Ludwig von Mises Institute
Much has been written lately, including by me, about the coming rejection of the dollar as the primary reserve currency of the world’s most important central banks.My prediction is based upon two things: one, that the Federal Reserve is controlled by inflationist politicians whose main goal is to monetize the federal government’s vast annual budget deficits; and, two, that the rest of the world is getting fed up with holding ever more fiat dollars of decreasing purchasing power. In the first instance, as long as the Fed can get away with printing dollars that ultimately are used to purchase federal government debt, there is no reason for it to cease federal debt monetization, or for the federal government itself to balance its budget.In the second instance, it is in the self interest of the rest of the world to find an alternative to being robbed by loss of the dollar’s purchasing power. In short, if the Fed does not stop debasing the dollar, its status as a reserve currency will continue to erode.If the Fed wants the dollar to remain the world’s reserve currency of choice, it must raise interest rates rather than create more money and the government must slash its spending to avoid imposing higher taxes. If it chooses neither of these, or in such small increments as to make little difference, then I fear the dollar is doomed as the world’s primary reserve currency.What Is a Reserve Currency?Central banks hold reserves in order to facilitate international trade. Individuals and companies within a monopolized currency area (either an individual nation or some region, such as the euro zone) must exchange their local currency for some other nation’s currency in order to import goods and services. Likewise, individuals and companies within a monopolized currency area must convert foreign currency to local currency in order to pay their local suppliers for producing goods and services that are sold abroad and for which they were paid in foreign currency.They do this through the central bank. Alternatively, individuals and companies may decide to conduct these exchanges in a third currency, one that is accepted in most of the world. Since the end of World War II, the US dollar has performed this role, meaning that the world is willing to hold dollars (or dollar denominated assets, such as US Treasury bonds), that circulate outside the borders of the US. Over time, this led to the eurodollar and the petrodollar markets.But simply saying that the world has preferred to hold US dollars does not explain why it preferred to do so. We have lost sight of the fact that there were real reasons for the eurodollar and petrodollar markets, which transcended some mystical faith in the dollar and the US. The world simply had recognized that the dollar was the most marketable currency to hold, I believe mainly for both geopolitical (i.e., US military dominance) and economic (i.e., the size and success of the US economy) reasons. But now those reasons are evaporating, creating an opening for some other, better currency.Is There Any Better Reserve Currency?The market wants a currency which retains its purchasing power and can be exchanged readily for the most varied real goods, services, and assets. As long as nations issue fiat currencies, only a nation with a large internal market will find that its currency is accepted as one of many reserve currencies. If no one else will accept that currency, it always will be accepted in the monopolized currency zone of the central bank that issued it. For example, it is possible that the eurodollar and petrodollar markets could end, forcing holders of US dollars to exchange them for goods and services in the one part of the world that must accept dollars.The American market is huge, offering lots of choice; whereas, a smaller market, such as Singapore or Russia, would have fewer assets, goods, and services for exchange against the Singapore dollar or the Russian ruble. Much has been written of late that Russia, whose economy is one tenth the size of the US, wants to end what it calls the dollar’s "special privilege." But there is a natural limit on the demand by central banks to hold Russian rubles, because Russia exports mainly commodities and few goods or services. Furthermore, property rights in Russian companies and other assets are not seen by the market to be as secure as those in Western countries. China’s yuan might fare better than the ruble, because China exports many more goods to the West than Russia; thus, holders of yuan would have somewhat more confidence that they could find readily marketable goods in exchange for yuan.Gold Backing Adds to a Currency's MarketabilityBut there is one step that small market countries or those with questionable dedication to defending property rights could take that would enable them to make their currencies attractive to hold nonetheless. They could tie their currencies to gold. Gold backing provides two important assurances to potential holders. One, gold cannot be inflated at the stroke of a key on a central bank’s computer; therefore, the currency could not be (as easily) debased and would retain its purchasing power. And, two, gold is acceptable intrinsically anywhere in the world. The holder of a gold backed currency can look beyond ultimately exchanging his currency in the issuer's monopolized currency zone; he can exchange the currency for gold and spend it on real assets, goods, and services anywhere in the world.Gold Backing Only Works If …But the risk to a holder of gold backed currency has not yet been completely removed. Two further hurdles need to be crossed. One, the holder needs to know that the issuer of the gold backed currency is not secretly issuing currency that is not backed by the commodity, what Mises calls "fiduciary media." At the Bretton Woods Conference in 1944 the US promised to maintain a dollar to gold ounce ratio of thirty-five to one. The International Monetary Fund was established at the same Bretton Woods Conference and charged with ensuring that the US honored the agreement, but it failed to do so.The US issued so much unbacked (fiduciary) media that the Fed suffered a run on its gold reserves as the US’s trading partners scrambled to redeem US dollars for gold at the promised price. Therefore, an issuer of a gold backed currency needs to open its books to periodic and random independent audits.But even independent audits are not completely sufficient. Complete confidence in a currency requires that the holder be able to take possession of the actual specie without incurring undue cost. For example, the gold might be held in a remote or possibly dangerous location, such as Moscow or Tehran. Worse yet, the currency issuer might refuse to redeem its currency for specie upon demand even though it had honored its promise not to issue fiduciary media.For example, holders of rubles might not be allowed to take possession of the physical gold in Moscow, even though independent auditors had established that the ruble had not been debased by the Russian central bank. This risk could be mitigated by the currency issuer establishing gold redemption centers in many, convenient places around the world. These redemption centers would promise to surrender specie upon demand for any issuer willing to contract with it to do so and by the currency issuer moving sufficient specie there to reassure the market.Sound Money Conveys No Special Privilege on the IssuerSound money (i.e., money that is backed one hundred percent by specie and for which provisions have been made for safe and dependable redemption) actually conveys no special privilege upon the issuer but, rather, an obligation. The "special privilege" that critics of the dollar have expressed refers to the Fed’s ability to debase its currency. Were it not allowed to do so, the Fed would become simply another market participant producing a good or service desired by the market. In a sound money environment, if the market discovered that the Fed had debased the dollar, demand to hold dollars would quickly erode.The market’s demand to hold dollars would fall and its demand to hold other, sounder currencies would rise. Once found to be issuing fraudulent fiduciary media (i.e., media not backed 100 percent by specie), international demand to hold dollars might never return, because the Fed’s reputation for honesty had been destroyed.I fear that the dollar’s reputation has been destroyed. It is no secret that base money in the US has risen tremendously, from $569 billion in March 2000 to $4,083 billion in September 2014. In that time the Fed’s inventory of gold has remained the same at 261.5 million ounces. This abuse of the market has opened the door for others. If any country could convince the market that its currency was sound, by following the principles outlined above, international demand to hold that currency would rise, supplanting the dollar as the world’s primary reserve currency. Furthermore, it would be doing all international market participants a favor. Remember, providing a sound currency conveys an obligation to the issuer to honor its promises; it does not convey a privilege to cheat the market by printing unbacked currency.The benefits that accrue to issuers of sound money are all ancillary. For example, the British pound represented more than the fact that it was backed by specie redeemable upon demand. The convertible British pound was representative of a nation that honored the rule of law, fair dealing, honesty, and prudence. British law was exported to the world, as was its form of government, because the world recognized that these institutions were part and parcel of its financial and economic success. British bankers, lawyers, and businessmen gained in stature and real wealth because they upheld these values. The redeemable British pound was a daily verification of trust in everything British. In other words, Britain led by example, and the example was the British pound.One More ThingSo far we have assumed that only central banks can issue money that would be accepted by international traders as a reserve currency. But there still is one risk to holders even of a fully redeemable, gold backed currency — the risk of sovereign suspension of gold redemption by all (or most) of the major central banks. This is exactly what happened at the start of World War I. Regardless of the reason for suspension of gold redemption, a central bank would be protected from court action by its national government. National governments hold the monopoly of coercive force within their sovereign area, so holders of the currency could be denied redemption there, although they might have access to partial redemption of gold held at remote locations. However, a private issuer of a redeemable gold backed currency would have no such protection and national governments would have little incentive to provide it. Courts in many countries could attach the assets of the currency issuer and even bring criminal charges of fraud against the principals, a risk that central bank bureaucrats need not face. Therefore, the ultimate reserve currency is one that is issued by private institutions, such as international banks.ConclusionThe world needs honest money founded in law to which men everywhere can seek justice in the protection of their trade, property, and wealth. Honest, sound money is representative of an entire society’s dedication to the rule of law, fair dealing, prudence, and reliability. There is no secret to sound money, only dedication to providing its ready and convenient redemption. The perfect reserve currency is provided by private institutions who guarantee gold redemption through contracts with independent agents in many easily accessible and safe areas of the world. Failure of the issuer to redeem for specie would be prosecutable for breach of normal commercial and criminal law. The sooner the world adopts these principles the sooner will it recover from the headlong path to currency destruction to which it is headed today.Image source: iStockphoto.
