Posts tagged Austrian
Illogic in Fractional Reserve Banking
If there was one business venture the leftist and forgotten “Occupy” movement was right to distrust, it was the banking industry. In the wake of the 2008 financial crisis and subsequent bailing out of the world’s financial system by fascist states, taxpayers – especially the progressive types – were correct to feel amiss. But rather than take a scrutinizing look into the privilege afforded to the banking class, the outraged took to political action in the callow hope of correcting a wrong.
Like any popular uprising, the goal was quickly smothered in favor of further rent-seeking. Instead of aiming consternation at the incestuous relationship between government and the money-changers, occupiers wanted the quick-fix of redistribution. The cries of “this is what democracy looks like” might as well have been “this is what panhandling looks like.” Centralized banking went unquestioned. The nature of fractional reserve practices was ignored – or likely not understood by the pea-brained philosophers. Still, the radical levellers who set-up camp in Zuccotti Park were on to something by asking why their precious public officials voted to shore up the balance sheets of a disproportionately small member caste.
Banking is, to put it bluntly, a strange and unique business. The industry is centuries-old, and the legality of its operations has been questionable since inception. I am referring specifically to the practice of bankers lending out claimed reserves – a contentious issue among libertarian theorists. If the larger public were to become privy to this business model, it may spark a troubling curiosity in the less-moneyed class. But then again, this author never ceases to be amazed by the bounds of common apathy.
In banking, certain legal doctrines have guided the trade since antiquity, including the nature of contracts. The violation of these distinct forms of lawful guarantees once carried the weight of justice. But no longer; as the deliberately obscuring practice of loaning out deposits meant to be available on-demand has created such instability in the banking system, the incessant teetering on the cliff of insolvency remains an ever viable threat to economic tranquility.
Libertarians – specifically those schooled in the Austrian, causal-realist tradition of economics – are intellectually miles ahead of the Occupy folks when it comes to the study of currency. And while the students of Mises and Hayek are fervently opposed to any central bank management, there remains a sharp divide on the ethics of fractional reserve banking. In a recent missive in the Freeman, economist Malavika Nair questions the Rothbardian ethic that finds the practice of banks creating credit out of thin air fraudulent. The piece, which deconstructs the dean of the Austrian school’s original argument, frames banking away from the supposed cut-and-dry thinking model of anti-fractionalists.
Nair begins with a false choice by asking: “Would fractional reserve banking exist in a world without a central bank? Put another way: Is fractional reserve banking inherently fraudulent?” These statements are not one in the same; they reference two separate conditions. Absent central banking, unbacked credit expansion could still exist. Back in mid-to-late 19th century America where the Federal Reserve was still a twinkle in the centralizers’ eyes, fractional reserve banking and pyramiding credit were common practice. The question at hand is whether such business is based on a fraudulent understanding of the nature of goods.
Nair finds issue with the essence of contracts and how they relate to the duty of those individuals entrusted with safeguarding money. The contract – an extension of humanity’s self-ownership and free will – has been a recognized covenant enforceable by compulsion for as long as man first conceived of himself as an autonomous being. It finds legitimacy in the human understanding of bonds and keeping one’s word. The evolution of common law has dictated that any activity stipulated in a compact cannot entail unlawful activity. To enforce an illegal activity would thereby be a crime in itself – an ipso facto contradiction in reason.
The contract is key for banking operations. Nair argues that bank functions, both deposit and lending, are plainly justifiable; the discrepancy arises in the manner that customer funds are utilized. Currently, bankers freely lend out money that is available on command by both the borrower and depositor. In practice, this is the creation of two goods from one ex nihilo. In a totally isolated instance where a bank were to service only two patrons, the act of creating what Mises called “fiduciary media” would appear as the very perversion of intuitive law it embodies. It would simply come off as no more than a violation of the known rules of the world.
Nair counters by asserting that a “claim to money is not the same thing as the money itself.” This is a confusing affirmation as antagonists to fractional reserve banking hardly make that claim. The point of contention is that promissory notes for bank deposits represent real money, though they may circulate as mediums of exchange and fulfill the role of currency. Should two or more of these “I owe you” certificates be created to represent one unit of bank reserves available on-demand, there is a direct and unquestionable inconsistency. It is certainly true, as Nair points out, that the fungible quality of money dictates it be treated differently than non-substitutable goods. However, the fact that cash is interchangeable does not dismiss its limited character.
