarter was 75 cents and we reacted to that by eliminating most of the silver in that quarter and replacing it with base metal,that was “Unconstitutional” literally. Reconstitutionalizing could be as simple(and as complex)as putting the Silver back into the quarter. Removing the all Silver half dollars & dollars from circulation was another unconstitutional Tactic.

  13. Really what are we without the Constitution, we’re a larger Articles of Confederation as in pre 1787, if we’re lucky, or something much worse, as the late Herman Kahn, used to call it ‘an ideological renewal regime’, his version of a good police state. something of this was speculated in the dystopian series Jericho, which had that old hoary chestnut, they set the nukes off to enable the takeover by a a certain faction.

    James O’ Neal, aka James O’Born posits a similar scenario in the first of a series of novels, beginning with the Human Disquise, The
    first dystopia really set in South Florida, although Ferrigno seems to have dabbled in this scenario in his last, nukes, bioweapons have
    rendered this neck of the woods, a quarantine zone, under state
    of emergency, Rex’s conscripted army of mostly foreigners fight
    an infinite number of battles on distant shores,

  14. @ Rex Caruthers:

    Clearly it is controversial. Otherwise that’s what we would be doing.

    My point is that ” stable predictable money” is possible only in a trivial sense. Yes we can order that a dollar is worth a specific quantity of silver, or whatever, but the real economy will accomplish the effect of fiat money through other media of exchange. Except such a system produces higher highs and lower lows with less predicability.

    In any event, I guess I’m Troskyite about this, ie I don’t think “stable predicable money” is possible in one country. The globlalized economy depends on fiat money and the US no longer has the critical mass to bend the world economy to its will.

  15. bob wrote:
    @ Rex Caruthers:

    (1)Clearly it is controversial. Otherwise that’s what we would be doing.
    (2)My point is that ” stable predictable money” is possible only in a trivial sense. Yes we can order that a dollar is worth a specific quantity of silver, or whatever, but the real economy will accomplish the effect of fiat money through other media of exchange. Except such a system produces higher highs and lower lows with less predicability.
    (2)In any event, I guess I’m Troskyite about this, ie I don’t think “stable predicable money” is possible in one country. The globlalized economy depends on fiat money and the US no longer has the critical mass to bend the world economy to its will.

    (1)It is not controversial in the sense that given a choice,everything else being equal,no one would choose paper money over gold backed money,so why,in this free market we love so much,,don’t we have competitive currencies, answer,everyone would choose the Best currency,because of stability. One dollar =s 1/35 oz gold in 1970,one dollar =s1/1200 oz gold in 2010,which would you choose in 1971,gold backed or paper dollars,the point is you can’t choose,and the other point is that the constitution mandates the government maintain not destroy the value of its currency.
    (2)Please check the buying power of our dollar in 1944 and compare it to 1970. Then compare 1971 to 2010. (If you compare 1944 to 2010,you’ll need a barf bag)
    We don’t need and are not required to bend the world economy to our will,we are required to have a monetary and fiscal system that functions. BTW,who is the biggest buyer in the World Market,doesn’t the biggest buyer get the best terms,and the sellers have to kiss the buyers ass. I’ve been selling all my life,has the global economy changed that dynamic?
    Bottom line here Bob,there is no credible argument left to justify the Fiat money/ international floating currency system in terms of what is good for America,it’s been great for China,and India,and Japan* and the EEC*.
    “Until like us,they wrecked their economies on Fiat Debt.

  16. The system was already showing signs of strain with the 1907 crash, which was somewhat comparable to what we face now in some respects, Morgan bailed it out then. This was the impetus for Jeckyl
    Island which gave rise to the Fed, under Benjamin Strong, they handled
    the ’20 downturn not too badly, but misgauged the interval in the mid to late 20s, and well completely fumbled the ball after that, Smoot Hawley closed the capital window in ’30, which triggered the collapse
    of Creditanstalt in ’31, and we know what happened then. Roosevelt
    then closed the gold window, but that was the least of his offenses

  17. NARC/Rex’s conscripted army of mostly foreigners fight
    an infinite number of battles on distant shores

    No deferrments for my Draftees. If we’re going to have infinite battles,we’re going to shed infinite American blood in order to appease the wet dreams of the War Lovers.