[Originally published in The New Banner: A Fortnightly Libertarian Journal on 25 February 1972. Thanks to J. Michael Oliver (The New Libertarian: Anarcho-Capitalism) for sending it to the Mises Institute. Thanks also to W. Robert Black III, of the New Banner Institute.]IntroductionDr. Murray Rothbard, libertarianism's foremost theorist and advocate today, is a scholar, teacher and author of considerable reputation. Without question he is one of the thinkers most responsible for the formulation of the doctrine of anarcho-capitalism. While his efforts have been primarily in the field of economics, his writings and activities demonstrate a much wider range of thoughtDr. Rothbard has studied under Professor Joseph Dorfman at Columbia University and Dr. Ludwig von Mises at New York University. He took his undergraduate and graduate work in economics at Columbia University. He has taught at the City College of New York and currently teaches at the Polytechnic Institute of Brooklyn.As an author he has numerous works to his credit, including, his monumental economic treatise, Man, Economy and State; its sequel, Power and Market, an analysis of government intervention in the market; America's Great Depression; The Panic of 1819; and What Has Government Done to Our Money? Articles by Dr. Rothbard have appeared in numerous books and periodicals including American Economic Review; American Political Science Review; Journal of History and Ideas; Quarterly Journal of Economics; New Individualist Review; Intellectual Digest; and the New York Times.Among his most outstanding accomplishments in the study of human action are; his revolutionary theory of monopoly in which he shows that there can be no monopoly in a free market; his original analysis of patents and copyrights; and his refutation of numerous interventionist fallacies. Primarily in his classic Man, Economy and State, he shows that "the workings of the voluntary principle and of the free market lead inexorably to freedom, prosperity, harmony, efficiency, and order; while coercion and government intervention lead inexorably to hegemony, conflict, exploitation of man by man, inefficiency, poverty, and chaos."Aside from his obvious scholarly efforts, Murray Rothbard has deeply involved himself in the daily struggles of the libertarian movement — such as his spearheading of the assault on the current state price freeze. He is also the editor of the Libertarian Forum, a monthly libertarian newsletter.Dr. Rothbard was interviewed in his home in New York City on January 13, by J. Michael Oliver and Donald C. Stone of The New Banner.Managing Editor's Note: Having never met Murray Rothbard prior to this interview I was only aware of his scholarly side — through his writings; I had no conception of the type of personality which I was to encounter. Donald Stone, editor of the libertarian newsletter Pegasus and friend of The New Banner, who accompanied me and assisted in the interview, had only briefly met Murray Rothbard on one occasion a year before. We were both quite pleased, therefore, to discover that his esteemed reputation as a scholar was matched by his joviality and candor as a host and conversationalist. The New Banner is confident that with this interview, it has made available to its readers an up-to-date view of the libertarian struggle by the man who stands today as perhaps the foremost libertarian.NEW BANNER: In the No. 7 issue of the Ayn Rand Letter, Miss Rand admonishes her readers, "Do not join ... libertarian hippies who subordinate reason to whims and substitute anarchism for capitalism." Do you think that this remark was directed at you and other advocates of free market alternatives to government institutions, and do you think this remark is in keeping with Miss Rand's oft-stated principle of “defining your terms?"ROTHBARD: Well, it's hard to say, because you notice there are very few specific facts in her discussion. There is one sentence covering "libertarian hippies." Who are they? Where are they?The movement that I'm in favor of is a movement of libertarians who do not substitute whim for reason. Now some of them do, obviously, and I'm against that. I'm in favor of reason over whim. As far as I'm concerned, and I think the rest of the movement, too, we are anarcho-capitalists. In other words, we believe that capitalism is the fullest expression of anarchism, and anarchism is the fullest expression of capitalism. Not only are they compatible, but you can't really have one without the other. True anarchism will be capitalism, and true capitalism will be anarchism.As for her remark being in keeping with the principle of defining one's terms — well, obviously not. I don't think she has ever defined the term "anarchism," as a matter of fact.NEW BANNER: Do you see a possible future for libertarian retreatism or do you see it as a blow against an effective political development of the movement?ROTHBARD: I don't think it's a blow, because there are not going to be many retreatists. How many people are going to retreat to their own island or their own atoll! Obviously, half a dozen people go out there, if they do, and it might be fine for them. I wish them well, but personally I wouldn't do it. I'm not going to go off to some damn island or some damn atoll! Ha. I think that most libertarians or most Americans won't do it either.This might be a personal out for these individual people, but it is hardly a solution for the country. It's not a solution for me or for anybody else that I know of. And so I just think that they are interesting to read about, but they're irrelevant — to use a much clichéd term — to the current concerns of myself or the rest of the public.Even if it were feasible — even if the government didn't crack down on it as a "hazard to navigation" or whatever, which it undoubtedly would, even if they could get it off the ground, who is going to go there?Some of the retreatists, by the way, are philosophically very bad. You might know of this fellow Marshall who is the big retreatist and nomad leader. He has this view that in order to be free you have to be a nomad. In other words, any ties to a place or a career injures your freedom. I think this is an evil philosophical error — which all too many people have.NEW BANNER: The American people seem on the whole to be passively if not actively supporting Phase II. Conservatives are more concerned with law and order than with economic freedom; liberals are calling for more after this recent taste of controls. The rest the country apparently will resign itself to any situation after so many years of Orwellian double-talk. Where does this leave the libertarian? Alone for the next generation?ROTHBARD: Well, not necessarily, because I think what's happened is that a vacuum of leadership has developed in the country about Phase I and Phase II. In other words, libertarians have been the only people who have been against Phase I and II from the beginning and on principle. Some of the labor union leaders are against it because they didn't get enough share of the pie. They obviously were not against it on principle. Libertarians were the only ones from the very beginning to establish this record and to go out to the public and attack it. I know that I've spent an enormous amount of time attacking it, debating Herb Stein and so forth. But I think it’s useful also strategically, because Phase II is going to fall apart. It's already beginning to crack-up. As it cracks-up libertarians will be the only ones who have established a record of opposition to it. I think in a sense we can fill the vacuum. This might be a very good thing for the libertarian movement. As the thing falls apart people will begin to turn to us for leadership. "Well, here are these guys who've been prophetic. When everybody else was going along with it they realized it wasn't going to work."NEW BANNER: Some libertarians have recommended anti-voting activities during the 1972 election. Do you agree with this tactic?ROTHBARD: I'm interested to talk about that. This is the classical anarchist position, there is no doubt about that. The classical anarchist position is that nobody should vote, because if you vote you are participating in a state apparatus. Or if you do vote you should write in your own name, I don't think that there is anything wrong with this tactic in the sense that if there really were a nationwide movement — if five million people, let's say, pledged not to vote. I think it would be very useful. On the other hand, I don't think voting is a real problem. I don't think it's immoral to vote, in contrast to the anti-voting people.Lysander Spooner, the patron saint of individualist anarchism, had a very effective attack on this idea. The thing is, if you really believe that by voting you are giving your sanction to the state, then you see you are really adopting the democratic theorist's position. You would be adopting the position of the democratic enemy, so to speak, who says that the state is really voluntary because the masses are supporting it by participating in elections. In other words, you're really the other side of the coin of supporting the policy of democracy — that the public is really behind it and that it is all voluntary. And so the anti-voting people are really saying the same thing.I don't think this is true, because as Spooner said, people are being placed in a coercive position. They are surrounded by a coercive system; they are surrounded by the state. The state, however, allows you a limited choice — there's no question about the fact that the choice is limited. Since you are in this coercive situation, there is no reason why you shouldn't try to make use of it if you think it will make a difference to your liberty or possessions. So by voting you can't say that this is a moral choice, a fully voluntary choice, on the part of the public. It's not a fully voluntary situation. It's a situation where you are surrounded by the whole state which you can't vote out of existence. For example, we can't vote the Presidency out of existence — unfortunately, it would be great if we could — but since we can't why not make use of the vote if there is a difference at all between the two people. And it is almost inevitable that there will be a difference, incidentally, because just praxeologically or in a natural law sense, every two persons or every two groups of people will be slightly different, at least. So in that case why not make use of it. I don't see that it's immoral to participate in the election provided that you go into it with your eyes open — provided that you don't think that either Nixon or Muskie is the greatest libertarian since Richard Cobden! — which many people, of course, talk themselves into before they go out and vote,The second part of my answer is that I don't think that voting is really the question. I really don't care about whether people vote or not. To me the important thing is, who do you support. Who do you hope will win the election? You can be a non-voter and say “I don't want to sanction the state" and not vote, but on election night who do you hope the rest of the voters, the rest of the suckers out there who are voting, who do you hope they'll elect. And it's important, because I think that there is a difference. The Presidency, unfortunately, is of extreme importance. It will be running or directing our lives greatly for four years. So, I see no reason why we shouldn't endorse, or support, or attack one candidate more than the other candidate. I really don't agree at all with the non-voting position in that sense, because the non-voter is not only saying we shouldn't vote: he is also saying that we shouldn't endorse anybody. Will Robert LeFevre, one of the spokesmen of the non-voting approach, will he deep in his heart on election night have any kind of preference at all as the votes come in. Will he cheer slightly or groan more as whoever wins? I don't see how anybody could fail to have a preference, because it will affect all of us.NEW BANNER: What other activities would you consider appropriate for libertarians during the election?ROTHBARD: Well, as I tried to indicate — supporting candidates. I think there will be two main groups of libertarians this year. One group will be the non-voting group. The other group will be the Dump Nixon group of which I am an enthusiastic member. I almost take the position — anybody but Nixon. Dump him! Punish him! Smash him! Retire him to the private life which he so richly deserves. Get him out! I think there are all sorts of reasons why, if you want to pursue it, why Nixon should be dumped.I do not support Ashbrook, but I think it is a very interesting development, because there is a possibility that the extremists in the conservative camp are hoping that Ashbrook will run on a 5th party ticket in the general election, which is the important thing. Because, if he runs in Ohio, California, etc., he can break Nixon by just getting 10 percent of the conservative vote. That is, if he has the guts to run in a general election.NEW BANNER: At the outset, your newsletter, Libertarian Forum, was co-edited by Karl Hess. He has since departed. What ideological differences led to this split?ROTHBARD: First of all, he wasn't the editor, he was the Washington editor, which meant that he wrote a column. He did not have anything to do with the editorial policy of the paper. The concrete split came when I made a very tangential attack on the Black Panthers. He got very upset about this. He thought, one, it was a terrible thing to attack the Panthers, and two, since his name was on the masthead, the Panthers might think he was a part of the party which was attacking them. He felt at that time that it was very important to work with the Panthers. I consider the Panthers a bunch of hooligans and I don't see any reason for supporting them — either in regard to whatever criminal activities they participate in or their free breakfast program. You know the Salvation Army has been giving away breakfast for many years, and I don't see anything particularly revolutionary in that. At any rate, at that time he was very committed to the Panthers and that was really the split.But more deep than that is the fact that Karl after having been an anarcho-capitalist for some time shifted over to become an anarcho-communist or anarcho-syndicalist. I don't really see any basis for collaboration between the two groups, because even if we are both against the existing state, they would very quickly come up with another state. I don't think you can be an anarcho-communist or an anarcho-syndicalist. You know if the commune runs everything, and decides for everything, whether it is a neighborhood commune or a mass country commune — it really does not matter in this case, somebody's got to make the communal decision. You can't tell me that you'll have participatory democracy and that everybody is going to equally participate. There is obviously going to be a small group, the officiating board or the statistical administrative board or whatever they want to call it, whatever it's going to be, it's going to be the same damn group making decisions for everybody. In other words, it's going to be a coercive decision for the collective property. It will be another state again, as far as I can see. So I really can't see any basis for collaboration. That is really part of a broader analysis of the communist versus the individualist position.You see, I was one of the people who originated the idea of an alliance with the New Left. But I didn't think of it in these terms. I didn't think of an alliance with the New Left as living in communes with the Black Panthers. I thought of it as participating with the New Left in anti-draft actions or in opposition to the war. I conceived of a political rather than an ideological alliance. While we are both against the draft, let's have joint rallies to attack it, or something like that. This is a completely different sort of thing.This incidentally has been a problem with libertarians for a long time. Both in the old days when they were always allied with the right-wing and now when they tend to be allied with the left. You start allying yourself with a group and pretty soon you find yourself as one of the group. In other words, the alliance slips away. Start with the idea that we are going to work with either conservatives or radicals for specific goals and somehow they start spending all their time with these people and they wind up as either conservatives or radicals. The libertarian goal drops away and the means become the ends. This is a very difficult problem because you don't want to be sectarian and have nothing to do with anybody. Then you're never going to succeed at all. I think that one of the answers to it is to have a libertarian group which is strong enough to keep reinforcing the libertarianism of our members.NEW BANNER: David Nolan is forming a Libertarian Party. Its membership has indicated an interest in nominating you for its Presidential candidate in 1972. What is your response to this overture?ROTHBARD: Ha, ha, ha (prolonged laughter). I really don't think, as lovable as third parties are, that a libertarian party at this stage of our development is anything but foolhardy. There are just not that many libertarians yet. There's no finances, there's no people, there's nothing. Maybe eventually we will have a libertarian political party.NEW BANNER: What would be the purpose of a libertarian party?ROTHBARD: I think if there were a libertarian party — and I don't want to make it seem as if this is a realistic thing at this time — if there ever were a strong libertarian party it could do several things. Tactically, we could have a balance of power. Even better as an educational weapon. If we had ten guys in Congress, let's say, each of whom are constantly agitating for libertarian purposes — voting against the budget, etc., I think it would be very useful.Also, we have a long-range problem which none of us has ever really grappled with to any extent. That is, how do we finally establish a libertarian society? Obviously ideas are a key thing. First off you have to persuade a lot of people to be anarchists — anarcho-capitalists. But then what? What is the next step? You certainly don't have to convince the majority of the public, because most of the public will follow anything that happens. You obviously have to have a large minority. How do we then implement