Wednesday, December 14, 2016

Don’t let fallacies torpedo your thinking

A fallacy is defined as a mistaken belief or a failure in reasoning.  Though most people make an effort to avoid mistakes, no one is infallible, not even great writers.

You can download a chart of common fallacies here.  The online chart is hyperlinked to each of the fallacies.

Here’s another source of common fallacies with examples, including their Latin names.  Example: post hoc ergo propter hoc (‘false cause’) fallacy: "after this, therefore because of this.”

I break fallacies into two major groups:

A.  First, we have traditional fallacies you might remember from philosophy 101.  In these, the reasoning is obviously absurd, though we might be at a loss to explain the specific violation involved:
Your dog has puppies. 
Your dog is a mother. 
It is your dog, therefore it is your mother.

Every distance, no matter how short, consists of an infinite number of points 
For a body to move any distance requires covering an infinite number of points. 
Nothing can move an infinite distance. 
Therefore, all movement is deceptive.



B.  More frequently we find these, where the fallacies are more subtle:
“The country’s top economists are in agreement that the Federal Reserve is necessary for economic prosperity.”
“The country’s leading experts agree that X is harming the environment.  Therefore, the government should regulate or ban X.”
Let’s address the first statement found under B.

Is it true?  In a literal sense, yes — the top economists wouldn’t dream of doing without a central bank.  Or if they did it would be considered a nightmare.

So is our work finished?  Do we affirm it as true and move on?

No, because the statement suggests that unless you’re a top economist, you have no grounds for disagreeing.  I call it the “Who are you?” (Quis es?) fallacy.  History tells us experts can be dead wrong, so let’s at least mount a challenge, shall we?

The country’s top economists hold advanced degrees from universities that support central banking.  The universities, in turn, receive funding from the federal government, which created the federal reserve system and relies on it heavily for monetary support.  Is it odd the universities would promote the Fed as an essential economic institution?

With regard to funding, many of the top economists themselves are deriving at least a portion of their income from the Fed.  Is it a stretch to imagine these economists are reluctant to turn against an institution they’ve been trained to salute?  Is it possible their bank accounts play a role in their refusal to cast a critical eye? 

And do the ones on top belong there?  If they’re the best and brightest, how did the bust of 2007-2008 explode in their faces?  Almost none of the “top” economists saw it coming, including the leading ones on the Board of Governors.  The same blindness prevailed before the stock market crash of 1929, with one notable exception.

In economics as in other crony (government-connected) professions there is a pay-to-play aspect, where the payment is an unstated agreement never to question certain assumptions.

Perhaps the economics the top economists learn is flawed.  In school they are taught that low interest rates are necessary for economic growth.  Since the central bank has the exclusive power to increase the money supply and thereby (indirectly) lower the rate of interest, it is therefore a pillar of prosperity.  

The idea that the economy is harmed by changes in the money supply, that any increase in money available for lending should come from real savings, is given little or no hearing in classrooms or policy discussions.  Not coincidentally the few economists who adhere to these views, who for this very reason are not considered “top,” had claimed a crisis was “baked in the cake,” as some put it.  

I should also mention that if the Fed is necessary for prosperity, how did we ever prosper before November 16, 1914 when the Federal Reserve Bank of New York opened for business?  And if the Fed is needed to control the business cycle — the booms and busts — how is it we’ve had some of the biggest economic crises since the federal government imposed it on us?

So, returning to the original statement, we find the country’s top economists to be incompetent, grossly so, while the Federal Reserve has been anything but a facilitator of general prosperity.  


I leave the second example in B for you to dissect as an exercise.

Monday, November 28, 2016

Technology: The Great Bushwhacker

If anything is clear about the 2016 presidential election it is the failure of the establishment media to push their favored candidate into the White House.  How did this happen?  A nearly-ubiquitous force known as the Web riding on the quietly-soaring Pegasus of technology As Gary North wrote in 2013,
What is going to shape the thinking of the American electorate is access to the Web, which enables people to read in-depth stories that interest them, and which interest people of similar perspectives. The social media will determine which news stories are read, not a handful of news screeners at the four major television networks. . . .
The Left is blaming Facebook in 2016.  But where did Facebook come from?  

Moore's Law bushwhacked the election.  It is bushwhacking almost everything.