  18. He has a soft spot for FDR, as he did for Dupleisis, doesn’t mean he’s right, he was railroaded by an out of control prosecutor though

  19. bob wrote:

    The globlalized economy depends on fiat money and the US no longer has the critical mass to bend the world economy to its will.

    The US dollar is still the world’s reserve currency, and the manner in which the CVS worked to stabilize the value of the dollar wouldn’t necessarily be all that more radical than what the Fed does now. That doesn’t mean it would be perfectly successful at all times, and anyway you couldn’t run a moment to moment adjustment of currency in circulation ensuring that the theoretical exchange value of every single dollar was exactly the same permanently.

    Sovereign nations can re-value their currencies or let them float – that’s a big part of what makes them sovereign. Buchanan, as opposed to Rex, seems to embrace Smith’s understanding of money. He just wants to see that understanding understood in its practical implications, with an agency above and before majoritarian politics protecting the integrity and stability of the economic system as relating to monetary values.

    I read his brief comment on the role of the dollar in the world to suggest that it would likely maintain its position, and that its usefulness to the world would increase.

  20. @ CK MacLeod:

    Buchanan:

    And if the United States should constitutionalize the dollar, along the lines suggested here, there would be little or no concern about the adherence of other countries to the dollar’s continuation as the international unit of account

    .

    There’s already more than a little concern about the role of the dollar with China last year proposing a gradual move away from the dollar, citing among other things the Triffin dilemma.

    Buchanan’s remark simply brushes the issue aside without giving any justification for his confidence. In fact he does not refer to globalization directly at all. The large and growing interdependence of the national economies of the world is a fact that can’t be simply brushed aside. Without some discussion of this, this idea seems incomplete at best.

  21. @ bob:
    To argue Buchanan’s point for him, and I suspect Rex would agree, the justified doubts about the worthiness of the dollar as global reserve currency are intimately tied to its uncontrolled, anarchistic virtual devaluation. In the meantime, there are grave doubts as to whether the status of the dollar as reserve currency under current conditions has been a net positive for the long-term health of the U.S. economy. It’s enabled us to build up an elephantine, intrinsically unproductive financial services sector, while supporting massive trade imbalances, deficits, and the offshoring of manufacturing and employment.

    “Globalization” can mean different things in different contexts: It can mean increasingly globalized trade, communications, politics, etc., or it can mean what actually has transpired during the period marked by globalization. It’s putting the U.S. in a position where, to guard our accustomed relative prosperity, we have to assert ourselves politically – that is, in the end, by force – because more and more of the real productive labor upon which we depend is accomplished outside of our sovereign borders, less and less within them. We are materially dependent on our former customers. Over the long term, the tendencies/choices would be 1) attempt to restore our national economy, 2) adjust to a severe downward adjustment in relative prosperity and influence, or 3) imperialism. Looks to me like we’re implementing all three at once, with shifting emphases – not clear yet which if any will predominate.

  22. BOB/ In fact he does not refer to globalization directly at all. The large and growing interdependence of the national economies of the world is a fact that can’t be simply brushed aside. Without some discussion of this, this idea seems incomplete at best.

    Here’s some discussion,the only reason that we are dependent in any way on China,and the only reason China is pushing for a change in the Primary Reserve Money* is that we need to borrow from them to finance our Balance of Trade shortage and General deficits,and they hold Trillions of our dollars that they rightly worry might shrink. AND The only reason we have such Gargantuan Balance of Trade problems and deficits is the Floating Fiat system.
    *Russia is pushing hard to make Gold the Primary Reserve Currency(Guess Why? Duh?)This issue was at the heart of the recent Spy story that hit the news big.

    CK/” That doesn’t mean it would be perfectly successful at all times, and anyway you couldn’t run a moment to moment adjustment of currency in circulation ensuring that the theoretical exchange value of every single dollar was exactly the same permanently.”

