Tuesday, January 29, 2013

Thomas Paine on war, commerce, government, and paper money

Thomas Paine, born 276 years ago today in 1737, was a profoundly influential public figure and one of history’s most widely read authors.  John Adams is reputed to have said that without the pen of Paine, the sword of Washington would have been wielded in vain.  Yet Adams, like many others in the forefront of the political cataclysms of the late 18th century, loathed almost everything about Paine.  “The longer John Adams lived,” writes Harvard historian Jill LePore, “the more he hated Thomas Paine, and the more worthless he considered that seventy-seven-page pamphlet” Common Sense that sparked the American Revolution.

During the last years of Paine’s life, rabidly pro-British and firebrand journalist William Cobbett used his widely-read Porcupine’s Gazette to attack Paine on nearly every issue.  Quoting Cobbett in his biography of Paine, author Craig Nelson writes:
Whenever and wherever [Paine] breathes his last, he will excite neither sorrow nor compassion; no friendly hand will close his eyes, not a groan will be uttered, not a tear will be shed.  Like Judas he will be remembered by posterity; men will learn to express all that is base, malignant, treacherous, unnatural and blasphemous, by the single monosyllable, PAINE. [p. 5]
Cobbett had sized up the public’s contempt quite accurately.  After the Quakers had denied Paine his wish to be buried in their cemetery, Paine, who died on the morning of June 8, 1809, was interred on his farm in New Rochelle, NY.   His close friend Marguerite Bonneville recounted the burial:
The interment was a scene to affect and to wound any sensible heart.  Contemplating who it was, what man it was, that we were committing to an obscure grave on an open and disregarded bit of land, I could not help feeling most acutely. . .  Looking round me, and beholding a small group of spectators, I exclaimed, as the earth was tumbled into the grave, “Oh! Mr. Paine!  My son stands here as testimony of the gratitude of America, and I, for France!” [p. 324]
As I wrote in an earlier essay, “The man who inspired the country to secede from a corrupt state had six people in attendance at his funeral, none of whom were dignitaries.”

Yet, amazingly, after Paine’s death Cobbett underwent a radical conversion.  Of all the issues on which he had to concede Paine was right, perhaps none affected him more than Paine’s essay, The Decline and Fall of the English System of Finance, in which the author predicted the Bank of England would fail from “Britain’s never-ending warmongering” and “her escalating national debt, crushing taxes, and overreliance on paper money.” [p. 4]  Aided by Marguerite Bonneville, Cobbett wrote “a definitive Paine biography, doing penance for having been the American publisher of Francis Oldys’s The Life of Thomas Paine, a slanderous attack subsidized by the British government.” [p. 6]

Paine was a polemicist of the highest order who held strong convictions.  He wrote in language that was easily understood by anyone, which because of his radical views often made him subject to the charge of rousing the rabble.  He attacked monarchy and believed the path to peace and prosperity was found in democratic republics.  He did not anticipate the breakdown of “free states” into functional authoritarianism that developed and accelerated in the early 20th century and continues unabated to this day.  So, for example, when he writes: “Government on the old system is an assumption of power, for the aggrandizement of itself,” he was referring to monarchies, but we can apply that observation to any government of today.

In celebration of his birthday, I have collected a few of his insights into war, commerce, government, and paper money.  All italics are in the original.

From the writings of Thomas Paine . . .

On this question of war, three things are to be considered. First, the right of declaring it: Secondly, the expense of supporting it: Thirdly, the mode of conducting it after it is declared. The French Constitution places the right where the expense must fall, and this union can be only in the nation [the people]. The mode of conducting it after it is declared, it consigns to the executive department. Were this the case in all countries, we should hear but little more of wars. - Rights of Man, The Complete Writings of Thomas Paine, Volume 1, p. 285.

Whatever is the cause of taxes to a nation, becomes also the means of revenue to a government. Every war terminates with an addition of taxes, and consequently with an addition of revenue; and in any event of war, in the manner they are now commenced and concluded, the power and interest of governments are increased.

War, therefore, from its productiveness, as it easily furnishes the pretense of necessity for taxes and appointments to places and offices, becomes a principal part of the system of old governments; and to establish any mode to abolish war, however advantageous it might be to nations, would be to take from such government the most lucrative of its branches. The frivolous matters upon which war is made, show the disposition and avidity of governments to uphold the system of war, and betray the motives upon which they act. - ibid., pp. 342-343

Why are not republics plunged into war, but because the nature of their government does not admit of an interest distinct from that of the nation? Even Holland, though an ill-constructed republic, and with a commerce extending over the world, existed nearly a century without war: and the instant the form of government was changed in France, the republican principles of peace and domestic prosperity and economy arose with the new Government; and the same consequences would follow the same causes in other nations. - ibid., p. 343

If universal peace, civilization, and commerce, are ever to be the happy lot of man, it cannot be accomplished but by a revolution in the system of governments. All the monarchial governments are military.