Technology is poised to redefine life-as-we-know-it, including government.   There are numerous books that advance this outlook in great detail, among which are  Engines of Creation: The Coming Era of Nanotechnology, The Singularity is Near: When Humans Transcend Biology, Radical Abundance: How a Revolution in Nanotechnology Will Change Civilization, and Regenesis: How Synthetic Biology Will Reinvent Nature and Ourselves And putting technology in an economics context, Human Action: Scholar’s Edition 

There are many high-IQ people who talk about the future as if technology were an irrelevant consideration.  Political commentators especially have been speculating on presidential candidates for 2020 and 2024, as if the world will be essentially the same then as it is now in late 2016.  Have they forgotten how technology helped an underdog get elected in 1960?  Have they not seen Wag the Dog?


If anything is certain about the future it is the continuing decentralization of political power along with the technological empowerment of the individual.  It's possible government will suffer the same fate as landlines -- still around but headed for extinction.

Technological change is coming at us in ways that resonate with science fantasy and at an increasingly rapid pace, and nothing short of a global disaster will stop it.    

In 1965, Gordon Moore, co-founder of Intel, published a paper in which he noted that the number of components on an integrated circuit doubled every year.  Since the cost of the integrated circuit would remain roughly constant, we would get twice the speed and twice the circuitry at the same price.  Though later revised to every two years, Moore’s prediction has proven to be remarkably accurate and is known eponymously as Moore’s Law.  Ray Kurzweil, futurist, inventor, and head of engineering at Google, gives us a sense of what this means:
When I was an undergraduate [in the late 1960s] we all shared a computer at MIT that took up half a building.  The computer in your cell phone is a million times cheaper and a thousand times more powerful.  That’s a billion-fold increase in price/performance of computing since I was an undergraduate.  
Moore's Law will bow to another

Many observers predict Moore’s Law will end within the next few years, and with it we’ll see tech development slow from a sprint to a walk.  But as Kurzweil frequently points out, Moore’s Law is not the first but the fifth paradigm to provide exponential growth of computing.  Whenever one paradigm runs out of gas another one has been developing in the wings ready to continue the exponential.  In his words:
Computing devices have been consistently multiplying in power (per unit of time) from the mechanical calculating devices used in the 1890 U.S. Census, to Turing’s relay-based “Robinson” machine that cracked the Nazi enigma code, to the CBS vacuum tube computer that predicted the election of Eisenhower, to the transistor-based machines used in the first space launches, to the integrated-circuit-based personal computer which I used to dictate (and automatically transcribe) this essay.
He thinks the sixth paradigm of computing will be modeled on the structure of the human brain:
Chips today are flat (although it does require up to 20 layers of material to produce one layer of circuitry). Our brain, in contrast, is organized in three dimensions. We live in a three dimensional world, why not use the third dimension? The human brain actually uses a very inefficient electrochemical digital controlled analog computational process. The bulk of the calculations are done in the interneuronal connections at a speed of only about 200 calculations per second (in each connection), which is about ten million times slower than contemporary electronic circuits. But the brain gains its prodigious powers from its extremely parallel organization in three dimensions.  
There are many technologies in the wings that build circuitry in three dimensions. Nanotubes, for example, which are already working in laboratories, build circuits from pentagonal arrays of carbon atoms. One cubic inch of nanotube circuitry would be a million times more powerful than the human brain. There are more than enough new computing technologies now being researched, including three-dimensional silicon chips, optical computing, crystalline computing, DNA computing, and quantum computing, to keep the law of accelerating returns as applied to computation going for a long time.
In an interview with K. Eric Drexler, the founding father of nanotechnology, Kurzweil asked what sorts of things will emerge from nanotechnological engineering in the years ahead.
Kurzweil: One thing we can build today is very powerful computers.  What kind of computers can we build with nanotechnology?
Drexler: There’s a very conservative design for computational systems that can be the basis for computers that are comparable in power to modern CPUs but occupy approximately one cubic micron.  
And putting the power of a modern-day CPU into a cubic micron lets you deliver that kind of computational power in a volume that’s about 1/1,000th that of one of the cells in your body.  
I think that says something about the kinds of tools that will be available for biomedical instrumentation and intervention in the future.
By controlling the structure of matter at an atomic level, nanotechnology will also launch a revolution in manufacturing, including factories on a desktop.
Drexler:  Nanotechnology will provide a basis for taking everyone in the world — including people who are dirt-poor today — and providing them with a standard of living that’s far beyond the developed world today, and with less ecological impact. . . .
The greatest difficulty I see in developing advanced nanotechnologies is more cultural than scientific or technological.  We need a new field of engineering . . . .  
Scientists are used to working in small teams exploring new frontiers.  Engineers, to build large systems, work in larger teams and seek their challenges in taking known components and building new systems.   
Having a culture of systems engineering developing nanoscale technology is one of the greatest challenges we have today.  
Moore’s Law will stall, but the exponential progression of technology will continue as long as civilization survives.
Incorporate technology into your thinking, and keep this chart in mind, one of many in The Singularity is Near.  

