Posts tagged Mises
20 years ago NAFTA passed, This is what one of the greatest free market economists ever had to say about it at the time.0
20 years ago NAFTA passed, This is what one of the greatest free market economists ever had to say about it at the time.
This essay by Murray Rothbard holds particular relevance as the Trans Pacific Partnership continues to be negotiated in secret.
Yet Nafta is more than just a big business trade deal. It is part of a very long campaign to integrate and cartelize government in order to entrench the interventionist mixed economy. In Europe, the campaign culminated in the Maastricht Treaty, the attempt to impose a single currency and central bank on Europe and force its relatively free economies to rachet up their regulatory and welfare states.
In the United States, this has taken the form of transferring legislative and judicial authority away from the states and localities to the executive branch of the federal government. Nafta negotiations have pushed the envelope by centralizing government power continent-wide, thus further diminishing the ability of taxpayers to hinder the actions of their rulers.
Today’s Wealth Destruction Is Hidden by Government Debt
Still unnoticed by a large part of the population is that we have been living through a period of relative impoverishment. Money has been squandered in welfare spending, bailing out banks or even — as in Europe — of fellow governments. But many people still do not feel the pain.
However, malinvestments have destroyed an immense amount of real wealth. Government spending for welfare programs and military ventures has caused increasing public debts and deficits in the Western world. These debts will never be paid back in real terms.
The welfare-warfare state is the biggest malinvestment today. It does not satisfy the preferences of freely interacting individuals and would be liquidated immediately if it were not continuously propped up by taxpayer money collected under the threat of violence.
Another source of malinvestment has been the business cycle triggered by the credit expansion of the semi-public fractional reserve banking system. After the financial crisis of 2008, malinvestments were only partially liquidated. The investors that had financed the malinvestments such as overextended car producers and mortgage lenders were bailed out by governments; be it directly through capital infusions or indirectly through subsidies and public works. The bursting of the housing bubble caused losses for the banking system, but the banking system did not assume these losses in full because it was bailed out by governments worldwide. Consequently, bad debts were shifted from the private to the public sector, but they did not disappear. In time, new bad debts were created through an increase in public welfare spending such as unemployment benefits and a myriad of “stimulus” programs. Government debt exploded.
In other words, the losses resulting from the malinvestments of the past cycle have been shifted to an important degree onto the balance sheets of governments and their central banks. Neither the original investors, nor bank shareholders, nor bank creditors, nor holders of public debt have assumed these losses. Shifting bad debts around cannot recreate the lost wealth, however, and the debt remains.
To illustrate, let us consider Robinson Crusoe and the younger Friday on their island. Robinson works hard for decades and saves for retirement. He invests in bonds issued by Friday. Friday invests in a project. He starts constructing a fishing boat that will produce enough fish to feed both of them when Robinson retires and stops working.
At retirement Robinson wants to start consuming his capital. He wants to sell his bonds and buy goods (the fish) that Friday produces. But the plan will not work if the capital has been squandered in malinvestments. Friday may be unable to pay back the bonds in real terms, because he simply has consumed Robinson’s savings without working or because the investment project financed with Robinson’s savings has failed.
For instance, imagine that the boat is constructed badly and sinks; or that Friday never builds the boat because he prefers partying. The wealth that Robinson thought to own is simply not there. Of course, for some time Robinson may maintain the illusion that he is wealthy. In fact, he still owns the bonds.
Let us imagine that there is a government with its central bank on the island. To “fix” the situation, the island’s government buys and nationalizes Friday’s failed company (and the sunken boat). Or the government could bail Friday out by transferring money to him through the issuance of new government debt that is bought by the central bank. Friday may then pay back Robinson with newly printed money. Alternatively the central banks may also just print paper money to buy the bonds directly from Robinson. The bad assets (represented by the bonds) are shifted onto the balance sheet of the central bank or the government.
