The Exit on the Road to Serfdom

One of my favorite quotes from the quotable Thomas Paine is a mere footnote in his treatise, Rights of Man, Part Second, in which he wrote:

It is scarcely possible to touch on any subject, that will not suggest an allusion to some corruption in governments.

Paine was referring to “the splendor of the throne,” which he said “is no other than the corruption of the state.  It is made up of a band of parasites, living in luxurious indolence, out of the public taxes.”  He thought the U.S. federal government, newly created by the Constitution, provided hope against political corruption because of the limitations it imposed on the government.  Paine was in England at the time and had no idea that the new government, whose intellectual leader was Alexander Hamilton, was busy interpreting those limitations out of existence.

Paine also didn’t know the Constitutional Convention of 1787 was in fact a coup d'état.  The participants had been authorized only to amend the Articles of Confederation, but the nationalists, at least, wanted to replace the Articles with a new government that would be more “energetic.”  Knowing that Washington’s presence at the convention would be critical to its success, Henry Knox told the retired general that he would be given the president’s chair, and moreover, that he would not be presiding over some middling conference of officials tinkering with the “present defective confederation,” but instead would lead a prestigious body of men as they created an “energetic and judicious system,” one which would “doubly” entitle him to be called The Father of His Country.

In a previous note Knox had awakened Washington’s interest by lying about the meaning of Shays’s Rebellion.  According to Knox, former Revolutionary War officer Daniel Shays had organized the riffraff of Western Massachusetts to shut down the courts to avoid paying their taxes.  They were levelers, Knox said, who sought to annihilate all debts through “the weakness of government.”  Washington, who owned some 60,000 acres in the Virginia backcountry, thought that such people were “a wretched lot, not to be trusted, and certainly not to be the bone and sinew of a great nation.”

In truth, as historian Leonard L. Richards has shown, Shays’s Rebellion was not an uprising of poor indebted farmers, but a protest against the Massachusetts state government and its attempt to enrich the few at the expense of the many through a regressive tax system. The rebellion began as peaceful petitioning and escalated into violence only after the state repeatedly ignored the petitions.  Though they were described in various disparaging terms, the rebels saw themselves as regulators whose purpose was “the suppressing of tyrannical government in the Massachusetts State.”  They drew their inspiration from the Declaration of Independence that said people should throw off any government that is destructive of their rights.

But the rebellion was finally crushed and has since been interpreted as proof that a stronger central government was necessary.  Following ratification, “We the people” were headed down the long road to serfdom at an accelerated pace.

Is there an exit on that road?

A few thinkers have argued that there is.

In 1849 in Paris, Gustav de Molinari and his laissez-faire colleagues met to discuss Molinari’s new book, Les Soirées de la Rue Saint-Lazare, a series of fictional dialogues between a conservative, a socialist, and himself, whom he referred to as the economist.  Molinari argued that the free market could produce the state’s traditional function of security without monopoly, or as he put it in another essay, “the production of security should . . . remain subject to the law of free competition.”

His friends at the meeting included Charles Coquelin, Frederic Bastiat, and Charles Dunoyer.  None of them accepted his thesis.  In the absence of a monopoly state, Coquelin asserted, competition was “impossible to put into practice or even to conceive of it.”  Bastiat said the only way to guarantee justice and security is with force, and that requires a “supreme power,” not spread over bodies “equal amongst themselves.”  Coquelin later wrote a review of Molinari’s arguments, correctly describing the latter’s position as one in which

the State would be nothing but a kind of insurance company, a rival to many others, and each person would, just as he pleases, freely subscribe to this one or to that one to guarantee himself against the troubles that threaten him, exactly as one would guarantee his house against fire or his ship against shipwreck.

Murray Rothbard describes the Belgian-born Molinari as the most “consistent, longest-lived and most prolific of the French laissez-faire economists.”  He was proposing life without a state, and there were virtually no takers.

Almost simultaneously in England a young Herbert Spencer was advancing a nearly identical thesis in his book, Social Statics.  Spencer argued that government would inevitably become smaller and “decay” as the voluntary institutions of the market replaced it.  As David Hart points out, “it must be assumed that the two thinkers arrived at their positions independently of one another, suggesting that anti-statism is inherent in the logic of the free market.”