Wednesday, November 16, 2016

Revenge of the barbarous relic

A former Fed chairman addresses the country on national TV (fiction):

“There should be a sign on the front of the Fed building in Washington saying, ‘We work for the elites – the commercial bankers and government – at the expense of everyone else. Try and stop us.’ 

“Let’s try, shall we? 

“Bankers and politicians have had a mutually rewarding relationship for ages. Bankers create money and loan it out at interest, which can be very profitable. Trouble is, creating money electronically or with a printing press, which is what central banks do, is counterfeiting. In return for a share of the newly-created money, government lets banks get away with it. Government gets bigger, bankers get richer. 

“Bank counterfeiting, which is another name for inflation, fuels a great many evils for which it gets little credit, such as wars and depressions. To put an end to this racket we need to establish a free market in banking, which means open it up to competition. What would prevent banks from counterfeiting on a free market? Property right enforcement. All money is someone’s property. If I deposit my money in a bank and pay a fee for the service, I expect to be able to get it back on demand. If the bank can’t provide it because the bank’s loaned it to someone else, it has violated my property rights. If the law respects property rights consistently, the law will hold the bank responsible. In the long run at least, counterfeiting would be unprofitable. Few bankers will find such prospects tempting. 

“Money was founded on the market. At first it was a commodity that was bartered for other commodities or services. But because of the great number of people willing to accept it in trade, it began to be acquired for trading purposes only – as a medium of exchange, or money. 

"Gold won the competition as the most popular money long ago. Gold is very difficult to produce, which is one of the biggest reasons it became the preferred medium of exchange. When a rare commodity such as gold is used for money, the supply remains fairly constant. 

"People have always known that increasing the money supply dilutes the value of each monetary unit. But apparently they didn’t make a connection between this fact and government’s eagerness to adopt a fiat dollar as our monetary standard. When new money is created as a matter of policy, as it has been for generations with the encouragement of leading economists, the dollar is doomed, and so are dollar users. 

“We need to remember, though, that banking as such is crucial to higher civilization. As one commentator has astutely observed, without an international banking system most of us wouldn’t be alive today. Money and banking make possible the division of labor, which has drastically reduced child mortality and raised living standards wherever free markets flourished. 

"But it’s also true that throughout most of banking history, banks promised to redeem their notes in some precious metal, either gold or silver. Though they could keep that promise for only a small fraction of their customers, it still served as a vital check on their propensity to counterfeit. 

“For Americans, the gold standard was killed by presidential decree during the crisis of the Great Depression. In 1971 another president told foreigners they could no longer get gold for American dollars and thus removed the last trace of monetary gold from international trade. Since then all governments have been on a fiat money standard, depreciating their currencies as a matter of policy. 

“The story of gold’s disappearance is part of a larger narrative about the growth of government. Besides being a check on bank counterfeiting, or inflation, gold is also a serious restriction on government expansion. For the advocates of big government, therefore, gold becomes a barbarous relic that stands in their way. 

“The corruption of money began when people started keeping their gold with banks, which would issue deposit receipts, or banknotes, as money-substitutes. Because of the banker’s reputation for trust and propriety, their notes were readily acceptable in trade as substitutes for the gold locked away in their vaults. People knew they could redeem the notes for gold any time they wished. But because of the convenience of carrying and doing business with banknotes rather than coins, people tended to leave their gold in the bank. 

“Bankers became the money centers of their communities, even though most of the money under their protection wasn’t theirs – they could only claim a small percentage of it as a fee for their service. Because money was in their possession, though, businessmen would come to them for loans, and the bankers, seeking additional profit opportunities, found ways to accommodate them. 

“Unfortunately, they turned to counterfeiting as a means of accommodation. What I mean is, they began creating and loaning out deposit receipts that had no gold behind them. The new notes were counterfeit because they were being passed off with the understanding that they were genuine gold substitutes. But in fact the notes only looked like the real thing. The bankers knew, though, that as long as they didn’t issue too many of these counterfeit bills, they would escape detection. 