this? This is the power problem. As I've expressed this in other places, the government is not going to resign. We are not going to have a situation where Nixon reads Human Action, Atlas Shrugged, or Man, Economy and State and says “By God, they're right. I'm quitting!" I'm not denying the philosophical possibility that this might happen, but strategically it's very low on the probability scale. As the Marxists put it, no ruling class has ever voluntarily surrendered its power. There has to be an effort to deal with the problem of how to get these guys off our backs. So, if you really have a dedicated group in Congress or the Senate, you can start voting measures down or whatever. But I don't think this is the only way. I think maybe there will be civil disobedience where the public will start not paying taxes or something like that. If you look at it, there are several possible alternatives in dismantling the state. There is violent revolution, there is non-violent civil disobedience and there is the political action method. I don't know which of these will be successful. It's really a tactical question which you can't really predict in advance, it seems to me that it would be foolhardy to give up any particular arm of this.It's incumbent upon people to come up with some sort of strategic perspective to dismantle the state. For example, Bob LeFevre somehow works it out that it's almost impossible to get rid of the state — from his own point of view. He is against violent revolution — okay, now that is a very respectable position; he's also against voting; he's against political parties — it becomes very difficult to really see how one can get to the state at all with this kind of procedure. I don't see why we should give up something like political parties. It might be a route eventually to dismantling the state or helping to dismantle it.NEW BANNER: In the February, 1971, Libertarian Forum you stated that the movement was "taking off." In the perspective of the last year would you change your opinion?ROTHBARD: No, I think it's taking off. It's growing very rapidly, and it's getting a lot of publicity which is important. The recent New York Conference was very successful in many ways. We are still in pretty good shape. I don't know where to go from here, particularly. I'd like to see more strategic thinking on the part of the movement as to what to do next. For instance, should there be any organizational effort, if so, what? This sort of thing.NEW BANNER: Do you see any wisdom in anarcho-capitalists allying with today's New Left?ROTHBARD: There is no New Left now. The New Left is really finished — there isn't any such animal anymore. One of the reasons that I liked the New Left in the old days, in the middle-60's, was that there were a lot of libertarian elements in the New Left. Not only was there opposition to the war and the draft, but also opposition to bureaucracy, central government and so forth. But all that seems to have dropped out. There is really nothing going on in the New Left now at all.NEW BANNER: Why do you think the New Left has never strongly supported the anti-draft movement? They seemed to have been more anti-war, but not concerned with anti-draft.ROTHBARD: They were against the draft, but as you say, they didn't really have their heart in it. They really weren't against the draft. They are in favor of the People's Republic draft, when the People's Republic gets established. I remember when Castro first got in power in 1959. A lot of the more sincere Castro followers said that one of the great things about Castro was that he had abolished the draft. Of course, he had, but a couple years later it was back. So you see, they're against a draft by a reactionary government, but not by a people's government. Ha, ha.NEW BANNER: Do you agree with the proposal that libertarians overlook their philosophical differences in order to provide a unified front?ROTHBARD: I don't think that question can really be answered flatly. I don't agree with the sectarian idea that you have to agree on everything before you can act on anything. In other words, that you have to agree on A is A, free will, modern art, or whatever. I don't buy that, I think it's unrealistic. On the other hand, simply saying that you will unite on anything if you agree on “Smash the State," on a couple of slogans, is very dangerous, too. It depends upon the goal of your action or activity. If you are engaging in an ad hoc sort of thing like an anti-draft rally, then I don't see anything wrong with having speakers or common activity with all anti-draft people regardless of their original premises. If you are going to have a libertarian organization carrying on all sorts of activities, conferences, journals and things like that, you will want to have much more full agreement.Of course, in the libertarian movement you have a pretty wide spectrum, which I think however, fortunately is narrowing. I think we are getting a situation in which the extreme left and the extreme right, so-called, are sort of mellowing into a central position, which gives us more basis for cooperation. The "rip off Amerika" group is beginning to calm down, and the Randians are beginning to get more wary about the Constitution, the Founding Fathers and American foreign policy. So, I think that there is more agreement now than there was a year ago.NEW BANNER: In regard to the ongoing debate between you and the Friedmanites. David Friedman has made an accusation. He has accused you of having not read what his father Milton Friedman has written, misquoting or quoting out of context what you have read, and further has accused you of being a mediocre economist who is jealous of all the attention accorded Milton. Any comments?ROTHBARD: Ha, ha, ha.As for misquoting, of course, you can always say that nobody has fully read the works of other people.I don't think Milton, for example, knows anything about the Austrian School. Obviously, Milton is more of an expert on his own writings than anyone else. As for being jealous of attention, that's like saying that I am jealous of Keynes or Galbraith. Let me put it this way, I think that they are getting over-deserved attention. It seems to me that Galbraith is getting a lot more attention than he deserves, and I think the same is true of Milton.But I think it is also very clear that you don't have to be an expert on Friedman's writings to realize that Milton is in favor of the absolute control of the money supply by the state, that he is in favor of a 3 or 4 per cent increase in the money supply (the numbers keep changing all the time) by the state every year, that he favors a negative income tax which is essentially a guaranteed annual income by the state, and that he favors a voucher plan which would leave the state solidly in control of the educational system. These things are quite blatant; there is no secret about it. I think it is pretty clear that Friedman is a statist. I mean, if you are in favor of the state having control of the money supply, control of the education system, and a guaranteed annual income, that's it. There is not much more that can be said. The fact that the Friedmanites are against price control is all very well, and I hail that, but the fundamental aspects of the state remain. The state still commands the highposts of the economy.This is one of the problems with Friedmanites — they have no political theory of the nature of the state. They think of the state, and this is true of Milton and the whole gang as far as I can see, as another social instrument. In other words, there is the market out here and then there is the state, which is another friendly neighborhood organization. You decide on which thing, which activity, should be private and which should be state on the basis of an ad hoc, utilitarian kind of approach. "Well, let's see, we'll feed the thing through the computer. We find that the market usually wins out, that the market is usually better." So, most of the time they come out in favor of the market on things like price control or government regulations, but they really think of the state as just another social instrument. And so when they come out in favor of the state, they go all out. In other words, there is no limitation. Well, they say, the state will do this. The state will run the educational system or whatever the cop-out happens to be. So, they feed the thing in — we'll have controls for a while and then they will die out — it's not very important anyway. You see, they really think they can put through Friedmanism, let's say, just by educating Nixon. The sort of thing I said before jocularly, about Nixon reading Atlas Shrugged and being converted. That is really the sort of theory of social change the Friedmanites have. You see the President once in a while, you talk to him and you convince him that there shouldn't be price controls, the ICC should be eliminated, or whatever — and then he goes ahead and does it. But it just doesn't work that way. They have no realization that the state is essentially a gang of thieves and looters. That they are exploiting the public, that they have a whole bureaucratic apparatus of exploitation, and that they are not just going to give it up. In other words, there is the whole problem of power involved which the Friedmanites refuse to face. They don't realize that the state is not a social instrument. It's an inimical organization which is hostile to society, plundering it, which has to be confined, whittled away, reduced and hopefully ultimately abolished. They have no conception of that at all. They just think of it as another friendly, corner grocer kind of thing which you either use or don't use.NEW BANNER: Federal Reserve Chairman Arthur Burns said recently that he would expand the money supply at a rate that would insure a "vigorous" expansion of the U.S. economy. At the same lime, the Price Commission will be permitting only limited price increases. What do you think the net result of these policies will be?ROTHBARD: The net result will be further inflation, with black markets and with people losing out. Those people who haven't got the political muscle at the Price Commission or Pay Board won't get their increases, while those who do have that muscle will get it.All sorts of monstrous situations will occur. Decline in quality, for example. We will find that there will be more air in the Baby Ruth — you can't find the Baby Ruth anymore anyway. There will be less chocolate in the chocolate. There is no way the state can police this, of course. And it's very harmful to the public.And the real root of inflation, which is the money supply, well, the tap is being turned on. It's unfortunate, but a lot of people including conservatives and libertarians even, have been great fans of A.F. Burns. I've never been able to see that. He's always been an inflationist, a statist and a pragmatist.NEW BANNER: Nixon is supposed to push for a value-added tax (VAT), a move which he will probably reveal soon. What might be the results of such a tax?ROTHRARD: Well, it's a national sales tax. It is one thing that has not been tapped yet. I think Chodorov said that the principle of taxation that the government always uses is the same principle as the highwayman: Grab them where they are — if it moves, tax it! If you can find something that hasn't been taxed yet, well, tax it. VAT is a new gimmick which hasn't been imposed yet in the United States.Income tax is obviously reaching a critical limit. It would be difficult for them to increase that. The property tax is fortunately going by the board. And with the whole education question — well, they need a new tax to finance it. It's a sales tax, so it will tax the poor more than the wealthy. Also, it's a hidden tax, so the public wouldn't realize it. It's a value added tax which is paid by each manufacturer as they go down the list.It also injures turnovers. If a product is made 8 times, if it turns over 8 times before it gets to the consumer, it is going to be taxed twice as much as if it turns over 4 times. This will restrict what the Austrians call "the longer process of production" which will injure capital investment a great deal. Incidentally, only the Austrians have dealt with this whole question of the period of production. It will also bring about vertical integration — mergers — which the government claims are monopolistic. If the thing turns over it means that you pay an extra tax, but if the two firms merge they won't have to pay any tax on that phase of it. So, it will encourage mergers.NEW BANNER: In the light of your past record of accurate predictions, what will be the nature of Phase III?ROTHBARD: I don't claim to be a great predictor or forecaster. It is in the nature, incidentally, of Austrian economic theory that the economist can't really forecast perfectly at all. I'm not sure about Phase III. A lot depends upon whether Nixon gets reelected or not. As in all cases of government intervention you are presented with two alternatives as the sun sinks in the west — as Phase II begins to crack up as it already is.Already the Pay Board has granted increases to some groups and shut off increases to other groups. So, as this thing becomes increasingly unworkable, then the government will be faced with the question — either we scrap the thing altogether and go back to the free market or we tighten the controls, get people who really believe in it, get Galbraith instead of Stein, and we have a rigorous program. It could go either way. Who knows how Nixon is going to go? You can't tell from one day to the next what Nixon is going to do anyway. The summer of last year, Nixon would have been equally likely a priori to either drop a bomb on China or else form an agreement with it. There is no way of predicting which path he is going to take.You have the curious situation now where the economists in charge of the Phase II program almost exclusively are against it. They all say, "Well of course we're against control and are in favor of the free market, but we have to do this anyway." In this kind of self-contradictory situation, who knows what they're going to do?NEW BANNER: In February, 1971, Senator Mark Hatfield made some interesting but vague comments in praise of your book Power and Market. Have you had any contact with the senator concerning his ostensible sympathy with libertarianism?ROTHBARD: I've only met the senator personally once — in the summer of 1969. At that time he was very friendly toward libertarianism and said he had committed himself to the cause of libertarianism. Now, I've had a couple of contacts with him since then by mail. But, obviously his voting record is not particularly libertarian. It's very good on foreign policy and the draft, but it's not too great on other things.What the reason for this is I really don't know. However, he has been very good in introducing legislation for tax credits and for the right to own gold. I really don't have that much contact with the Hatfield staff. In the abstract, at least, he is very favorable to libertarianismHe seems to understand it. I also understand that one member of the Hatfield staff is an anarchist who was converted by the Tannehill book — this is the rumor I get.NEW BANNER: I understand that you have written two other major manuscripts that have yet to be published; the Ethics of Liberty and The Betrayal of the American Right.ROTHBARD: The Betrayal of the American Right is not really a major manuscript. It is a pleasant enough thing. It's fairly short. It's sort of a combination personal and general history of the right-wing from Mencken and Nock in the Twenties and going into the World War II period and then up to the present. That's not going to be published so far, because Ramparts Press, which was originally supposed to publish it, didn't like it, and it has now been turned into a reader. Right now the idea is that they are going to come out with a reader of Old Right stuff like Mencken and Nock, and I'll be picking the readings and doing the introduction. So, as for that manuscript, after the reader comes out, I guess I'll look around for a publisher for the original Betrayal of the American Right.The ethics book has only been partially finished, so that's the problem with that.Right now I'm working on a libertarianism book for MacMillan. The tentative title is For a New Liberty. It will be sort of a general book. It is a rather difficult book to write, because I can't be as scholarly as I'd like to be, and yet on the other hand I can't be too mass oriented. So, I have to pick my spots. I've started off with a description of the movement discussing who is in it, the spectrum in it, and then I go into the philosophy of the movement — the central core of libertarian philosophy. Then I go on to the applications of that philosophy. I just finished the chapter on education and next I'll go on to welfare. After I finish that I'll start working on the ethics book, which is really my favorite. So far I have written in Power and Market, etc., on the "value free," praxeological aspects of liberty and I have not really tackled the ethical position in print. One thing which I find exciting in it is that I'm going to try to deduce the ethics like I do the economics from a Robinson Crusoe and Friday situation — a Crusoe political philosophy. I'll show what happens when Crusoe and Friday engage in voluntary trade and exchange as opposed to coercion and then bring in the whole coercion versus liberty issue. Then work from there on up.I also have another manuscript which is a very long-term thing — that being a history of the United States. In that I have written up to the Constitution. It will be a history of the United States from a libertarian point of view. It is very difficult to write that, because the thing is we don't know what has happened — a lot of the facts have been buried. Orthodox histories don't give many facts; a lot of facts are just left out.NEW BANNER: Is it intended to be a textbook?ROTHBARD: No, not really. It's just a libertarian history of the United States. It could be used as a textbook, I hope. You know, Man, Economy and State was originally supposed to be a textbook and wound up as a giant treatise. I think this might be the same thing,NEW BANNER: Dr. Rothbard, on behalf of our readers and our staff, I would like to thank you for this most informative interview.ROTHBARD: You are quite welcome.Image source: Mises Rothbard Archives.