As a consequence, Robinson Crusoe may have the illusion that he is still rich because he owns government bonds, paper money, or the bonds issued by a nationalized or subsidized company. In a similar way, people feel rich today because they own savings accounts, government bonds, mutual funds, or a life insurance policy (with the banks, the funds, and the life insurance companies being heavily invested in government bonds). However, the wealth destruction (the sinking of the boat) cannot be undone. At the end of the day, Robinson cannot eat the bonds, paper, or other entitlements he owns. There is simply no real wealth backing them. No one is actually catching fish, so there will simply not be enough fishes to feed both Robinson and Friday.
Something similar is true today. Many people believe they own real wealth that does not exist. Their capital has been squandered by government malinvestments directly and indirectly. Governments have spent resources in welfare programs and have issued promises for public pension schemes; they have bailed out companies by creating artificial markets, through subsidies or capital injections. Government debt has exploded.
Many people believe the paper wealth they own in the form of government bonds, investment funds, insurance policies, bank deposits, and entitlements will provide them with nice sunset years. However, at retirement they will only be able to consume what is produced by the real economy. But the economy’s real production capacity has been severely distorted and reduced by government intervention. The paper wealth is backed to a great extent by hot air. The ongoing transfer of bad debts onto the balance sheets of governments and central banks cannot undo the destruction of wealth. Savers and pensioners will at some point find out that the real value of their wealth is much less than they expected. In which way, exactly, the illusion will be destroyed remains to be seen.
Philipp Bagus is an associate professor at Universidad Rey Juan Carlos. He is an associate scholar of the Ludwig von Mises Institute and was awarded the 2011 O.P. Alford III Prize in Libertarian Scholarship. He is the author of The Tragedy of the Euro and coauthor of Deep Freeze: Iceland’s Economic Collapse. The Tragedy of the Euro has so far been translated and published in German, French, Slovak, Polish, Italian, Romanian, Finnish, Spanish, Portuguese, British English, Dutch, Brazilian Portuguese, Bulgarian, and Chinese. See his website.
Image credit: https://www.mises.org
The Mises View: “Our Enemy The Fed” | Glenn Jacobs
Published by misesmedia
Glenn Jacobs explains why understanding the Federal Reserve System is one of the most important tasks facing Americans. Jacobs is an American professional wrestler and actor, known by the ring name “Kane”. For more information, visit the Mises Institute online at mises.org.
90 Years Ago: The End of German Hyperinflation
On 15 November 1923 decisive steps were taken to end the nightmare of hyperinflation in the Weimar Republic: The Reichsbank, the German central bank, stopped monetizing government debt, and a new means of exchange, the Rentenmark, was issued next to the Papermark (in German: Papiermark). These measures succeeded in halting hyperinflation, but the purchasing power of the Papermark was completely ruined. To understand how and why this could happen, one has to take a look at the time shortly before the outbreak of World War I.
Since 1871, the mark had been the official money in the Deutsches Reich. With the outbreak of World War I, the gold redeemability of the Reichsmark was suspended on 4 August 1914. The gold-backed Reichsmark (or “Goldmark,” as it was referred to from 1914) became the unbacked Papermark. Initially, the Reich financed its war outlays in large part through issuing debt. Total public debt rose from 5.2bn Papermark in 1914 to 105.3bn in 1918. In 1914, the quantity of Papermark was 5.9 billion, in 1918 it stood at 32.9 billion. From August 1914 to November 1918, wholesale prices in the Reich had risen 115 percent, and the purchasing power of the Papermark had fallen by more than half. In the same period, the exchange rate of the Papermark depreciated 84 percent against the US dollar.
The new Weimar Republic faced tremendous economic and political challenges. In 1920, industrial production was 61 percent of the level seen in 1913, and in 1923 it had fallen further to 54 percent. The land losses following the Versailles Treaty had weakened the Reich’s productive capacity substantially: the Reich lost around 13 percent of its former land mass, and around 10 percent of the German population was now living outside its borders. In addition, Germany had to make reparation payments. Most important, however, the new and fledgling democratic governments wanted to cater as best as possible to the wishes of their voters. As tax revenues were insufficient to finance these outlays, the Reichsbank started running the printing press.
