Austrians Remove the Burden of Fear

Bad ideas are sometimes the hardest to de-throne.  It’s probably accurate to say most people think of money as the paper currency printed by governments.  And it is money in the sense that it functions as a medium of exchange, but is it sound, is it vulnerable to inflation?  Its very existence is evidence that it is, so why are so many people reluctant to switch to a money that isn’t?

There any many myths surrounding hard money currencies, and one of them is that money, both its nature and supply, is best left to the alleged guardian of our rights, the state.  The fact that money came into existence on the market and its ultimate form and supply were determined by economic law, is disregarded.  Money matters belong to the state, because the state, unlike the rest of us, is in a position to remove itself from market discipline.  Since the state is necessary to our survival, the story goes, it cannot do its job unless it can control the growth of money.  Money therefore must be of such a nature that its supply can grow in accordance with the orders of a state-appointed committee.

Even the classical gold standard was under control of the state.  When that control proved too limited for those eager for war, it was abandoned.  The gold standard did not fail.  States failed to keep the gold standard.

When Keynes unloaded his General Theory on the world in 1936 it was a manifesto of state economic law.  Free market economists would critique his work, but capitalism untethered scared the public.  After 1929 it became the devil in fine suits.  The fact that even top economists and industry leaders failed to see the Crash coming was especially unnerving.

Unaware of Austrian trade cycle theory, the public saw the market as an alluring evil, drawing people into its clutches with promises of riches then suddenly stripping them of their wealth.  Fear, then, and not ideological persuasion, led them to reject the market as it existed in the 1920s, and along with it any notion that the unhampered market was self-regulating.

Prior to U.S. entry into World War I, the government and its media allies worked hard trying to convince Americans that Germany was a threat to civilization itself.  No such effort was required to scare them about the Depression.  Unlike the Germans who were “over there,” the Depression was very painfully over here.

Robert Higgs’ outstanding book, Neither Liberty Nor Safety: Fear, Ideology, and the Growth of Government, underscores the importance of widespread fear for government growth.  In his opening chapter, “Fear: The Foundation of Every Government’s Power,” he contends that, contrary to the positions of Hume, Mises, Rothbard, and others, “public opinion is not the bedrock of government.  Public opinion rests on something deeper and more primordial: fear.”  After the Crash, the man in the street feared the market, and the governments of Hoover and FDR were eager to oblige.  Gold, by then, had been corrupted enough to take the fall.

Whether the public still feared the market six years later was immaterial because neither major party offered a free market candidate for election.  But Franklin Roosevelt knew the importance of keeping the public uneasy.  In his State of the Union address of 1936, he told listeners that “in thirty-four months we have built up new instruments of public power. In the hands of a people's Government this power is wholesome and proper.”  In hands under control of “an economic autocracy such power would provide shackles for the liberties of the people.”  It’s difficult to believe Americans would fall for the notion of a wholesome “people’s government,” but the times were ripe for collectivist concepts as long as they were served up properly.  FDR won re-election that year by a huge landslide.

It’s been said that FDR “saved” capitalism by co-opting the radical left into his New Deal.  Without FDR, in other words, we would be living under full fascism instead of quasi-fascism.  The free market was still useful, especially the name, but only if government-appointed bureaucrats regulated it, and never mind the contradiction.  Exactly which regulations were needed was a big unknown, but as a way of emphasizing the new in New Deal, government would experiment until it found the right combination.  How would they know if the system of “rugged individualism” that favored the big guys was adequately harnessed?  By looking at the economy.  Every trouble spot, for the government, acted like a magnet, the attraction of which was in direct proportion to the potential votes at stake.

The Highly Regulated “Free” Market

So successful were FDR and his successors in saving capitalism that finding something today that isn’t taxed, regulated, subsidized, cartelized, forbidden, mandated, or bound like a mummy in endless red tape, is a near impossibility.  We can get a feel for the massive amount of regulations the market is subjected to on the federal level alone by browsing the electronic version of the Code of Federal Regulations, updated daily by the Office of the Federal Register.  Obama, as president, has the whole economy in his hands.  As Higgs points out, with passage of

the National Emergencies Act (1976) and the International Emergency Economic Powers Act (1977), nearly all economic liberties in this country exist at the sufferance of the president.  If he decides to take over the economy, he possesses ample statutory power to do so. [p. 132]

What was once an economy with a strong element of freedom has become an economy of rent-seeking special interests, or as Nock expressed it, people using politics to gain an “uncompensated appropriation of wealth produced by others.”  In accordance with Garet Garrett’s thesis of a revolution within the form and the word, the old names have been quite useful for getting people to look the wrong way, as we saw in 2008 when Bush announced he was “abandoning free market principles” to save the economy from collapse.

The “forgotten man” of the Depression, whether Sumner’s or FDR’s, was fearful, and considering the intellectual ammunition at his disposal it’s easy to see why.  But what can one say about today?  Should people be fearful of the economic mess governments have created?  Not necessarily.  More people are beginning to understand, if only vaguely, that “politics” has brought the roof down, and that a sound economy is impossible without something politically indifferent supporting it: sound money.