War is their trade, plunder and revenue their objects. While such governments continue, peace has not the absolute security of a day. What is the history of all monarchical governments, but a disgustful picture of human wretchedness, and the accidental respite of a few years' repose? Wearied with war, and tired with human butchery, they sat down to rest, and called it peace. - Rights of Man II, ibid., pp. 355-356

Almost everything appertaining to the circumstances of a nation, has been absorbed and confounded under the general and mysterious word government. Though it avoids taking to its account the errors it commits, and the mischiefs it occasions, it fails not to arrogate to itself whatever has the appearance of prosperity. It robs industry of its honors, by pedantically making itself the cause of its effects; and purloins from the general character of man, the merits that appertain to him as a social being. - ibid., p. 356

Government on the old system is an assumption of power, for the aggrandizement of itself; on the new, a delegation of power, for the common benefit of society. The former supports itself by keeping up a system of war; the latter promotes a system of peace, as the true means of enriching a nation. The one encourages national prejudices; the other promotes universal society, as the means of universal commerce. The one measures its prosperity, by the quantity of revenue it extorts; the other proves its excellence, by the small quantity of taxes it requires. - ibid., p. 363

. . . it is nevertheless true, that a great portion of mankind in what are called civilized countries, are in a state of poverty and wretchedness, far below the condition of an Indian. I speak not of one country, but of all. It is so in England, it is so all over Europe. Let us inquire into the cause.

It lies not in any natural defect in the principles of civilization, but in preventing those principles having an universal operation; the consequence of which is a perpetual system of war and expense, that drains the country, and defeats the general felicity of which civilization is capable. - ibid., pp. 398-399

Commerce is no other than the traffic of two individuals, multiplied on a scale of numbers; and by the same rule that nature intended the intercourse of two, she intended that of all. For this purpose she has distributed the materials of manufacturers and commerce in various and distant parts of a nation and of the world; and as they cannot be procured by war so cheaply or so commodiously as by commerce, she has rendered the latter the means of extirpating the former. - ibid., p. 400

When in the last, as well as in the former wars, the commerce of England sunk, it was because the general quantity was lessened everywhere; and it now rises because commerce is in a rising state in every nation. If England, at this day, imports or exports more than at any former period, the nations with which she trades must necessarily do the same; her imports are their exports, and vice versa.

There can be no such thing as a nation flourishing alone in commerce; she can only participate; and the destruction of it in any part must necessarily affect all. When, therefore, governments are at war, the attack is made upon the common stock of commerce, and the consequence is the same as if each had attacked his own. - ibid., p. 401

It is not whether this or that party shall be in or out, or Whig or Tory, or high or low shall prevail; but whether man shall inherit his rights, and universal civilization take place? Whether the fruits of his labor shall be enjoyed by himself, or consumed by the profligacy of governments? Whether robbery shall be banished from courts, and wretchedness from countries? - ibid., p. 404

But as the principles of the present Revolution differed from those which preceded it, so likewise did the conduct of America both in government and war. Neither the foul finger of disgrace nor the bloody hand of vengeance has hitherto put a blot upon her fame. Her victories have received luster from a greatness of lenity; and her laws have been permitted to slumber, where they might justly be awakened to punish. War, so much the trade of the world, has here been only the business of necessity; and when the necessity shall cease, her very enemies must confess, that as she drew the sword in her just defense, she used it without cruelty, and sheathed it without revenge. - Letter to the Abbe Raynal, The Complete Writings of Thomas Paine, Volume 2, pp. 220-221

I shall enumerate some of the evils of paper money and conclude with offering means for preventing them.

One of the evils of paper money is, that it turns the whole country into stock jobbers. The precariousness of its value and the uncertainty of its fate continually operate, night and day, to produce this destructive effect. 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.

It was horrid to see, and hurtful to recollect, how loose the principles of justice were left, by means of the paper emissions during the war. The experience then had, should be a warning to any assembly how they venture to open such a dangerous door again.

As to the romantic, if not hypocritical, tale that a virtuous people need no gold and silver, and that paper will do as well, it requires no other contradiction than the experience we have seen. Though some well- meaning people may be inclined to view it in this light, it is certain that the sharper always talks this language.