“In extending loans with counterfeit notes or by creating unbacked deposit accounts, they could point to conspicuous growth in the local economy. According to almost everything we read, bankers weren’t committing fraud, they were helping business grow, putting people to work, helping them earn a living. As businessmen, the bankers could tell themselves they were merely reacting to the demands of the market, in their case a demand for money. And they reacted by simply printing and issuing it. 

“Looking back, most commentators now find little fault with what they were doing. So what if their notes weren’t backed by gold? Today’s financial press would say the bankers were ‘investing’ or ‘accommodating’ or ‘providing liquidity.’ You never hear anyone call it counterfeiting, at least not in mainstream circles. 

“But by issuing banknotes or credit not covered by gold, the bankers were increasing the money supply, a process identical in its effects to counterfeiting. An increase in the supply of money confers no broad social benefits – but it does benefit early users of the new money at the expense of others: the first users have the advantage of buying goods at current prices. Later, when prices have gone up, the inflated money supply doesn’t benefit anyone. We improve the general welfare by increasing the production of goods, not by increasing the production of money. 

“Nevertheless, the banks’ practice of generating unbacked money substitutes prevailed. Invariably, some would go too far and cause depositors to begin doubting their banker’s rectitude. A few would start showing up at teller windows wanting their notes exchanged for gold. Other note holders would catch on, and the bank was soon confronted with a run. But without enough gold to redeem, many of the banks had to shut their doors. As the panic spread, even the more cautious banks would experience massive demands for redemption. 

“For reasons of its own, government took a strong interest in the bankers’ plight and usually issued moratoriums on note redemption. For a period sometimes lasting years, banks were permitted to default on their liabilities to note holders while being allowed to conduct all other banking activities. 

“Helpful as this privilege was, it wasn’t enough. Banks weren’t always allowed to renege on their promises, their easy credit policies created bankruptcies and recessions, and besides, bank runs were embarrassing. No banker liked seeing crowds swarming at his door demanding what was theirs, even if the law was on his side. 

“Fortunately for American bankers and their political allies, Europe provided examples of ingenious solutions to the dilemma of bank counterfeiting. During the early years of the twentieth century U. S. bankers imported some of their ideas and, together with a few powerful politicians, devised a plan for a banking cartel. 

“The cartel would consist of all the national banks of the country organized under the authority of a central bank, which would be endowed by government with a monopoly of the note issue. Furthermore, all the deposits of the member banks would be moved to the central bank and held as reserves, with the central bank dictating to its members what fraction of its reserves they had to maintain when making loans. Historically, banks have been held to a ten percent reserve requirement most of the time, meaning they could extend nine dollars in loans for every dollar held in reserve. By dictating reserve ratios for all members, the central bank would control the rate of monetary inflation in a uniform manner so that any one bank wouldn’t get more reckless than the others and get itself and the rest of the banks in trouble. 

“Americans didn’t like cartels or centralized power, the planners realized, so they called their creature a ‘reserve system’ instead of a banking cartel and dressed it up with regional branches to avoid the appearance of a concentration of power. As John Kenneth Galbraith observed many years later, the regional design was ingenious for serving local pride ‘and for lulling the suspicions of the agrarians.’ Since no cartel will work without government guns, it was natural, perhaps, to attach the name ‘federal’ to it, as well. Thus, the American central bank became known as the Federal Reserve System, or the Fed. 

“Signed into law on December 23, 1913, the Federal Reserve Act was hailed as a major victory of the Progressive Era’s fight against the alleged abuses of concentrated market power, in this case, the Money Trust. Banking was at last rescued from the hands of Wall Street and put under the enlightened care of government. Greed had been tamed by the people through their selfless representatives in Congress and their man in the White House. Government would see that the Fed served the ‘public interest’ and would ensure that it didn’t fail. And with the Fed providing the economy with an ‘elastic currency,’ the ruinous panics and depressions of the past would be gone forever. 

“Those were the beliefs, but the facts reveal a far different story. 

“It was the Morgans and Rockefellers of Wall Street who turned to government to cage their banking competition, especially the growing challenge from non-national banks in the South and West, and came up with a plan for a central bank. It was the big bankers who took the lead in creating a system that would protect them from the hazards of bank counterfeiting and make them a monopoly issuer of bank notes. After the Act became law, it was Morgan bankers who occupied the seats of power in the new system, particularly at the Fed’s New York branch where Benjamin Strong, president of J. P. Morgan’s Bankers Trust Company, ran the money machine from the Fed’s inception in 1914 to his death in 1928. 