A disciple of Spencer’s, Auberon Herbert, agreed with Molinari that the market, unhampered by the state, could satisfy every want that we have, including protection services.  David Hart:

Neither Spencer nor Herbert went as far as Molinari's suggestion that these voluntary defense agencies would be fully professional business organizations whose prices would be determined on the market by competition. They merely limited themselves to criticizing the monopoly of the state and arguing that the individual had the right to organize freely.

However reasonable their views might sound, they never had a wide following.  Molinari believed that the state would die a natural death, that full liberty and a free market were inevitable, yet in the last half of the 19th century he witnessed the rise of statism in all its virulent forms.  David Hart:

Molinari had well understood the fact that these groups which controlled or had access to the state, comprised a class which would not willingly give up the privileges that power bestowed. Unfortunately, he had badly over-estimated the readiness of the exploited classes, the workers, the consumers and the industrialists who did not seek state privileges, to identify government intervention as the enemy of progress.  [emphasis added]

The State: Protector or Predator?

Before dismissing Molinari as a hopeless idealist we should refresh ourselves on what the state actually is.  As Rothbard has written in “The Anatomy of the State,” one can acquire economic goods either by production or predation.  Following the line of thought of German sociologist Franz Oppenheimer, Rothbard says the state, as a monopolist of violence, “is the systematization of the predatory process over a given territory.”  More precisely,

The State provides a legal, orderly, systematic channel for the predation of private property; it renders certain, secure, and relatively "peaceful" the lifeline of the parasitic caste in society.

With this understanding, its hardly surprising that the state’s biggest problem is ideological.  To stay in control, it needs the support of the majority of its subjects, even if such support is only grudging acceptance.  Political leaders alone cannot muster the needed support.  The rulers need intellectuals to persuade the masses that the state is “good, wise and, at least, inevitable, and certainly better than other conceivable alternatives.”  In return for this support, the state sees that its intellectuals are well-taken care of. 

From this it follows that the greatest danger to the state is the person who publicly proclaims the nakedness of the emperor. 

This is our cue.  The state will continue to grow relentlessly if people are convinced that at the very least it is a necessary evil, as Paine once put it.  But the state’s abundant historical record is clear: It isn’t at all necessary.  It is simply evil. 

Snowden vs. Bernanke

From the regime’s viewpoint only, who is the greatest threat, Edward Snowden or Ben Bernanke?

The government’s defenders would likely turn their backs on the question, but they ought to look closely at it.  Here’s their take: Snowden has broken the law and exposed sensitive government snooping operations.  At the very least he should be in prison.  Bernanke is keeping the economy’s engine running with prodigious amounts of digital money, all of it backed by the full faith and credit of the U.S. government, and by most indicators he’s doing a stellar job.  Bernanke is a hero, Snowden is a traitor.  It’s not even an open-and-shut case because it doesn’t deserve to be opened.

But if they did open it, what might they find?  Snowden made headlines with his Glenn Greenwald interview but he’s revealed nothing new.  James Bamford started writing about the NSA’s warrantless eavesdropping back in 1982.  At worst, Snowden is reminding the public of something they should already know.  But that’s it.  If what he’s done has created a crisis, it’s only a crisis of confidence - confidence in the trustworthiness of government.  Congress will continue funding the NSA, and the NSA will continue doing whatever it wants.  Americans thought they had constitutional protection from prying government eyes, but it turns out they don’t.  If they had been paying attention they would’ve known this years ago.  A lot of people are outraged, but this too will blend with countless other government misdeeds and will fall off the radar.

Bernanke, on the other hand, recently tested the waters, perhaps inadvertently, and the result was terrifying to investors.

Gary North described the results in picturesque terms:

Stocks fell, bonds fell, gold fell, oil fell, commodities fell. All over the world, markets tanked.

Why? Because Bernanke hinted that the U.S. economy is recovering, and the Federal Reserve may cut back sooner than expected on its trillion-dollar-a-year pump-priming operation.

Bernanke is the equivalent of the head of the international drug cartel. He is the pusher. He is the man supplying the daily “fix.” Around the world, addicts depend on his supplies of digital “snow.” The fix is in. Bernanke is the fixer.

When the pusher hints that the supply of the investors’ drug of choice — digital money — is likely to be reduced, they panic. The fear of withdrawal discomfort spreads through “the street.”