There are a set of men who go about making purchases upon credit, and buying estates they have not wherewithal to pay for; and having done this, their next step is to fill the newspapers with paragraphs of the scarcity of money and the necessity of a paper emission, then to have a legal tender under the pretense of supporting its credit, and when out, to depreciate it as fast as they can, get a deal of it for a little price, and cheat their creditors; and this is the concise history of paper money schemes.

But why, since the universal custom of the world has established money as the most convenient medium of traffic and commerce, should paper be set up in preference to gold and silver? The productions of nature are surely as innocent as those of art; and in the case of money, are abundantly, if not infinitely, more so. The love of gold and silver may produce covetousness, but covetousness, when not connected with dishonesty, is not properly a vice. It is frugality run to an extreme. But the evils of paper money have no end. Its uncertain and fluctuating value is continually awakening or creating new schemes of deceit. Every principle of justice is put to the rack, and the bond of society dissolved: the suppression, therefore, of paper money might very properly have been put into the act for preventing vice and immorality.

The pretense for paper money has been, that there was not a sufficiency of gold and silver. This, so far from being a reason for paper emissions, is a reason against them.

As gold and silver are not the productions of North America, they are, therefore, articles of importation; and if we set up a paper manufactory of money it amounts, as far as it is able, to prevent the importation of hard money, or to send it out again as fast it comes in; and by following this practice we shall continually banish the specie, till we have none left, and be continually complaining of the grievance instead of remedying the cause.

Considering gold and silver as articles of importation, there will in time, unless we prevent it by paper emissions, be as much in the country as the occasions of it require, for the same reasons there are as much of other imported articles. But as every yard of cloth manufactured in the country occasions a yard the less to be imported, so it is by money, with this difference, that in the one case we manufacture the thing itself and in the other we do not. We have cloth for cloth, but we have only paper dollars for silver ones.

As to the assumed authority of any assembly in making paper money, or paper of any kind, a legal tender, or in other language, a compulsive payment, it is a most presumptuous attempt at arbitrary power. There can be no such power in a republican government: the people have no freedom, and property no security where this practice can be acted: and the committee who shall bring in a report for this purpose, or the member who moves for it, and he who seconds it merits impeachment, and sooner or later may expect it.

Of all the various sorts of base coin, paper money is the basest. It has the least intrinsic value of anything that can be put in the place of gold and silver. A hobnail or a piece of wampum far exceeds it. And there would be more propriety in making those articles a legal tender than to make paper so. . . .

The laws of a country ought to be the standard of equity, and calculated to impress on the minds of the people the moral as well as the legal obligations of reciprocal justice. But tender laws, of any kind, operate to destroy morality, and to dissolve, by the pretense of law, what ought to be the principle of law to support, reciprocal justice between man and man: and the punishment of a member who should move for such a law ought to be death. . . .

If anything had, or could have, a value equal to gold and silver, it would require no tender law: and if it had not that value it ought not to have such a law; and, therefore, all tender laws are tyrannical and unjust, and calculated to support fraud and oppression.

Most of the advocates for tender laws are those who have debts to discharge, and who take refuge in such a law, to violate their contracts and cheat their creditors. But as no law can warrant the doing an unlawful act, therefore the proper mode of proceeding, should any such laws be enacted in future, will be to impeach and execute the members who moved for and seconded such a bill, and put the debtor and the creditor in the same situation they were in, with respect to each other, before such a law was passed. Men ought to be made to tremble at the idea of such a bare-faced act of injustice. It is in vain to talk of restoring credit, or complain that money cannot be borrowed at legal interest, until every idea of tender laws is totally and publicly reprobated and extirpated from among us. - Dissertations on Government, ibid., pp. 406-409

Wednesday, January 16, 2013

In counterfeiting we trust

If there is one central myth supporting the folly that passes for monetary policy and by extension fiscal policy, it would have to be the unchallenged assumption that money should be defined and controlled by government.  Given the role of money in the economy - that it is one-half of virtually every transaction - nothing has been more destructive to the well-being of most people than the government’s usurpation of money from the market.

Money was once the most marketable commodity (Ludwig von Mises, 1912).  Today, money is whatever the government says it is, and since 1933 in the U.S. it has been pieces of paper or their digital substitutes issued by the central bank and its members, the commercial banks. 

What’s wrong with having the government or its agent, the central bank, define money and regulate its supply, which in practice means regulating the rate at which the supply is increased?

First, the money is not theirs - it doesn’t belong to the government or the central bank.  Banks legitimately get their funds from depositors or investors.  Anything they create on their own through fractional-reserve lending is fraudulent, because they’re guaranteeing the same dollar to both a borrower and a depositor.  Government gets its revenue through the threat of violence and cannot rightfully claim ownership of any of it.

