Wednesday, June 2, 2021

The mother of all counterparty risks

Investors looking for safety consider US treasuries the safest investments possible because they are guaranteed by the US government. If you’re looking to minimize counterparty risk you buy treasuries. 

Though rarely mentioned by investment analysts, the government’s “guarantee” of payment is backed by the guaranteed invasion of coercive taxation.  If a person refuses to pay taxes the government will fine, incarcerate, or murder him.  In buying treasuries, therefore, investors will at least get the nominal value of their investment back at term, but at the price of helping to fund a supreme criminal organization.

Most people of course don’t see the government as organized crime, so they view the purchase of treasuries not only as an investment but an act of patriotism.  They are helping in some small way to sustain this great country we live in.  

Make no mistake, it is still a great country.  But in some small way they are making it less so by feeding the beast.  

Are governments as they exist really criminal in nature?  

How could governments be criminal if most political scientists view them as necessary for the survival of civilization?  How, in other words, could a criminal organization be the necessary foundation of a free society?  It makes no sense.

Thomas Paine, in his blockbuster pamphlet Common Sense, which lit the fuse leading to the American Declaration of Independence, argued that “the race of kings” under which mankind suffered had no honorable origin: 

It is more than probable, that, could we take off the dark covering of antiquity and trace them to their first rise, we should find the first of them nothing better than the principal ruffian of some restless gang; whose savage manners or pre-eminence in subtlety obtained him the title of chief among plunderers . . .

The conquered country “had a king, and then a form of government; whereas the articles, or charter, of government should be formed first, and men delegated to execute them afterwards.”

Sounds reasonable but how successful has Paine’s recommendation been?  The US started with the Articles of Confederation in 1781 but, due to the nationalists push for a more “energetic” government, were replaced with the US Constitution in 1789 that included taxing powers.  Two years later Alexander “implied-powers” Hamilton succeeded in establishing the First Bank of the United States (BUS), “explicitly rejected by the constitutional convention” and nowhere found in the new government’s charter. 

(For those arguing for the necessity of government in the sense of a powerful central state, note the absence of any such government during the war itself, 1775-1781, which saw colonists, albeit with foreign aid, defeat the contemporary world’s most powerful military.)

The rematch

The US launched a war against Great Britain in 1812 in retaliation for impressing some 15,000 American sailors into the British military since 1793.   It went to war without the inflationary support of the BUS, the charter for which had expired in 1811.  Since wars are fought with massive debt, this was a major problem. Without the aid of the capital-intensive banks of New England, where the war was highly unpopular, the US government

“encouraged an enormous expansion in the number of banks and in bank notes and deposits to purchase the growing war debt. These new and recklessly inflationary banks in the Middle Atlantic, Southern, and Western states, printed enormous quantities of new notes to purchase government bonds. The federal government then used these notes to purchase arms and manufactured goods in New England.”  Rothbard, The Mystery of Banking, epub, p. 350

What was wrong with this arrangement?  Without it, the government would have to rely on high taxes to fund the war.  And that would mean negotiating a truce, since no one wanted taxes increased to pay for the war.  Wars and taxes had been the core reason for declaring independence from the mother country.  Was there to be no escape? 

Apparently not.  By the war’s end the number of bank notes and deposits had increased by 87.2%, while specie support (gold in bank vaults) had declined by 9.4%.  Bank counterfeiting, a deceptive form of taxation, paid for the war.  

But it wasn’t that straightforward.  As the inflated notes piled up, the New England banks demanded redemption in specie from the inflating banks, which they mostly didn’t have.  In August, 1814, governments at the state and federal level allowed the inflationary banks to remain in business while declining their contractual obligation for redemption.  At the same time they were allowed to force their debtors to pay up.

New England bankers, who perhaps thought they were operating in a free market, were victims of counterparty theft.  They got shafted.  It’s little wonder why New England nearly seceded from the union at the Hartford Convention of 1815.  

Keep in mind that under free market capitalism, “the moment a bank cannot pay its notes or deposits in specie, it must declare bankruptcy and close up shop.”  (Rothbard, p. 351)

But the precedent for fraud had been set, and the US government would return to it again and again, especially after the creation of the Federal Reserve System, which has proved indispensable for funding its welfare/warfare programs through dollar destruction. 

While on the topic of the Creature and our forced counterparty risk, let’s not forget how it has kept its part of the bargain to keep the US dollar  sound:


Had fractional-reserve banking been regarded as embezzlement, the argument for the FED would dry up.  Banks that counterfeited credit would go out of business.  Before the FED’s dollar arrived ordinary people could save by keeping gold or silver coins under their mattress.  Their money actually appreciated because prices declined.  Gold truly has no counterparty risk unless the government decides to control it.  

But then it’s the criminal government, not gold, that poses the risk.


George Ford Smith is the author of nine books, including The Flight of the Barbarous Relic, Eyes of Fire: Thomas Paine and the American Revolutionand The Fall of Tyranny, the Rise of LibertyHe is also a filmmaker whose works include Do Not Consent- Think OUTSIDE the voting booth, Last Day, and Risky Pinch Hitter. 

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