There was a rush to the exits yesterday [June 20]. People run to cash, especially the dollar, when they think the markets are going to lose their supply of counterfeit money. The world is dependent on the continuing supply of digital money, which is supported by government IOUs.

Bernanke’s hint has exposed a fatal flaw in the alleged economic recovery.  If the influx of fake money is ever slowed or stopped, it’s over.  If the Fed stops printing, investors go back in their shells.  If investors even get a hint of a slowdown, the indicators so supportive of a recovery will reverse, unless Bernanke holds a press conference to stop the bleeding.

It’s highly unlikely that a whistleblower like Snowden can seriously impair the regime’s expansionist aspirations.  Revelations of snooping aren’t monetary issues.  The Fed’s QE programs are.  If they don’t work, the government’s grandiose aspirations, based as they are on confiscated wealth, are seriously threatened.  If the Fed can’t keep manufacturing money at will while keeping the economy at least stable, the regime will be in serious trouble.  The Fed was created by and for the big bankers but it can’t exist without government protection.  In return for this favor the Fed buys government debt, directly or indirectly, to augment its tax revenue.  In recent years the government’s been doing a lot of augmenting - in the range of a trillion dollars per annum.  If this racket proves defective - if the economy can’t shoulder the burden - then government will have to turn to more overt forms of confiscation.  And that, in turn, could threaten the perceived legitimacy of the state.

People think they can live while being spied on in all their communications.  And most of them can.  Many of them think it’s a necessary freedom to surrender if they don’t want to be murdered by terrorists, even if they’re four times more likely to be killed by a lightning bolt, and even if they have no choice about surrendering their freedom.  They’ve been pawns of the government for so long “political freedom” is little more than a collection of nonsense syllables, so they don’t miss it.  They can learn to hate Snowden and love their government herdsmen.

What they can’t live without in a modern economy is sound money.  They don’t know what sound money is, but they do know what they earn and what it costs to live.  If the former is not in a good relationship with the latter they suffer, and they know who to blame for their pain.  Historically, government has gotten away with attacking speculators, hoarders, and of course the free market when their schemes blow up.   Thanks to the internet, Ron Paul, and Austrian economists, their schemes are now more transparent to more people.  The co-conspirators - the Fed and the government - will take the heat when the next crisis arrives.

Bernanke has given the world a sneak preview of the soundness of his counterfeiting program.  Counterfeiting theory says counterfeiting favors the counterfeiters and his pals, which in this case is the banking cartel and the government.  It also says that in the long run it doesn’t favor anyone because the money becomes worthless, but they’ve forgotten this.  If the bureaucrats are in the mood to identify threats to their power, they should forget Snowden and bring Bernanke in for some in-depth questioning - preferably by someone trained in Austrian economics.
     

The “Case” Against Thomas Paine

Thomas Paine died on the overcast morning of June 8, 1809, in New York City.  Libertarians have long savored his unabashed attacks on government and the many evils of paper money, and the fact that he not only ignited the drive for American independence but kept it alive during its darkest moments.  He played an important role in history, both here and abroad, yet is not given the respect he deserves.

If you extend the list of “Founding Fathers of the United States” far enough you find “Thomas Paine” included on it.  Historians for the most part consider a Founder as one who signed the Declaration of Independence or the Constitution; Paine signed neither, nor was he invited to sign them.  Joseph Lewis published a reasoned and well-documented case that Paine might have authored the first draft of the Declaration. 

If a Founder can be considered someone who helped change the united colonies to the United States, then Paine should be at the top of the list.  It could even be argued that Paine was the founder, and all the others were supporters but only after Paine took the lead.

Of all the nominal Founders, he was perhaps the only one who publicly condemned slavery, cruelty to animals, dueling, and war.  As editor of Pennsylvania Magazine he published “An Occasional Letter on the Female Sex,” one of the first essays for women’s rights in the West.   