If the principle of unbacked expansion of credit were applied to other industries such as automobiles or condominiums, titles to the same good could theoretically be multiplied, but not without controversy. Having two titles for one car is not based on logic or a firm understanding of universal law. You simply cannot create real, definite material by declaration. Nair asserts that this is not true when it comes to the market of money. In his words, the over-issuing of redeemable bank notes “does not mean one thing is in two places at the same time” but that “two different things are in two places at the same time.” This is only so much sophistry, as the claims to bank reserves are still representative of real goods. There may be multiple slips of paper representing one unit of money-proper floating around in the economy, but that does not dismiss the plain and true fact that there are more claims than what is available.
As economist Jesús Huerta de Soto documents in his tour de force Money, Bank Credit, and Economic Cycles, government has played a leading role in fostering this banking fraud for centuries. The state is forever on the search for more resources to carry out its bidding. Cooperation with the leading money-lending institutions was an obvious route for subverting the moral means to wealth creation. Since the days of classical Greece, it was well understood that transactions of present goods fundamentally differed from those involving future goods. In practical terms, deposits for safekeeping were of considerable difference to those made for the strict purpose of lending out and garnering a return. Bankers who misappropriated funds were often found guilty of fraud and forced to pay restitution. In one recorded episode, ancient Grecian legal scholar Isocrates lambasted Athenian banker Passio for reneging on a client’s depository claim. After being entrusted to hold a select amount of money, the sly banker loaned out a portion of the funds in the hopes of earning a profit. When asked to make due on the deposit, the timid Passio pleaded to his accuser to keep the transgression “a secret so it would not be discovered he had committed fraud.”
The underlying chicanery behind fractional reserve banking has existed since the days of Plato. Modern technology has not negated the rationale used to discover and affirm natural law. Binary codes on a computer screen do not create a new reality. The governing doctrines of humanity are, in de Soto’s words, “unchanging and inherent in the logic of human relationships.” While fractional reserve banking could exist in a free market environment and regulate itself through vigorous competition, that theoretical scenario does not prove the entire fulcrum of the business rests on solid ground.
The truth remains, and will always remain, that an organic product is not replicable through any kind of witch doctoring. A thing is a thing is a thing. Any money substitute that represents a real piece of fungible currency cannot pertain to that which is not in existence. Such is the lawful understanding that goes back to the time preceding the Hellenisitc period.
Malavika Nair offers an interesting argument by trying to justify the practice of creating something out of nothing; but it ultimately fails. The free lunch of artificial credit creation is nothing more than slipping out of the baker’s shop without paying. It would have served the Occupy crowd well to have recognized this shaky foundation upon which the modern financial system rests. Perhaps their message of widespread corruption would have been better received – at least more so than by creating shanty towns and defecating on the street. Instead, we were gifted with a muddled and confused political message made by an irate minority who hadn’t a clue of the forces that govern their own lives.
James E. Miller is editor-in-chief of the Ludwig von Mises Institute of Canada. Send him mail
Image credit: http://mises.ca
By Alex Newman
As concerns over the U.S. dollar and the Federal Reserve continue to grow, U.S. lawmakers explored sound money, competing currencies, and the route to monetary freedom during an August 2 congressional hearing chaired by Rep. Ron Paul (R-Texas). It was the final House Domestic Monetary Policy Subcommittee hearing led by the long-time champion of honest currency and reining in the controversial Fed, but analysts say the impact of Rep. Paul’s work is only just starting to be felt.
Entitled “Sound Money: Parallel Currencies and the Roadmap to Monetary Freedom,” the hearing featured powerful testimony from several expert witnesses. But Rep. Paul, almost single-handedly responsible for sparking the ongoing nationwide debate about monetary policy, offered his own thoughts on the issue as well, slamming central planning and calling for honest money as a precursor to free markets and true liberty.
“One of the most pressing issues of our time is the push for monetary freedom,” Rep. Paul said in his opening statement, citing Austrian economist Ludwig von Mises — widely considered one of the most important advocates of free markets in history. “The only sound monetary system is one which protects sound money and allows consumers, businesses, and investors the freedom to transact in the currency of their choice.”
By Joseph Beck
The recent Greek elections resulted in the Hellenic Republic staying in the Euro zone, for now. According to the New Democracy leader Antonis Samaras, the people of Greece chose “policies that will bring jobs, growth, justice and security.” Of course, we all hope that to be the case. The debt-suicide epidemic and the abandonment of children on the street by their families is hard for anyone to watch. Even Greece’s historic archaeological sites are being opened up to advertisers and other ventures due to the financial crisis. We are witnessing a collapse that we can only hope doesn’t replicate itself here in America.
When crises occur, the reaction is vitally important. What should the government do? Will the new election make a difference? Fellow PolicyMic Pundit Barry Lyndon lays out the case for Ron Paul’s favored school of economic thought, the Austrian School—bailouts, inflationary stimulus, and other government interventions only prolong the crisis, making the inevitable burst of the bubble much more severe than it would be if the recession, the correction, was allowed to occur. Something we should also consider: how did Greece get in this situation? It wasn’t the typical government largesse alone; Greece and her people are the victims of financial terrorism. None other than Goldman Sachs, campaign contributor to both Barack Obama and Mitt Romney, not Ron Paul, profited immensely from the debt trap they set for the Greek people.
