11 posts tagged “money”

Is the financial crisis really over?

The mainstream media and the politicians say that its end is near.

Take a step back, though. Too much spending and borrowing, we are told, helped cause the crisis. And what has been the response? More spending and more borrowing has been the response by the power elite. It is not only that. They think that the answer to a bubble that has started to pop is to inflate it again. Instead of bad assets being liquidated, the Federal Reserve has basically become a giant hedge fund. What about the stability of banks? Every week, quietly behind the scenes, the FDIC takes over yet another failed bank or two and transfers their deposits to another bank.

Unemployment figures remain high, but they don't tell us the full story. A more accurate accounting of these figures reveals that the numbers are much higher than what politicians tell us. GDP figures are similarly distorted to even include such things as Cash For Clunkers. If President Obama started to build a Tower of Babel tomorrow for a trillion dollars, it would be positively added into the GDP. And who knows what the so-called Plunge Protection Team is doing to influence the stock market.

What about gold? Right now it is roughly $1,100 per ounce.

Mr. Charles Goyette, author of The Dollar Meltdown: Surviving The Impending Currency Crisis With Gold, Oil, And Other Unconventional Investments, says that the rising price of gold is "the canary in the coal mine." The assorted commodities are moving upward and the dollar is moving downward. The trend is clear.

Dollars are multiplied in quantity almost ad infinitum. Fed Chairmen Ben Bernanke, like his predecessor, is convinced that solving our problems can be done by creating more money and by attempting to price fix interest rates to levels lower than they otherwise would be at. Instead of interest rates being determined by the relationship between the supply of savings and the demand for them, men have been led to believe that this process can be, for all intents and purposes, socialized.

The supply of money has shot up to new heights. This (unhappily) canceled out, I believe, any kind of potential "deflation" from happening at the outset of the crisis. Bernanke, despite his double talk, has been aware that this monetary expansion would lead to a downward dive in money's purchasing power. Consequently, he started to pay banks not to loan new money. Taking, somehow, all or much of this new money out of the banks is virtually impossible. And Bernanke, to be sure, is still however worried about any kind of deflationary events in the future. Those in power will take "inflation" over deflation any day.

Government debt is out of control, to put it mildly, and is ultimately not payable. Its maintenance is akin to a Ponzi scheme. When such bills come in, government goes into even more debt by issuing more bonds to sell and often by simply creating more paper money. This can't last forever.

Leaders around the world see what is happening. They are not blind to the fact that dollars are not a good investment long-term. Rather than what were private whispers, there are public talks about moving away from the dollar as the reserve currency of the world. For example, India's central bank recently purchased 200 metric tons of gold. There is a clear shift in the world's view of both U.S. dollars and bonds.

This is not mere speculation, this is happening as we speak. The world will not support the U.S. Leviathan forever. It's only a matter of time, it seems to me. And Empires don't last forever; they go bankrupt.

In his book, Goyette shows---if you are not yet convinced that there's a problem---that the real figures to calculate U.S. debt are largely hidden. Added up, it is not $12 trillion but nearly $100 trillion. That's about $1.3 million for a family of four. Direct taxation undoubtedly has severe limits when it comes to these figures. Only repudiation and printing up money can solve this in the end. And if the Chinese backed away from buying more bonds tomorrow, U.S. authorities have no solution but (surprise!) repudiation and the printing press. That's it.

How did we get here? "America has become a piñata," answers Charles Goyette. Politicians, looking to get votes, pass the democratic stick around to various special interest groups so that they all can take a whack. Grabbing millions from this piñata are not enough. Even billions are too small. Now it's trillions. Next, I suppose, it will be quadrillions, then quintillions, and then sextillions. The piñata won't survive. We never think about that, says Goyette. We think of benefits, never costs.

He notes that the Iraq War alone, when you attempt to figure in all of the hidden costs, amounts to 4 or 5 trillion dollars according to Joseph Stiglitz and Linda Bilmes (which is even more than their conservatively titled book). Just think about the fear premium on the price of oil! Once again: We think about the supposed "benefits" of Empire, never the costs. China has it right: It is cheaper to buy oil than to steal it. Right now, like good capitalists, they are searching the globe to find it.

For these and other reasons the author of The Dollar Meltdown argues that a future currency crisis is unavoidable. The supply of dollars keeps moving up, and this speed is even in a position to potentially accelerate even more than it has already, and its demand is on the edge of falling. If dollars from around the world start to come home, hyperinflation is the next stop. There is no "quick fix" to turn this around. Politicians are not going to go straight and the American public is not going to wake up until the crisis happens.

So what can we do? All we can do is protect ourselves and our families to the best of our abilities. The more that protect themselves, the better off all of us will be. We can even profit. But note, no one has a magic ball. How things play out will depend on many factors, of course, and the question of "when" is always difficult to answer, but the responsible thing for any man to do is to insulate his family from the possibility of a currency crisis, be it a relatively mild one or a severe one.

Section four of the book is where Goyette walks us through his recommendations. Gold as you can easily guess is one of them. So is silver. Oil and agriculture are also recommendations. All of these things are explained in a straightforward way. You don't have to become a day trader or anything like that.

He names specifics, explains exactly how to invest in them, and how each of these markets work.

Silver, for instance, has much potential. Much of its demand is purely for industrial use. This would change in a currency crisis and the speed of it shooting up in price could easily be faster than gold. This, shown in the book, has historical precedence.

Agriculture contains many profit opportunities. There is a growing world population and therefore more and more mouths need to be fed. "Jim Rogers," writes Goyette, "says that ten years from now instead of twenty-nine-year-old stockbrokers driving Maseratis, it will be twenty-nine-year-old farmers."

Charles Goyette's expertise and intellect is clearly seen in the book. Section three of it explains "what happens next." In addition to some of the things already mentioned, here for example he explains what the probable reactions would be by the government in a currency crisis. (Hint: All of their reactions would be bad and would make the problems worse. They would attack the symptoms.) The second section talks about "how we got here" and the first section explains "where we are."

He additionally shows the link between sound money, liberty, and the rise and fall of civilizations. To harden his analysis, he looks at ancient Athens, the Byzantine Empire, and the city of Florence. He turns to Britain and early America. For historical cases of massive inflation, he looks to France and Germany.

Mr. Michael Nystorm, in his review of the book at The Daily Paul, remarks that it's "interesting that these lessons can be learned intuitively simply through the study of money."

Take a look, Goyette says at the end of the book, at America's earliest coins, which "portrayed Liberty," in comparison to today's coinage, which "celebrates the state." Look at today's symbols and its culture, and you'll understand where we are.

***

Also: The Mises Institute recently held a conference on the gold standard.
You can listen to the archived audio here.

The Free Market Economy is the Engine of Civilization: From Barter to Money.

Money is a crucial feature to any advanced civilization, notwithstanding how much it is looked at negatively and portrayed as intrinsically a nasty thing in "progressive" culture. Now before man can attempt to answer questions, such as, What is money?, Why do we have it?, or How does money develop in society?, there first must be an understanding of why there is any trade at all.

Comprehending that is reasonably straightforward. After that, we all will endeavor to answer those questions raised in regards to money. In so doing, the important connection money has to civilization and liberty will be concretized in the mind. Finally, we will look at the forces that undermine money, and thereby undermine civilization and liberty.

But first, imagine, following the lead-----I'm just attempting (please understand!), as a midget, to stand on the shoulders of giants-----of Murray N. Rothbard's work, that egalitarianism was not a "revolt against nature." That is, if all men were exactly alike in every single way imaginable. That even land was distributed in a homogeneous way in which every acre of land had an exactly equal proportion of resources. And, also, imagine that Mother Nature behaved in a way in which her affects were always and everywhere the same across the world in a homogeneous-collective manner as against one in which her behavior, so to speak, was different at different locations. And so on. Man in this world would be little different than a robot produced out of a mass production factory. Every man, being of identical nature, confined to his land, being of identical nature as well, would produce and consume exactly the same thing, in the same proportions as every other man. Clearly a division of labor qua society would not develop. To quote Ludwig von Mises (as Rothbard did on this subject): "No social life could have arisen among men of equal natural capacity in a world which was geographically uniform."

The real world, in which we live, is not like this at all. Rothbard is therefore absolutely correct when he said that egalitarianism is a "revolt against nature." Men, on the contrary, differ vis-à-vis each other. Land, too, is heterogeneous. Neither is Mother Nature a fan of egalitarianism. As Erik von Kuehnelt-Leddihn wrote, "'Nature' (i.e., the absence of human intervention) is anything but egalitarian; if we want to establish a complete plain we have to blast the mountains away and fill the valleys; equality thus presupposes the continuous intervention of force, which as a principle, is opposed to freedom. Liberty and equality are in essence contradictory."

Man would obviously not trade with his neighbor if his neighbor had everything he had. Man instead trades with his neighbor because his neighbor has something he does not have. More fundamentally, it is recognizing that trade in the second of the two cases is better or more profitable than trying to produce everything in isolation. A world with an extreme household protectionism would have extremely low standards of living. The population number would be nowhere near the number it is today.