Property rights violations notwithstanding, why is this a harmful arrangement economically?  Because the government-supported banking system is a counterfeiting racket.  The act of counterfeiting money consists of duplicating the legal tender or standard currency and passing it off as legitimate.  The process allows the counterfeiter to default undetected on his end of the trade when he spends it because his money does not represent goods or services produced.  The subsequent increase in the supply of money puts downward pressure on the purchasing power of the monetary unit, so that holders of previously existing money are in effect paying for the counterfeiter’s purchases. 

Murray Rothbard discusses the counterfeiting process in his book, The Mystery of Banking. 
Counterfeiting, and the resulting inflation [of the money supply], is therefore a process by which some people—the early holders of the new money—benefit at the expense of (i.e. they expropriate) the late receivers. The first, earliest and largest net gainers are, of course, the counterfeiters themselves. . . .

Government is supposed to apprehend counterfeiters and duly break up and punish their operations. But what if government itself turns counterfeiter? In that case, there is no hope of combatting this activity by inventing superior detection devices.  pp. 36-37
Kings of old could debase their coins and pass them off as the real thing but this was a slow, tedious process that didn’t yield much revenue.  Not only that, people grew wise to it and found ways to tell a cheat from a genuine article.  And they saw it as a cheat, not as a way of increasing GDP, or making the price of exports more competitive, or stabilizing the price level.

Paper money changed all that.

People deposited their gold and silver in banks for safekeeping, then used the paper claims to the metal as convenient substitutes for money.  Bankers soon proved they couldn’t be trusted.  They would give in to the temptation to loan out some of their deposits at interest, having observed that most people were satisfied using the paper itself in their transactions and would rarely redeem it for the gold or silver. 

When noteholders and depositors came running to redeem their rightful claims and the banks proved unable to comply, the government allowed the banks to turn them away empty-handed while remaining in business.  

Slamming the doors on legitimate note holders and depositors was embarrassing to the banks, not to mention unprofitable.  Thus in the U.S. the biggest bankers pushed for and finally got a law passed in 1913 that created a central bank - the Federal Reserve.  Economist Joe Salerno describes the Fed as
a cartelizing device that limits entry into and regulates competition within the lucrative fractional-reserve banking industry and stands ready to bail it out, thus guaranteeing its profits and socializing its losses.  p. xxi
For a few years there was a serious problem with this arrangement: gold stood in the way.  Central banks could conceivably counterfeit gold but the fake coins would differ in composition from the real thing and would be subject to detection.  From the counterfeiters’ perspective, the beauty of paper money is that it all looked the same.

Gold was subsequently framed as one of the causes of the Great Depression and by decree paper, the money substitute, became money itself.  The president the people elected seized their gold and locked it up in the Fort Knox Bullion Depository.  As dollars can now be created with a few keystrokes, it has proven trivial to fund trillion dollar deficits and endless rounds of QE.

Today, the rich are getting richer and the poor are getting poorer not because of “capitalism,” but because of a government-supported monetary system that enriches designated counterfeiters and their beneficiaries at the expense of other dollar holders.

Ironically, Milton Friedman, never a champion of a gold coin standard, had priceless insight to how it worked:
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. 366
Given that monetary policy today consists of varying degrees of counterfeiting, we need to get government out of the way and let the market-designated money - whatever it may be - take care of itself.

Friday, January 11, 2013

Lessons not learned from World War II

Policymakers today draw what they consider obvious conclusions from the Good War.   The New Deal had been chipping away at unemployment and the economy was recovering, but then Japan’s surprise attack provided the political means for allowing the government to shift gears.  Over the next four years the American economy got a heavy dose of Keynesianism, and the results prove the Keynesian case: GDP soared and unemployment all but disappeared.  Only in 1946 did official GDP take a beating, though surprisingly, given that the government fired roughly 20% of the labor force, the unemployment rate rose to only 3.8%.  (Five percent is considered normal for a healthy economy.)

Since Keynesianism has been validated under fire in the real world, its advocates tell us, it is altogether appropriate that government spend and inflate the economy back to prosperity today or any other time.

This is why Obama in 2009 came charging into office touting a big spending plan.  Mark Zandi, one of the architects of Obama’s stimulus package (officially, the American Recovery and Reinvestment Plan of 2009), projected in November, 2008 that “even with the [$300 billion] stimulus [in 2009], some 1.8 million jobs will be lost, with unemployment peaking near 8%.”  Without the stimulus, God forbid, unemployment would reach 8.94% by October, 2009.