    There are only three options a Government/Central Bank has with its Currency(1)Devalue It-Inflation(2)Overvalue it-Deflation(3)Keep it as close to the same as possible. #s1&2 are always negative eventually,so #3 is the only rational policy,unless you prefer short term advantages like Bubbles and Boom Bust Cycles.

  23. Rex Caruthers wrote:

    #3 is the only rational policy,unless you prefer short term advantages like Bubbles and Boom Bust Cycles.

    Exactly – I was just responding to the idea that the Constitutional Value Squad would have to bend the rest of the world to its will in order to act to guard the dollar’s value. I assume that it would be more in the manner of a current Fed meeting, where economic data were carefully analyzed, and the Squad would decide on appropriate measures to counteract #1 or #2. So if banks or GSEs or entitlements or massive speculation or anything else was threatening an “aggregate revaluation,” the CVS would, for example, tighten up on credit – no doubt causing people to scream in agony, like toddlers at the grocery line denied their candy bars or, very similarly, like LBJ told he couldn’t have his War and his Great Society, but, because it was CONSTITUTIONAL, Americans would presumably grumble a bit, but fall in line.

  24. Exactly – I was just responding to the idea that the Constitutional Value Squad would have to bend the rest of the world to its will in order to act to guard the dollar’s value.

    I like what you’re saying. However,as you know,I prefer the CVS to be Gold,which would bend the entire World’s economy to ITS will.

    ” And, as the limited and ultimately ineffectual constraints exercised by the gold standard, as it OPERATED IN REALITY, were allowed to disappear, the RAVAGES OF MONETARY ANARCHY became visible for all to see.”/JB

    “As we know, at least since 1971, there has been no commodity
    basis for money. Instead, the commercial world has been
    described as embodying a pure paper or fiat unit of exchange and
    account, which has essentially become the United States dollar.
    And this unit retains value only to the extent that the effective
    aggregate supply is kept within limits by the issuing authority, in
    this case by the Federal Reserve Board. Because money, as such,
    has no intrinsic value and because it is nearly costless to produce
    (printing paper), there is no economic reason for economizing on
    usage, as would be the case if money were defined in terms of a
    designated commodity, which has nonmoney use value and which
    requires resources to produce.
    Recognition of this elementary but crucial difference between
    commodity-based and fiat (paper) money has profound implications
    for institutional-constitutional design and operation. Since,
    under a fiat system, there is no efficiency logic for economizing on
    money, as such, there is no justification for traditional banking that
    allows for the generation of multiple account values from fractional
    reserve bases. The central logic of leverage banking, of any
    sort, is absent under the operation of a pure fiat money system.”/JB

  25. I guess I’m assuming that Buchanan’s proposal is intended as a back door method for Rex’s view. Otherwise, what’s the point?

    I do agree that this proposal has something of flavor of the parts of the Constituion that are “beyond that of democratic majoritarian politics” to protect “the minoity ” the fathers were so fond of. But I don’t see that as a good thing.

    “Majoritarian politics” and politics are not the same thing. The Senate, Electoral College and the Court are quite enough that’s beyond that of democratic majoritarian politics for me. This strikes me as a rear guard actin of conservatism to at least blunt the force of the demographics running in a less conservative direction.

  26. bob wrote:
    I guess I’m assuming that Buchanan’s proposal is intended as a back door method for Rex’s view. Otherwise, what’s the point?

    Rex’s View/Views have been on a variety of Conservative/NeoConservative forums for over ten years,and to say my views were mightily disagreed with in those forums is understatement. Lately,as the crisis may be deepening,many of those who lately opposed my opinions,are now more open to them. At ZC,and Contentions,everyone jumped me at first. So nobody is offering me a back door,or needs to,I’ve been coming through the front door for a long time,uninvited. Also,I have made avaliable to my Zombie colleagues,many viewpoints by well known journalists and academics that tend to support my contrarian views, I was invited by the Financial Times and The Huffington Blog to be interviewed,which I agreed to,but I never saw either interview in Print. My track record in examination of the effects of Fiat Money,Floating Currency,Toxic Derivatives,Shadow Banking,Off Balance sheet Liabilities,perverted Government/Banking Accounting Practices,and other areas of concern,are gaining credibility,I am knocking the Front Door Down.