From April 1920 to March 1921, the ratio of tax revenues to spending amounted to just 37 percent. Thereafter, the situation improved somewhat and in June 1922, taxes relative to total spending even reached 75 percent. Then things turned ugly. Toward the end of 1922, Germany was accused of having failed to deliver its reparation payments on time. To back their claim, French and Belgian troops invaded and occupied the Ruhrgebiet, the Reich’s industrial heartland, at the beginning of January 1923. The German government under chancellor Wilhelm Kuno called upon Ruhrgebiet workers to resist any orders from the invaders, promising the Reich would keep paying their wages. The Reichsbank began printing up new money by monetizing debt to keep the government liquid for making up tax-shortfalls and paying wages, social transfers, and subsidies.
From May 1923 on, the quantity of Papermark started spinning out of control. It rose from 8.610 billion in May to 17.340 billion in April, and further to 669.703 billion in August, reaching 400 quintillion (that is 400 x 1018) in November 1923. Wholesale prices skyrocketed to astronomical levels, rising by 1.813 percent from the end of 1919 to November 1923. At the end of World War I in 1918 you could have bought 500 billion eggs for the same money you would have to spend five years later for just one egg. Through November 1923, the price of the US dollar in terms of Papermark had risen by 8.912 percent. The Papermark had actually sunken to scrap value.
With the collapse of the currency, unemployment was on the rise. Since the end of the war, unemployment had remained fairly low — given that the Weimar governments had kept the economy going by vigorous deficit spending and money printing. At the end of 1919, the unemployment rate stood at 2.9 percent, in 1920 at 4.1 percent, 1921 at 1.6 percent and 1922 at 2.8 percent. With the dying of the Papermark, though, the unemployment rate reached 19.1 percent in October, 23.4 percent in November, and 28.2 percent in December. Hyperinflation had impoverished the great majority of the German population, especially the middle class. People suffered from food shortages and cold. Political extremism was on the rise.
The central problem for sorting out the monetary mess was the Reichsbank itself. The term of its president, Rudolf E. A. Havenstein, was for life, and he was literally unstoppable: under Havenstein, the Reichsbank kept issuing ever greater amounts of Papiermark for keeping the Reich financially afloat. Then, on 15 November 1923, the Reichsbank was made to stop monetizing government debt and issuing new money. At the same time, it was decided to make one trillion Papermark (a number with twelve zeros: 1,000,000,000,000) equal to one Rentenmark. On 20 November 1923, Havenstein died, all of a sudden, through a heart attack. That same day, Hjalmar Schacht, who would become Reichsbank president in December, took action and stabilized the Papermark against the US dollar: the Reichsbank, and through foreign exchange market interventions, made 4.2 trillion Papermark equal to one US Dollar. And as one trillion Papermark was equal to one Rentenmark, the exchange rate was 4.2 Rentenmark for one US dollar. This was exactly the exchange rate that had prevailed between the Reichsmark and the US dollar before World War I. The “miracle of the Rentenmark” marked the end of hyperinflation.
How could such a monetary disaster happen in a civilized and advanced society, leading to the total destruction of the currency? Many explanations have been put forward. It has been argued that, for instance, that reparation payments, chronic balance of payment deficits, and even the depreciation of the Papermark in the foreign exchange markets had actually caused the demise of the German currency. However, these explanations are not convincing, as the German economist Hans F. Sennholz explains: “[E]very mark was printed by Germans and issued by a central bank that was governed by Germans under a government that was purely German. It was German political parties, such as the Socialists, the Catholic Centre Party, and the Democrats, forming various coalition governments that were solely responsible for the policies they conducted. Of course, admission of responsibility for any calamity cannot be expected from any political party.” Indeed, the German hyperinflation was manmade, it was the result of a deliberate political decision to increase the quantity of money de facto without any limit.