Geithner Wants To Get Rid of Physical Currency (Better Tracking)
By Gary North
Timothy Geithner, the Secretary of the Treasury, wants to get rid of paper money. He says it’s part of a cost-cutting measure.
Nonsense. It’s part of the government’s attempt to track our purchases. Its a plan to get rid of the underground economy, where people buy what they want, sell what they want, and leave no digital trail.
The government cannot control the cash markets. It wants to tax them. But paper money resists taxation.
A good article on this appeared last week by Austrian School economist Joe Salerno. It is posted here. He wrote this.
Under cover of its multiplicity of fabricated wars on drugs, terror, tax evasion, and organized crime, the US government has long been waging a hidden war on cash. . . .
Despite this enormous depreciation, the Federal Reserve has steadfastly refused to issue notes of larger denomination. This has made large cash transactions extremely inconvenient and has forced the American public to make much greater use than is optimal of electronic-payment methods. Of course, this is precisely the intent of the US government. The purpose of its ongoing breach of long-established laws regarding financial privacy is to make it easier to monitor the economic affairs and abrogate the financial privacy of its citizens, ostensibly to secure their safety from Colombian drug lords, Al Qaeda operatives, and tax cheats and other nefarious white-collar criminals. . .
Fortunately, the free market provides the prospect of an escape from the fiscal police state that seeks to stamp out the use of cash through either depreciation of central-bank-issued currency combined with unchanged currency denominations or direct legal limitation on the size of cash transactions. As Carl Menger, the founder of the Austrian School of economics, explained over 140 years ago, money emerges not by government decree but through a market process driven by the actions of individuals who are continually seeking a means to accomplish their goals through exchange most efficiently. . .
Just like the highly publicized war on drugs that the US government has been waging – and losing – for decades, it is doomed to lose its surreptitious war on cash, because the free market can and will respond to the demand of ordinary citizens for a reliable and convenient money.
The ATM is our friend. No matter how hard the government tries to stamp out paper currency, people will use it. They buy freedom with it. They buy privacy.
To read about Geithner’s plan, click here.
April 2, 2012
Copyright © 2012 Gary North
Was Judge Andrew Napolitano cutting to close to the bone for the establishment?
February 10, 2012
The Fox Business Channel has cancelled one of the only shows on the entire Fox News network that was in any way informative or watchable - Freedom Watch with Judge Andrew Napolitano.
In a press release distributed late Thursday, the channel announced that its entire prime-time programming lineup had been changed, with re-runs of already existing programs replacing Freedom Watch.
Napolitano’s show had been airing for a year, in which time he had consistently covered major issues that other news programs would only gloss over, if they devoted any coverage to them at all.
Napolitano’s coverage of the freedom stripping National Defense Authorization Act for one was second to none as far as mainstream news output was concerned. His legal and constitutional expertise on such matters is also unrivalled.
His focus on Austrian economics and Libertarian social policy provided a much welcome alternative to the endless left/right bickering constantly played out on programming from the likes of MSNBC, CNN, and FOX News itself.
Napolitano regularly defended the free market and lambasted the actions of the Federal Reserve, holding it accountable daily for the economic crisis that the US finds itself mired in. Congressman Ron Paul was a regular guest on the show, with a host of other informative analysts who were not merely about peddling the establishment party line or representing special interests.
It is for these very reasons that many fans of the show suspect Napolitano has been axed by the corporate machine.
Regarding Napolitano’s future, Fox Business stated that the judge will be “continuing to make significant contributions to both FOX Business and FOX News” and would “be showcased throughout future programming on both networks”
“Currently one of the leading judicial analysts on television, Judge Napolitano will continue his role on both FOX Business and FOX News, providing key legal insights surrounding the growing intersection between Washington and Wall Street.” the statement read.
Linking to the press release on his Facebook page, Napolitano wrote “sad news friends, but don’t worry I’ll still be here defending liberty.”
Libertarian activist Lew Rockwell is spearheading a campaign to have Freedom Watch reinstated, writing on his website yesterday:
“If you are as outraged as I am at the cancellation of Judge Andrew Napolitano’s “Freedom Watch,” here is something you can do.”
Please contact Fox Business to ask them to reverse their decision.
Senior Vice President Media Relations
“Be respectful but be sure to convey your outrage at this matter, and state that you and many others will boycott the network if the show is taken off the air.” Rockwell added.