It is the fact that engaging in a market economy with others is more profitable than not to engage that explains why barter developed. Man's needs and wants can be better fulfilled in the market economy. It is based on exchange and in production----production to be used in future exchange. Society is hence not an end to itself; it's a means. Men come together to do things together.

Now explanations of this development, from famous economists like Adam Smith, according to economist Hans-Hermann Hoppe, that pronounce the market economy developed for reason that man has an instinct to it and an inborn like of other men is erroneous. Both of these assumptions are not needed to explicate the development.

Trade may take place between two men, who might actually dislike each other, who rationally, opposed to instinctively, see the advantages of this type of interaction. If these two men trade with each other, then it is because the first man has something the second man wants and the second man has something that the first man wants. (Feelings of friendship, when voluntary cooperation has been established, can then truly develop!) This is not, though, the consequence of them viewing what they trade as equal to each other. No trade would result if that was the case. The trade is the consequence of them viewing these traded goods as having a different worth. One man ranks one thing higher and the other man ranks the other thing higher. Hence both trade because they see themselves as becoming better off than not trading.

This is the beauty of what Robert Nozick called "capitalist acts between consenting adults" (whose line the economist Walter Block often quotes). The mutually beneficial nature of all capitalist acts inter partes is logically implied when they take place (ex ante). It is because it is logically implied----because it must be logically implied----that such acts take place. Voluntary exchanges all logically imply it. For this reason, no empirical testing is required (and how would man go about that testing?) and no empirical testing can show this to be false. This logical deduction of action is not technically observed, but is implied even for an observer----who is an actor----who wishes to observe anything----i.e., it is implied in the way one observes anything----and for this reason cannot be refuted. It is the prerequisite (or praxeological precondition) for any voluntary exchange to take place. It is the foundation of these exchanges.

("Socialist" acts, contrariwise, we can call "acts between non-consenting adults." They imply something quite different than capitalist acts. Whereas capitalist acts take place because they are seen as advantageous for both parties, socialist, non-consenting acts are acts where one party aggressively forces his will on another. One party benefits; the other party has a loss to what was taken away. Furthermore, institutionalizing socialism above individual acts of random physical invasion is to make matters even worse for a society than "unsystematic socialism." Since institutionalized socialism is a systematic attack or redistribution of wealth from those engaging in capitalist acts----who under systematic socialism cannot rightfully defend their property from attacks----to those engaging in socialist acts, the costs of engaging in capitalist acts will be higher, and therefore there will be less capitalist acts in society. Consequently, there will be less wealth and wealth creation.)

But, from the fact that these initial barter (direct) exchanges necessitate a situation where there is a double coincidence of wants (i.e., the first man has something the second man wants and the second man has something that the first man wants), there is a major hurdle to which man has to jump through to exchange with another. It might turn out, for example, that one man sees that another man has in his ownership something he himself very much wants, but cannot trade with him because he himself has nothing that this man wants. In each and every exchange there is this hurdle. The range of man's potential capitalist exchanges will be limited. Thus, the division of labor cannot be complex and diverse under barter. Specialization, like we have today, is not a possibility.

This is why indirect exchange develops. To fulfill man's desire to trade, as elucidated above, man must find ways to facilitate it in a way to overcome the difficulties of barter. Man wanting to expand his trading opportunities, by overcoming the lack of double coincidence of wants, must find goods that are greatly marketable. These are goods that are popular; that are in high demand; that many, many people want and value. By obtaining these goods a man has therefore opened up his trading opportunities to a higher degree. And the higher this degree is, the more wealth creation prospects he has. The value he places on these goods, unlike other goods, is that they help him in acquiring services and other goods. He values it for its exchange value as opposed to its potential use value. It also follows that he will have the incentive to find a marketable good that has divisibility (without losing value), which will allow him to divide it up so as to more easily purchase more than one item and to easily purchase both expensive and inexpensive items.

Uncertainty, it should be noted, is what pushes man to adopt money. It is the uncertainty of knowing whether or not one is able to trade. (Only a world of "perfect certainty" would money not be needed.) As long as at least one entrepreneurial man can perceive all of this, a society can then start to economically evolve out of the primitive barter stage. Other men will see this. They will see that he who does such progresses upward in the hierarchy of wealth. There will therefore be an increasing demand for goods qua a medium of exchange. The interconnection of the market will increasingly intensify. It will push other men, who otherwise might not be bright enough to see the advantage of doing so, to follow the lead. "The result is a reinforcing spiral," wrote Murray Rothbard. "[M]ore marketability causes wider use as a medium which causes more marketability, etc. Eventually, one or two commodities are used as general media----in almost all exchanges----and these are called money."

This reinforcing spiral will result in the choice of a commodity that is demanded (valued), dividable, durable, homogeneous, portable, scarce, stable in supply, etc. Money is dependent on man's valuing it in terms of its, to quote Rothbard, "preexisting prices on which to ground demand." It depends on its barter demand. Unwinding the spiral by a regression, one finds that the evolution of a good (or two) to the position of money is the result of it being originally valued by man as a good in itself to be consumed. Hence, money can only originally develop through the free market as a commodity. And, hence, the only way government can enter the picture of money is if it does so on top of the necessary market development of money. Fiat paper money, by itself (with or without government force), could never get off the ground; anymore than if you took a clean sheet of practically worthless paper, applied some ink to it, and tried to buy something with it. Money, like language, is a product of freedom. That is, of free interaction, association, and discrimination. The State did not create money; anymore than it created language.

With the development of money, to iterate, the severe limitations of barter go away. The market economy becomes integrated. "Capitalist acts between consenting adults" can happen right away with money. Practically everything can be bought and sold in terms of money, without the problem of double coincidence of wants. There will thus be more exchanges and productions of goods and services. The standard of living will thus rise.

Money, moreover, allows man to easily calculate. Cardinal calculations are possible. (But the development of this, which man has to place value on, is itself an ordinal choice or ordinal value. Further, it is the feature of a market money's homogeneity that makes these cardinal calculations possible.) Exchange ratios arise. The question of how to direct scarce resources to fulfill the most wanted desires of man becomes possible to answer with a common, universal medium of exchange. The entrepreneur can now more easily see what lines of production are (relatively) more profitable than others. He can compare them. Of course this, too, raises the standard of living exponentially. The businessman can see his profits and losses. He can calculate his capital and income. Money thus develops the pricing system, which helps direct the traffic of the market. Any complex society needs the pricing system to direct scarce resources which have alternative uses. The only alternative is chaos.

The Transformation of Capitalistic Money to Socialistic Money.

Increases in the supply of money, once money has been established in society, is of no particular importance in terms of net living standards. Unlike other goods and services, an increase does nothing to make society wealthier. Only insofar as an increase of the particular money confers a non-monetary benefit to be consumed (either directly or, as a capital good, in the production of a future consumer good), can such an increase be said to raise living standards. A greater supply of money, ceteris paribus, just means a smaller purchasing power. A lesser supply of money, ceteris paribus, just means a larger purchasing power.

Assuming that the money chosen was gold, as it has been in modern times, in a free "society, one can acquire money in only three ways," said Rothbard:

(a) by mining more gold [which, by the way, is an expensive and slow process that will generally not lead to "price inflation"---my note]; (b) by selling a good or service in exchange for gold owned by someone else; or (c) by receiving the gold as a voluntary gift or bequest from some other owner of gold. Each of these methods operates within a principle of strict defense of everyone's right to his private property.

In the world in which we live this might look a little foreign, no doubt. So obviously something happened to the development of capitalistic money to turn it into the socialistic money we have today. This is an involved subject, but economically speaking the transition follows a precise pattern.

Before this blog entry briefly gets into that, however, it is very important to understand that one can try to acquire wealth by counterfeiting money. This activity of fraud is in direct violation of private property rights. As such, it is not part of the three acceptable ways to obtain money, which Rothbard described above.

The societal development of money brings the formation of banks. Their job is the storage of money and to provide for increased transactions between savers and entrepreneurs. Banks can either obtain income legitimately, as covered above, or illegitimately. They can facilitate transactions between savers and entrepreneurs legitimately or illegitimately, as well. Fractional reserve banking is an example of illegitimacy. All banks might have the desire to engage in this activity, but their desire will be limited indeed as long as there is open entry into competition (with no government central bank regulating this away in which this limit or check is eliminated [see below]). In addition, with a free market it will be limited because of the possibility of bankruptcy. (Profit and loss is both salubrious and necessary for an economy. [Bank runs are beautiful.]) Only the government can change matters. It and only it can take away competition by force or can attempt to prevent bankruptcy when bankruptcy occurs. Either of the two interventions will create moral hazard (i.e., there will be more financially risky behavior) and encourage the practice of fractional reserve banking.

Fractional reserve banking occurs when a bank issues more paper receipts (titles) than actual commodity money they possess. A one-to-one ratio (one hundred percent reserve banking) does not exist. From this it should be straightforward to see that if a bank engages in the handing out of more paper receipts (called "fiduciary media") than gold it holds in storage, it is no different ethically than a garage storage place taking one's items away from their customers while they promise to guard them. This is a violation of private property and makes the given bank financially bankrupt. That is to say, if each and every customer would come to the bank to demand their money, the bank would not be able to fulfill its contracts. Those interested in a just and free society, then, must want the law-contract enforcement agents that be to prevent these kinds of practices.