“The Fed became an indispensable instrument of profit and power. Beginning in 1914, it cut reserve requirements approximately in half, dropping the ratio from 21 percent to 11 percent, roughly doubling the money supply and permitting both financial aid to the Allies and eventual American entry into the European war. Under the impetus of the war, the Fed became the sole fiscal agent of the Treasury, securing the deposit of all Treasury funds at the Federal Reserve. The Morgans, exploiting its ties with England and its position of power at the New York Fed, became the sole purchasing agent in the U.S. for war materials to be shipped to Britain and France. The Morgans also became the sole underwriter for British and French bonds floated in the U.S. to pay for armaments and other goods the Allies wanted. 

“Government, meanwhile, used the war as an excuse to create what one economic historian has aptly called a ‘garrison economy.’ Among other things government took over railroads and communications industries, seized hundreds of manufacturing plants, fixed prices, intervened in hundreds of labor disputes, raised taxes, and conscripted a million men for military service so they could join the bloodbath over there, in the European trenches. The Supreme Court, the alleged guardian of the Constitution – which itself is our alleged guardian against an aggressive government – ruled most of the war interventions constitutional, including the draft. Merely questioning the constitutionality of the draft could get you thrown in jail. Thus, the federal reserve – a government-protected, government-serving, elaborately-cloaked counterfeiting cartel – played a crucial role in converting a peaceful America into a bellicose, interventionist state. 

“All the belligerents in the war went off the gold standard and resorted to inflation – counterfeiting – to fund the carnage. Taxes were raised, but only so far. Governments that attempt to fund wars by raising taxes often find themselves facing a revolt on the home front. Wars require massive inflation, and the institution responsible for inflation is the government’s central bank. Without government control of the monetary system through its central bank there would’ve been no war, or certainly not one nearly as long or destructive. 

“The war killed over 19 million people, counting both military and civilian deaths. How many of those deaths could have been prevented if the governments did not control the money supplies? If they had engaged in central bank ‘disarmament’ instead of slaughtering one another? 

“Rather than pointing out the inflationary theft of resources that underlies all modern wars, many commentators were instead spellbound by the patriotic fervor and the wonderful command and control economy the war brought in its wake. No doubt it was a heady experience for the elites in command and very lucrative for a few others. In this connection I strongly urge you to read a short book written by two-time Medal of Honor recipient, Major General Smedley D. Butler, called War is a Racket. A racket, General Butler said, is something that is not what it seems to the majority of people. Only a small group of insiders knows what it is about. A racket is conducted for the benefit of the very few at the expense of the very many. 

“We hear voices calling for patriotism during war. But who exactly were the patriots during ‘the war to end all wars’? 

"Was it J. P. Morgan, who repeatedly said, ‘Nobody could hate war more than I do’ as he was amassing commissions totaling $30 million as a purchasing agent of war supplies for England and France? 

"Was it Morgan’s steel, shipbuilding, and powder enterprises that bought controlling interest in, and editorial control over, the country’s 25 most influential newspapers? 

"Was it President Woodrow Wilson who had won reelection with the slogan ‘he kept us out of war’ then five months later asked Congress to join a war that had already killed 5 million men? 

"Was it Senator Robert La Follette of Wisconsin, who rose in the Senate to dissect Wilson’s call for war point by point, arguing that Wilson and his advisors had been colluding with Britain for two years trying to find a pretext for American entry into the fray against England’s enemies? 

"Was it the senators who spoke after La Follette and for five hours hotly denounced him as ‘pro-German’ and ‘anti-American’? 

"Was it the majority of Americans who in spite of a well-orchestrated media campaign against Germany still opposed joining the war? 

"Was it the million men who were conscripted and sent overseas, over 100,000 of whom lost their lives? 

"Was it the industrial firms back home, thousands of miles from the slaughter on the Western Front, whose income tax records showed huge profits during the war years? 

"Was it the millions here who kept their mouths shut about the war because the Espionage Act of 1917 and its successor, the Sedition Act of 1918, hung a 20-year prison sentence over the heads of Wilson’s critics?

“Washington, Jefferson, Madison, and John Quincy Adams are generally considered patriotic, yet they counseled strongly against American entanglement in foreign affairs. ‘Commerce with all nations, alliance with none,’ were Jefferson’s famous words. America ‘well knows that by once enlisting under other banners than her own, the fundamental maxims of her policies would insensibly change from liberty to force,’ John Quincy Adams warned his colleagues in a famous Fourth of July speech to Congress. ‘Of all the enemies of true liberty,’ James Madison wrote, ‘war is, perhaps, the most to be dreaded, because it comprises and develops the germ of every other. War is the parent of armies; from these proceed debts and taxes; and armies, and debts, and taxes are the known instruments for bringing the many under the domination of the few.’