  27. bob wrote:

    I guess I’m assuming that Buchanan’s proposal is intended as a back door method for Rex’s view. Otherwise, what’s the point?

    Back door? More like the front entrance, with searchlights, marquee, red carpet, and rope line.

    Though the protection against “majority faction” is about as you describe, it’s as much a protection against short-term expediency and the ability of a powerful minority – financial speculators in particular – to control the lives of everyone else. I wouldn’t begin to offer an assessment of its political viability, but I think its selling points to progressives would be as strong as its selling points to conservatives.

    I don’t get your demographics argument.

  28. Just to expand further on my observation of the Rex v World arguments – the final points of contention between him and people like our dear departed JEM and JED, or mainstream-ish conservatives like David Frum, were always that, 1) it’s not a magic answer, as the day after we went back on the gold standard, we would possess the same political ability as we did in the past to futz with and eventually bypass it (for the same reasons as before or some version), and 2), related, gold or other potential commodity-backing might impose limits, a good thing if you buy the arguments of economists on Rex’s side, but those limits are artificial and overly constraining (i.e., relating to the actual physical quantity of particular resources whose value may not really be as “eternal” as their proponents claim), not to mention alien to most people alive today – in other words, they lack the conceptual and practical efficiency and flexibility of the fiat/floating system.

    Buchanan’s proposal answers both criticisms as well as they can be answered in our system. I really think Rex should consider fully adopting it: He could continue to wax eloquently on the past benefits of the gold standard and the harms of fiat anarchy, but wouldn’t get caught up on the “wrong” side of historical debates with the ghosts of Roosevelt, Churchill, and others.

  29. What might make the argument particularly appealing to some of the far lefties would be if, in addition to being presented as a kick in the teeth to Wall St speculators (though not to real businesspeople), it was presented in conjunction with some variation on the Big Writedown/Jubilee, and maybe some version of Mike Hudson’s revamp of the tax system. Might as well swing for the fences.

  30. OK “back door” is a poor choice of words.

    Still, comparing it to the current workings of the Fed seems to undersell it a fair amount. So, let me rephrase:

    If Buchanan means anything, he means a fundamental change in our financial system. Otherwise, what’s the point?

    This would constitutionalize a variant of conservative orthodoxy that the country does not have a consensus in favor of. It would be operated by a structure beyond the majority control. (The dynamics of demographics of the country probably not in favor of current conservative orthodoxy) If it did ever get enacted, it would be very difficult to overturn.

    Again, otherwise, what’s the point?

    I am making the argument conservatives make about “activist judges” usurping the legislative branch’s role.

    Honestly, both of you know a lot more about all this than I do. And I’m amazed that I seem t be making as much sense (comparatively speaking) as your reactions suggest.

    But this seems to me not a silver bullet, but a can of worms.

  31. BOB/If Buchanan means anything, he means a fundamental change in our financial system. Otherwise, what’s the point

    We did a fundamental change in our financial system in 1971,and most people today don’t know/care much about what happened before 1971,they think it’s been the way it is today forever,39 years is forever.
    I could take you on a tour of the carnage done to our economy since 1971,but you would think I’m a lunatic. I do have a lot of “FACTS” at my disposal,but I admit,it’s not easy to figure it out. I always thought that everybody saw it clearly,but I now realize that
    most just don’t get it. But I’ll give you a hint,in order for us to get out of this malaise,the Debt Overhang,has to be written off,and that’s a hard reality for those that loaned too much to too many that can never pay it back. The way out of this mess is to reloan to everyone possible,but in order to do that,we have to clean up the liability side of the individual balance sheets. Long term,we have to stabilise our Currency.
    ” But this seems to me not a silver bullet, but a can of worms”?
    It’s a GOLD Bullet,and can you imagine a bigger can of worms than our economy is right now?

