Thursday, October 25, 2012

A Review of Gary North's "What is Money?"

The inaugural installment of this collection of essays first appeared on on September 29, 2009 - fittingly, Ludwig von Mises' birthday. Dr. North is one of the foremost Austrian economists and economic historians working today, and has gained a wide following with his writing and lectures. These essays are virtually impossible to overrate; they clear up so much of what is misunderstood about money and banking.

Our civilization depends on sound money and honest banking. As North makes emphatically clear, we have neither.

A few excerpts should get my point across:

"The heart of the modern monetary system is fractional reserve banking. This system is based on fraud. At the very heart of the modern economy is fraud -- fraud on a gigantic scale. What is the nature of this fraud? Counterfeiting. Banks are government-licensed institutions that issue bogus IOUs. Because these IOUs function as money, they are counterfeit money. This is the heart, mind, and soul of all modern banking."

"Counterfeiting is universally condemned by civil governments. Wherever we go, a national civil government has passed a law imposing serious sanctions against anybody who would counterfeit the national monetary unit. Why do governments do this? Because they are all counterfeiters, and they deeply resent an invasion of their turf. Laws against counterfeiting in today's world are a form of gang warfare."

"To reform central banking is to perpetuate it. To perpetuate it is to accept the fundamental premise of modern economics: money is different. Money is not governed by the same laws of supply and demand that govern the rest of the economy. Money requires experts to administer it. Private contracts are not sufficient."

"Someday, perhaps, central banks will stop subsidizing their respective Treasury Departments. On that glorious day, governments will move rapidly toward bankruptcy, interest rates on government debt will rise, the markets will begin to crash, consumer prices will begin to fall, and the mother of all bank runs will begin. Get there early."

"The powers that be will cease to be powers if money dies. They have based their political control and their wealth on their control of digital money. This is the line to which the hook of state power is attached. To destroy the currency is to break this line. Better a new Great Depression than hyperinflation, if you are a central banker.

"If money dies, a lot more than money will die. This includes Bernanke's pension. He knows this."

I suppose one could be critical of the author for writing so informally about a subject that many would say cannot be translated into everyday language; that any attempt to translate it corrupts it and renders it misleading or just plain wrong.  But one of the hallmarks of Austrian School economics is the clarity of its expositors, a trait that seems to annoy the Keynesians who understand money only in the context of aggregates, equations, and central planning.  But if thought is to be a guide to individual action, then clarity of thought is indispensable, and North, in these essays, offers the reader a remarkable degree of lucidity.

There are other popular essays that delve into the nature of money.  Bastiat's What is Money? is instructive and entertaining, and Thomas Paine's attack on paper money lays bare what we've forgotten.
Having no real value in itself it depends for support upon accident, caprice, and party; and as it is the interest of some to depreciate and of others to raise its value, there is a continual invention going on that destroys the morals of the country.
Also highly recommended is Ron Paul's three-part lecture series, What is Money?

The sophisticated elites who run the monetary system proudly admit they don't know what money is, though they do concede that being unable to define money makes it difficult to manage. In a sense I can empathize with them.  Money - the commodity - was removed from the economy completely in 1971.  It is indeed hard to manage something that no longer exists, and if it did exist, would not require managing.  As Milton Friedman once wrote,
If a domestic money consists of a commodity, a pure gold standard or cowrie bead standard, the principles of monetary policy are very simple.  There aren't any.  The commodity money takes care of itself.  [p. 356]
North, borrowing from Mises, tells us what money is in six words, then proceeds to build on it.  Not very sophisticated, but infinitely usable.

Tuesday, October 9, 2012

Securing Property Rights in the Absence of a State

Many Rothbardians are vowing not to vote in this or any election since voting only supports the State.  But I wonder if they could be persuaded otherwise if they knew one of the ballot choices were to dissolve the governments and replace them with voluntary market institutions.  Of course, we don’t have that choice, and most people would either laugh or be scared to death if it were proposed.   But with sovereign nations riding the Keynesian sled into the Abyss, the dissolution might fall in our laps anyway.  Preposterous as it might sound, we might need to consider organizing society around something other than the coercive monopolies driving us to extinction.

Fortunately, we have both experience and theory to draw upon.  In this article I want to touch on two sources from each: The classic study by Terry L. Anderson and P. J. Hill, An American Experiment in Anarcho-Capitalism: The Not So Wild, Wild West and Robert P. Murphy’s Chaos Theory.

Thanks to Hollywood and popular literature, the American West [1830-1900] is often portrayed as violent and lawless.  As long as you had a fast gun and were willing to use it, you could get away with anything.  The reason: weak or nonexistent government.  In their literature search, though, Anderson and Hill found ample evidence to the contrary.  For example, W. Eugene Hollon, in his book Frontier Violence: Another Look found that “the Western frontier was a far more civilized, more peaceful, and safer place than American society is today [the early 1970s]."  Another researcher, Frank Prassel, writing in the mid-1930s, found that
if any conclusion can be drawn from recent crime statistics, it must be that this last frontier [the West] left no significant heritage of offenses against the person, relative to other sections of the country.
In the early West people protected their property and lives with private agencies.  Significantly, these agencies understood that violence was a costly method of resolving disputes and usually employed lower-cost methods of settlement such as arbitration and courts.  Nor was there a universal idea of justice common to these agencies.  People had different ideas of what rules they wished to live under and were willing to pay for.  Competition among the agencies provided a choice. 