“The Fed, and its partner in theft, the income tax, enabled politicians and their financial backers to ignore their warnings. Should we be surprised that many American war supporters made out like bandits? J. P. Morgan was one of those Americans who cleaned up handsomely from the war he professed to hate. As journalist H. L. Mencken noted a few years later, ‘The Government hospitals are now full of one-legged soldiers who gallantly protected [Morgan’s] investments then, and the public schools are full of boys who will protect his investments tomorrow.’

“The man who unfortunately became the most influential inflationist of the twentieth century, John Maynard Keynes, saw clearly how monetary fraud leads to a country’s downfall. Writing shortly after World War I, he said, ‘There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.’ To ‘debauch’ a currency you inflate it.

“No government bent on amassing power, however, can do so while banknotes and deposits are still redeemable in gold. Gold, therefore, has to go, but it must be removed in a deceptive manner, so that people won’t notice the theft. Encouraging people to keep their gold in banks is a crucial first step on the road to confiscation, but having it reside in local banks means people can withdraw it easily. The next step, therefore, is to create or exploit a crisis and cite that as an excuse to have it moved into the vaults of the central government. In theory, it would still be accessible to the owners, but highly inconvenient and, not coincidentally, unpatriotic to withdraw. 

“Thus, in 1917 the Federal Reserve law was changed to allow the Fed to exchange its notes for gold, on the grounds that the government wanted to protect the gold supply from foreigners. In dealing with its member banks the Fed increased its holdings from 28 percent of the nation’s gold stock before American entry into the war to 74 percent by the war’s end. With gold largely centralized at the Fed, people were reluctant to touch it. Instead, they dealt almost exclusively with notes that promised to pay gold coin on demand. 

“After the war, and after a depression from 1920 to 1921 made brief by government’s inability to intervene in time, the Fed continued its inflationary policies and financed the boom years of the 1920s. Most economists today will tell you we had no inflation during this decade because overall prices remained the same. But the 1920s were also a period of advancing technology and new methods of manufacturing, which improved productivity enough to hold prices level. In other words, if the banks had not engaged in credit expansion during the ‘20s, prices would’ve dropped, and the country would have enjoyed prosperity without a crash waiting in the wings. But in fact the Fed boosted the money supply by roughly $26 billion from mid-1922 to mid-1929. And the new money pushed stock and real estate prices up to feverish levels. 

“The stock market break that began in October, 1929 signaled the beginning of a necessary correction to the preceding boom years. From the country’s first major depression in 1819 until the depression of the early 1920s, government had mostly allowed the economy to correct itself. The depressions, consequently, lasted only about a year or two, and 1930 should have been a typical period of correction and gradual recovery. 

“The country’s failure to recover is unfairly blamed on the Federal Reserve, which is charged with failing to initiate an inflationary binge to restore the lost euphoria. The Fed certainly tried to inflate the economy back to the boom by lowering interest rates and purchasing government securities, and it deserves blame for the Crash itself because of the money it created. But it was government intervention that deepened and prolonged the depression. 

“To repeat, credit expansion brought on the Crash, government policies lengthened and intensified the depression. 

“On the surface, the goals of the interventionists had a noble ring – they were being done to keep wage rates and prices from falling. Thus, for example, the Hawley-Smoot Tariff of June, 1930 was promoted as a way to support domestic industry and labor, but it virtually closed foreign markets to American products. Agriculture, a major export industry, was hit particularly hard, and prices for farm products dropped to unprecedented lows. Hundreds of thousands of farmers went into bankruptcy, and the rural banks who were their creditors suffered the consequences. From 1930 to 1933, many thousands of banks failed. The crushing blow to agriculture caused great harm to the banking system, which in turn spread panic to its millions of customers. 

“The Hoover administration did everything it could to revive the economy, which was precisely why economic conditions grew worse. They believed the command economy installed for World War I had been effective in putting the U.S. on the winning side. If government controls were successful during a war, why not put government in charge of a receding economy? Having abandoned the teachings of the classical liberals, they believed that government decrees had produced the goods that won the war. Another round of government impositions, they were convinced, would again make the desired outcome appear. 

“‘We could have done nothing,’ Hoover said during his 1932 presidential campaign, but ‘that would have been utter ruin.’ He attacked those economists who had urged a hands-off approach, claiming he was determined not to ‘follow the advice of the bitter-end liquidationists ,‘ as he disparagingly called them, and see the whole body of debtors and savers ‘brought to destruction.’ 