  32. @ bob:
    I’m curious as to what aspect of the Buchanan message struck you as “conservative orthodoxy.” It seems to me that there are numerous aspects of it that are totally anti-orthodox from a mainstream conservative point of view – most of all the way he runs right into and administers a pants-down paddling to free market purism. Without monetary discipline, he says, the free market is financial anarchy. The implications for our tax structure would eventually be immense, too, even if we didn’t go all the way to Mike Hudson’s neo-progressivism – my term, not his. Hudson probably counts as a market socialist in conventional terms – though I’d be curious to hear how describes himself.

  33. “The implications for our tax structure would eventually be immense, too, even if we didn’t go all the way to Mike Hudson’s neo-progressivism – my term, not his. Hudson probably counts as a market socialist in conventional terms – though I’d be curious to hear how describes himself.”

    He describes himself as a Free Market Capitalist who understands that the economy was hijacked by the FIRE segment in terms of tax incentives. Factor in the Carry Trade with the triumph of the Fiat,and the FIRE segment displaces the entire manufacturing segment. FIRE/FINANCIAL INSURANCE REAL ESTATE/or the Financial,Governmental Complex.

  34. I got the impression that he favors a pretty thoroughgoing, democratic progressivist/protectionist intervention on behalf of the working classes, but also on behalf of true venture capital, against rent-seekers/collectors/speculators – a revival of what he was calling the American school.

  35. For those of you that depend on Larry Kudlow for their Financial analysis,here’s some Kudlovian follow-up.

    “They seem unaware that China is slowing and the US is tipping into a second leg of the Long Slump. Last week’s collapse in America’s ECRI leading indicator to -9.8 marks the end of the V-SHAPED REBOUND. If this means what it normally means – recession within three months – Europe must take immediate action to prevent being drawn into a deflationary vortex. Spiralling public debt precludes further Keynesian spending, so this must come from central bank stimulus. Tight fiscal policy offset by ultra-loose money is the only option for Europe, the US, and Japan.”

    Ambrose Evans-Pritchard: more comment
    No student of Milton Friedman is surprised by the US relapse. The Fed has allowed M3 money to contract at a 10pc pace for much of this year – the Great Depression rate. The economy has hit the wall with the usual lag. Textbook stuff. Never ignore the quantity theory of money.
    The US Conference Board’s indicator is not yet flashing a red alert, but that is because it gives weight to “yield curve inversion”, where long rates fall below short rates. This indicator is meaningless in a Japan-style bust where policy rates are zero.
    I suspect that Fed chair Ben Bernanke knows the economy buckled around the Ides of June, but is stymied by hawks at the regional Feds. All he can do for now is to talk down credit costs through hints of more quantitative easing, or QE2. In this he has succeeded. The yield on two-year Treasuries fell to an all-time low of 0.5765pc on Friday. It’s Weimar, all right: circa 1931, not 1923.”
    http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7897304/Stress-testing-Europes-banks-wont-stave-off-a-deflationary-vortex.html

  36. @ CK MacLeod:

    I also included he word variant to modify “orthodoxy”, perhaps too weak a word to convey Buchanan’s innovation. (Also, maybe this is a contradictory formulation, can there be a variant of orthodoxy?)

    At any rate, the orthodoxy is that money is, should be, commodity based. Buchanan’s innovation is change this to: money should function as if it were commodity based. But the indended result is the same (same in the sense of what is frequently claimed for commodity money) even if the mechanism is innovative.

    The other orthodox aspect is as a cri de coueur for US sovereignty and world pre-eminence. It strikes me as kinda Panama Canal-y. (I problably shouldn’t include this since if this makes no sense as stated, I’m probably not going to be albe to explain it for a while.)

  37. Thing is, I don’t think it’s conservative orthodoxy at all that money should be commodity-based. That’s mainly fringe group-y, Ron Paul, don’t scare the children stuff. Free market purism is much closer to a conservative orthodoxy.