What are the lessons to be learned from the German hyperinflation? The first lesson is that even a politically independent central bank does not provide a reliable protection against the destruction of (paper) money. The Reichsbank had been made politically independent as early as 1922; actually on behalf of the allied forces, as a service rendered in return for a temporary deferment of reparation payments. Still, the Reichsbank council decided for hyperinflating the currency. Seeing that the Reich had to increasingly rely on Reichsbank credit to stay afloat, the council of the Reichsbank decided to provide unlimited amounts of money in such an “existential political crisis.” Of course, the credit appetite of the Weimar politicians turned out to be unlimited.
The second lesson is that fiat paper money won’t work. Hjalmar Schacht, in his 1953 biography, noted: “The introduction of the banknote of state paper money was only possible as the state or the central bank promised to redeem the paper money note at any one time in gold. Ensuring the possibility for redeeming in gold at any one time must be the endeavor of all issuers of paper money.” Schacht’s words harbor a central economic insight: Unbacked paper money is political money and as such it is a disruptive element in a system of free markets. The representatives of the Austrian School of economics pointed this out a long time ago.
Paper money, produced “ex nihilo” and injected into the economy through bank credit, is not only chronically inflationary, it also causes malinvestment, “boom-and-bust” cycles, and brings about a situation of over-indebtedness. Once governments and banks in particular start faltering under their debt load and, as a result, the economy is in danger of contracting, the printing up of additional money appears all too easily to be a policy of choosing the lesser evil to escape the problems that have been caused by credit-produced paper money in the first place. Looking at the world today — in which many economies have been using credit-produced paper monies for decades and where debt loads are overwhelmingly high, the current challenges are in a sense quite similar to those prevailing in the Weimar Republic more than 90 years ago. Now as then, a reform of the monetary order is badly needed; and the sooner the challenge of monetary reform is taken on, the smaller will be the costs of adjustment.
About the Author:
Thorsten Polleit is chief economist of the precious-metals firm Degussa Goldhandel GmbH. He is also an honorary professor at the Frankfurt School of Finance & Management. He is an adjunct scholar of the Ludwig von Mises Institute and was awarded the 2012 O.P. Alford III Prize in Libertarian Scholarship. His website is www.Thorsten-Polleit.com. Send him mail.
Image credit: https://mises.org
By Hunter Lewis
Monsanto’s Friends in High Places
Editor’s Note: The following is adapted from Hunter Lewis’s new book Crony Capitalism in America, now available in the Mises Store.
Many companies hope to send an employee into a government agency to influence regulation. How much better if the employee can actually shape government regulation to promote and sell a specific product! Monsanto seems to have accomplished this — and much more.
Michael Taylor is among a number of people with Monsanto ties who have worked in government in recent years. He worked for the Nixon and Reagan Food and Drug Administration in the 1970s, then became a lawyer representing Monsanto. In 1991, he returned to the FDA as Deputy Commissioner for Policy under George H. W. Bush, and helped secure approval for Monsanto’s genetically engineered bovine (cow) growth hormone, despite it being banned in Canada, Europe, Japan, Australia, and New Zealand.
This was only a start for Taylor. He also did not like some producers advertising their milk as bovine-growth-hormone-free. That seemed to put Monsanto’s product in an unfavorable light. So in 1994 he wrote a guidance document from within the FDA requiring that any food label describing the product as bovine-growth-hormone-free must also include these words: “The FDA has determined … no significant difference has been shown between milk derived from [BGH] and non-[BGH] supplemented cows.”
It apparently did not concern Taylor that this new pronouncement by the FDA was unsupported by either Monsanto or FDA studies. A private company making any such unsupported claim could have been charged with fraud. But since it came out of the FDA, milk producers would place themselves at legal risk by not printing it on their label.
Taylor moved to the US Department of Agriculture (USDA) in the mid-1990s. During this period, he tried to persuade the FDA and Federal Trade Commission (FTC) to take a further step and make it illegal for dairies to make any claim to a bovine-growth-hormone-free product. Failing in that, he reached out to state governments to make such a claim illegal at the state level. This was finally blocked by a court decision in Ohio that there was indeed a “compositional difference” between BGH and non-BGH-treated milk. Long before this 2010 ruling, Taylor had returned to Monsanto as a vice president, and then returned to President Obama’s FDA, first as Senior Advisor on Food Safety and then Deputy Commissioner for Foods.