Put in another way, there will be more titles representing money property than actual money property. It tries to make two equal to one. It is an attempt to create physical property from nothingness. Because these titles have no value except insofar as they serve as a function to represent what they are titles to, the notion of free and contractual fractional reserve banking seems to make little sense. When man A deposits x amount of money, it cannot be said that x amount of money is also owned by man B at the same time. Only if it was contractually loaned (or voluntarily given) to B can it be his, but it cannot be exclusively owned both by A and B at the same time.

But, as stated, it is free banking, with no central bank, that has a build-in major economic limitation to fractional reserve banking activity, even if the enforcers of law do nothing about it. Interactions do not just occur with one customer and his respected bank or two customers of the same respected bank. Interactions can happen between one customer of one bank and another customer of another bank. That is, one man of Bank A can write a check to a man of Bank B. The second bank, with the new check, will demand the money (all of it) from the first bank. If Bank A has been reckless in engaging in fractional reserve banking, it will not be able to fulfill Bank B's request. To cut to the chase, this associational environment will thus put a major constraint on this fraud. The more banks there are, the more this constraint will increase. (Another limitation is a public that is aware of fractional reserve banking and is very untrusting of any bank that engages in it.)

What is more, artificially increasing the supply of money (via, e.g., bank notes, bank deposits, or "checkbook money" that people can use in their daily affairs)----which, unhappily, costs virtually nothing----will lead to a host of unintended consequences. (More will be written on this a little later. The unintended consequences will be far more pronounced when this artificial increasing of the money supply is systematically implemented via government.) There will be a redistribution of wealth, as already indicated. The greater the supply of money, ceteris paribus, the less purchasing power it will have relative to all goods and services. However, the result of inflation (i.e., the increase of the money supply without "specie" or commodity backing) is a result that comes to pass in a way that trickles through the economy. It is not an instantaneous event. Those accordingly getting the fake new "money" get it at the parasitic expense of those who get it later or not at all. After this inflationary process has trickled its way through the economy, prices will have risen (ceteris paribus) to reflect the new condition of the larger money supply. It is this uneven process that results in what are called "Cantillon effects." Effects of which have the result of redistributing real wealth.

Government, wanting to expand its revenues, can see all of this. This is why governments have sought control over the supply of money and the making of an alliance with the banking industry. Such an alliance would be beneficial to both, if only they can ideologically corrupt the public to thinking that it is beneficial to them as well. That, sadly, is not too difficult taking into consideration that the public's knowledge of economics is abysmal. Both the government and the banking industry can then engage in robbing the wealth of the public by controlling the money supply. Government can then tax in a new way, an indirect and unseen way.

The monopolization of minting by government, in a nutshell, first occurs and then the debasement (coin-clipping) of money, which is enforced on the public by means of legal tender laws. This debasement it pockets to itself at the parasitic expense of everyone else. More coins are created by the debasement and then the public is forced to act like nothing has happened. Now given that government outlaws all competition, the government has no competition to keep it in check. Government can thus keep on providing a inferior money without worry of a competitor offering consumers a superior money. Moreover, any remaining superior money will be driven off the market, since government will be forcefully overvaluing inferior money and undervaluing any superior money.

Then the government has monopolized money paper titles (bank notes) and creates a central bank (à la the Federal Reserve System). Counterfeiting can then occur uniformly vis-à-vis the banks. The central bank becomes the "bankers' bank" and the "lender of last resort." Gold, as the commodity money, becomes nationalized. It starts to lose its role, in the minds of the public, as money. And banks can inflate, with the government's blessing, off of government's inflation through fractional reserve banking with bank deposits. They can no longer issue bank notes, since the central bank has monopolized their issue, but can still issue bank deposits as a way to inflate. In this monetary socialism, they can do this without too much worry, as long as the public does not wake up to what is happening (or hyperinflation occurs). The previous free banking constraints largely disappear. At this time the government will also have the desire to get off the gold standard completely, and thus allowing this check to go the way of the dinosaurs for it to fill its power and greed ambitions. Soon all that is left is a fiat paper money system----a system very easy to counterfeit with.

The government can inflate at will with the counterfeiting apparatus. All that is done, essentially, is that the central bank buys some, say, government bonds. This money is produced literally out of nothingness. The bond dealer takes it to deposit at a bank and the bank then deposits it at the central bank. This deposit is the bank's reserves. The bank can then make deposits, through fractional reserve banking, on top of these reserves, in the amount the government allows by law----i.e., the reserve ratio. A reserve ratio that is 10:1, for example, means that the banks, ultimately, can increase deposits by tenfold out of nothingness on top of that original money that, too, came from nothingness.

Additionally, in the U.S., there has been the further creation of other programs that give the false impression to the public that the banking system is a sound system; instead of it being seen as a house of cards. The making of the Federal Deposit Insurance Corporation (FDIC), for instance, is an example. However, wrote Rothbard, "the FDIC itself has less than one percent of the huge number of deposits it 'insures.'" He went on: "The very idea of 'deposit insurance' is a swindle; how does one insure an institution ... that is inherently insolvent, and which will fall apart whenever the public finally understands the swindle?" And the very existence of the FDIC makes the banking system more unstable by creating moral hazard and by relieving customers their responsibility to take good care of where they put their money.

Not only will this fascistic-statist system perpetually promote inflation, it will perpetually promote business cycles leading to recessions and depressions. By perpetually declining the purchasing power of money, this system will discourage savers and encourage non-savers and debtors. Consumption, leisure, short-term thinking and planning will be relatively encouraged. The cultural characteristics and work ethics that make a healthy economy are thus punished with this system; whereas the opposite is rewarded.* Many businesses will also be thrown off course because business calculations will be distorted as a result of inflation. There will be an overestimation of profits, during the initial effective stages of inflation, and this will misdirect many businesses, and might even lead them to use up their capital on these false signals. Just as the effects of inflation will reward bad financial behavior for the individual and for the family unit, it will do ditto for private enterprise.

It is the facilitating of transactions between savers and entrepreneurs by the artificial expansion of credit (via fiat money) that sets into motion mass business cycles. The initial "boom," in the higher-order capital goods industries----which basically operate on man's ability to develop roundabout methods of production, and willingness to hold off instant gratification so as to invest present goods in such capitalistic production, that aims at an output with a higher net total of goods (than not doing so) in the temporal future----that received the credit, is artificial and the resulting bust phase is simply the market trying to correct the distortions that the government and the banking system created. Simply put, the ratio of consumption to saving (qua investment**) in society will not be reflected. With an artificially greater supply of credit, the interest rate (i.e., the cost of the procurement of money or capital in the present) is lower than it otherwise would be on the market. Instead of it reflecting the actual time preference levels (i.e., the rate in which man prefers present consumption over the future) and, on the other side of the same coin, saving levels (vis-à-vis spending-consumption levels) that men have in society, the market is misdirected to act like the time preferences are lower than what they actually are and to act like savings are higher than what they actually are. That is, instead of the boom being created out of actual savings with a low time preference that is temporally sustainable, the "boom" is based on hot air. And, remember, an increase of fiat money most certainly does not increase wealth for society. It does not and cannot increase (real) savings or lower time preferences.

A shaky imbalance in investments is created between consumers' goods (of the lower-order) and capital goods (of the higher-order). A mass of malinvestments becomes inescapable. When the rate of interest lowers, there is a shift from lower-order to higher-order industries. There will thus be an artificially greater investment in higher-order capital goods and correspondingly less investment in lower-order consumer goods. If private property and the market was respected, then it would be just the opposite given the current time preference and saving levels. However they are not respected. Even moreover, men will be saving less as lenders (and, hence, consuming more) because the return will be artificially lower than it otherwise would be. Thomas E. Woods, Jr., an historian and economist, has pointed out that, in effect, the anti-market intervention is in a tug-of-war match in which the economy is being pushed in two opposite directions at the same time. But, in the long-run, the market will win because real resources are not there to keep the "boom" going. These resources are consumed. (Insufficient resources have been freed up for the future. Instead of saving, men have been consuming. And instead of entrepreneurs producing for such present oriented things, they were being pushed into future oriented things.) The prices of these capital goods at first go up. These investments are made to seem profitable. A bubble develops. But as the effects of inflation trickles through the economy and the bank credit expansion ends, these investments will be seen for what they are, viz., hot air investments. Now they are seen (correctly) as not profitable. The prices of consumer goods will go up (with the given ratio of consumption to saving), with a shortage of resources, relative to the capital goods and there will be a redirection, in which a recession or depression occurs, of investments back to where they would have gone (in terms of production order), and the higher-order investments dry up. Hence, this process will produce another inescapable result: wealth destruction. "In sum," wrote Rothbard,

businessmen were misled by bank credit inflation to invest too much in higher-order capital goods, which could only be prosperously sustained through lower time preferences and greater savings and investment; as soon as the inflation permeates to the mass of the people, the old consumption-investment proportion is reestablished, and business investments in the higher orders are seen to have been wasteful.