Austrian critics are debunking the claims about gold’s role in the Great Depression, pointing out that the straw-man gold exchange standard of the 1920s and early 1930s was another government solution destined to collapse.  Ben Bernanke’s statement that “the longer that a country remained committed to gold, the deeper its depression and the later its recovery” is being seen as grossly misleading, at best.

(Earlier in his commentary Bernanke explained that the gold standard of the 1920s was a “reconstituted” version of the gold standard that had endured prior to World War I.  Abandoning a pseudo gold standard makes sense only if an honest monetary system replaces it. As it was, the country moved from one controlled system to one much worse.)

Unlike the poor souls of the Depression era, anyone on planet earth who is wired and can read English can access a vast literature of economic theory and criticism.  It would be impossible to deal with today’s misinformation without the many works of Austrian analysis, most of which are accessible to a lay audience.  In their absence we could well be the hapless captives of an FDR admirer like Obama.

Who said it, when and where?

Over the years I've accumulated a long list of quotes about money and banking extracted from online articles and books I've read.  Unlike most other sites that post pithy remarks from famous authors, I include hyperlinks to their sources, so that anyone who wishes can not only verify a quote but, perhaps more importantly, read the context in which it was used.  And unlike other sites, most of these quotes originated with today's financial writers and economists, writing from a perspective consistent with Austrian School principles -- people like Peter Schiff, Lew Rockwell, Steve Saville, Joseph Salerno, Gary North, Edwin Vieira, Judy Shelton, Frank Shostak, Ron Paul, and others, even Alan Greenspan.  What these writers have in common is their respect for a market-sponsored commodity money, traditionally gold and silver coins.

My purpose in publishing these hyperlinked quotes is to draw attention to the vast literature of criticism that has arisen over the money and banking system we are forced to live under.  The list is continually expanding as writers are continually writing.  I ask that you excuse the many omissions such a list necessarily entails and hope you will alert me to insightful quotes I have missed.

I personally find these words of wisdom intellectually stimulating.  Observations such as Ron Paul's "“Everything possible is done to prevent the fraud of the monetary system from being exposed to the masses who suffer from it" or Judy Shelton's "Inflation makes suckers out of savers" are not merely true, but critical to a full understanding of today's political institutions, especially when combined with Jorg Guido Hulsmann's contention that inflation is always an imposed increase in the money supply.  They help keep me focused and fired up.  I hope they will do the same for you.

Here's the list.

From "golden fetters" to handcuffed investors

"The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves." - Alan Greenspan, 1966

An NBER working paper by Carmen Reinhart and Belen Sbrancia describes how Western governments in the post-world war economies unloaded their debts on credulous citizens through a policy of financial repression.  Because it is politically palatable (as opposed to outright default, hyperinflation, or overt tax increases) some analysts expect governments to try it again.  One part of it - inflation - is already well-underway.  Financial repression means savers (investors) will be forced to pay leviathan's debts, whether they like it or not.

The particulars of financial repression vary, but the general scheme is this: Using its power to violate private property rights, the government makes the domestic investment community a "captive audience."  With central bank cooperation it mandates low nominal interest rates along with a higher inflation rate, resulting in negative real interest rates.  The latter transfers wealth from, say, pension funds to the government, thus liquidating a portion of its debt.  Since the bond holders are "captive," there is no ready remedy for investors wishing to preserve or grow their wealth.  If investors attempt an alternative such as purchasing physical precious metals, the government will either restrict those activities or abolish them.  One way or another it will see that it has the "captives" needed to pay its bills.

The working paper contains language suggesting the authors have accepted several monetary fallacies.  For example, we read:

It is important to stress that during the period after WWI the gold standard was still in place in many countries, which meant that monetary policy was subordinated to keep a given gold parity. In those cases, inflation was not a policy variable available to policymakers in the same way that it was after the adoption of fiat currencies.

The post-WWI gold standard was a straw version of the classical gold standard, which itself was under government control.  Yet it's true, holders of Federal Reserve Notes could, in theory, swap them for gold coins prior to Roosevelt's heist in 1933.  "Monetary policy" (inflation) was indeed subordinated to gold, which is why government got rid of it, and the government-spawned gold-exchange standard of the 1920s served to set up gold, intentionally or not, to take the fall when the roof collapsed.  As economist Joesph Salerno writes,

The end of the classical liberal era in 1914 caused the removal from government central banks of the "golden handcuffs" of the genuine gold standard. Were these "golden handcuffs" still in place in the 1920’s, central banks would have been rigidly constrained from inflating their money supplies in the first place and the business cycle that culminated in the Great Depression would not have taken place.

The fractional-reserve scheme began to cave, as it always had, when too many people attempted to claim their property at the same time.  It exposed the essential fraud of the banking system, though few economists see it that way.  Which is not surprising, given that most of them, directly or indirectly, feed at the Fed's trough.

In another section of the NBER paper, Reinhart and Sbrancia tell us,

World War I and the suspension of convertibility and international gold shipments it brought, and, more generally, a variety of restrictions on cross border transactions were the first blows to the globalization of capital. Global capital markets recovered partially
during the roaring twenties, but the Great Depression, followed by World War II, put the final nails in the coffin of laissez faire banking.