Anderson and Hill looked at four institutions in the early West that approximated anarcho-capitalism (AnCap): land claims clubs, cattlemen’s associations, mining camps, and wagon trains.

Land Claims Clubs

Found throughout the Middle West, the land claims clubs or squatters’ associations showed how newly arriving pioneers joined together for common purposes without government assistance. 
Each claims association adopted its own constitution and by-laws, elected officers for the operation of the organization, established rules for adjudicating disputes, and established the procedure for the registration and protection of claims.
Though violence was an option to be used against those who didn’t follow the rules, at least one association used social ostracism to curtail or punish violators.  They formally resolved:
That we will not associate nor countenance those who do not respect the claims of settlers and further that we will neither neighbor with them . . . Trade barter deal with them in any way whatever.
Some claims associations were formed to oppose “speculators,” while others encouraged speculation, exemplifying how the clubs “developed rules consistent with the preferences, goals, and endowments of the participants.”

Cattlemen’s Associations and Mining Camps

Like the claims groups, cattlemen’s associations drew up formal rules governing their members, but their enforcement methods were often more violent.  As protection agencies, they hired gunfighters (stock detectives) to eliminate rustlers.  The mercenaries were not motivated by ethics, but by “the side which made them the first or best offer.”

Did the gunslingers ever form criminal associations of their own, selling protection and violating property rights as they wished?  There were a few loose associations of this kind, but they were “dealt with more quickly and more severely under private property protective associations than under government organization.”

The California gold rush of 1848 brought thousands of easterners west to seek their fortune, as did gold discoveries later in Colorado, Montana, and Idaho.  Many gold seekers organized before leaving home, and as with other private agencies the rules varied between organizations.  People had the choice of purchasing the set of rules they preferred.  Interestingly, many of the mining organizations prohibited lawyers from their districts and in one case specified no more than fifty nor less than twenty lashes for lawyers who were caught practicing law.

Anderson and Hill:
One early Californian writes, "We needed no law until the lawyers came," and another adds, "There were few crimes until the courts with their delays and technicalities took the place of miners' law.”
Miners courts provided a system of justice, and a judge and jury were selected from among the members.  Any law-abiding miner might serve as prosecutor or defender of the accused. 
In Colorado there is some evidence of competition among the courts for business, and hence, an added guarantee that justice prevailed.
Wagon Trains

Wagon trains rolling west in search of gold provide perhaps the best example of anarcho-capitalism in the American frontier.  Realizing they would be passing beyond the pale of the law, the pioneers “created their own law-making and law- enforcing machinery before they started.”  In many cases they created constitutions similar to the U.S. Constitution.  Once the travelers were beyond the jurisdiction of the federal government, they elected officers to enforce the rules laid out in the document. 
The constitutions also included eligibility for voting and decision rules for amendment, banishment of individuals from the group, and dissolution of the company. 
What made this arrangement work, according to the authors, was a profound respect for property rights.  Yet there was little mention of property rights in their constitutions.  The inviolability of property rights was so throughly ingrained that the pioneers rarely resorted to violence even when starvation was imminent.  Quoting John Phillip Reid from his study of the Overland Trail, the authors tell us:
While a few of those who were destitute may have employed tricks to obtain food, most begged, and those who were "too proud to beg" got along the best they could or employed someone to beg for them.
Certainly the transient nature of these rolling communities made them more adaptable to anarcho-capitalism.  The demand for “public goods” such as roads or schools never came up, for example, though they did have to protect themselves from Indian attacks without relying on the State.  For the most part, their arrangements worked.  People bought protection and justice, found competition among rules producers, and the result was an orderly society, unlike that generally associated with anarchy.

Murphy’s Case for Anarcho-Capitalism

In Chaos Theory, Robert P. Murphy sketches how market forces would operate to support the private production of justice and defense -- two areas that are traditionally conceded to be the sole province of the State.  Murphy contends that not only would the market be able to provide these services, but would do so much more efficiently and equitably than the system we have now.

Here, we’ll confine our discussion to a few key points he makes about the production of “justice” on the free market.

As with the western pioneers and the world today, no single set of laws or rules is needed to bind everyone.  People would enter into voluntary contracts that spell out the rules they agree to live by.   “All aspects of social intercourse would be ‘regulated’ by voluntary contracts.” 

Who makes the rules?  Private legal experts, who would draft laws under open competition with rivals.  The market deals with “justice” as it does with other services.  As Murphy notes,
“the market” is just shorthand for the totality of economic interactions of freely acting individuals. To allow the market to set legal rules really means that no one uses violence to impose his own vision on everyone else.
In an advanced AnCap society, insurance companies would play a major role.  People would buy policies, for example, to indemnify their victims if they were ever found guilty of a crime.  As they do now, insurance companies would employ experts to determine the risks of insuring a given individual.  If a person were considered too great a risk he might be turned down, and this would be information others would use in deciding if and how they wished to interact with him.