*(To note, the more wealth, the lower the time preference tends to be. That is because it is less difficult to save with more wealth than less. One would hence expect that, because there is more wealth, real interest rates would be lower than the last generation. As Hoppe notes in his must read Democracy - The God That Failed book, they are higher with today's generation. This can only be the result of a systematic increase in time preferences. That is, society is more "child-like" today. ...... Mises himself recognized that the particular statist intervention of inflation is a direct attack on what we can call "conservative" values: The cultural damage of inflation is "epically strong among the youth. They learn to live in the present and scorn those who try to teach them 'old-fashioned' morality and thrift.")

**(The issue of "hording" has no direct influence on this discussion and thus will be ignored. But understand that all this would do is increase the purchasing power of the "remaining" money in circulation. For a very quick look into the un-evilness, in both an ethical and economic sense, of misers see Walter Block's Defending the Undefendable.)

Transforming Socialistic Money Back to Capitalistic Money.

Money is an important cornerstone to civilization. It is, as Murray Rothbard said, the "lifeblood" of the economy. Because of this, when men look at the evil affect the State and their banking allies have on money (and all the side effects that are produced), this should be all we need to know about the State and how regulations are designed not to protect consumers but to protect special interests.

Apologists for the status quo, especially mainstream conservatives (who are not at all friends or allies of liberty----who would be aptly described as largely fascists), fail to recognize that much of big business and big media are intermingled with the government. These businesses get granted special privileges and benefits that mom-and-pop shops do not. On the other hand, mainstream liberals that respond that money is therefore to blame for this is equivalent to saying that water is to blame for the coerced drowning of a person, instead of the criminal that murdered the person with the employment of water.

In itself money, like water, is neutral. Usage can be for good and evil. As long as there is this central machine of democratic power it is only natural that those with more influence will direct its usage to their own benefit and at the expense of others. It is therefore nonsensical to think anything but rich people will have the most direct influence on government. These particular rich people want to go to the government because it has power and they do not. For this reason, the problem is not wealth or money. The problem is power. They do not go to the government because they have power but because they don't.

The banking industry got tied into the governmental system because that system has power. And government is all too happy to get more power and control. The control over money allows the State to implement an "inflation tax." The president of the Mises Institute, Llewellyn H. Rockwell, Jr., has as a result said that the central bank is "[t]he heart of the modern state." If you understand the economics of money and the outcome of statist intervention on money, then you understand the modern state.

The justifications for the existence of the U.S. Fed can only be described as hilarious: for example, the idea that the Fed "fights" inflation. But its very nature is inflation. Since the creation of the Fed, over 95 percent of the value of the dollar has been lost. Not exactly a "fighter!" "Not worth a Continental," comes to mind. Then there is the claim that the Fed stops business cycles. Again, its very nature is business cycles. We have business cycles all the time. Right now we are in one.

Perhaps it should be also quickly noted that the Fed, as many suggest, is not a "private" bank. What is needed is a private free market in the banking industry, not more of the same. The Fed was created and established by the government, it is maintained by government, the officials in the Fed are largely appointed by the government, etc. A "Fed" could not exist if it were truly private. Competition would drive it out of business in a blink of an eye by hyperinflation over the production of worthless pieces of paper, which cannot be money without monopolistic government aggression and force.

Those that favor either no government or a very small, decentralized government must then work for the separation of State and money. This means an end to central banking and an end to fractional reserve banking. It means a return to a free market commodity money. It means an end to the house of cards we have now. It means an end to artificial bubbles generating booms-and-busts in the economy. No central plan is needed to move back to a free market of money and banking. A free market is the lack of a central plan. Accordingly, what needs to be done is the elimination of legal tender laws, the allowance of man to be free to choose his money, deregulation, and, ultimately, the abolition of the Federal Reserve. (In a manner of speaking, the inverse of "Gresham's Law" would occur.) For a guide to follow, we can turn to the recommendations of Rep. Ron Paul, a scholar in the economics of monetary issues and author of Gold, Peace, and Prosperity and The Case for Gold. In times like ours, seeking fiscal sanity is more important than ever.

"Man cannot turn back the clock" might be the reply some men have to the idea of returning to a money of free market capitalism. But, to quote the great Richard M. Weaver, "I'm not turning it back; I'm setting it right."

References: I'm just striving to stand on the shoulders of giants. Hopefully I balanced the content in this blog entry successfully. Any shortcomings are my own. Above quotes of Rothbard's comes from, respectively, What Has Government Done to Our Money?, The Case Against the Fed, "Taking Money Back," and America's Great Depression. On egalitarianism, see his Egalitarianism As a Revolt Against Nature.

A number of essays and books have shaped by understanding of monetary issues (and my understanding is still being shaped). For those new to this subject, the first and best book to read is What Has Government Done to Our Money?. It is beautifully and clearly written. See the layman populist essay "Taking Money Back." Listen to this mp3 Rothbard lecture. And be sure to read his "Economic Depressions: Their Cause and Cure." Besides Rothbard, Bob Murphy provides a reading list here. Read "What You Should Know About Inflation" by Henry Hazlitt. Take a look at "The Business Cycle" in Jim Cox's The Concise Guide to Economics. See Hans Hoppe's "Banking, Nation States, and International Politics" and "How is Fiat Money Possible?." For something light and entertaining (although, slightly off topic), see "The Economics of Star Trek or What is Good for Business?" by Dmitry Chernikov.

If you just stumbled into The Paleo Blog and know little to nothing about economics, then the best book to read is Economics in One Lesson by Henry Hazlitt and then, if you are still interested, read Economics for Real People by Gene Callahan. Thomas DiLorenzo provides a more historical perspective on the importance of economic freedom in his great How Capitalism Saved America. I highly recommend it. For something a bit more advanced, but still short in size, see An Introduction to Austrian Economics by Thomas Taylor. 

The Meaning of $1,000 Gold: Ron Paul tells all.

Gary North on the Upside-Down Mortgages and Sinking Home Prices and Bernanke's Mortgage Market House of Cards.

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The Revolution: Mr. McCarthy on The Tory Anarchist blog provides a syllabus for Ron Paul libertarians. Check it out!

See also his recommendations for newbies to paleoconservatism and libertarianism.

Woods on NY Times' outrage over Ron Paul Republican Murray Sabrin.

One of the many ways in which the Ron Paul Revolution is having an affect on the consciousness of the public is with the topic of monetary policy. As this "Revolution" expands, this will no doubt increasingly be true. A couple of months ago, for example, an ordinary and average-day gentleman was discussing the topic with me out of the blue. We were talking about the government-generated housing bubble. The mainstream media recently did a report on Ron Paul going after Helicopter Bernanke. So the Ron Paul Revolution is having an impact for the good. Even if this is as "good as it gets," Dr. Paul and his grassroots have had an impact and the pond-waves will spread.

Instead of reading an economics book on monetary matters, you might prefer listening to an mp3 lecture by the man himself: Murray N. Rothbard.

Listen Here via the Ludwig von Mises Institute.
(Recently linked-to on the LRC blog.)

“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold....This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.”

Shhh. Alan Greenspan said that. Power corrupts.

Bank Run!

Murray Rothbard:

“But why? What is the magic elixir possessed by the federal government that neither private firms nor states can muster? The defenders of the private insurance agencies noted that they were technically in better financial shape than FSLIC or FDIC, since they had greater reserves per deposit dollar insured. How is it that private firms, so far superior to government in all other operations, should be so defective in this one area? Is there something unique about money that requires federal control?

“The answer to this puzzle lies in . . . ”

Read Article Here.

Watch Money, Banking, and the Federal Reserve.

See Also: Bob Murphy on understanding the crisis.

Debates between Democrats and Republicans in the mainstream media are subterfuge. It is largely a distraction from the more fundamental issues. It divides men up and pins them against one another into some kind of binary, partisan debate of "Republican good" and "Democrat bad" or vice versa.

And it feeds on emotions. Perhaps it is just a sad fact of human nature to become emotionally attached in a partisan way to "one's team," so to speak. Watching political debates is often like watching a debate between two sports fans of opposing teams.

Emotions are so strong, also, because man has invested so much of his energy into the political world. With a democratic and super-centralized government micromanaging society in a multitudinous of ways, men invest less and less of their energies in voluntary civil society and more and more of their energies into political plunder. Surely, the upshot of this is a degeneration of men as they put more effort to develop their political personalities.

Against such pusillanimous and daft men is to be a "radical." To be radical, in its etymological sense, is to strike at the root; it is to boil things down to their essence. To be radical is to see things for what they really are; it is to ignore the thought police and the current taboos. The only thing that politics today promotes is the status quo and the ignoring of giant problems, such as the current monetary system. Such problems become so big that men become blind to them. It requires a man to step back, see the big picture, and to analyze. Apparently, the traits to do this most men don't have, as they are conditioned by public education and their boob tube. The masses don't think; they follow current trends and current elites.