This is truly shameful scholarship.  Banking was in no sense "laissez-faire."  The Federal Reserve Act of 1913, establishing a government-enforced banking cartel, erased the last traces of freedom in banking.  As we read in Wikipedia,

[Laissez faire] describes an environment in which transactions between private parties are free from state intervention, including restrictive regulations, taxes, tariffs and enforced monopolies.

The Fed is a monopoly money producer established by the state.  As such it is in violation of capitalism's private property foundation, and its very presence creates distortions in market activities.  (See The Ethics of Money Production, p. 170)  It seems that the further we move away from laissez-faire the more it is blamed for the catastrophes that follow in interventionism's wake.

Still, the NBER paper has great value.  The authors (rather tediously) document how Western governments from 1945-1980 used repressive financial schemes to pay down their debt relative to GDP.   The great appeal of such schemes is their transparency to the general public, making them virtually irresistible to today's debt-choked governments.

Reinhart and Rogoff's This Time is Different: Eight Centuries of Financial Folly spells it out this way:

Under financial repression, banks are vehicles that allow governments to squeeze more indirect tax revenue from citizens by monopolizing the entire savings and payment system. Governments force local residents to save in banks by giving them few, if any, other options. They then stuff debt into the banks via reserve requirements and other devices. This allows the government to finance a part of its debt at a very low interest rate; financial repression thus constitutes a form of taxation. Citizens put money into banks because there are few other safe places for their savings. Governments, in turn, pass regulations and restrictions to force the banks to relend the money to fund public debt. (from Prudent Investor Newsletters) (emphasis mine)

It's an effective racket, almost as effective as the central banking - debt monetization schemes that brought us to disaster's door in the first place.

The Fed and gas prices

Last week Austrian economist Robert Murphy testified before Congress on the Fed's role in raising gasoline prices.  Here is part of what he had to say:

After hitting record highs in the summer of 2008, the price of crude oil crashed amidst the financial crisis and slowdown in world economic growth. After hitting a low of $33.87 per barrel on December 19, 2008, the benchmark price of a Cushing oil futures contract had risen to $96.91 by May 17, 2011. . .

There are two main routes through which Fed policy could have influenced oil prices (quoted in dollars). First, the Fed could have caused the dollar to depreciate against other currencies. Second, the Fed could have raised the price of oil relative to most other goods and services. In the remainder of this written testimony, I will first lay out the extraordinary interventions of the Federal Reserve in the wake of the financial crisis, and then turn to each of the two possible connections to oil prices.

The Extraordinary Interventions of the Federal Reserve

The Federal Reserve has engaged in several extraordinary measures since 2007 to deal with the developing financial crisis. The Federal Reserve Bank of New York has compiled a timeline of these specific interventions. In addition to cutting the federal funds target interest rate to virtually zero, the Fed has expanded its balance sheet by purchasing mortgage-related derivatives and Treasury debt. . . .

[F]rom the creation of the Fed in late 1913 up until September 2008, the monetary base grew by a little more than $932 billion. From September 2008 until the present, the monetary base has grown by an additional $1,595 billion. The Federal Reserve has clearly embarked on unprecedented injections of liquidity into the financial system during the last few years. . . 

Crude oil is traded on a world market. If the dollar falls against another currency, such as the euro, then either the euro-price of oil has to fall, or the dollar-price of oil has to rise, to eliminate arbitrage profits. From its peak in March 2009, the dollar has fallen 17 percent against other major currencies. Therefore, holding everything else constant, the dollar deprecation alone from early 2009 can explain a 20.5 percent increase in oil prices (quoted in dollars).  [Emphasis added]  Put differently, the oil price quoted in (say) Japanese yen has not risen as much since early 2009 as it has in U.S. dollars. . .

In addition to causing oil prices (quoted in dollars) to rise because of a weakening dollar, Federal Reserve policy may also affect oil prices more directly to the extent that it has caused investors to shift some of their wealth into commodities as an “inflation hedge.”  For example, since September of 2008, gold and silver prices have increased some 80 percent and 210 percent, respectively. A certain segment of investors and the general public are very concerned about the future purchasing power of the dollar, and have invested in the precious metals to protect themselves from potentially large future price inflation.

More generally, some investors may be turning to other commodities (including oil) thinking that they will provide a relatively safe store of value, in the event that the dollar and other paper currencies weaken in the future. However, although this theory has a surface plausibility, in practice it is difficult to distinguish it from an explanation that oil’s price rise is due to “the fundamentals,” i.e. a genuine growth in end-user demand for oil relative to the increase in output. . .

Conclusion

If policymakers want to lower the price of gasoline for American consumers, they have several options. Most obvious, they could reduce federal and state gasoline taxes. They could also expedite the regulatory and permitting process for the development of offshore and other domestic oil resources. Finally, with respect to the Federal Reserve, to the extent that a tighter monetary policy would strengthen the dollar and reduce investor concern about future price inflation, we would see lower crude oil prices and hence lower gasoline prices. It is notoriously difficult though to estimate the quantitative impacts of these policies, because market prices are influenced by so many different factors.