    I also didn’t get anywhere near as much chauvinism from Buchanan. Until and unless there’s a world currency, “sovereign” governments will be charged with establishing how each currency is valued, to the extent its within their power. As we can see from Greece in the Euro Zone, not having the power to re-value one’s own currency puts strict limits on how to adjust with economic crises – i.e., puts a limit on sovereignty when it matters most.

    If there were a world currency, then the choice would be the same: seek to stabilize its value, or let it be subject to financial anarchy.

    Whatever you think of Buchanan’s argument on the merits, it’s not inherently left/right – which is one of the most appealing things about it, to me.

  38. The question that JB partially answered, inasmuch as he had the stomach for it,was that the innovations of 1971,evolved into the causes of the current crisis, remember,he avoided directly opposing the 1971 program,he offered general common sense type caution,but stayed away from controversy. Even as the Derivatives Beast grow big enough to Bankrupt the World Economy,JB was not present on that one. He had no desire to be a Pariah.

  39. I don’t see why you attribute bad faith or cowardice to him. He had a different specialty. That his analysis overlaps with yours doesn’t mean he sees things the same way you do at all. He may think that attempting to go back to the gold standard would be even worse, and his analysis seems to imply that doing so would be regressive.

  40. I don’t see why you attribute bad faith or cowardice to him

    I don’t,I see him peeking at the Fiscal Universe made possible by Computerization as an older man,and thinking,I’ll hand my sound general principles off,and watch where they go.

  41. Control of the money supply corrupts. Absolute control of the money supply corrupts absolutely.

    If I understand your understanding of Buchanan, he believes that a new “independent” controller of the money supply can be constituted which will be capable of resisting the political pressures that have corrupted the previously constituted “independent” controller of the money supply.

  42. The “bad” thing about the gold standard was/is that it prevented all wise and all just governmental experts from playing money value games. We’ve long been off the gold standard; but there it (gold) is still, inhibiting governmental experts from playing money value games, it’s trading price serving as a check on the real value of fiat money.

  43. Sully wrote:
    The “bad” thing about the gold standard was/is that it prevented all wise and all just governmental experts from playing money value games. We’ve long been off the gold standard; but there it (gold) is still, inhibiting governmental experts from playing money value games, it’s trading price serving as a check on the real value of fiat money

    Bullseye,When a Government runs an actual Gold Standard,the Gold Dollar Ratio has to stay equiviliant to the actual market price for Gold. Before we went Fiat in 1971,the market price of Gold went to 115 Oz(Fixed Price was 35 Oz)because of Lyndon Johnson Debt. That movement in Gold exposed the Game we had been playing of going into debt to pay for war and welfare without raising taxes,and forced Nixon’s hand. (BTW,as a direct result of Fiatism,OPEC 4xed the price of oil to adjust for the flimsier dollar,and so it goes.

  44. By their behavior they’ve given up the benefit of the doubt, that they knew what they were doing, Nixon’s wage and price controls, something he should have been impeached for, that had real consequence

  45. I was being metaphorical, you’re always raving about 1971,none of this earned Nixon any street cred, rather it encouraged the hatred
    against him.

  46. @ narciso:

    The political class and the public “economists” still believed in the 1960’s that government bureaucrats could better allocate resources than the market, hence the experiment with wage and price controls ala WW2.

    Currently the political class and the public economists still believe that the money supply can be better managed by government bureaucrats than by the impersonal market; but the market keeps on keeping on biting them in the rear. Eventually it will bite them in the rear to the extent that it did during the Great Depression which was arguably worse by far than the panics and shorter sharper lesser depressions and inflations that plagued the gold and silver years.

    One nice thing (for the political class, government bureaucrats and unscrupulous “investors” who subvert and ultimately own them) is that control of the money supply allows them to make such depressions and inflations relatively painless for themselves while they work to increase their power. Until common folks realize what is happening and rise up with pruning hooks to upset the whole system.

    People in general come to have reason to hate it when that happens, of course.