So, as a replacement for getting caught up in the trivialities of the daily political circus, we will be looking at more fundamental issues in a radical way. However, because of the fragility of today's faulty monetary system, this subject will become increasingly important in open debate in the coming years. This concise overview of some of the issues concerning money and politics is written for those who can rise above the common man. It is only those who can lead that shape future direction. If future conditions go the way they have been going, then we can expect much financial trouble ahead. It is those who are prepared for such conditions and who understand what brought about those conditions that can lead society in the correct direction.

This essay is appropriately enough dedicated to the Remnant.

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Money and Politics

I.

The most important thing to understand, as M. Rothbard would say, is that money is just a commodity. In this sense it is no different than any other commodity on the free market. It exists with a certain finite supply and there exists a definite public demand for it. The difference is that this particular commodity is most often used as a general medium of exchange. Men use it so as to participate with others in trade and division of labor. It is not independent of the market (or have a "neutral" affect on the market), but is derived from it as a solution to overcome the many problems and limitations of a barter (non-money) system.

Why is barter filled with problems and limitations? Imagine Bob has good "x" and Mike has good "y." Bob wants "y" but Mike does not want "x." In this case Bob is stuck. No direct exchange can take place. This is why indirect exchange develops. Bob starts to think about how he could get "y." He could run all over town to see if someone has "y" and wants "x." He could also ask Mike what he desires and would be willing to trade "y" for. Say Mike answers "z." Bob could then, using this indirect method, look for someone who has "z," buy it from him, and then sell it to Mike for "y." Bob would then value "z" only insofar as it facilitated a trade with Mike. But in any case a double coincidence of wants still needs to occur. That is to say, for Bob to accomplish his objective, it will only happen if and only if he finds someone who is willing to trade for "x." This is a very disorganized and inefficient system, as we can see. Another problem that can often develop is a problem of indivisibility.  Say that "x" is an object that cannot be divided. Bob this time wants "b," "c," and "d." Say that he finds three people that offer these things separately. Again, Bob is in trouble.

In a barter economy it is almost instantaneous, as we can reason based on the analysis of the above paragraph, that men will be trading via indirect methods. This is what sets into motion the adoption of money, i.e., a generally used medium of exchange. For wanting to engage in many trades, entrepreneurial men look for goods that are highly marketable. These are goods that are greatly desired in the community. These goods have a high demand as a consumer good. But these entrepreneurial men value the acquisition of these goods as just a facilitator of trade. This adds a new "layer" of demand for these goods. In turn, this increases their marketability even more. An accretion of men will thus shift to this commodity as a medium of exchange. In turn, the marketability will go up even more. This process is what brings to life moneys that are used as general and universal mediums of exchange. The problems of barter disappear. Practically all trades start to take place with money. And owing to this development of money: more interactions between men can and will take place; all men will have a common "store of value;" and all men will have the ability to calculate monetarily their finances.

The incipient purchasing power of money relies upon the purchasing power yesterday (y) and the purchasing power yesterday relies upon the purchasing power yesterday minus one day (y-1) and so on. Money originates on the free market as a commodity with a pre-money barter demand and "price." So, not only has no money ever developed as fiat paper in any of recorded human history, but it is a priori impossible. A nascent money, shown with a regression proof, must have had a high non-monetary value on which to base its purchasing power.

Rothbard writes:

Economic analysis is not concerned about which commodities are chosen as media of exchange. That is subject matter for economic history. The economic analysis of indirect exchange holds true regardless of the type of commodity used as a medium in any particular community. Historically, many different commodities have been in common use as media. The people in each community tended to choose the most marketable commodity available: tobacco in colonial Virginia, sugar in the West Indies, salt in Abyssinia, cattle in ancient Greece, nails in Scotland, copper in ancient Egypt, and many others, including beads, tea, cowrie shells, and fishhooks. Through the centuries, gold and silver (specie) have gradually evolved as the commodities most widely used as media of exchange. Among the factors in their high marketability have been their great demand as ornaments, their scarcity in relation to other commodities, their ready divisibility, and their great durability. [Man, Economy, and State: A Treatise on Economic Principles, p. 164, emphasis has been removed.]

Clearly, then, a free market production of money is natural because that is where money originates. This selection process of money is also by nature competitive. Commodities which better serve as money will out compete and replace commodities that do not. It moreover gives men financial security since they have the freedom to pick and reject moneys they want and do not want. The competition in money production will thus produce the best moneys that men desire. Under a monopolistically managed money, though, this market mechanism is absent. Monopoly money, backed by legal tender laws, that is being debased and abused, for instance, cannot be replaced by a competitor's production of better money. Cheating, coin-clipping, and counterfeiting can only be much more intense than it otherwise would be under such monopolistic conditions.

Now we have a simple and straightforward reason governments have always tried to take control of the monetary system: They want to obtain more revenue. Cheating, coin-clipping, counterfeiting, and the like serve this purpose. What better way then to take control of the supply and management of the "lifeblood" of the economy, i.e. money? And in contrast to all forms of direct taxation, the bonus of appropriating revenue via monetary means is that it is indirect and unseen.

II.

It is now appropriate to go into a bit more extensively the economics of money production.

As already touched upon, money is basically like any other good that is being produced right now. It is a "hard" and "real" thing that needs to be produced. It is a commodity and hence has a "price." This price is shown daily in a man's financial transactions at the store. The man buys some bread and the store buys some money. The price of money is accordingly seen in the countless arrays of exchange ratios. Money's supply is the quantity of money in existence. And the demand for money is how much or little men are willing to give it up in exchange for other things or how willing or unwilling men are to forgo this action to save instead.

To repeat one more time: the difference between money and a "normal" good is that it is primarily used as a medium of exchange. Thus, this difference implies that once money is established in society, an increase or even a decrease in the supply does not give any social benefit or social loss per se. Therefore the production of money will be limited and slow. The supply will be more constant and steady than all other goods.

On the free market, money producers will produce money to the degree that it turns in a profit. Meaning in this case, it will be produced to the extent that men demand more money and less consumer goods that could have been produced with the same factors of production.

Private coinage will be the primary business of these producers. They are more costly to produce than bullion but they are also more valuable to consumers because they economize. Weighing and melting down to figure out quality becomes less needed with trusted private coins. In the past there have also been private insured coins. Naturally, these coins are more valuable than uninsured coins.

It is important to keep in mind that in a free market man is free to choose his money. Therefore, if a given money becomes unusable because, for example, it is later found to exist in an almost unlimited supply, man is able to shift to another money. Furthermore, even though the scarcity of a supply of money above a certain threshold in no way limits the facilitation of trade because money is only a medium of exchange relative to the things it is bought with, for purely practical reasons a given money supply might stop being used for the reason that the purchasing power has become far too high. It would then become unpractical to carry around and use microscopic coins. Man might use property title substitutes for this money, but he might also switch to another money altogether. Incidentally, as economist J. G. Hülsmann has explained, this is why if we today had a free market in money silver, versus gold, might be the primary money in use.

Man lives in a world of scarcity. His time is limited, he has only one body that has a temporarily finite existence, and most of the things he desires have a finite supply. Not everything that a man wants can be gotten. He must therefore make choices in what objectives he seeks to obtain, and these choices imply the cost of curtailing other possible objectives that he could have alternatively aimed at. Man thus aims at objectives which he (subjectively) perceives as more valuable than other possible objectives. So, obtaining an additional homogeneous unit of a good (g+1), all other things being equal, will be put to use only to ends less valuable than what the previous unit (g) was. Harmoniously, an increase in the supply of a man's money will make it less valuable than otherwise. And it will be less valuable vis-à-vis other goods than otherwise. Hence, all other things being equal, the purchasing power will go down and the buying and selling prices of goods will go up.

A redistribution of wealth will occur as the supply of money increases. Those with higher cash balances will spend their new money. They (men A) will be able to buy more than they otherwise could. And those who receive this new money (men B), from the first users, will also have higher cash balances. They, as the second users, too, will be able to buy more than they otherwise could from other market participants (men C). As a consequence early receivers will benefit and late receivers will lose. Step-by-step prices will be bid up until the economy as a whole has been adjusted to the larger supply of money.

The Catholic Spanish Scholastic Luis de Molina---a member of the founders of economic science---explained in the 1550s as follows: "Just as an abundance of goods causes prices to fall (the quantity of money and number of merchants being equal), so does an abundance of money cause them to rise (the quantity of goods and number of merchants being equal)."

Just as the supply is important, the demand is important, he also said:

Wherever the demand for money is greatest, whether for buying or carrying goods, ... or for any other reason, there its value will be highest. It is these things, too, that cause the value of money to vary in the course of time in one and the same place. [Quotes from Faith and Liberty: The Economic Thought of the Late Scholastics by A. A. Chafuen, pp. 64-5.]

All human action implies changes in society's distribution of wealth. E.g., the increase in the supply of television sets or the decrease in the demand for fax machines implies a change in wealth distribution. These changes are hardly bad per se. And, from a practical point of view, it would be impossible to regulate society in such a way that no one lost value in their respective properties. Ex ante, we do not know if our actions will negatively affect the (subjective) value of someone else's property. This cannot possibly be controlled from an ex ante point of view. For these kinds of reasons private ownership can not be said to include the ownership of "value." Instead, ownership can only be ownership in the physical-objective integrity of "real" and "tangible" things. In this case, we do know (or can know) ex ante if our actions trespass or do not trespass against the physical-objective integrity of someone else's property.