When the central bank meets to decide on the level of interest rates, most people care about only one thing: are my home loan, car, and credit card repayments going up, down, or staying the same? Although this is no trivial concern given the importance of managing a household budget, such a limited view does scant justice to the broad, critical, and complex role interest rates play in an economy.What Soda Prices Tell Us About Interest RatesThe usual narrative is that low rates are good and high rates are bad. But the real problem is not “high” interest rates, but wrong interest rates. You see, interest rates are like prices. Like the price of a soda drink is agreed between seller and buyer, so interest rates are the price of loans agreed between lender and borrower.Suppose the government forced the price of sodas to half their market level, jailing anyone caught selling them at any price above this new level. What happens? Soda lovers flock to the stores to buy soda. Soda makers, by contrast, take heavy losses and either close down or find some way to make cheap and less tasty soda for half the original cost. The supply of soda plummets, while the quality of good soda free falls.Paradoxically, setting a price artificially low makes a product easy to buy for a while, but eventually leads to shortages. Interest rates in most modern economies work in a similar way. The central bank forces this price (the interest rate) to a desired level through extensive regulatory control over the banking system, relying on the fact that the money it creates is the only legally permissible money used in trade. When the central bank forces interest rates too low, borrowers think life is great. Houses, cars, and furniture seem cheap and starting a business with a loan is easy. Except that discerning lenders don’t see much point in lending anymore, because they are no longer adequately compensated for their costs and risk. Not only do loans from these lenders dry up, but the quality of remaining loans falls.Make Lots of Cheap, Low-Quality LoansHow does the quality of loans fall? Just like the soda makers who sourced cheap and less tasty products, so credit providers (banks) move away from sourcing funds from discerning investors who would charge more, and rely instead on getting cheap money directly from the central bank, which prints it out of thin air and lends it to the bank at the cheap rate.With this cheap funding, and with the ability to resell the loans to governmental and quasi-governmental organizations like Fannie Mae, the banks don’t have to be nearly as careful who they lend to and can happily accept lower interest repayments from borrowers. And, if things go wrong, the banking system can also appeal to the Fed and the US treasury for bailouts.Risky borrowers who were unable to pay the rate of interest discerning lenders demanded can now access cheap loans. Simultaneously, even prime borrowers are misled by the reduced interest rate into projects that turn out to be malinvestments.Furthermore, because the loans created out of thin air look exactly like the money in the hands of discerning lenders, this poor quality is veiled and people are fooled into thinking that discerning lenders are supplying loans, when in fact they’re running for the hills. (But even the discerning lenders are fooled in the initial phases of the boom as the new money makes borrowers look more stable and profitable than they really are.)Consuming More Than We ProduceThis ends in disaster. Borrowers get into too much debt and the money loaned out of thin air floods into the economy. New money in people’s hands causes the economy to consume more than it produces and the result is a gaping and unsustainable trade deficit. The new flood of money pushes prices up and causes the currency to weaken.After initially feeling flush, people realize they are not as well off as they thought as price increases eat into their real living standards. Forced to rein in inflation before it destroys everyone’s living standards, the central bank hikes interest rates to entice the discerning lenders to do more lending. Businesses addicted to cheap loans find their input and funding costs rising unexpectedly, damaging profitability.The return of discerning funding is critical for sustainable economic growth, because it funds productive capital investments that yield the highest return, creating jobs and quality, affordable products. Meanwhile, higher interest rates punish those who gorged on artificially cheap credit, restoring the economy to healthy reality and balance.The next time the central bank meets to decide on the level of interest rates, don’t just ask how much your home loan payments are going to cost next month. Also ask: are interest rates at the right level to foster sustainable economic progress, and might I be living an illusion?Image source: iStockphoto.
This interview with Mises Institute President Jeff Deist is reprinted from the October 2014 issue of the Lara-Murphy Report.Lara-Murphy Report: How did you become interested in Austrian economics?Jeff Deist: I definitely discovered libertarianism first, which then led me to Austrian economics. I was a hardcore libertarian fairly early in life, going to see Ron Paul at a 1988 Libertarian Party campaign event when I was in college. A few years later my close friend Joe Becker enrolled at UNLV for the express purpose of studying under Professor Murray Rothbard in the graduate economics department, and I was able to sit in on a few of Murray’s classes. I knew nothing about the Austrian School at the time, but it became clear I needed a more comprehensive intellectual foundation — antipathy for the state and a belief that free markets “worked” better was not enough. Reading Rothbard was my start. This is how most young people today first hear about Mises, Rothbard, or Hayek — they already have an interest in libertarian political theory.They hear references to these great names from their friends, from libertarian think tanks or organizations, from a huge variety of libertarian websites, and from social media, and they begin the process of educating themselves.The Ron Paul 2012 campaign was a great example of this: people instinctively knew they favored property rights, markets, and peace. They knew they opposed cronyism and the banking cartel. But when Ron mentioned Murray or Mises or Austrian economics or the Fed in a speech, people wanted to go out and find the original sources for themselves. Of course those of us from Generation X remember when vast amounts of free Austrian literature were not just a click away, to put it mildly. If you were lucky your local mall bookstore might have Milton Friedman’s Free to Choose and maybe Hayek’s Road to Serfdom — right next to John Kenneth Galbraith’s The Affluent Society. Mises and Rothbard certainly weren’t available at local libraries or university libraries. All that has changed today.But obviously the Austrian School predates the modern libertarian movement. That’s why for much of the twentieth century many people read Austrian economics before arriving at philosophical or political libertarianism. The direction was reversed. Smart individuals were absorbing giants like Leonard Read, Henry Hazlitt, and Mises, but they saw themselves as liberals in the classical European tradition of the word. Murray Rothbard deserves much of the credit for building a modern libertarian framework using Austrian economics as the foundation, and creating a bridge for true liberals after the term was hijacked.LMR: You worked for Ron Paul in his congressional office for several years. I suppose unlike most people in that type of a job, you didn’t have to lie every day at work! Is there any story you can share to illustrate the culture of DC and how you were the oddballs?JD: My favorite anecdote involves other members of Congress asking us to have Ron sign books, photos, etc., for their constituents. This no doubt galled them, because Ron was a celebrity of sorts while they were unknown. But trust me, the average member of Congress deserves to be forgotten. They are a venal, mean, petty, and self-important bunch, despite the fact that maybe 1 in 20 of their constituents knows their names.Working for Dr. Paul was a great experience. We (as a staff) never had to worry about Ron being tempted to sell out or cast a safe vote due to political pressure. Ron’s office was far and away the most intellectual and philosophical office on Capitol Hill; the other members of Congress were purely political animals focused either on consolidation of power or self-preservation, depending.By contrast, we were busy quoting Mises, Rothbard, Bastiat, Tom Woods, Lew Rockwell, Lysander Spooner, you name it, in Ron’s speeches, statements, press releases, and weekly columns. Virtually everyone on staff was at least familiar with Austrian thought, and we used mises.org as a frequent resource.The degree of groupthink and sheer cowardice in most offices was almost laughable. You have to understand that members of Congress receive voting instructions, talking points, and memos from party “leadership,” and they are expected to then regurgitate these tired slogans and platitudes like trained seals — whether on the House floor, talking to the media, or at constituent meetings.But Republican leadership left Ron alone, and lobbyists did the same. We were free to promote Austrian economics, liberty, and peaceful non-intervention without the slightest hint of self-censorship. And yet Ron’s district in Texas always reelected him overwhelmingly, even when many of his constituents strenuously disagreed with certain of his positions. They enjoyed having a famous congressman, and they trusted his integrity regardless of their personal political leanings.Perhaps the best part of working for Ron was meeting thousands of liberty-minded people over the years. If I had to choose two people who really stand out in my memory, I would say James Grant (a true patrician gentleman, brilliant yet humble) and Glenn Jacobs (Kane [the stage name of the professional wrestler — ed.], incredibly thoughtful and giving of his time). But we also met world famous academics and writers, billionaire business owners, stay-at-home moms, soldiers, high school and college students, peace activists, medical marijuana advocates, progressives, conservatives, libertarians, hardcore anarcho-capitalists, nonvoters, and everyone in between. We received a steady stream of visitors from around the country and around the world, generally unannounced. Ron (and often his wife Carol) always took the time to speak with them.LMR: As a tax attorney specializing in mergers and acquisitions, you also have expert knowledge with the US financial and regulatory system. What’s your take on FATCA (Foreign Account Tax Compliance Act) and the other ways the US government has been tightening the vise on American wealth holders?JD: I see FATCA as tightening the noose, leading us ever closer to outright capital controls. Control begins with information. FATCA is designed to make it more difficult for US taxpayers to diversify political risk by holding assets abroad, plain and simple. It’s a deterrent, but also a veiled warning to those Americans who dare not to see themselves as subjects of the US state. In a few short decades, a US passport has gone from being one of the most sought-after possessions on earth — something people would risk their lives for — to an albatross around our necks.The Bank Secrecy Act of 1974 was a terrible development in American history, but few fully understood its potential impact at the time. The feds have always hated the privacy that cash provided, so they cloaked their malicious intentions with false patriotism and began a long smear campaign against financial privacy, especially the offshore variety. Understand that the $10,000 cash transaction reporting requirement in the Act has never been adjusted for inflation; it ought to be at least $46,000 today. Americans should be able to walk into a bank, a car dealership, a jewelry store, or a precious metals shop and conduct business in cash. But instead most of our financial “wealth” consists of easily controllable electronic blips representing bank accounts, stock shares, mutual fund shares, etc. This should be very frightening to anyone paying attention.LMR: Your current position, of course, is the president of the Mises Institute in Auburn, Alabama, where one of us (Murphy) has spent a great deal of time both learning and teaching Austrian economics. What role does the Mises Institute serve in the intellectual battle for liberty?JD: We want the Mises Institute to serve as the intellectual home for the worldwide Austro-libertarian revolution. We want to be a place that incubates young (and not so young) minds. We want the Mises Institute to be the MIT or Stanford of the liberty movement — a place where people learn theory and first principles, so that they can go out into the world as entrepreneurial libertarians and apply what they’ve learned in academia, business, civil society, and beyond. And we are moving, slowly but inexorably, toward making virtually everything we offer free to the consumer.We are a school, but school is being radically redefined. School is not necessarily a place you attend only when you’re young. School is not necessarily a place you attend physically. School does not necessarily involve a one-way lecture and a textbook. School does not necessarily mean long hours of study. One size does not fit all. Some may want to spend whole weeks at the Mises Institute absorbing advanced Austrian theory, reading copious amounts of economics texts, and building an academic career. Others simply may want to monitor our twitter feed and click on the occasional link. This may be all the “education” they need or desire in their busy lives. The point is that people learn in different ways, and our efforts should reflect that.Our mission is narrower and deeper than most think tanks and advocacy groups. While many wonderful liberty-minded organizations focus on much broader social topics, on the full gamut of libertarian issues, on political activism, or on public policy, we want to be known as the place to get the economics education you can’t get in traditional schools. But we hope what individuals learn at the Mises Institute will spill over into everything they do.LMR: As our previous questions have indicated, you’ve had an eclectic career, and for that reason probably have seen things that, say, a lifelong investment banker or college professor would overlook. With your unique perspective, do you have any words of wisdom for those who share the Mises Institute’s goals of liberty and peace?JD: Try to combine an investment banker’s income with a college professor’s lifestyle! Never invest based on your ideology, unless you have very long time horizons. And don’t succumb to Rothbard’s Law, whereby people tend to specialize at what they’re worst at.Image Source: Mises Archives.