  47. SULLY/than by the impersonal market; but the market keeps on keeping on biting them in the rear.

    Silver $18 Oz
    Platinum$1500 Oz
    Gold $1200 Oz

  48. The political class and the public “economists” still believed in the 1960′s that government bureaucrats could better allocate resources than the market

    Declaring murder, robbery, extortion, and fraud out of bounds is also intervention into pure freedom.

    No market can work efficiently without basic rules. Buchanan argues that the stability of the unit of account should be one of them – that the entire system would function more efficiently if everyone’s financial calculations weren’t subject to radical aggregate revaluation.

    What government bureaucrats or anyone else believed and what they did in the 1960s is beside the point.

  49. they all were influenced by the likes of Samuelson, and other Keynesian, and what did Keynes say about ‘dead men influencing
    the future’

  50. @ CK MacLeod:

    Buchanan argues that the stability of the unit of account should be one of them – that the entire system would function more efficiently if everyone’s financial calculations weren’t subject to radical aggregate revaluation.

    If that’s what he’s arguing I agree with him completely. Where I have an issue is his (I assume based on your piece and the foregoing discussion) belief that an “independent” group of bureaucrats can be expected to be more trustworthy and wise in managing the money supply than the market will be if the fiat currency has to be backed up with reserves of a commodity ala the gold standard.

  51. CK/”No market can work efficiently without basic rules. Buchanan argues that the stability of the unit of account should be one of them – that the entire system would function more efficiently if everyone’s financial calculations weren’t subject to radical aggregate revaluation”

    CK,Let me show you two approachs to revaluation,A more Conservative approach but still way above JB’s tolerance level would be FDR who left the Gold arrangement at 22$s Oz,and returned to it at $35 OZ
    Nixon left Gold at 35$ Oz/115$ Oz,and took it to 0$s/115$Oz,
    The depreciation of the Dollar based on Market prices,from 1971 to 2010\ is approx. 25% per year average decline, based on Gold’s appreciation. In terms of overall inflation,a Dollar in 1970,would buy 95$s* worth of mixed goods and services today. I have never met a proFiat defender that is able to explain how that level of Inflation was generated,or why that level of Inflation is a benefit.
    *Based on a CPI that includes Housing,Food,Energy,and Clothing(And why should a CPI exclude those items that 95% of the population must buy daily/weekly/monthly. )

  52. Sully/If that’s what he’s arguing I agree with him completely. Where I have an issue is his (I assume based on your piece and the foregoing discussion) belief that an “independent” group of bureaucrats can be expected to be more trustworthy and wise in managing the money supply than the market will be if the fiat currency has to be backed up with reserves of a commodity ala the gold standard.

    Gold gets my vote over human oversight,based on 5000* years of Currency manipulation by those that could(Why does a Dog lick his Genitals?)
    *Ancient Egypt

  53. Without Stable Money, There Can Be No Trust
    John Tamny, 07.21.10, 06:00 PM EDT
    If you can’t trust what a dollar is worth, what can you really trust?

    “Imagine being contacted by a real estate agent about a 5,000-square-foot house, only to show up and find a home half the size. Off the bat, the prospective purchaser would have very little trust.
    Of course the above scenario is purely hypothetical given that a foot is a foot. Since its definition is unchanging, 5,000 square feet means the same today as it did 20 years ago. Whatever the level of trust home buyers have in their real estate agents, square footage will never be a factor; that is, unless the length of the foot is allowed to “float,” and its length declines. Suddenly, 5,000 square feet could very well mean 2,500 square feet in “real terms,” and trust in real estate agents will plummet.
    this is the case with the world’s currencies. Debased currencies without definition are what the world has suffered since August of 1971, when President Richard Nixon severed the dollar’s link to gold. No longer defined in terms of the most stable commodity on earth, the dollar has been left to fluctuate without a golden anchor, its value changing minute by minute, hour by hour, and day by day.”
    http://www.forbes.com/2010/07/18/dollar-gold-standard-trust-opinions-john-tamny-fiat-currency.html

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