Hence, the shifting of wealth through the private production of money is not per se bad or wrong. A shifting of wealth in money production, however, is bad and wrong if it is done through violations of private property rights. This, for example, is implied when one is forced to stick to a certain money because of legal tender laws. Man cannot protect himself and move from one money to a better money in such a case. In addition, even if one is to reject the vital and unambiguous distinction between ethical and unethical money production, from the point of view of someone that wants to minimize such shifts of wealth one must conclude that the private production of money would be vastly superior to government production. Monopoly money, which can be turned into pure fiat paper money, can be more easily debased and expanded in supply than competitive money, which can only last in competition because it is scarce and costly to produce. Paper money can drop down to a value of zero whereas a commodity cannot. (Which, then, is a safer and better money? The answer is obvious.) Besides, being a monopolist in paper money production gives one incentive to be more and more inflationary (i.e., expansionary) through time. Just imagine being a money monopolist, where money grows on trees! Only the possibility of hyperinflation curtails those in this position.

We can also conclude that under a free market "the norm" would be prices falling through time versus rising through time. A robust economy would be producing lots of goods. Market money would only be expanding slowly and predictably. As a result, the purchasing power of money would increase as it is being used for a larger amount of goods. Although today we see just the opposite, this is the result of a monetary system that is socialistic and fascistic. We would not see it in a freer and more moral society. Though, this no doubt begs questions concerning deflation and hoarding.

Defining deflation as simply the overall fall in price levels is something that much of history has seen during periods of tremendous growth and prosperity. Empirically speaking, then, we can refute the notion that deflation is necessarily "bad." Even today we can see industry-specific "deflation," e.g., in computers. These industries refute the notion that deflation leads to the stoppage of consumer purchases or the stoppage of wealth production. Men often buy an expensive computer despite the fact that they know that in a year that same computer will be less expensive. This can easily be explained. Man, all things considered, prefers present goods over future goods. In his actions, he acts through time towards the fulfillment of his objectives. Man works to get closer and closer to enjoying his goals. His actions show that he would rather get to his goal sooner rather than later. While the intensity of one man's preference for present goods over future goods differs with another man's (and differs with respect to himself at different points in time), all men have this preference----that is, time preference----given man's finite temporal existence.

Money not spent on consumer goods is saved and invested or hoarded. It is generally more profitable to save and directly invest than to hoard, even in a deflationary depression. Since we save for something in the future, this activity is in no way a net loss to the economy. On the contrary, more production and wealth will be present in the future than there otherwise would be. There will be more transactions between savers and entrepreneurs, a decreased interest rate with a larger supply of savings, and more investment. Only a readjustment in the "structure" of the economy would be required to adapt to the increased savings. In place of a market economy that relatively panders to the selling of present consumer goods (e.g., the electronic store), the market economy will relatively pander to the production of areas (e.g., research and development) remote from such selling and remote from stages of production close to such selling. The future result will be an even larger amount of consumer goods than otherwise. This is why such processes are undertaken. Capital accumulation, after all, is the road to prosperity. This will be explored more in Section IV.

Hoarding is a "withdraw" of money from market interactions. In and of itself it has no net macro consequences because, recall, economically speaking any amount of money is equally servable. A decrease in the amount of money being "used" results in an increasing purchasing power. Plus keep in mind as well that money is always "sitting" in one's cash balance. It just moves from one man's cash balance to another man's. In doing its "sitting" it's doing its job, so to speak. Additionally speaking, man is not a hermit. And a man who becomes one does not "rob" society.

It is true that deflation has often followed depressions. But this deflation is the result of shrinkage in the money supply which is partly or fully based on paper money and fractional reserve banking. When a man takes out his money from the bank he also takes out the money that the banks pyramid off of that via fractional reserve banking. For example, banks might have a reserve ratio of ten percent. The man that takes out $100 to hoard in actual practice gets "rid of" a total of $1,000 (which is equal to his $100 plus the $900 created via fractional reserve banking) from the economy. This is because when this man deposits the $100, the central bank will be sent $10 as reserves, and the $90 it will lend. The borrower with this $90 spends it and this hence goes into another bank which then puts $9 into reserves and lends out $81. Etc. When thinking about it in terms of money as gold it is straightforward: more property titles exist than actual property with fractional reserve banking. This is fraud. Secondarily, another reason for deflation is the increased financial uncertainty. It is uncertainty, specifically, that explains why man holds any cash at all. It is the uncertainty of knowing if one, for example, is able to trade with another due to a double coincidence of wants. In an economy where everyone knew exactly what everyone wanted and so forth, then everyone could engage with each other without money. (At the very least there would be no reason to hold additional cash in one's balance.) The real world is not like this. When times of uncertainty increase, men want more protection and this protection logically wants the most salable good available; that is, money. As H. H. Hoppe explains: "Because money can be employed for the instant satisfaction of the widest range of possible needs, it provides its owner with the best humanly possible protection against uncertainty." ["'The Yield from Money Held' Reconsidered."] Accordingly, the demand for money cash holdings increase, the purchasing power goes up, and overall prices fall ("deflation"). Increased certainty results and men are better off.

The only group that needs to be fearful of deflation----as a shrinkage in the supply of money by the extirpation of fiat paper money----is the power establishment. As Hülsmann writes:

Political entrepreneurs are ... right to fear deflation. For deflation takes away the source of their illegitimate income and puts them finally back on equal footing with all other members of society, whose incomes are based on efforts and services provided in a competitive environment. ["Deflation: The Biggest Myths."]

III.

Monopolization of minting operations has often gone hand-in-hand with having the face of government officials imprinted on coins. Weight and quality start to decrease, as officials enrich themselves at the expense of the public at large. Legal tender laws are put into place to force all contracts to accept such debased money on par with un-debased money. Of course under free market conditions, in direct distinction, such activity would be considered fraud and even if it did occur (man being what he is----imperfect), it would be harshly limited to a complete stop because of competition. Competitive conditions would allow men to seek honest and high quality companies. Such a possibility is, by definition, not possible under governmental management. Moreover, no legal tender laws would exist, by definition, to force men to accept such inferior money.

New coins introduced into the market via government that have a real weight of Z start to be labeled with a weight value = to Y, where Y is > Z. Y is the weight of the old coins which are labeled properly. Because of legal tender laws these old and new coins become legally equal to each other. Mathematically, so to say, we know that this is unmistakably impossible from the outset. Men will discriminate between coins. The old coins (which have a weight of Y = to their label) start to be hoarded and the new artificially overvalued coins in circulation (which have a real weight of Z which is < Y despite their label saying it is > Z and = to Y) start to become the only coins traded. In trading and contracting it only makes sense to trade with the inferior money. In a way, one can say that this makes robbery legal. One man's contract with another can be fulfilled using this new money. Matching this, bimetallism----in comparison to freely floating parallel standards----is a vivid illustration of this kind of interventionist policy. Here a fixed exchange ratio is set by law between two moneys, say, gold and silver. But, clearly, this form of price control will only sooner or later conflict with reality. Supplies and demands are not constant. How one exchanges into another will change.

"Gresham's Law"----[tells us] that an artificially overvalued money tends to drive an artificially undervalued money out of circulation----is an example of the general consequences of price control. Government places, in effect, a maximum price on one type of money in terms of the other. Maximum price causes a shortage----disappearance into hoards or exports----of the currency suffering the maximum price (artificially undervalued), and leads in circulation by the overpriced money. [What Has Government Done to Our Money? by M. Rorthbard, p. 72.]

Flip-flops will take place, too, in terms of what is being undervalued and overvalued. The market will become chaotic----all in the name of public officials saying that they are making moneys "stable" vis-à-vis each other! When one money is driven out of the market, another effect will be produced. This will be artificial deflation. As a massive readjustment process takes place to handle the price control's sudden effect of taking money off the market, business calculations will be massively thrown off. Many bankruptcies and readjustments will thus take place. Moreover, the incentive to use fractional reserve banking will increase so as to stabilize this process. Such bimetallism, therefore, has an indirect result of shifting man to use more and more notes that are not 100% covered by what it is meant to represent, viz., a "hard" commodity.

Juan de Mariana, another Late Spanish Scholastic, called these kinds of debasements and manipulations "systematic robbery" and "barbaric," and that they are a "plague in the republic." He said that it additionally produces "distrust" in commerce and the thus the reduction of interaction. He wrote:

I understand that any alternation of money is dangerous. It can never be good to debase currency or to fix its price higher than its natural valuation and common estimation. [Quotes from Faith and Liberty, pp. 66 & 68.]

As is always the case, one interventionism leads to another. Government comes in and all of these bad consequences and unintended consequences occur. Next the call for more government involvement is asked for. Then more bad consequences occur. Next more government is called for. ... Etc. From the point of view of the government and its allies, this is generally wonderful. Those who consider the welfare of the public at large as more important, though, see this as something else entirely. Government obtains its revenues parasitically from those who actually produce wealth and improve society. Production is logically prior to government. Hence, government can only be viewed as a parasite. All of its activities are based on this parasitism. Its interest in expanding its wealth is more or less like any other man's, but it can expand its wealth not by serving voluntary consumers (which proves it is actually serving them well versus competitive alternatives) but by expropriation and exploitation (which proves that it is obstructing consumers by destroying their "sovereignty" and by destroying competitive alternatives).