Critics say this might work for peaceful, rational people but what about incorrigible thieves and ax murderers?  How would market anarchy deal with them?

All Property is Privately Owned

Murphy reminds us that “wherever someone is standing in a purely libertarian society, he would be on somebody’s property.”  This allows for force to be used against criminals without violating their natural rights.  He cites the example of a person entering a movie theater, with an implicit contract such as the following:
If I am judged guilty of a crime by a reputable arbitration agency [perhaps listed in an Appendix], I release the theater owner from any liability should armed men come to remove me from his property.
In this way the use of force would have been authorized by the recipient himself beforehand.

But where do these armed men take the criminal?  On a free market, a high-security analog to jails would evolve.  These jails, though, would resemble hotels because they would be competing with each other for business, which in AnCap means both pleasing the criminal and guaranteeing his secure detention.  Unlike government prisons there would be no undue cruelty and virtually no chance of escape.  If a dangerous criminal escaped and killed again the insurance company would be held liable.  And a prisoner who didn’t like the way he was treated would have the option of switching to a different jail, as long as his insurance company was in agreement.

Would the Mafia Take Over?

People who support the State because they believe organized crime would take control of an AnCap society should consider that we’re already living  under the “most ‘organized’ criminal association in human history.”  Whatever crimes the Mafia has committed, they are nothing -- nothing -- compared to the wanton death and destruction states have perpetrated.   

We need to consider, too, that the mob gets its strength from the government, not the free market. 
All of the businesses traditionally associated with organized crime—gambling, prostitution, loan sharking, drug dealing—are prohibited or heavily regulated by the state. In market anarchy, true professionals would drive out such unscrupulous competitors.
Applying AnCap

Murphy discusses several applications of anarcho-capitalism in today’s world, one of which is medical licensing.  Almost everyone believes that without government regulation we would all be at the mercy of quacks.  “Ignorant consumers would go to whatever brain surgeon charged the lowest price, and would be butchered on the operating table.”  Therefore, we need the iron fist of government to restrict entry into the medical profession.

But this is pure fiction.  Since the demand for safe and effective medicine is universal, the market would respond accordingly with voluntary organizations that would allow only qualified doctors into their ranks.  Insurance companies, too, would only underwrite doctors who met their standards, since they would stand to lose millions in malpractice suits.

Regarding the ongoing controversy of gun control, Murphy sees legitimate points to both sides of the debate:
Certainly we cannot trust the government to protect us once it has disarmed us. But on the other hand, I feel a bit silly arguing that people should be able to stockpile atomic weapons in their basement.
How might AnCap resolve this?  Let’s say Joe Smith wants an insurance company to agree to pay $10 million to the estate of anyone Smith happens to kill.  “The company will be very interested to know whether Smith keeps sawed off shotguns—let alone atomic weapons—in his basement.”  In this way truly dangerous weapons would be restricted to those willing to pay the high premiums for owning them.

Though it’s hard to imagine any company willing to issue a policy to a holder of nuclear weapons, nevertheless, if someone wanted to, there would be no agency with the authority to prohibit owning them.  But without a policy, a person would be unable to guarantee his contracts with others and would find it virtually impossible to function in society.

Getting there from here

Establishing an AnCap society depends heavily on the history of the region.  North Korean market anarchists, for example, might have to use violence to curtail that brutal regime, while in the United States, “a gradual and orderly erosion of the State is a wonderful possibility.” 
The one thing all such revolutions would share is a commitment by the overwhelming majority to a total respect of property rights.
People already understand that rape and murder are crimes - even rapists and murderers.  The hard part is convincing people “that murder is wrong even when duly elected ‘representatives’ order it.”

We can build on intuitive notions of justice, just as newly arriving miners in California respected the claims of earlier settlers. 
To take a more modern example, even inner city toughs unthinkingly obey the “rules” in a pickup game of basketball, despite the lack of a referee.
As he explains in a footnote, the players in a pickup game still recognize the existence of a foul (and other rules), even if the offending player denies he committed one. 
Now, the market solution to such ambiguity and bias, for games deemed important enough to warrant the extra cost and hassle, is to appoint official referees to apply the “law” (which they too unthinkingly respect). Notice that at no point is a violent monopoly needed to achieve this orderly outcome. 

Those who defend the State as necessary to protect  property rights should brush up on their history, from day one to the present.  As Murphy wraps up,

I ask that the reader resist the temptation to dismiss my ideas as “unworkable,” without first specifying in what sense the government legal system “works.”

George Ford Smith is the author of The Flight of the Barbarous Relic and two other books.  Robert P. Murphy is Libby Gadsen's scheduled guest for her radio show Gadsen Rising on Tuesday, October 16, 2012 from 4:30-6:00 P.M. ET.   His topic will be anarcho-capitalism.  Gadsen Rising is a production.  Call 347-324-3704 to listen or participate.