Season five of the smash hit British period drama, Downton Abby, begins in six weeks. The series continues the fictional story of the aristocratic Crawley family and the family’s friends, relatives and servants set in and around the Downton Abbey estate. The series recounts the day-to-day lives impacted by all the great events of the early twentieth century from the sinking of the Titanic through the aftermath of World War I and beyond.An Even-Handed View of the AristocracyA key general theme is the vast disparity in wealth between the aristocratic family and the lowly servant class. The irony is that the people in the aristocratic family and their servants seem oddly equal in terms of both abilities and flaws. The series is not an indictment of the aristocracy, which is why the left hates it. For example, Salon recently published a hit piece on the show. “The show depicts a group of actual monsters in a manner that’s explicitly loving,” the article opines. “[W]hen the facts get in the way, they’re disposed of. Downton Abbey is a show about how the world was straightforwardly better when an entrenched class system ruled.”“Actual monsters”? The idea that there are no decent people in an aristocracy is just nonsense and so is the idea that the show depicts the characters unrealistically. In truth the Crawley family is portrayed as vulnerable, somewhat inept, increasingly irrelevant, and often forced to adapt to change against its collective will.Other commentators have seized on this realism. For example, Jerry Bowyers of Forbes finds the show reasonable and realistic, and that the aristocrats are flawed but admirable. He even concludes that the show portrays an anti-class-warfare message, which is another reason the left hates it and the masses love it. John Tamny’s exploration of series creator Julian Fellowes’s ideology reveals an insightful and complex thinker and one that points us in the direction of libertarianism rather than conservatism, which also helps explain the show’s great popularity.The plot is largely driven by secrets. One episode might be based around a servant who has a secret on another servant. Another episode might be based on one member of the aristocratic family having a secret about another family member or friend. The juiciest secrets are often secrets held by a servant about one of the family members. However, the dirtiest secret about Downton Abbey is not fictional and has never been told before. The secret reveals the true nature of the state, whether it be aristocratic, democratic, or dictatorial.The Origins of the Titled AristocracyThe actual setting for the show is Highclere Castle, which is used for exterior and interior shots of Downton Abbey. Highclere is the estate of George Herbert, the 8th Earl of Carnarvon (third creation) and his wife Fiona Aitken. The dirtiest secrets of the real-life Downton Abbeys of the world can be better understood with an examination of the 1st Earl of Carnarvon (second creation) James Brydges, and how such aristocracies came to be in the first place.The position of Earl of Carnarvon has actually been created three times with Brydges starting the second creation and Herbert at the end of the third creation. So there is no actual blood line between the two men.The first true economist, Richard Cantillon, described during Brydges’s era (i.e., the early 1700s), the nature of human society thusly:[I]f a prince at the head of an army has conquered a country, he will distribute the lands among his officers or favorites according to their merit or his pleasure. He will then establish laws to vest the property in them and their descendants.This pretty much explains how the original English aristocracy came into being and how James Brydges became the 1st Earl of Carnarvon. Brydges was born into a low-level aristocratic family and became a Member of Parliament, largely through bribery, around age 25. He then used this position to impress and curry favor with the ruling political elite. His political influence continued to grow and he soon was appointed Commissioner of the Admiralty.His next appointment was the lucrative position of British Paymaster General. He held the military purse strings during most of the War of Spanish Succession (1701–1714). It was this position that allowed Brydges to become fabulously wealthy and to be able to purchase several more high-ranking positions in the English aristocracy. Biographers Collin and Muriel Baker called him the “most successful war profiteer in that age.”Biographer Joan Johnson draws attention to records that indicate that Brydges “was the most surprising instance of a change in fortune … in any age. When he came first into the office of Paymaster of the army, he had little or no estate of his own … but by means of this office … in little more than ten years, living expensively too in the meanwhile, he had accumulated a fortune of not less than six or seven hundred thousand pounds.” This would be the equivalent today of over $1 billion!Government “Service” as the Way to WealthUsing political offices for self enrichment was as common then as it is today. Brydges merely surpassed all others of his time period and of course wartime is the perfect time for feeding at the public trough. The two main tools at his disposal were the budget of his office, which was enormous. He received his full budget at the beginning of the year so he had access to vast sums of money. He also had insider information about the war on the continent because he was one of the first to know the location of armies, the outcomes of battles, and the requirements of the troops. He therefore had a vast amount of capital to invest and the critical insider information with which to invest it. Plus he could legitimately collect fees and take advantage of swings in exchange rates.Here enters the previously-mentioned economist, Richard Cantillon. He came from a dispossessed Irish Catholic family some members of which were fighting on the side of Spain and France in the War of Spanish Succession. Other members of his family operated banks on the European continent. Cantillon’s uncle was a banker in Spain who no doubt initiated the effort that resulted in Richard being hired by Brydges as his agent in Spain.Cantillon developed what was a “two sets of books” accounting system whereby Cantillon would use money obtained from Brydges through his uncle’s bank to purchase supplies and materials for Brydges’s personal account. These goods would then be marked up in price and resold to the Paymaster’s account. With war raging and communications greatly diminished it was fairly easy to widen the spread between the two accounts and amass a huge fortune.It was a safe bet on Brydges part that Cantillon would keep Bridges’s secrets because the British had invaded Cantillon’s country and taken possession of his family’s estates in Ireland. To seal the deal, Brydges helped set up Cantillon in the banking business in Paris after the war.Brydges finally relinquished his office as Paymaster when the Peace Treaty of Utrecht was signed in 1713, making further work in the office unprofitable. Brydges was accused of wrongdoings and embezzlement in office, but was never brought to trial or convicted for his crimes. Having amassed a vast illicit fortune we can gain a clearer sense of his character by what he did with his wealth.Not a True MeritocracyAs Cantillon indicates, the aristocracy is established by a conquering King who claims title to the conquered land. The land is then subdivided among his generals and friends who manage their estates and pay taxes to the King. The aristocracy is therefore not a true meritocracy, but quite the opposite. These positions are obtained by being good at killing, corruption, and court intrigue. The pomp and circumstance of the aristocracy is designed to mislead the public about the true nature and origins of the privileged class.It should not be surprising that Brydges was a man of bad character and limited abilities. Johnson notes that outside of holding aristocratic and political positions, Brydges could not compete in a world that was growing more competitive and that he “had none of the necessary shrewdness, ruthlessness and staying power for this” (i.e., entrepreneurship). “The results of his undertakings only rarely measured up to the effort he put into them or impressed his contemporaries.”Johnson goes on to note the narrow-mindedness of Brydges by noting that he “did not concern himself with philosophical moralizing or political and economic theories. He was essentially a realist, living in the present and rather like Walpole whom he admired, he had no lofty ideals that might have made him stand out among his contemporaries. His successes were material ones and his influences limited to his own immediate circle, so that his death caused few ripples beyond his circle.” It is exactly this “living in the present” lifestyle that led Brydges to eventually exhaust the vast fortune acquired as a war profiteer.The dirtiest secret of the real-life Downton Abbey is that it was established with the ill-gotten gains of a corrupt and conniving spendthrift, James Brydges, the 1st Earl of Carnarvon. War may be the health of the State. However, let it also be said that not only does it bring out the worst in us, it also raises up the worst among us. The underlying issue is not so much class warfare, but real warfare. War is destruction and theft on a massive scale. It enriches the State and its minions at the expense of the productive class.Whether aristocratic or democratic, the administration of the State matters little. Power, theft, war, and plunder is what really matters. That is the dirtiest of all secrets. Image Source: wikimedia http://commons.wikimedia.org/wiki/Category:Highclere_Castle#mediaviewer/File:Highclere_Castle_02.jpg
[This article is excerpted from Conceived in Liberty, chapter 36, "King George's War."] What, in all this time, was happening to Plymouth, the mother colony of all New England? Succinctly, it was rapidly and irretrievably declining. As we have seen, its fur trade had virtually disappeared by 1640. And for the next 20 years, only further decline ensued. By the mid-1640s the town of Plymouth was virtually a ghost town; and economically the colony had become a backwater of Massachusetts Bay.By the 1640s Plymouth, like Massachusetts, found the intensity of its religious zeal on the wane, and heresy and "moral" laxity were increasing. Plymouth faced a crossroads on how to react to this development: by liberty and toleration or by following Massachusetts' path of persecution? The critical point came in 1645 when William Vassall, a leading merchant, presented to the General Court of Plymouth as well as to that of Massachusetts Bay a petition for complete religious liberty — to grant "full and free tolerance of religion to all men that will preserve the civil peace and submit unto the government." "All men" meant exactly that, including Familists, Roman Catholics, and Jews. There was great sentiment in the General Court in favor of the Vassall petition. It commanded the support, in fact, of a majority of the chamber of deputies, and even of such an old roustabout as Capt. Miles Standish. But the ruling oligarchy of the colony, headed by Governor Bradford, Thomas Prence, and Edward Winslow, strongly opposed religious liberty and was able to block its approval.This was the turning point and for the next two decades Plymouth accompanied its economic decline by following the lead of Massachusetts in increased theocracy and religious persecution. The colony proceeded to impose fines for failing to attend church, corporal penalties for denying the scripture, and denial of the rights of citizenship to all critics of the laws of Plymouth or of the "true religion."One of the persistent troubles of Plymouth was a shortage of ministers, aggravated by its poverty, decline, and increased intolerance. To deal with this scarcity, Plymouth took another fateful step down the theocratic road: it established a state church supported by taxation. Protests against this new establishment were led by Dr. Matthew Fuller, of the town of Duxbury, who for his pains was denounced as "wicked" by the Plymouth authorities and forced to pay a steep fine.Despite this establishment, the Pilgrim ministers remained poor, as they had to collect the pulpit taxes themselves and the parishioners were usually far in arrears.Religious persecution continued to tighten. The colony did not believe itself too poor to afford inspectors of youth; one was appointed in each parish to supervise and birch any boy unruly in church. When this procedure failed, the inspectors intensified their birching penalties and included girls in this corporal punishment as well.Governor William Bradford died in 1657 at the age of 67. He left the colony impoverished, though he himself died a rich man, the richest in Plymouth. He was succeeded by Thomas Prence, who liked to think of himself as a "terror to evildoers." When the Quaker influx arrived in Plymouth, Prence was as good as his word. Laws passed against Quakers provided for the summary arrest of suspected heretics, in order to keep "corrupt" would-be freemen from the colony. And as a special slap at any Anglican deviation, the vicious practice of celebrating Christmas was outlawed.In 1659 six Quakers were banished and Governor Prence thundered that all Quakers deserved "to be destroyed, both they, their wives, and their children, without pity or mercy." But most Pilgrims balked at this call for total victory. As a result, the colony did not flay, brand, or mutilate — let alone kill — its Quakers, as did Massachusetts Bay.The leading case of Quaker persecution in Plymouth was that of Humphrey Norton, who