“But he only intensified the destruction he sought to avoid. Liquidation of unsound projects created by the inflationary boom was precisely the tonic needed to revive the economy, as history and theory had made clear. When he left office, his coercive concern for the whole body of debtors and savers left one in four workers unemployed, a new low in American history.

“And yet, incredibly, we find historians and economists describing Hoover’s policies as ‘laissez-faire,’ as if he sat back and did nothing while the economy tried to correct itself. If only he had. He intervened far more than any president before him and brought the economy to its knees. Government should ‘do something’ was the dominant thinking then as now, and applying the laissez-faire label pinned the blame on the market instead of the government. If Hoover had been re-elected, he might have been even more aggressive in attacking the economy. As it was, he left that to his successor. 

“In his inaugural address the new U.S. president told the American people their economic problems were due to ‘unscrupulous money changers’ whose conduct in banking and business was ‘callous’ and ‘selfish.’ He promised his listeners that if Congress should fail to act properly, he would ask them for broad executive powers that might be given to a president in the event of an invasion. One Supreme Court justice described the depression as ‘an emergency more serious than war.’ Taking the hint, Congress acceded to the president’s wish and granted him dictatorial powers to resolve the banking crisis. 

“After his inaugural address Roosevelt issued Presidential Proclamation 2039 in which he explained the cause of the national emergency as the ‘heavy and unwarranted withdrawals of gold and currency from our banking institutions for the purpose of hoarding,’ along with speculation abroad in foreign exchange that ‘has resulted in severe drains on the Nation’s stocks of gold.’ Gold and hoarding were his targets. ‘It is in the best interests of all bank depositors,’ he concluded, ‘that a period of respite be provided’ to prevent ‘further hoarding of coin, bullion or currency or speculation in foreign exchange.’ He concluded the proclamation by closing all banks in 1933 from March 6 to March 9, inclusive. 

“Hoarding is a pejorative term for an increase in an individual’s cash holdings. If hoarders are guilty of anything, it’s for exposing the unscrupulous and unsound nature of the banking system for manufacturing multiple claims to the same deposit of gold. In 1931, as people were redeeming $800 million in bank deposits for cash, Hoover lashed out at them for their ‘traitorous hoarding.’ In early 1932 he organized a citizens committee and launched a public campaign against hoarders, blaming them for keeping the country mired in the depression by withholding money from circulation. Evidently, Roosevelt and his Brain Trust agreed with him. But people, in taking their money out of the banks, were only trying to protect what was rightfully theirs. There would have been no problems with hoarding had the bankers not been cheating them.

“We need to remember that money is a medium of exchange and not wealth as such, and the act of withdrawing deposits and keeping them off the market, which decreases the money supply, does not destroy wealth. It only means each monetary unit will command more resources than before. In other words, prices will drop.

“But as we saw, falling prices and wages had been the devil government was fighting. Government spokesmen had reversed cause and effect – at least in their public statements. Rather than seeing the depression as causing prices and wages to drop, they credulously proclaimed that lower prices and wages caused the depression, ignoring ample historical evidence to the contrary. By their logic, therefore, bringing the country out of the depression was a matter of boosting prices and wages to where they were during the good times before the Crash. Since ‘hoarding’ was keeping this from happening, on April 5, 1933 Roosevelt ordered all people with gold in their possession to turn it over to the Federal Reserve, for which they would receive government paper money in return. 

"Who could pass up a deal like that? The government figured everyone could, so they made it a felony for failing to comply, punishable by a fine not exceeding $10,000 and a prison sentence of up to 10 years.

“In its eagerness to inflate the money supply, government was busy inflating the criminal supply. People, in other words, were becoming criminals only because they were resisting the criminality of the state. One of our foremost economic commentators cites the famous work of Friedman and Schwartz, A Monetary History of the United States, 1867-1960, in pointing out that many American citizens anticipated Roosevelt’s gold confiscation and successfully kept their property from the state’s greedy hands. During the three months prior to Roosevelt’s gold grab, circulating gold coin diminished by a whopping 35.5 percent. The state’s actual theft was only 3.9 million ounces or 22 percent of the gold coin then in circulation. Friedman and Schwartz conclude that the remaining 78 percent – roughly 13.9 million ounces of gold – “was retained illegally in private hands.” I commend those people who resisted the plunder, whoever they were. 