This interventionist road led to banks increased use of fractional reserving banking (FRB). This pestilence played the key role in the devolution of money. FRB is inheritably unstable because it opens up the possibility of a bank run. A bank will not be able to fulfill its contracts in such a case. And the bank run of one bank leads to a chain reaction that will generally cause the run of another bank and another. In some sense, then, all have a collective incentive to prevent such a thing. This gives an impetus to form a cartel-----a central bank. In actual practice, the formation of one requires the protection of government. Government, motivated by self-interest, agrees because this will increase its revenue and control over men. Inflation as a way to increase its income starts to have essentially no limitations. Printing up more money or, even better, adding more money electronically has a cost of almost zero.

Another advantage, from the point of view of government, of fiat paper money is its constant homogeneity in comparison to commodity coins because men cannot evaluate and discriminate between the newer and older money. An increase in fiat paper money therefore does not lead to artificial deflations, as has been covered above.

Now it is often complained that before the Federal Reserve System there was "wildcat banking." In several different periods of American history this is basically true and is what led to the formation of the Fed (and its short-lived predecessors). However, it was only the logical step resulting from previous interventions. Not only did the government legitimatize FRB, it tremendously encouraged its practice, and it often allowed banks to "suspend species payments" when a bank run occurred. As far as the last thing is concerned, this gave a given bank the ability to cancel its contractual obligations, at least for a period of time. This set a precedent and encouraged more and more reckless behavior on the part of banks. In fact, FRB combined with government protection creates moral hazard on a massive scale. It is only through the power of government and its violations of the free market that allow FRB to reign.

One major factor to FRB has been war funding. The War of 1812, for example:

Most of the country's banks were located in New England, a section unsympathetic to America's entry into the war. These banks refused to lend for war purposes, and so the government borrowed from new banks in the other states. These bands issued new paper money to make the loans. These banks issued new paper money to make the loans. The inflation was so great that calls for redemption flooded into the new bands, especially from the conservative nonexpanding banks of New England, where the government spend most of its money on war goods. As a result, there was a mass "suspension" in 1814, lasting for over two years (well beyond the end of the war); during that time, banks sprouted up, issuing notes with no need to redeem in gold or silver. ... This suspension set a precedent for succeeding economic crises; 1819, 1837, 1857, and so forth. [What Has Government Done to Our Money?, pp. 78-9.]

To quickly skip ahead, 1913 saw the creation of the Federal Reserve System (Fed), with the help of major banks and businessmen (e.g., J.P. Morgan and John D. Rockefeller) seeking to enrich themselves at the expense of the public. Ultimately, it allowed all banks to expand their money supply more uniformly. It became the "bankers' bank" because all of the banks were forced to deal with it and only it. Banks could then only create deposits on top of these monopoly notes (based on the reserve ratio). The Fed additionally became the "lender of last resort."

Although this did not really solve the problems that previously existed. For instance, a bank run can still occur, in principle, on the Fed. It is only when the money in existence completely turned into pure paper money backed by nothing that this was absolutely prevented. Then the Fed can never go bankrupt. (This is exactly what happened in 1971 with the collapse of Bretton Woods. The U.S. central bank could not redeem its dollars to other central banks with gold. This was entirely predictable from the start because Bretton Woods allowed the Fed to get away with more inflation than it could before. And so it was later finally facing a run and thus cut its ties to gold.) On the other hand, it now has the ability to print up money with no technical or practical limitations that can result in hyperinflation and the complete break down of the economic system. Natural market checks on reckless behavior have only decreased more with this money devolution.

IV.

A Fed can bail out any bank or any business simply by printing money. Given the interconnection much of big business has with big government, such activities are to be expected. Big business by itself has no power. It becomes "big" by profiting voluntary consumers (who can boycott at any time).* Government has power (which no one can boycott without going to jail) and that is why big business comes to it seeking privileges. And government agrees because it can then expand its role in civil society.

More fundamentally, a large scale bankruptcy can have the result of bringing down the unstable, pyramid-based banking system. This is why the Fed has the incentive to bailout. But this is what creates moral hazard. Businessmen start to behave recklessly knowing that a bailout is likely if many of them fail consumers. The monetary system is ubiquitous; it should thus be expected that its negative consequences are economy-wide.

Furthermore, businessmen become more credit dependent and bank dependent, as the work of economists such as Hülsmann show. Credit will be cheaper and more abundant than otherwise, and hence this is the area competition will pressure businessmen to. Equity (real cash holdings) will thus decrease whereas liabilities (credit) will increase and make businessmen more fragile to any miscalculations on their part concerning future market conditions. Likewise, private men will become more debt orientated in their finances.

FRB and its centralized nature via the Fed will put the economy through violent swings of booms and busts as well.

We have already demolished, at least in rough form, the idea that saving is a "bad" thing for the economy. A society that moves from the position of saving little to saving much results in a change in the capital structure of the economy, as shown in Section II. The upshot of this shift will result in a society that will be more prosperous in the future than if this shift did not occur. We have also showed that money gets its primary value as a medium of exchange. So real wealth, as should be more than clear, is not created by growing money on trees, or printing it up. Producing desirable goods for consumers is wealth creation.

To further this process requires capital goods, which are used to create consumer goods. The growth thereof depends on technological innovation and the holding off of present gratification, to save and invest. Such production aims at a higher total of consumer goods in the future. Savings is what allows this to happen. It is a freeing up of resources to devote to such production instead of being used on present consumption. Man cannot logically consume X and invest X at the same time.

With a bank acting as an intermediary, men's savings can be transferred to entrepreneurs as a loan. It is the supply (savings) and the demand for such loans that determine interest rates. Consequently, the more savings, all other things being equal, the more to loan and thus the lower the interest rate is. Printing up money and creating "imaginary savings," to be sure, can lower the interest rate. But it is a lowering of the interest rate independent of true market conditions. It ignores the proportions men are saving versus consuming. Such artificial lowering of the interest rates through the banking system's centralized top-down nature will therefore push entrepreneurs to invest in long-term projects far removed from the consumer at the same time consumers are continuing their consumption versus savings activities. That is, men will be consuming, and, accordingly, a freeing up of resources (e.g., equipment and labor) will not be occurring to sustain these projects for the long-term. On top of this, men will actually be saving less than they would be because it will pay less to loan. An unsustainable boom has occurred which will go bust as soon as the new money flows through the economy reestablishing interest rates that reflect real market conditions. As a result, resources will become scarce for these investment projects and profitability will be destroyed. In addition, due to the location of the "boom," many investments and projects will even have to be completely abandoned. They will not be able to be moved to other areas of the economy because they are so capital-specific in their location.

Money calculation is essential when understanding this subject. Quoting D. Mahoney, money, as it allows for cardinal calculations so as to compare things based on a common medium, is a "'measure' of the amount of property available for production processes." ["Austrian Business Cycle Theory: A Brief Explanation."] Hence, an artificial lowering of the interest rate will bring the illusion of a larger pool of savings. There will be, in other words, a mismatch between time preference (as it is represented in the public at large) and investment. This in turn will distort entrepreneurs to start up more projects than can be temporally maintained. Now, keep in mind, to engage in capital production requires savings so that temporally lengthy roundabout methods of production can take place. So from the very outset, a greater amount of projects will be started than reality will allow; hence, a bust after the "boom."

L. v. Mises writes:

The whole entrepreneurial class is, as it were, in the position of a master-builder whose task it is to erect a building out of a limited supply of building materials. If this man overestimates the quantity of the available supply, he drafts a plan for the execution of which the means at his disposal are not sufficient. He oversizes the groundwork and the foundations and only discovers later in the progress of the construction that he lacks the material needed for the completion of the structure. It is obvious that our master-builder's fault was not overinvestment, but an inappropriate employment of the means at his disposal. [Human Action: A Treatise on Economics, p. 557.]

*[Put in another way: in a genuine free market, getting rich is dependent---versus independent, as under government---on getting others rich. The very rich man gets rich by making the masses rich. The market makes us think about how we can better serve our fellow man, since a man must use the goals of others as economic means to achieve his own goals. It is therefore untrue, as many dullards claim, that the free market promotes egotistical selfishness. The diminution of the division of labor would help to accomplish that. Increased statism, likewise, would do that. After all, under a voluntary system---where violence against the non-violent is viewed as unethical---you can always cancel your interaction with or membership to an organization. This is impossible under statism. States, for this reason, do not really have to directly serve their constituents well. They do not have any direct competition in the area they are monopolists. Nor are they directly dependent on changing and heterogeneous consumer demands, since they can easily expropriate property. No requisite exists, unlike free enterprise, for them to be cost-effective or to put maximum effort into improving the quality of their services. Hence a State enterprise often grows not because it is being cost efficient and is being ever better in its quality of services but despite it, as economist Hoppe has shown. Given that man is no angel, increased perversity should be expected as the outcome of increased government. Moreover, allocations of the State will always have to be arbitrary and wasteful with no profit - and - loss. When a true economic businessman fails, he then suffers a loss and perhaps disappears. It promotes correct allocations. On the other hand, when the State fails nothing often happens. There is nothing that helps divert resources into productive uses, which can only be done on the market with the pricing system. No continuous mechanism would exist so as to rationally and non-arbitrarily filter out bad lines of production and promote good lines of production. The State that does X activity necessarily does it at the expense of other things. It is absolutely impossible to judge if alternative Y or Z or A or B, or a combination of them, is more or less wanted by the public----a public that is heterogeneous. And its simplistic top-down nature cannot manage a complex world in an effective manner.]