was banished and then returned. Though denounced by Governor Prence, Norton refused, according to Quaker principles, to take an oath of allegiance. Sentenced to be whipped, Norton managed to escape the punishment by refusing to pay the customary marshal's fee for the "service" of being whipped, and was again expelled.As in Massachusetts Bay, there was widespread public opposition to the persecution; the persecution itself multiplied the number of Quaker converts. Thus, almost the entire town of Sandwich at the entrance to Cape Cod was converted to the Quaker faith. Barnstable, further along the Cape, liberally harbored and protected Quakers. Indeed, Barnstable's Pilgrim minister, Rev. John Lothrop, accepted as church members all who promised to keep the Ten Commandments.To deal with the troublesome Sandwich problem, the colonial government of Plymouth sent there as special colonial constable one George Barlow, soon to be notorious as the "Quaker Terror." Barlow was paid on a commission basis by Plymouth Colony for finding heretics. Naturally his zeal was unbounded. Barlow ruthlessly plundered the town of Sandwich, finding all suspects and disfranchising eight freemen. The people of Sandwich dealt with Barlow in their own good way: resisting, harassing him and his family, and putting him into the stocks. Finally the people triumphed, and Barlow was driven out of town.Another leading center of resistance and heresy was Duxbury, north of the town of Plymouth. Duxbury was a town filled with Baptist and Quaker converts. Here resistance to the tyranny of the Plymouth authorities was led by Rev. John Holmes and the Howland family. Zoeth Howland was put into the stocks by the authorities for criticizing the persecuting ministers and many citizens of Duxbury joined him in choosing to pay the fine rather than attend the Pilgrim church. Particularly galling to the despotic Governor Prence was the fact that his own daughter Elizabeth had fallen in love with Arthur Howland, the leading opponent of his tyrannical rule. Repeatedly, Prence had Howland arrested and heavily fined for the crime of courting Elizabeth, but Prence finally, after a decade, broke down and permitted their marriage.One of the strongest centers of liberal resistance in Plymouth was the town of Scituate, at the extreme north of the colony. Here the resistance was led by two eminent leaders of the colony, the veteran assistant governor, Capt. James Cudworth, and Timothy Hatherly, a member of the General Court for 20 years. Hatherly was summarily expelled from the General Court and disfranchised by the province, but the town of Scituate stubbornly reelected him as a deputy. The General Court, however, refused to seat the intractable Hatherly. Cudworth, in his turn, was dismissed from his high post as one of Plymouth's two commissioners of the United Colonies. Bitterly, Cudworth denounced the actions: "Our civil powers are so exercised in matters of religion and conscience that we have no time to effect anything that tends to the promotion of the civil weal." Cudworth also attacked the establishment of a state religion as well as the persecution of the Quakers. But even Cudworth's protest was met in the familiar way: he was dismissed as assistant governor, deprived of his military command, and disfranchised.This treatment of Cudworth only swelled the tide of protest. The frightened magistrates decided to appoint sound and reliable Pilgrims in each town to argue with the Quakers and convert them. But this policy turned out disastrously. Deacon John Cooke, officially appointed to spy upon heretics, was himself converted to the Baptist faith and excommunicated by the Pilgrims. A much more telling blow to the authorities was the case of Isaac Robinson. Robinson, son of the beloved Rev. John Robinson, the founder of the Pilgrim sect, who had never left Leyden, Holland, for America, was appointed the official convincer at Sandwich. Instead, the would-be converter was himself converted and became a Quaker. The embittered magistrates denounced Robinson for "sundry scandals and falsehoods," dismissed him from all his offices, and deprived him of his rights as a freeman.In the end, the Quakers emerged victorious, as they did in Massachusetts Bay. Town after town in Plymouth Colony eventually took it upon itself to grant full civil rights to the Quakers. The death of old Governor Prence in 1673 brought the more liberal younger generation to the fore, and the new governor, Major Josiah Winslow, restored all civil rights to the Quakers and their supporters. James Cudworth, too, was renamed assistant governor. The old persecuting zeal in Plymouth Colony was ended.Image Source: wikimedia.
A surprising range of news and opinion outlets have memorialized a string of anniversaries related to the Great War over the last few months: the assassination of the Archduke, the July Crisis, the start of the war, etc. Newspapers, magazines, the blog world, the top ten list sites, and Youtube channels have all featured anniversary observations. We have now arrived at another grim centennial, but one which may not be as obvious as the terrorist murders in Sarajevo. At this moment a hundred years ago, one of the less distinct but nonetheless crucially important “events” of the First World War took shape: the formation of stalemate on the Western Front.The early months of the war in the West that started with the German invasion of Belgium and Luxembourg was characterized by huge armies, high-tech communications, and devastating weapons, but it was fought to a large extent in the old way. The first real assault of the war, that of the Germans on the fortress ring around Liège, featured German soldiers formed up in column, marching toward the bristling Belgian guns — like something out of the Napoleonic Wars. Indeed, the French, British, Belgian, and German armies all experienced unbelievably high losses (killed, wounded, captured, MIA) in the first months of the war. The French lost the most: just short of a million men during the last five months of 1914, about a third of those were killed in action. The Germans lost nearly 700,000 in 1914 on the Western Front alone.The opening phase of the war, from the first days of September, we call the Battle of Frontiers. Germans attacked, French and Belgians counterattacked, the British Expeditionary Force (BEF) arrived to slow down the German advance. Waiting and waiting, the ponderous French commander Joffre used the sagging French line as a trap, springing that trap on September 5. In seven furious days of fighting along the Marne River, Joffre overturned the German Schlieffen Plan, the design for a short war in the West and a protracted war against Russia. By mid-September, the “First Battle of the Marne” ended with the Germans moving back to strong prepared positions — the beginnings of the trench network. Over the next weeks, as the Allies tried to destabilize or outflank the entrenched Germans and the Germans tried to maintain forward motion at least somewhere along the front, the stationary line filled in. The “Race to the Sea” was on.By the end of October 1914, the vast Western Front was almost formed. The war of movement raged only in a small piece of western Belgium (the war had started, remember, in eastern Belgium). There the tattered and footsore Belgian army and the BEF, having very nearly exhausted its whole strength in the previous months, struggled to place themselves in front of the still moving Germans. For the Germans, confusion represented the last chance for anything like a quick outcome in the West. Hence, in this piece of Belgian Flanders the Germans mounted a series of assaults centering on the town of Ypres (more correctly known today by its Flemish name, Ieper) and extending all the way to the watery flatlands on the coast, between Ostend and Nieuport, a few miles from where the British would be trapped by the Germans in 1940, at Dunkirk.Beginning on October 19, the Germans hurled themselves at Ypres. The beautiful Renaissance trading center lay just west of (and half encompassed by) a semi-circular rim of hills, which the Germans utilized to great advantage in shelling soldiers and city. The BEF, having fought a series of storied defensive battles for two months, now brought up its last reserves.To the north, right up to the sea, the Germans attacked British and Belgian positions at Dixmuide, Langemarck, and other places. Exhaustion was close on both sides, but the Germans were able to draw on new recruits, a part of which were students from military academies and high schools who had volunteered in August. These new, inexperienced units moved on the entrenched British and Belgians in stand-up frontal assaults in columns and waves. In a certain German nationalist myth, they were all students, and the “Slaughter of the Innocents” (Kindermord, Murder of the Children, in German) would later become a trope of national sacrifice for ultra-nationalists, including the Nazis. In reality, the students were in the minority of German assault troops, and the preponderance of these “innocents” was less pronounced than later patriotic depictions. But the German attacks against dug-in and experienced (if weary) Belgians and Brits was in no uncertain terms a slaughter.The Germans drew closer and closer to Ypres, probing, attacking, digging in. From the coast all the way to the French border, most sections of the line were already dug in on both sides, but in the gaps, German commanders continued attacking to keep up momentum. On November 11, a number of German assaults — and even at this stage still in stand-up, closed packed formations — made some headway, and in a couple of days were a mile and half from the walled city of Ypres. At numerous spots along the line, the fight came down to few hundred yards of unexploited stretches where defenders were sparse or absent. Some of the most crucial fights came down to footraces between attackers and defenders on the outskirts of Ypres.As a unit, the original BEF, the “Old Contemptibles,” was now nearly extinct. The Belgians had been fighting and marching constantly since August 4. But at the close of October and beginning of November, the two remnants delivered one more defensive feat: the Germans pounded the lines, moving closer and closer, but they could not take Ypres. By November 16, the gaps were filled, the Germans momentarily exhausted. And that was the last of the “war of movement” on the Western Front.The stalemate that now settled in consisted of two trench networks facing each other across No Man’s Land, from the English Channel to the border of Switzerland, 400 miles give or take, across a piece of Belgium and then across northeastern France. The zones were much deeper than one might imagine, since the trenches were vast networks including front line trenches, support trenches farther back, and communications trenches (paths dug into the earth) around the network with at least some safety.The front was miles wide, counting support and logistical services in the rear, we could call it ten miles on the average. Some parts of this vast slaughterhouse would not change location over the next four years. Some would move by hundreds of yards, even some miles. And some would then move back to where they started.This was stalemate in the extreme, and in recognition of its beginning exactly one hundred years ago, we should see it as one of the fundamental events of the twentieth century.It was this stalemate and the desire to “break through to the green fields beyond” which immediately led to emergency and crisis of the kind that Robert Higgs analyzed in his classic Crisis and Leviathan. So, for example, the “shell crises” among all participants in 1915 offered to the warring states the “Crisis!” justification for all kinds of authoritarian wartime political, social, and economic measures. On every side, pre-war observers predicted a short war, in part for the very good reason that no government on earth could afford the massive costs of the new kind of warfare: huge armies, expensive weapons, enormous transport and logistical costs, and all the rest.The war’s prelude had been a time of often brutal imperialism, mightily strengthened tax systems, practiced by all Western states in manipulating currency both domestically and internationally (especially in “imperial” settings). All these trends were already in train in Europe and the West, in part generated in imperial practice. But the combination of these political and financial techniques with the unbearable Crisis effect of the Western Front stalemate make the ferocious death rates of October and early November 1914 even more pointless, more tragic. This was truly the great Higgsian moment.Once the two sides sat and faced each other, the only way out of the situation was breakthrough, either on the Western Front or elsewhere. And any breakthrough was expensive, whether through the use of poison gas or shelling for days or developing tanks or sending expeditions to fight the other side far away. It all cost money in quantities hardly ever imagined before. And this financial need to “service” the stalemate effected a fundamental shift in the amount of wealth that the modern state transfers from private to public hands. In terms of taxes alone, the rates of most governments moved a similar distance. For example, in the United States, in 1900, roughly seven percent of the wealth of the country was transferred to government at all levels through taxes (actually, half of that to local community government); after the war, the percentage of wealth transfer via taxes had reached 15 percent. By the thirties, the US government was taking nearly 20 percent.But quite apart from taxes, an even more commodious method of transferring wealth to national coffers became routine. Beginning with the inflationary arrangements of central banks across Europe, the creation of the Federal Reserve, legislative support for changes in currency laws, the increasing conversion of the gold standard to a “gold exchange standard,” and much more, the transfer process of inflation became easily and continually available to all belligerents and eventually all governments. The “Age of Inflation” got its start before World War I, but the real crucible of inflationary plunder was the war itself. How much wealth would be transferred to central governments via inflation? To quote the inscription on many Great War graves: this answer is “known only to God.” But we can certainly imagine this transfer of wealth to governments as being much higher, even, than that which the increased taxes yielded.The stalemate “crisis” also justified related repression of all kinds: the internment of “enemy aliens,” new and commodious rights of confiscation of property, jail time for all kinds of nay-sayers, the command economy, the national security state (broadening and creation of state security police, patriot laws like the Defense of the Realm Act in Britain), the state assault on privacy, and much more.So as we memorialize the Great War, we might well think — with pity and regret — of the great tragedy of the numerous “innocents” slaughtered on all sides and in all battles. And the innocence of those early soldiers of 1914 seems somehow especially marked by the irony of noble expectations and mass death. But we should also think in particular of this moment that generated the dreadful stalemate that emerged a hundred years ago to shape our world. Reprinted from The World at War and the World That Was.Image Source: wikimedia - http://commons.wikimedia.org/wiki/Category:Battles_of_Ypres#mediaviewer/File:Page_1,_Auf_Vorposten_in_Ypern.jpg