“If it had been possible to print gold, government would never have abandoned the gold standard. But it did, and the alleged evil preventing recovery was eliminated by presidential decree. Government now had a money machine with virtually no brakes. They could inflate the money supply as necessary, drive prices and wages up, and put people back to work. 

“Things didn’t go exactly as planned and another World War had to start – and end – before the economy returned to its pre-Crash condition."

Read the rest of the speech, as well as the story behind it, in The Flight of the Barbarous Relic


 









Wednesday, November 9, 2016

Why Trump and not Paul?

Donald Trump led a gut-level attack on the Establishment.  Listening to a Trump speech you didn’t learn economics or the philosophy of liberty; you only heard what you already knew: you were getting the shaft from the elites.  

Ron Paul understands liberty and how it relates to economics, especially monetary theory, and attempted to educate Americans on some important points.  Although his approach had strong appeal to young people it didn’t wake up enough older Americans to create a major movement.  

And that was our loss.  Is it too late?  Maybe not.

Ron Paul rightly made the Fed a campaign issue.  As I understand him, he sees the Federal Reserve as the institution most responsible for the decline of our civilization.  Aside from government itself, I agree.

Main Street people don’t understand the Federal Reserve.  They sometimes confuse it with the Treasury if they think about it at all.  They have no idea what the Fed really does, other than adjust interest rates somehow.  To them the Fed is a big black box, but evidently an important one.  The FOMC gets together every so often and issues statements that are meaningful to a handful of people.   It is Greek to the rest.    

This is one way the Fed protects itself.  If it were widely seen as a monopoly counterfeiter the legitimacy of government would collapse.

You don’t get big government without a means of funding it, and if you need money — lots of it — and have already raised taxes to their political limit, the government solution is to print it into existence.  Think of a child playing make-believe.      

Long ago government counterfeiting often meant debasing the monetary gold or silver by mixing it with less valuable metals, but the citizens who were forced to use it could easily tell a fake from the real thing.  They would hoard the latter and use them on the black market. 

With the invention of paper money the defense against bad money disappeared.  One bill looked the same as the next.  As the long as the paper was a substitute for a weight of gold or silver, though, people could always attempt to claim the coins the paper represented.  Fractional reserve banking made this impossible for every note holder and caused crises when depositors showed up asking for their gold, which the banks didn’t have.  

Bankers were not inclined to throw away a profitable practice like fractional reserve banking, even though it amounted to embezzlement.  The solution was a central bank, but Americans were distrustful of centralized institutions.  

In the U.S. big bankers got together and devised a central bank so named as to appear not to be a central bank: The Federal Reserve System.   It became law in 1913, along with the income tax amendment to the Constitution. 

As World War I proved conclusively, wars and welfare are much more affordable when governments can print the money for their undertaking. 

Under the new centralized system, the Fed coordinates member bank inflation, so that any one member can’t over-inflate and cause a run on its reserves.  

But there was still a problem: Every dollar still had to be redeemable in gold coin.  

In 1933 President Roosevelt solved the problem by criminalizing the possession of gold coins.  The floodgates were now open.   Government could expand as it saw fit by borrowing the money it needed from the counterfeiter around the corner.  After the 1930s Americans found their dollars gradually evaporating in purchasing power, as former Fed chief Alan Greenspan noted in 2002.   As Keynes had warned earlier it is an insidious system that few can diagnose.

Inflationary monetary policy became one of the twin fiscal engines driving pathological government expansion, the other being withholding.

Does Donald Trump understand any of this?  Does he care if he does?  Is he motivated to find out if he doesn’t?

If he’s concerned about the plight of the middle class, he should be.

I think Austrian economists are in a strong position to influence the president-elect.  Ron Paul and other Austrian economists forewarned the crash of 2007-2008.  The Keynesians remained blissfully ignorant.  The Austrians didn’t just predict it, they explained why it would happen in terms of the Austrian Business Cycle Theory.  

The Austrians also warned against government interference with the recovery.  Unsound institutions should be allowed to fail, regardless of size.    Genuine recovery arrives sooner.

As a model of how to proceed they pointed to the Depression of 1921 and to the hands-off approach during the 19th century.  

As a model of how not to proceed they referred to the Crash of 1929 and its long, bloody aftermath.  

And as a way of avoiding the business cycle altogether, they recommended removing the cause: Repeal of the Federal Reserve Act of 1913 and all legal tender laws.

This may be too much for any president, even a maverick like Donald Trump.  But he could take the first step by removing the Fed’s note-issuing monopoly.  Allow competition in money.  And may the best money win.








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