Taylor’s story, however, is not just about milk, or even mainly about milk. During his second posting at the FDA, as Deputy Commissioner for Policy 1991–1994, Agency scientists were grappling with questions about the overall safety of genetically engineered foods (often labeled Genetically Modified Organisms). As Jeffrey Smith notes,
[Internal] memo after memo described toxins, new diseases, nutritional deficiencies, and hard to detect allergens. [Staff scientists] were adamant that the technology carried “serious health hazards,” and required careful, long-term research, including human studies. …
The Agency, under Taylor’s and later under others’ leadership, simply ignored these findings. No human studies were required. GMO foods were allowed to enter the food supply unregulated by the FDA and barely regulated by the USDA, which views them as an important US export product. By 2012, in the US, 90 percent of sugar beets (representing half of overall sugar production) was GMO, 85 percent of soybeans (which are to be found in 70 percent of all supermarket food products), and 85 percent of corn, including the corn used to make high fructose corn syrup, a sweetener used in most soft drinks and processed foods.
The few scientists trying to conduct independent research on GMO often found their careers damaged. Most food research, conferences, and fellowships are funded by “Big Food” companies including Monsanto, which has a chilling effect. Even sympathetic colleagues may be reluctant to back those who dare speak out.
Those who persevered in conducting independent research, often abroad, reported worrisome findings. An Austrian study found that mice fed GMO corn seemed fine in the first and second generations, but by the third were sterile. A Russian study of hamsters fed GMO soybeans found a similar result. Could human beings exhibit a similar, delayed response? No one knows. Another, unrelated study showed that the pesticide used in large quantities on engineered Roundup Ready crops is toxic to male testicle cells and threatens both testosterone synthesis and sperm count.
At the same time that the FDA tries to remain as silent as possible about GMOs, the US Department of Agriculture and other parts of the US government are doing everything they can to promote them. The USDA under both George W. Bush and Obama has sought to accelerate what is already an automatic rubberstamp for new GMO products, to “deregulate” them (including grasses such as alfalfa that cannot be restricted to the planted area), and to provide immunity from lawsuits over the spread of GMO crops to adjoining organic farms. Immunity from lawsuit was especially ironic. For years, GMO producers had threatened, intimidated, sued, and in every imaginable way attempted to bully adjoining farmers. If any of the patented seeds drifted and were found on the neighboring farm, that farmer would be charged with “theft.” The clear message: buy the patented seeds or face destruction through legal costs. Remarkably, courts were buying this specious argument. But finally the persecuted began to counter-sue successfully, and the USDA immediately rushed to provide legal immunity to the GMO producers in the form of an insurance policy that organic farmers would have to buy and that would be their only available form of compensation.
Although we have chosen to focus on the remarkable revolving door career of Michael Taylor at the FDA and Monsanto, because it has potentially affected the future health of hundreds of millions of people, stories like his are not uncommon. A Chicago Tribune article from 2012 is headlined: Chemical Firms Champion New EPA (Environmental Protection Agency) Expert. It describes how Todd Stedeford worked at the EPA from 2004–2007 under the George W. Bush administration, then joined chemical firm Albemarle Corp. While at Albemarle, which makes flame retardants, he defended chemicals used in many products and even suggested that the standard set by the EPA for flame retardants was 500 times too high. Having returned to the EPA in 2011, under President Obama, he is now “in charge of a … program studying whether dozens of industrial chemicals, including flame retardants, are too dangerous.” One must ask: what was the EPA thinking when it made this appointment?
Bill Ruckelshaus, twice EPA head, once said that “at EPA you work for a cause that is beyond self-interest. … You’re not there for the money, you are there for something beyond yourself.” But on leaving the EPA, he himself became a Monsanto director. Meanwhile the Geneva-based Covalence group placed Monsanto dead last on a list of 581 global companies ranked by their reputation for ethics.