The Federal Reserve’s doors have been open for “business” for one hundred years. In explaining the creation of this money-making machine (pun intended — the Fed remits nearly $100 bn. in profits each year to Congress) most people fall into one of two camps.Those inclined to view the Fed as a helpful institution, fostering financial stability in a world of error-prone capitalists, explain the creation of the Fed as a natural and healthy outgrowth of the troubled National Banking System. How helpful the Fed has been is questionable at best, and in a recent book edited by Joe Salerno and me — The Fed at One Hundred — various contributors outline many (though by no means all) of the Fed’s shortcomings over the past century.Others, mostly those with a skeptical view of the Fed, treat its creation as an exercise in secretive government meddling (as in G. Edward Griffin’s The Creature from Jekyll Island) or crony capitalism run amok (as in Murray Rothbard’s The Case Against the Fed).In my own chapter in The Fed at One Hundred I find sympathies with both groups (you can download the chapter pdf here). The actual creation of the Fed is a tragically beautiful case study in closed-door Congressional deals and big banking’s ultimate victory over the American public. Neither of these facts emerged from nowhere, however. The fateful events that transpired in 1910 on Jekyll Island were the evolutionary outcome of over fifty years of government meddling in money. As such, the Fed is a natural (though terribly unfortunate) outgrowth of an ever more flawed and repressive monetary system.Before the FedAllow me to give a brief reverse biographical sketch of the events leading up to the creation of a monster in 1914.Unlike many controversial laws and policies of the American government — such as the Affordable Care Act, the Troubled Asset Relief Program, or the War on Terror — the Federal Reserve Act passed with very little public outcry. Also strange for an industry effectively cartelized, the banking establishment welcomed the Fed with open arms. What gives?By the early twentieth century, America’s banking system was in a shambles. Fractional-reserve banks faced with “runs” (which didn’t have to be runs with the pandemonium that usually accompanies them, but rather just banks having insufficient cash to meet daily withdrawal requests) frequently suspended cash redemptions or issued claims to “clearinghouse certificates.” These certificates were a money substitute making use of the whole banking system’s reserves held by large clearinghouses.Both of these “solutions” to the common bank run were illegal as they allowed a bank to redefine the terms of the original deposit contract. This fact notwithstanding, the US government turned a blind eye as the alternative (widespread bank failures) was perceived to be far worse.The creation of the Fed, the ensuing centralization of reserves, and the creation of a more elastic money supply was welcomed by the government as a way to eliminate those pesky and illegal (yet permitted) banking activities of redemption suspensions and the issuance of clearinghouse certificates. The Fed returned legitimacy to the laws of the land. That is, it addressed the government’s fear that non-enforcement of a law would raise broader questions about the general rule of law.The Fed provided a quick fix to depositors by reducing cases of suspensions of their accounts. And the banking industry saw the Fed as a way to serve clients better without incurring a cost (fewer bank runs) and at the same time coordinate their activities to expand credit in unison and maximize their own profits.In short, the Federal Reserve Act had a solution for everyone.Taking a central role in this story are the private clearinghouses which provided for many of the Fed’s roles before 1914. Indeed, America’s private clearinghouses were viewed as having as many powers as European central banks of the day, and the creation of the Fed was really just an effort to make the illegal practices of the clearinghouses legal by government institutionalization.Why Did Clearinghouses Have So Much Power?Throughout the late nineteenth century, clearinghouses used each new banking crisis to introduce a new type of policy, bringing them ever closer in appearance to a central bank. I wouldn’t go so far as to say these are examples of power grabs by the clearinghouses, but rather rational responses to fundamental problems in a troubled American banking system.When bank runs occurred, the clearinghouse certificate came into use, first in 1857, but confined to the interbank market to economize on reserves. Transactions could be cleared in specie, but lacking sufficient reserves, a troubled bank could make use of the certificates. These certificates were jointly guaranteed by all banks in the clearinghouse system through their pooled reserves. This joint guarantee was welcomed by unstable banks with poor reserve positions, and imposed a cost on more prudently managed banks (as is the case today with deposit insurance). A prudent bank could complain, but if it wanted to use a clearinghouse’s services and reap the cost advantages it had to comply with the reserve-pooling policy.As the magnitude of the banking crisis intensified, clearinghouses started permitting banks to issue the certificates directly to the public (starting with the Panic of 1873) to further stymie reserve drains. (These issues to the general public amounted to illegal money substitutes, though they were tolerated, as noted above.)Fractional-Reserve Free Banking and BustThe year 1857 is a somewhat strange one for these clearinghouse certificates to make their first appearance. It was, after all, a full twenty years into America’s experiment with fractional-reserve free banking. This banking system was able to function stably, especially compared to more regulated periods or central banking regimes. However, the dislocation between deposit and lending activities set in motion a credit-fueled boom that culminated in the Panic of 1857.This boom and panic has all the makings of an Austrian business cycle. Banks overextended themselves to finance the booming industries during America’s westward advance, primarily the railways. Land speculation was rampant. As realized profits came in under expectations, investors got skittish and withdrew money from banks. Troubled banks turned to the recently established New York Clearing House to promote stability. Certain rights were voluntarily abrogated in return for a guarantee on their solvency.The original sin of the free-banking period was its fractional-reserve foundation. Without the ability to fund lending activity with their deposit base, banks never would have financed the boom to the extent that it became a destabilizing factor. Westward expansion and investment would still have occurred, though it would have occurred in a sustainable way funded through equity investments and loans. (These types of financing were used, though as is the case today, this occurred less than would be the case given the fractional-reserve banking system’s essentially cost-free funding source: the deposit base.)In conclusion, the Fed was not birthed from nothing in 1913. The monster was the natural outgrowth of an increasingly troubled banking system. In searching for the original problem that set in motion the events culminating in the creation of the Fed, one must draw attention to the Panic of 1857 as the spark that set in motion ever more destabilizing policies. The Panic itself is a textbook example of an Austrian business cycle, caused by the lending activities of fractional-reserve banks. This original sin of the banking system concluded with the birth of a monster in 1914: The Federal Reserve. Image source: flickr: https://www.flickr.com/photos/37815348@N00/6682415005/sizes/l
What the World Should Be: Woodrow Wilson and the Crafting of a Faith-Based Foreign Policy, Baylor University Press, 2008George W. Bush was not the first president to have a “faith-based” foreign policy. Most people know that Woodrow Wilson (1856–1924) was the US president from 1913 to 1921. Some perhaps know that he was the governor of New Jersey from 1911 to 1913. But few probably know that he was the son of a Presbyterian minister, president of Princeton University — then a Presbyterian institution that had always been headed by clergymen until Wilson — from 1902 to 1910, and had a faith-based policy of his own.But like the faith-based foreign policy of Bush, Wilson’s was shaped by a defective faith.Malcolm Magee is the director of The Institute for the Study of Christianity and Culture, “an academic research organization,” not “affiliated with any church or religious organization,” that “examines the intersection of religion, and particularly the Christian faith, and its surrounding culture.”He doesn’t specifically say in his important and insightful book What the World Should Be: Woodrow Wilson and the Crafting of a Faith-Based Foreign Policy (hereafter What the World Should Be) why he became so interested in Wilson, but it is clear that Wilson among all the US presidents is the president who is the most suitable candidate for studying the intersection of religion and culture as Magee plainly states the book’s thesis in his introduction: “The thesis of this book is that the future president was immersed in a particular Princeton and Southern Presbyterian tradition that he absorbed, quite literally, at the knees of his father, Joseph Ruggles Wilson, his devout mother, Janet Woodrow Wilson, and the religiously active clergy, family, and friends he was surrounded by from his youth onward.”What the World Should Be “is an attempt to let Wilson be Wilson, the man who throughout his life used such terms as covenant and freedom not in terms of their modern secular definitions but in terms of a very specific Calvinist rhetorical tradition, one largely unfamiliar today, especially among scholars of American foreign relations.”After his important introduction, Magee develops his thesis in four chapters:1. The Development of Woodrow Wilson’s Thought to 19132. The Challenge of the Present Age: The Persistence of the International Order3. Keeping to the Principles in Peace and War4. Negotiating the Tablets of StoneAfter a brief epilogue, there are four appendixes, notes, a bibliography, and an index.Magee deems Wilson to be “one of the most complicated individuals to occupy the White House.” To understand Wilson and his approach to foreign policy “requires an awareness of the religious convictions that informed his world view, his ideals, his assumptions and prejudices.” Wilson’s “religion was inseparable from the other aspects of his philosophy.”Magee believes that John Maynard Keynes’s “insight” that Wilson “thought like a Presbyterian minister, with all the strengths and weaknesses of that manner of thinking” is “missing, for the most part, from modern historical scholarship concerning U.S. foreign relations during the Wilson presidency.”Wilson, who supported the views of his uncle James Woodrow on Theistic Darwinism (see Gary North for more detail on this), “believed the United States was divinely chosen to do God’s will on earth.” The United States was the “redeemer nation” destined by God to “instruct and lead the world.” While president of Princeton, Wilson said in a speech that the mighty task before us was “to make the United States a mighty Christian nation, and to Christianize the world.” Wilson viewed himself as “the divinely appointed messenger.” The United States was his parish, and he would “be an evangelist, a missionary, for the export of Christian democracy.” He compared himself to the prophet Ezekiel. He equated patriotism with Christianity and the United States with God’s chosen people.What is of most interest in What the World Should Be is how Wilson viewed himself and