V.

In this essay we have shown: (1) how and why money enters into society; (2) the superiority of competition in money production; (3) the redistributionist effects of changes in the supply of money; (4) that there is no reason to fear deflation; (5) why savings is the road to prosperity, even in a depression; (6) the non-problem of hoarding; (7) Gresham's Law; (8) the tendency of monetary interventions to lead to further interventions and further instability; (9) how the current monetary system leads to debt and enervates the economy; and (10) the economy-wide distortions of credit expansion in the structure of production.

We conclude, therefore, that there is a vital need to eliminate the current monopolistic system to allow a competitive market order as its replacement.

***

Notes and References: This essay was completely rewritten in Oct 2009 as the result of e-mail conversations I have had. My attempted answers to certain questions resulted, at least in part, in this essay. Now the essay itself has been greatly influenced not only by the late Murray Newton Rothbard but also Jörg Guido Hülsmann, a German economist teaching in France. He has written some outstanding essays on the economics and ethics of money production. Here are some of his essays, which have heavily influenced this essay:

• "The Political Economy of Moral Hazard"
• "Optimal Monetary Policy"
• "Legal Tender Laws and Fractional-Reserve Banking"
• "Deflation: The Biggest Myths"
• "Deflation and Liberty"
• "Toward a General Theory of Error Cycles"
• "Nicholas Oresme and the First Monetary Treatise"
• "The Cultural and Spiritual Legacy of Fiat Inflation"

Furthermore, for a further analysis of Late Scholastic thought on this subject, see "New Light on the Prehistory Theory of Banking and the School of Salamanca" by Jesús Huerta de Soto. (Though it should be pointed out that Luis de Molina versus Juan de Mariana, de Soto argues, was part of the group who were "most confused on the doctrinal treatment of the contract for the monetary bank deposit," viz. fractional reserve banking.)

Although I am not an active participant or observer these days at Reddit.com or Digg.com, I often found that the comment section to a submitted article on the gold standard contained at least one person claiming that the idea is “part of the past” and is identical to a scientist defending a “flat earth theory.” This is incredibly misunderstanding of economics and the role money has in an economy. While I would not claim proficiency or expertise on all of the laws and the detailed process of how the Federal Reserve System works and how the Banking System is allowed to balloon off it, in terms of inflation, via fractional reserve banking, I can give a gentle outline of the process with the help of Murray Rothbard and other economists. However, what I understand (relatively) better is how and why money shows up in the first place in an economy, what it is, how it responds to the normal market processes of supply and demand (the laws do not become broken when we are dealing with the very backbone of an economy, i.e. money!), and how it is corrupted and taken over by government to the point where money become purely fiat. Please take a look, if you have not before, at a previous entry I typed here at The Paleo Blog which gives a elementary introductory overview of this topic, where I summarize some of my notes from Murray Rothbard’s outstanding What Has Government Done to Our Money?. (And, by the way, that is a great place to start if you know next to nothing on this subject!)

Just right now I was reviewing a brilliant article by Hans-Hermann Hoppe, in which he demolishes those incredulous of a gold standard. Far from being a crackpot idea - - - it is people that support Milton Friedman that should be called the crackpots. If one really believes people should be “free to choose,” then why not with money? The second question that could be asked, is this: Most competent economists are against monopolies (i.e., where no free entry is present made possible by law), but then why do Friedman supporters believe that a monopoly in the production of paper money would not lead to abuses; particularly given that it is controlled by government? Not a more naiveté attitude could there be. In fact, history contains only examples of the mismanagement that continues to this very day. It is not there because of ‘bad guys,’ but because the entire operation will automatically lead to these problems.

The question is, is fiat money even possible in a free society?

The Economics and Ethics of Private Property by Hans Hoppe

. . . Regardless who----the bank or the public----now owns the notes, they represent nothing but irredeemable paper. Formerly, the cost associated with the production of such paper was by no means only that of printing paper tickets, but more importantly that of attracting gold depositors through the provision of safeguarding and clearing services. Now, with irredeemable paper there is nothing worth guarding anymore. The cost of money production falls close to zero, to mere printing costs. Previously, with paper representing claims to gold, the notes had acquired purchasing power. But how can the bank or the public get anyone to accept them now? Would they be bought and sold for nonmoney goods at the formerly established exchange ratios? Obviously not. At least not as long as no legal barriers to entry into the note-production business existed; for under competitive conditions of free entry, if the (nonmoney) price paid for paper notes exceeded their production costs, the production of notes would immediately be expanded to the point at which the price of money approached its cost of production. The result would be hyperinflation. No one would accept paper anymore, and a flight into real values would set in. The monetary economy would break down completely and society would revert back to a primitive, highly inefficient barter economy. Out of barter then, once again a new (most likely a gold) commodity money would emerge (and the note producers once again, so as to again acceptability for their notes, which begin backing them by this money).

Be sure to check out the full article here [PDF].

Hence it becomes very evident that the only way to have fiat is with governmental control. In freedom fiat money could never exist! Money does not fall down from the heavens. Neither can a king hand everyone pieces of paper and have a declaration calling them “money.” The requisite of the adoption of money is that the economy must undergo a process of evolution from the primitive stages of barter. Indirect exchange would develop and a common medium of exchange would come about. That medium would have to have an embedded preexisting market demand. Once it is demanded, by individuals seeking to enlarge their trading possibilities contra the “lack of double coincidence of wants” in barter, as a medium of exchange, rather than something to be just consumed, this will further increase its demand for this role and will “snowball” (as Rothbard put it). To cut this short, what has been selected in more modern times has been GOLD. The reasons are clear enough: There is demand. It is scarce. It is durable. It is dividable. It is economically efficient in using and for “molding” (for a lack of a better word) to the purposes of being used as money. It is transportable. Et cetera. (That is not to say we would be carrying around gold coins in our pockets. From this would develop notes, but they would be one-hundred backed and redeemable by gold.)

See Also:

• The Paleo Blog: "Money, Banking and the Federal Reserve"
• --- "Privatize Money"
• --- "Let's Take Our Money Back!"

PS ~ You might also want to check out The Case for Gold by Ron Paul and Lewis Lehrman here. (I have not read it myself, but I bet it is very good.)

Murray Rothbard wrote an excellent introductory populist article trying to persuade people to see the virtues of rolling back government control over the monetary and banking system.

"Taking Money Back" by Murray Rothbard
Originally published in The Freeman, Sept & Oct 1995.

I see a little Lysander Spooner here (it sounds like him):

By diluting the value of each ounce or dollar of genuine money, the counterfeiter's theft is more sinister and more truly subversive than that of the highwayman; for he robs everyone in society, and the robbery is stealthy and hidden, so that the cause-and-effect relation is camouflaged.

Just as Rothbard wrote in his short What Has Government Done to Our Money?, people are generally resistant to taxation. However, money itself gives governments a unique indirect route to tax the public behind their backs.

This is done through controlling the monetary system. Once it gets it under its control, it can then literally take steps to counterfeit money at the expense of the public. Since it is such a hidden and indirect form of taxation governments love it.

It is as if someone were to counterfeit money in his basement. He "creates" $1,000 using his printer and then spends it at the stores. He benefits, but those that receive the counterfeit money lose. Even if no one ever notices, society at large will lose, because the artificial increase in the money supply will devalue money.

Governments that create "new" "money" does result in seemingly new money for these governments to use. But it is always at the expense of us. Banks also benefit during this process. Because why shouldn't they, the banking market that is, help the government in this grand counterfeiting process? They benefit too. But this is at the expense of the public at large due to the resulting devaluation of money caused by the preceding inflation.

We little people get this new money last. We are the ones that see our living standards go down. It is a scheme to redistribute wealth.

Artificially tampering with the monetary system in this way also creates other problems besides just some indirect form of taxation. It distorts business calculation. It sets into motion boom-and-busts. It makes us debtors and not savers. And so forth.

In the article I linked, Murray Rothbard provides the basics. He then goes on to tell us how we can move from where we are today to a sound money system.

I must confess that this topic can get confusing for me sometimes in trying to figure out the twists, tangles, and knots in the banking system----not only of the nation scene but the international scene. I suppose---no, I know---governments and the banking elites in on the deal like it this way. But my reading of Rothbard is slowly clarifying things----or at least giving me a basic conceptual understanding.

See Also:  The Paleo Blog’s “Privatize Money”