A look at some Monsanto representatives and their positions in government:
|Suzanne Sechen, worked on Monsanto-funded academic research||A primary reviewer for bovine growth hormone in FDA|
|Linda J. Fisher, VP, lobbyist for Monsanto||Assistant Administrator at EPA|
|Michael Friedman, MD, Sr. VP, GD Searle, subsidiary of Monsanto||Acting Commissioner of FDA|
|Marcia Hale, international lobbyist, Monsanto||Assistant to President under President Clinton|
|Michael (Mickey) Kantor, director||Secretary of Commerce and US Trade Representative under President Clinton|
|William D. Ruckelshaus, director||Head of EPA under both Presidents Nixon and Reagan|
Hunter Lewis is cofounder of Against Crony Capitalism. He is the former CEO of Cambridge Associates and the author of eight books, including two new books, Free Prices Now! and Crony Capitalism in America: 2008-2012. He has served on boards and committees of 15 not-for-profit organizations, including environmental, teaching, research, and cultural organizations, as well as the World Bank. See Hunter Lewis’s article archives.
You can subscribe to future articles by Hunter Lewis via this RSS feed.
Image credit: https://mises.org
The Noble Lie of Government Healthcare
These words, spoken by U.S. President Barack Obama in various forms and iterations, have become a running joke amidst the rollout of the Affordable Care Act. All across the country, hundreds of thousands of citizens are receiving cancellation notices in the mail. The stringent requirements for insurance plans under the new edict are curtailing many individual policies. A simpleton can grasp the economics: you prohibit something, it goes away. And yet, for years prior, the White House ignored the oncoming train and is now slowly inching away from the wreckage.
This was not the unforeseen consequence of good-intentioned legislation. According to an investigative report from NBC, the Obama Administration was fully aware of the result its health care bill would have on the marketplace for insurance. A provision written in the original version of the law would have allowed for the grandfathering of existing plans that did not meet the new standards. However, the Department of Health and Human Services rewrote the stipulation to radically narrow the rule, so that an estimated “40 to 67 percent of customers will not be able to keep their policy.” Not one to be a wet blanket, President Obama continued to assuage the public and reassure everyone that their preferred insurance policy would not being going away.
This was a lie. And not one kept close-to-the-chest by a few high-level officials. House Democratic Whip Steny Hoyer admitted that many in his party knew “there would be some policies that would not qualify and therefore people would be required to get more extensive coverage.” A presidential election and a litany of Senate seats were won based on the falsehood that America’s health insurance market would not be totally disturbed.
The admission of guilt may have ramifications for supporters of big government. In the short term, it undermines the President and the promises he makes going into the future. But voters are fickle and have a memory prone to lapses. When the subsidies start flowing, they will begin to smile again. The balancing act will be whether the boost in tax benefits outweighs being forced to pay a higher cost for what was once a cheaper product. Those who are net beneficiaries will be content while the losers may sulk but will ultimately accept the “new normal.”
The deceit behind ObamaCare is nothing new in the practice of governing. The state’s monopoly power makes it a natural target of suspicion. Even the most ardent worshiper of socialism is still wary that his nation’s controllers will turn on him. He keeps an ear out for fiction spun by his rulers but will not question larger injustice as long as he is fed well enough. Even with the preponderance of lies, there is still the naive hope “good folks” will soon come along who have a deep aversion to dishonesty. The white knight never arrives, but optimism prevails.
The happy voter is the one who refuses to grasp the obvious point that government serves as a vehicle for the worst in society to play out their violent fantasies. As Hayek put it, “the unscrupulous and uninhibited are likely to be more successful” in operating the machinery of total intimidation. It is always from the throne of authority that the worst deeds are accomplished. This includes mass aggression against property as well as the truth. The productive capacity of society is decimated enough by government’s necessarily parasitical operation; the public’s concept of verity is challenged by the various ministries of agitprop that disguise their actions as beneficial rather than schemes of plunder.