the United States during World War I. He said soon after the war began that it “may have been a godsend.” Comments Magge: “He was unshaken by the conflict since, despite the carnage, it seemed to open possibilities for his own mission to bring God’s order to the world. He was called by God.” Being “predisposed to be an Anglophile,” Wilson interpreted information “in a way that favored British interests and penalized Germany while continuing to believe that he and the country were being absolutely neutral.”Wilson had some strange ideas about neutrality. His “active” neutrality “allowed America to act on behalf of the righteous.” The United States would “use its power as an aggressive neutral to conquer the forces of disorder and selfishness in the world on all sides.” Wilson referred to his policy of neutrality as the “peaceful conquest of the world.” U.S. neutrality would “conquer, convert, and change the nations.” The United States was chosen by God to be the “mediating nation of the world.” America was the “house of the Lord” and the “city on a hill.” The entrance of the United States into the war meant “salvation” to the Allies. Wilson believed in using “neutral force to mediate peace.” Even as American soldiers were dying in Europe, the United States was “neutral in spirit” in fighting a “righteous war.” Naturally, before he led the country into war, Wilson advocated an increase in the military, the reserves, and military spending, but “purely for defense.” If war became necessary, it “must be a peacemaking war.” He wanted a “new international order” that would prevent such a war from happening in the future. The Versailles Treaty would allow him as president to “do great good for the downtrodden inhabitants of the world.” The paternalistic Wilson had a tendency to “see the nonwhite peoples as being in need of instruction.”Everything that Magee says about Wilson’s religious political ideas is well documented, and he writes in a neutral tone. The problem with Wilson, as I see it, is not that he rejected his faith, but that his faith was defective. For another old-time Presbyterian whose views were contrary to those of Wilson, see J. Gresham Machen (1881–1937), a New Testament scholar who taught at Princeton Theological Seminary from 1906 to 1929.There are only two redeeming things about Wilson. One, he vetoed the Volstead Act, but his veto was overridden. And two, he criticized the 1846 Mexican War, but later sent U.S. troops to Mexico in 1914. And, of course, we can “thank” Wilson for the signing into law of the Federal Reserve Act and the Revenue Act of 1913.For a recent analysis of Wilson that is anything but neutral, see Judge Napolitano’s Theodore and Woodrow: How Two American Presidents Destroyed Constitutional Freedoms. Image source: AK Rockefeller https://www.flickr.com/photos/akrockefeller/8342735026/sizes/o/This article originally appeared at LewRockwell.com
It may seem unusual that an economist would talk about culture. Usually, we talk about prices and production, quantities produced, employment, the structure of production, scarce resources, and entrepreneurship.But there are certain things that economists can say about the culture, and more precisely, that economists can say about the transformation of the culture. So what is culture? Well, to put it simply, it is the way we do things. This can include the way we eat — whether or not we dine with family members on a regular basis, for example — how we sleep, and how we use automobiles or other modes of transportation. And of course, the way we produce, consume, or accumulate capital are important aspects of the culture as well.Limiting Budget Is the Key to Limiting GovernmentsNow to understand the effects of fiat money on the culture, we must first look at the relationship between financial systems and the nature of government.A number of economists have observed that fiat money is a prerequisite for tyrannical government, and the idea that monetary interventionism paves the way for tyrannical government is very old and goes back to Nicolas Oresme in the fourteenth century. It has not been emphasized in the twentieth century, but Ludwig von Mises is among the few who has stressed the importance of this relationship.Mises said that when it comes to limiting government power, it is essential that the government is financially dependent on the citizens, and this addresses the fundamental political problem of controlling the people in office once they are there. We know that generally, once they are in office, elected politicians turn around and do very different things than they said they would do, with many acting contrary to the common good and interests of their constituents.So how do we ensure that the people in power can be controlled?Mises tells us the way we control government is through the budget, and this is necessary in a free society. In a democratic system, at least, we elect certain people to the government, and they often enter office believing that they have a mandate to do certain types of things while in office.But it’s not sufficient that the people tell government officials what they should be doing. It is equally important, if not more important, to dictate how much money the government will have to achieve those ends. So, it is not enough to tell the government that it will only protect private property. This mandate could be pursued with $100,000 or a billion dollars depending on what the people are willing to pay. So if the budget it not controlled, a limited mandate in itself offers no limitation on taxation or how much money is spent.Mises believed that those who paid the taxes would then need to specifically limit the size of the government budget. The mission of the government does not by itself deter- mine the amount of resources to be used in the mission.In response, many will complain that if budgets are tightly controlled, then we’ll never have an increase in government services because people hate taxes. That might be so, but, of course, that is the point.Now, if we abandon a strict connection between what the citizens pay and what government spends, then we find that we move away from rule by the citizens who are being taxed, and toward greater rule by the elites.The first way this shift can happen is by the government going into debt. The financial relationships then shift toward the new group that is funding the government, namely those who are extending credit to the government. This then weakens the relationship to the citizens who are being taxed, and it also allows the government to spend more money than would have been possible with taxation alone.Now of course fiat money allows government to take out loans to an unlimited extent because fiat money by definition can be produced without limitation, without commercial limitation or technological limitation, and can be produced in whatever amount is desired. In this way, the government benefits from the support of a central bank, which is to be expected because the central bank itself depends on the legal framework of monopoly provided by the government.Through these means of finding government revenues outside of directly taxing the population, we see then that fiat money allows for an extension of government activities unconnected to the willingness of the population to actually support revenue increases. In turn, the government’s rule becomes rule by elites such as central bankers and financiers rather than rule by the taxpayers, and the government’s ability to spend becomes more dependent on the ability to access fiat money than the ability to convince the citizens to accept a higher tax burden.The Cultural Features of a Debt EconomyNow we come to the many ways through which a fiat money system affects the behavior of ordinary citizens.One of the central features of a fiat money system is that it tends to produce near-permanent price inflation. This contrasts with the workings of an economy based on natural monies such as gold and silver. Here the price levels tend to stay flat over the long run or decline, especially in the presence of vigorous economic growth. We saw this throughout the nineteenth century in both Europe and the US, where deflationary growth has been the rule.The reality of price inflation shapes culture in a variety of ways and much of this is deliberate, as it has long been an idea among government planners and ideologues of all sorts, even before Keynes, that ordinary people should be prevented from “hoarding” money at their homes.In a free economy with a natural monetary system, there is a strong incentive to save money in the form of cash held under one’s immediate control. Investments in savings accounts or other relatively safe investments also play a certain role, but cash hoarding is paramount, especially among low-income families.By contrast, when there is constant price inflation, as in a fiat-money system, cash hoarding becomes suicidal. Other financial strategies now become more advisable. It becomes advisable to exchange one’s cash for “financial products,” thus offsetting the loss of purchasing power of money through the return on that financial investment. It also becomes advisable to go into debt and leverage one’s investments. In a word, it becomes rational to pursue riskier investments in order to find a rate of return that can match or exceed the rate of price inflation. This is true across all sectors, including households and productive operations.Before the twentieth century and widespread access to fiat money, debt was far less common and there were cultural imperatives against going into debt for consumption. Credit for households, for example, was virtually unknown before the twentieth century, and only very poor households fell back on debt to finance consumption.But in a fiat money system, as price inflation diminishes the value of one’s monetary savings, we are encouraged to adopt a short-term perspective. That is, we need to hurry up to obtain credit as soon as possible and obtain revenue from that debt as soon as possible, because savings lose value if we just hold on to cash.It no longer makes sense to save up money for a decade to buy a house, for example. It is much more opportune to go into debt to buy a house immediately and to pay back the loan in devalued money. There is then a generalized rush into leverage in a fiat money system since debt- financed investment brings greater returns than savings in cash or equity-financed investments.It needs to be stressed that this tendency has no natural stopping point. In other words, fiat-money systems tend to make people insatiable in their quest for ever higher monetary returns on their investments. In a natural monetary system, as savings increase, the return on investments of all sorts diminishes. It becomes ever less interesting to invest one’s savings in order to earn a return, and thus other motivations shift into the foreground. Savings will be used increasingly to finance personal projects including the acquisition of durable consumers’ goods, but also philanthropic activity. This is exactly what we saw in the West during the nineteenth century.By contrast, in a fiat money society, you are more likely to increase your returns by remaining in debt and continuing to chase monetary revenue indefinitely by leveraging more and more funds.You can imagine, then, how this inflation and debt- based system, over time, will begin to change the culture of a society and its behavior.We become more materialistic than under a natural monetary system. We can’t just sit on our savings anymore, and we have to watch our investments constantly, and think about revenue constantly, because if it is not earning enough, we are actively getting poorer.The fact that the fiat money system pushes us into riskier investments also increases dependency on others because one must depend on the good behavior of those on whom the value of our investments depend.Similarly, the stronger the level of debt the stronger is the selfish concern about the behavior of others who may owe us money. So fiat money creates an attempt to control others through the political system.But at the same time, no household and no firm individually has an interest in abolishing the fiat system and putting in its place a natural monetary system. The short-term costs of such a transition would be immense. In this, we see that we are in a “rationality trap” in which one is motivated to maintain the fiat money system in spite of all its downsides, and because the culture at this point is so transformed by more than a century of easy access to fiat money.ConclusionWe can apply economic analysis to explain cultural transformation, and a particularly important example is fiat money. It has a very important impact on our culture. This is something we would not see unless we step back and take a longer-term historical perspective. Of course, there are many other factors that come into play, but fiat money is an important factor, and the system is perpetuated by the fact that everyone stands to lose in the short run if the current system ceases to function. Moreover, given how our modern culture has been so shaped by fiat money systems, it runs against the very cultural foundations of our current society. In spite of the many short-term costs, we should nonetheless dare to change this system, and it is ultimately a question of courage, and insight, and of the will.Image source: iStockphoto.
The Economist recently opined that interest rates don't affect investment. This claim is based on an empirical study that contradicts what we already know: that lower prices lead to more demand. In the end, the problem lies with the researches who fail to account for the behavior of central bankers.