I have just finished reading the wikipedia version of the Panic of 1907, where the authors were convinced that a central bank was needed to avoid these kind of speculative crises. I wonder what the austrian school's answer to the cause of these crises are, and if there eventually is any litterature treating these topics?
The Panic of 1907 was due to expansion of the money supply during the two previous years because at that time the US Treasury secretary Shaw tried to be the central banker. The loose money policy and inflation created a bank panic. So, the solution is to have a central bank to be able to expand the money supply just like the previous two years? The difference would be that a central bank coordinates the credit expansion of all banks simultaneously so no single bank can expand more than another.
They created a central bank not to prevent bank panics. Did they ever have another panic after the Fed was created? Of course! If anything, the 1907 panic was a deliberate attempt to make the public loose faith in a banking system that didn't have a central bank. The Morgans & Rockerfellers and other big businesses were pushing for a central bank ever since the late 1800's. They wanted a banking cartel that they had a close relationship and control of, which could be used in their favor to create money to fund their enterprises. Back in the late 1800's there were two sides. Those who wanted hard money and those who wanted a central bank with printing press like Europe. They went back to a gold standard in 1879 due monetary reform following the panic in 1873 (when National banks were allowed to create money) , but this was opposed by those who wanted to control the money supply. During the late 1800's and early 1900's during the progressive movement the Rockerfellers and Morgans underminded the whole system by orchestrating symposiumns and polarizing the educated elite to spread the word of the demand for a central bank. To make believe that it was private businesses, not the wall street banking sector, that wanted a central bank. However, the central bank's purpose is to primarily serve the Wall Street banks and the Morgans and Rockerfellers of that time. It took many years to play out, but the panic of 1907 and the secret Jeckyl Island meeting of two Rockerfeller men, two Morgan men, the US Treasury secretary and Senator Alrich in 1910 orchestrated the Federal Reserve we have to day.
To avoid speculative crisis like that of 1907 or other panics you don't need a central bank. It is the central bank who creates bank panics by allowing commercial banks to expand their supply of credit beyond that which would be acceptable without a central bank. The central bank is there to print money in case there is a bank run and people want their property (money) back - and the bank has all the money lent out. Without the central bank the investment and commercial banks keep each other in check. With the central bank the banks all expand their money supply even more - creating more instability in the banking system. Just like what has happened today during 2009's banking panic. But of course, they don't call it a "panic" anymore because that's too harsh of a word. To end speculative crisis and banking panics you need a sound hard commodity money that the government or central bank cannot create out of thin air. Historically, the free market economy has chosen gold to be their money. Unfortunately for government a money printing press can't produce gold, so advocates for centralized big government who want to control the economy always pushed to eliminate hard money and push for a printing press. With the printing press the centralized economic planners can counterfit money and redistribute the wealth to those who lobby hardest to gov't or to those sectors of the economy the gov't dictates it wants to develop or stimulate.
The creation of a central bank is perhaps one of the first steps to take for a movement toward Fascism.
Thank you for your answer. Wonder if you had any sources from your point that Treasury secretary Shaw acted as a central bank?
http://mises.org/books/fed.pdf
Also check out:
http://mises.org/MultiMedia/mp3/MoneyandGovernment84/02_1984_Rothbard.mp3
http://mises.org/multimedia/mp3/Fed1992/01_Fed1992_Rothbard.mp3
http://mises.org/media.aspx?action=search&q=federal%20reserve
I checked out Rothbards The Case against the Fed. He points out very briefly that as you mentioned Leslie Shaw acted as a central bank. I just wonder how he could do that? How could he expand the money supply during the gold standard (other than extracting a limited amount of gold each year)?
Well, from 1864 to 1912 we had a quasi-central bank. The Federal Reverse merely centralized what already existed.
Ok. But I still have som difficulties understanding exactely how these kinds of central banks expands the money supply with a gold standard. They probably have som reserves, but they can't keep taking from from the reserves all the time. And at the same time it is limited how much gold there can be extracted from the mines. So my question is how they actually succeed in expanding the money supply so much?
Unfortunately the editor of the "1907 panic" Wikipedia article do not tolerate anything other than the Wall Street party line.
Please read
Senator LaFollette, in Senate, on March 17, 1908, during the debate of the "Aldrich Bill" (S 3023) -- the story and causes of the 1907 money panic
http://www.yamaguchy.netfirms.com/7897401/lafollette/lf08mar17.html
A marxist's view on Morgan and his saving the day
http://www.yamaguchy.netfirms.com/7897401/myers/am_fortune/am_fortune_412.html
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Fractional reserve banking allows them to loan out 20x1 dollar based on 1 dollar reserve. But, even under the gold standard the banks (and the Fed) did not use gold as reserve; they used government bonds as reserve. the more government debt, the larger money supply
"Now, let me state to the Senator, as he well knows, there is no requirement in the national banking act that the capital shall bear any fixed relation to the loans, nor is there, I believe, in the State banking acts, and the result is that we have such conditions as these: That the Knickerbocker Trust Company, of New York, with a capital of only $1,000,000, was able to make loans to the amount of $50,000,000. So the proportion of capital to loans was not that of 1 to 5, as the Senator from Rhode Island suggests, but was the relation of 1 to 50." --Senator James P. Clarke, in Senate, March 11, 1908.
http://www.yamaguchy.netfirms.com/7897401/uregina/speeches.html
The link to Senator LaFollette's explanation does not seem to be working as of March 2012. Anyway, I read what Rothbard had to say about the causes of the Panic of 1907 and it was very little. I would like to see a detailed explanation that covers all the bases, going over the traditional narrative at each point saying where it was right or wrong.
The story usually begins with a few guys trying to corner the market on copper stock by artifically raising the price and preventing short sales. The short sellers were able to raise enough money to prevent the guys from cornering the market, and people began to pull out their stocks. The guys also sat on bank boards and resigned. Bankers who supported the few guys were compelled to step down. In response, customers started runs on banks. The smaller banks collapsed. JP Morgan came to the rescue and raised money to save banks.
What Rothbard says is that Treasury Secretary Leslie Shaw created inflationary policies. Now what we need is something that connects what Shaw did to the attempt to corner the copper trust and the subsequent banking collapses, and the Morgan-led rescue.
Here is an article about Shaw written by A. Piatt Andrew in 1907. Who was A. Piatt Andrew? In 1908 he become a leading member of the National Monetary Commission (a Rockefeller front-group created by Sen. Nelson Aldrich [of Jekyll Island fame] which lobbied for the creation of a central bank). In 1909 he became director of the US Mint. In 1910 he became Assistant Treasury Secretary. Also in 1910, he was one of the seven men who attended the Jekyll Island meeting and drafted the forerunner of the Federal Reserve Act.
http://www.jstor.org/stable/1883587
The article criticizes Shaw and offers up central banking as a solution (surprise surprise).
...my impression in general is that Shaw was a useful idiot, if not a willing co-conspirator, who was used to create the problem (panic of 1907) that subsequently justified the "solution" (the Federal Reserve) that people like A. Piatt Andrew desired from the start.
"I have just finished reading the wikipedia version of the Panic of 1907, where the authors were convinced that a central bank was needed to avoid these kind of speculative crises. I wonder what the austrian school's answer to the cause of these crises are, and if there eventually is any litterature treating these topics?"
You may also find more useful information on panics here.
Mises Wiki | Economic Resources and Books (search engine)
3 years went by; start here: www.yamaguchy.com, then look for "the story of central banking", then for Mr. Lafollette's speech.