The false characterization needed to sustain Obama’s signature piece of legislation was another variation of Plato’s noble lie. In his widely heralded Republic, the classical philosopher wrote on the necessity of the few lording over the many to achieve harmonious social relationships. These “philosopher-kings” could govern best by spreading falsities that would have the “good effect” of making the underlings “more inclined to care for the state and one another.” One could call this a textbook lesson in the art of ruling over a dim and detached populace.
Perhaps the best exponent of the noble lie was the late, neoconservative king Irving Kristol, who held political theorist Leo Strauss as a strong intellectual influence. Kristol affirmed what many thinkers before him found when it comes to truth:
“There are different kinds of truths for different kinds of people. There are truths appropriate for children; truths that are appropriate for students; truths that are appropriate for educated adults; and truths that are appropriate for highly educated adults, and the notion that there should be one set of truths available to everyone is a modern democratic fallacy. It doesn’t work.”
In many ways, this statement is completely accurate. In a democracy, the people must be corralled. They must get behind measures that ordinarily wouldn’t receive a lick of support outside of a few special interests. The naked, unvarnished truth is a dangerous weapon against tyranny. So it must be distorted to fit the agenda of collectivists, statists, dictators, and despots. Anything will do to assure for maximum support with minimum resistance.
Had President Obama been upfront about the full ramifications of his health care edict, the public may have turned. It’s one thing to apply for and receive a subsidy. It’s another to disrupt lives and force people to take action they otherwise wouldn’t. Outside disturbances are a nuisance to common folks trying to make the best go at their lives. Like a dog with its tail between its legs, the Administration is now backtracking on its own selling point. In a recent press hearing, White House spokesman Jay Carney, the quivering apparatchik of social democracy, was quick to ignore past statements and highlight the benefits of the health care bill. He told Fox News correspondent Ed Henry,
Well, let’s just be clear, what the President said and what everybody said all along was that there were going to be changes under brought about by the Affordable Care Act that create minimum standards of coverage — minimum services that every insurance plan has to provide.
So goes the guarantee of “if you like it, you can keep it.” As progressive columnist Clarence Page admitted to radio host Hugh Hewitt, it was “one of those political lies, you know.” The promise will eventually find itself lodged somewhere in the memory hole along with the guarantee of liberty in a security state. The state itself is a great lie. It purports to be the great savior of mankind. The political class likens itself to the great deliverance from struggle and despair. The reality ends up not as rosy.
Kristol was right on one thing: not everyone accepts the truth. They will self-deceive to feel comfortable in their own skin. It is this weakness the politician will manipulate for his own aggrandizement. Honesty and truth are always a virtue. And that’s why they are wholly absent from the halls of power.
James E. Miller is editor-in-chief of the Ludwig von Mises Institute of Canada. Send him mail
Image credit: http://mises.ca
The Mises View: “Government Shutdown, Spending Cuts, and other Fables” | Peter G. Klein
Published by misesmedia
Peter G. Klein explains that the “shutdown” is no shutdown and urges us to reject the economic version of Orwellian doublespeak. Klein is the Mises Institute’s Executive Director and Carl Menger Research Fellow. For more information, visit the Mises Institute online at mises.org.
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 Ben O’Neill
The Ethics of State Secrecy
[This is the second of a two-part analysis of ethical and legal questions pertaining to whistleblowers who expose government wrongdoing. The first part, “The Ethics of Whistleblowing” is available here. This second part goes beyond contractual considerations to look at government ownership of information and government oversight mechanisms.]
Government secrets and the “ownership” of secret government documents
The foregoing principles discussed in Part I of our analysis vitiate any allegation of criminal conduct by Edward Snowden resting on his alleged contractual duties to the NSA. His disclosures of NSA documents were certainly “unauthorized disclosures” as has been charged, but there is no reason that any government authorization should be required. Indeed, it is quite absurd to suggest that government permission should be required to disclose evidence of government criminality. But what of the remaining property-based claim that Snowden’s actions involve the “theft” of government property?
