April 7th, 2013

In Which a Spelling Error Arouses My Innate Paranoia and Suspicion

Having greatly enjoyed Bagehot's _Lombard Street_, I thought it was high time I finally read _Manias, Panics, and Crashes_ by Charles P. Kindleberger, who had an amazing career and who in many respects thinks about the world in much the way I do.

Alas, he spelled a Dutch word wrong, and that aroused my innate paranoia and suspicion. The word in question is "wisselruiterij", which he spelled incorrectly (and repeatedly) as "wisselruitij", and the misspelling occurs, at a minimum, in two separate editions of the book (Phillip Y. Lipscy of Stanford quotes Kindleberger's 2000 edition and I've got the 1996 one). I have no idea if it was present in earlier editions.

It is particularly _odd_ that Lipscy spells it incorrectly in a table based on Kindleberger, because in the same table he uses the parallel German term, Wechselreiterei -- that alone should make an alert writer aware that there's a problem with wisselruitij (the missing "er", specifically Wissel and Wechsel both mean bill, reiter and ruiter are both verbs for "to ride", as in a horse, the "ei" and "ij").

If you look up Wechselreiterei in German wikipedia, even if you can't make sense of the article as a whole, you will at least find out about Mefo Bills, which you can then look up in English wikipedia:

http://en.wikipedia.org/wiki/Mefo_bills

Then, at least, you are not stuck trying to work your way through something like this:

http://www.encyclo.nl/begrip/Wisselruiterij

Bills of accommodation are not inherently fraudulent, altho they are an unusually fragile system of credit, both because they can be fraudulent (search on Livesey!) and because even if they aren't, their pure reputational basis and short-term-nature makes them fall apart whenever there is _any_ kind of suspicion in the financial system.

Anyway, you could argue, big fat fucking deal, who cares, right? And that's fair on one hand. But it caught my attention (not least because he refers to Wisselruitij as "unpronounceable", when as Dutch words go it's pretty straight forward, and the meaning is clear as well: a bill that is riding around), so when he said this in the next paragraph, huge alarm bells went off:

"Additionally, the Bank Act of 1844 went wrong when it failed to limit deposits as well as currency."

Really. _That_ is where you think Peel's Act went wrong?

I'm forced to conclude that Kindleberger is not the careful thinker I believed him to be. A couple pages on, he has this to say, "If the Banking School was right on the need for credit expansion to make a start in economic expansion, the Currency School was surely correct in observing that credit creation based thereafter on ongoing business opportunities is a formula for disaster."

It sure can be, but equally it can be a disaster to conclude that There Is Enough Credit We'll Stop Now. Is taking the punchbowl away just as the party gets going the ideal to which government regulation/central banking strives? Yes it is. But we all know that there are people who will continually snatch the punchbowl away before we're even out of the ditch -- just as there are people who will be demanding more as the host is showing everyone the door.

A good chunk of the beginning of Kindleberger's _Manias_ is written in the context of Minsky's then-recent (well, the original _Manias_ was 1978, so Minsky's book was 3 years old or thereabouts at the time) book about Keynes how the then-current understanding of Keynes was flawed. (So I'm feeling really bad that I have Minsky's book around here somewhere and haven't read it, either. *sigh* This isn't ever going to end, and I'm going to be shocked and appalled every step of the way, I feel sure.)

And besides, if wisselruiterij and wechselruiterij and flying bills and windbills and all the rest have anything to teach us, it's that locking down the banking sector really hard just makes the out-of-banking sector shenanigans get that much nuttier, and you _really can't just let them all crash and burn_ so you'll eventually have to bail them out sometime.

I'm not saying I have a solution (certainly not a general one! I think general solutions in this area are part of the problem). I'm just a little concerned with some of the off-the-cuff judgments embedded in the historical development.

ETA: If you're thinking about third party checks as you're reading this, it seems like a valid comparison to me, too. Which is why we don't allow 3rd (much less nth) party endorsements on checks anymore. Not that anyone besides the government wants our paper checks anyway.

ETAYA: Probably not something to blame Kindleberger for, altho definitely a WTF moment.

p 58:

"the gold-exchange standard, or the system of adding to international central-bank reserves with a fixed world gold stock by counting in them not only gold holdings but also holdings of foreign exchange against countries that adhere to the gold standard. The system was long thought to have been a post-World War I development, based on the recommendations of the Genoa Conference of 1922 and the Gold Delegation of the League of Nations, and" blah blah Montagu Norman blah blah "However, the gold-exchange standard has been shown to have flourished before the war." 49 and 49 goes to something written in 1969.

Given that Bagehot refers to this development as occurring within his lifetime (and he _died_ in 1873), I'm having a great difficulty understanding how anyone got so confused about this. BUT the blah blah Montagu Norman blah blah suggests (to me, anyway) that while Norman was attempting to recreate the pre-Great War glory years, the idiot Americans had no clue what was going on and thought he was being all sharp.

I _really do_ (altho it doesn't seem like it above) understand that crossing language barriers to learn from other people is hard now and it is easier now than it has ever been before. However. Bagehot wrote in English, and Norman would surely have explained himself if anyone had bothered to ask and listen so I Just Don't Get It.

Bagehot doesn't call it a gold-exchange standard, but he refers to the increasing practice of other countries (notably Germany, as it was receiving payments from France) to hold BofE notes as well as gold, and to hold a lot of the notes and a lot of the gold _at the BofE_. That is, not only was the BofE holding the reserves for all the banks in England, they were holding a bunch of reserve and current accounts for other countries as well, for a variety of reasons including ease of payments (easier for the French to pay the Germans by doing a giro than by sending a boat or caravan or wtf of gold, amirite?). Anyway. Bagehot pointed out that as other countries did this more and more, it made running the BofE an even scarier enterprise, because you just never knew when another _country_ was going to decide it needed all of its money for something else or to be somewhere else, thus impacting the amount of gold in England and thus the circulation usw. usw. usw. Of course, a less responsible person might just shrug and assume you'd suspend if you had to.

Trust Kindleberger to only discuss the expansive potential of the gold-exchange standard and not its deflationary risks. *eye roll*