What actually happened?  By October, 2009, with a $250 billion stimulus (according to the CBO), unemployment reached 10.1%.  How did it happen that the cure made matters worse by more than a full point?  Always spin-ready, the administration’s post-facto claim was they had misjudged the degree to which Bush had ruined the economy.  Without the stimulus, you see, unemployment would’ve risen even further. 

They can say this with a straight face because they know big deficits and inflation did the trick in World War II.  They know because they’ve seen the data.  Even conservatives readily agree - “World War II got us out of the Depression.”

Conscription to the rescue

During the 1930s and up until Pearl Harbor, there were many deteriorating measures of economic health, but none worse than unemployment.  All the controls and regulations, all the taxes and inflation, all the fireside chats and damnations of the rich, all the privileges to the unions, all the deficits, were not restoring employment to anything close to pre-Crash levels.

Then the Japanese finally struck, giving Roosevelt the back door he had been looking for

Finally, the government was in a position to provide millions of men with a paying job - conscript them and send them overseas to fight a war.  Government’s pitch was we had tried minding our own business but the forces of evil spread to our shores - not our shores, exactly, but the shores of an island some 2,500 miles from the mainland where the U.S. Navy had been hanging out since the 19th century.

There was a sudden rush to kill a lot of people, and the government would pay men to do the killing.  Low pay, of course, but nonetheless something.  Since government was doing the “hiring,” the 10 million or so men who were drafted could either take the job or stay home in the comfort of prison.  In a display of patriotic fervor, most of them took the job.  The draftees had no way of knowing their beloved FDR had set them up by provoking an attack that killed over 2,400 people, including civilians.

Was the economy booming as a result of the war?  No.  People stateside were working, but they were building things for the military rather than private citizens.  People were getting paychecks but price ceilings, rationing, and other government controls made life anything but prosperous.

Let’s ask that question again: Was the economy booming?  Absolutely.  The GDP figures tell the story.  During the war years, GDP exploded.  The government component of GDP went wild while private investment shrank, but so what?  To most analysts, GDP is GDP.

Ignoring the market’s signals

From the beginning of the depression in 1930, the free market had been willing to put people to work, but government wouldn’t let it.  Allowing wages to fall along with other prices was deemed cruel and unfair.  Almost 12 years later wages did fall for the men sent overseas, over a million of whom came back dead or wounded.   

Americans had a choice - the market’s way or the government’s way.  Unfortunately, they let government decide for them.

Politicians know that workers don’t take kindly to seeing their nominal income decrease, even if other prices are falling, and are likely to register their displeasure at the polls.  But there has to be more to it than political expediency, so officials announce that if wages fall, workers can’t buy as much and the economy goes downhill.   So they keep wages up to protect the workers, without whose spending they put themselves out of a job.

Keeping wages from falling did protect them - the ones who managed to hold onto their jobs.  Given the falling prices prior to Roosevelt’s gold heist, people with jobs found the dollars in their paychecks were buying more.  Predictably, high wages led to high unemployment, but Keynes considered this evidence of market failure, that Say’s Law no longer worked - there was a glut of labor but no one was hiring.  As Rothbard explains, however,
There is never any genuine unsold surplus, or "glut," whether specific or general over the whole economy, if prices are free to fall to clear the market and eliminate the surplus.
Keynes’s recommended policy - deficit spending and inflation - was far more politically palatable than leaving wage rates to the market.  With above-market wages, especially after passage of the Wagner Act in 1935, not only were people out of work, but those with jobs frequently worked reduced work weeks and lived in constant fear of getting fired.  By contrast, if you were stateside during the war you had no trouble at all finding a military contractor willing to hire you.

Government deficits and inflation didn’t cure unemployment in the 1930s, and they didn’t cure it during the war, either.  

When did prosperity return?  After Roosevelt died and the war ended, a new attitude prevailed in Washington that gave investors enough confidence to begin investing again.  Most of the wartime controls were removed, and consequently private investment soared even though official GDP plummeted.

As Robert Higgs tells us,
A minimum estimate of [economic] growth in 1946 was 30%.  There was never a year like that in our history.  Ever.  Not even half that good.  Ever.  Thirty percent in one year.  This was real growth. 

What looks like the second-worse year in history from the standard GDP data was, in reality, the best year ever in year to year performance of all time.  This was the real peace dividend.

Keynesianism instills the conviction that some combination of deficits and inflation will set things right again, that when one QE or stimulus package doesn’t do the job, another will, then another, then another.  We need to remember that it wasn’t more government that restored prosperity in 1946, but rather the release of productive energy made possible by significantly less government.