This question can be dealt with in a similar manner, by consideration of the ordinary rules pertaining to the use of property in criminal dealings. When a private firm commits a crime using its own property as an instrument of wrongdoing it loses the right to claim ownership as a safeguard against investigation. If an investigator confiscates digging equipment and barrels of toxic waste from a private firm accused of dumping these on the property of others it is no bar to this action if the firm presents a receipt showing that the equipment belongs to them. (Indeed, this would be taken as further evidence linking them to the alleged crime.) The same applies to documentary evidence of a crime — it may legitimately be taken by an investigator as a means of proving criminal wrongdoing, notwithstanding the normal ownership claim that would apply to the item.
Government claims to ownership have no special status in this regard, and do not override these ordinary principles of property rights. In fact, the situation for government claims of ownership is even weaker than for a private enterprise, since the latter will generally have acquired the tools of its criminal dealings with its own money. If a private firm unlawfully dumps toxic waste on the property of others, it is likely that it has at least legitimately purchased its own barrels and digging equipment without having also stolen these. On the contrary, government agencies are built on a system of coercion, where the resources for their operations are extracted through forcible payment from the public, i.e., through taxation. Unlike in a private firm, this gives rise to a situation in which the “shareholders” of government are forced to contribute the instruments of further criminal activity, whether they wish to participate or not. Government claims to ownership of the property in its possession are extremely dubious, and this is made more so when the claim to ownership is made in order to shield knowledge of its own operations from those very shareholders. When the claim to ownership is made to prevent the disclosure of documents detailing further criminal actions by the government, the appeal to property rights is thrice-damned!
By Ben O’Neill
The Ethics of Whistleblowing
[This is Part I of a two-part analysis of ethical and legal questions pertaining to whistleblowers who expose government wrongdoing. The second part of the analysis is here. In this first part of our analysis we look at the principles of contract and confidentiality as applied to whistleblowers who expose government wrongdoing.]
Recent revelations about the extent and details of the massive NSA surveillance program have been made possible mostly by the actions of a single whistleblower, Edward Snowden, presently in hiding from the wrath of the US government, whose shameful and frightening secrets he has now made public knowledge. Despite repeated denials by its officials, it is now evident that the NSA runs a data-collection and spying network which collects masses of data on the private communications of non-US citizens, and some private communications on US citizens. It does so without requirement for any individual warrants for its targets, and without requirement for any probable cause with respect to any of the individuals whose communications are collected. Instead, the entire program operates under a broad procedure-based warrant system, whereby a special clandestine court hears submissions from the government in secret and then dutifully approves general procedures for mass surveillance, without any adversarial argument being raised by any other party. The warrants allow mass surveillance and storage of data at the discretion of NSA analysts, and these warrants are clearly at odds with the principle of eschewing unreasonable searches.
Proving the old adage that no good deed goes unpunished, Snowden is presently facing charges from the US government for theft of government property and unauthorized disclosure of defense and intelligence material. He is also subject to widespread vilification in the establishment media, where he has been branded as a “traitor” and a “cross-dressing Little Red Riding Hood.” Glenn Greenwald, the main journalist responsible for publication of the leaked material, is also in the crosshairs of the media, and has been accused of committing a felony for publishing the leaked material. He has also been questioned by establishment media figures as to whether he should be charged with a crime for having “aided and abetted” Snowden. This, of course, is preferable to a sack over the head and a bullet to the brain, but it is a far cry from creating an environment for openness and transparency in government conduct.
For supporters of the massive power apparatus of the US government, Snowden is a criminal, deserving of scorn and imprisonment (or for some, just plain murder). To others such as myself he is an intrepid investigator who succeeded in exposing government wrongdoing where others had failed. But even to some of his supporters Snowden is a hero of the “law-breaking” variety — a man who “stole” government documents to expose the activities of its most corrupt and secretive agencies. Such a circumstance gives cause to stop and examine the basic assumptions of government claims to ownership of the secret information it collects. Implicit in the charge that documents have been “stolen” and that there has been “unauthorized disclosure” is the requirement that the documents and information in question are legitimately owned by the government, and that communication of their contents legitimately requires government authorization.