If we think of the Founders - Washington, Jefferson, the two Adams, Franklin - what do we have for support?  With the exception of Washington, they all favored independence but none of them attempted to rally support for it among the general population.  Without that support, independence was a futile wish.  Congress chose Washington to lead the troops against the British in 1775, but without a clear aim.  As Pulitzer Prize-winning historian Bernard Bailyn has written,

A group of influential and articulate leaders, especially those from Massachusetts, were convinced that only independence from England could properly serve American needs, and Benjamin Franklin . . . had reached the same conclusion and had found like-minded people in Philadelphia.  But that was not the common opinion of the Congress, and it was not the general view of the population at large.  Not a single colony had instructed its delegates to work for independence . . . All the most powerful unspoken assumptions of the time -- indeed, common sense -- ran counter to the notion of independence. [Bernard Bailyn, Faces of the Revolution, pp. 69-69, emphasis in original]

Paine, unlike most Founders, unlike most people, was not afraid to take great risks. Six months after the publication of Common Sense, in which he referred to the king of England as a "hardened, sullen tempered Pharaoh" and "the Royal Brute of Great Britain," Congress announced the colonies’ independence as thirteen sovereign states.   Later that summer, he joined the Continental army as General Nathaniel Greene’s aide-de-camp.  Paine proved to be a willing but mostly incapable soldier, and senior officers decided he would serve the cause better with his writing.

During the fall of 1776 Washington had suffered defeats in New York and had retreated across New Jersey to the Pennsylvania side of the Delaware River, nine miles north of Trenton.  The British were convinced the war’s end was imminent, and British General William Howe, rather than pursue the rebels and capture Philadelphia, retreated to New York, leaving contingents at various New Jersey outposts, including Trenton.  Howe had a mistress, Mrs. Elizabeth Loring, whom he had brought from Boston to New York, and he favored spending winter with her instead of subduing a ragtag army of farmers.

In mid-December, Paine, carrying a draft of a new essay, trudged 35 miles from the army’s campsite to Philadelphia, finding the city in chaos.  Congress had fled to Baltimore, and Tory Americans were posting welcome signs to General Howe on the windows of their shops, anticipating his arrival.  Paine Biographer Craig Nelson:

News of defeat after defeat had frightened the vast majority of residents into flight, and morale had collapsed. . .  British troops were just across the Delaware River, ready at any moment to march into the city and force the American capital to surrender. . .  It was, Paine said, “the very blackest of times . . . when our affairs were at their lowest ebb and things in the most gloomy state.”

He frantically began writing the first of what would eventually number a series of thirteen pieces, one in honor of each colony.  [In American Crisis - Number One] Paine used every weapon in his propagandist’s arsenal to upend the great advantage Britain held in its favor -- fear.  In the America of 1776, everywhere they looked, Americans saw reasons to be profoundly afraid -- afraid of what the redcoats would do to them, their families, and their property; afraid of losing their British empire and their British citizenship; afraid of what this new homemade government would do, and what it would require.  Paine answered all of these vague and paralyzing terrors in a mere eight pages.  [Craig Nelson, Thomas Paine: Enlightenment, Revolution, and the Birth of Modern Nations, pp. 107-108]

The Philadelphia Journal published the Crisis pamphlet a week before Christmas, with Paine once again waiving any profits from the publication, as he had done with Common Sense.  Printers in other colonies distributed it, and its opening words became immortalized throughout the world: These are the times that try men’s souls.

Prior to crossing the Delaware for a surprise attack on Trenton, Washington had his officers bring the troops together in small squads and ordered them to read Paine’s essay to the men.   Whether enlisted men standing around in sleet and snow, hungry and ill-clad, could be brought to life listening to an officer read a pamphlet, is open to question.  But it did have the effect of lifting citizen spirits when it was published, along with news of Washington’s victory.  It was either John Adams or Joel Barlow who is reputed to have said, “Without the pen of Paine, the sword of Washington would have been wielded in vain.”

The evils of paper money

After the war, Paine sailed to England and continued to write on political and economic issues.  In an essay titled “Prospects on the Rubicon,” Paine saw clearly the defects of paper money.

Every thing shows, that the rage that [overran] America, for paper money or paper currency, has reached to England under another name. There it was called Continental Money, and here it is called Bank Notes. But it signifies not what name it bears, if the capital is not equal to the redemption. . . .

Credit is often no more than an opinion, and the difference between credit and money is that money requires no opinion to support it. . . .

In short, the delusion of paper riches is working as rapidly in England as it did in America. A young and inexperienced Minister, like a young and inexperienced Congress, may suppose that he sees mines of wealth in a printing press, and that a nation cannot be exhausted while there is paper and ink enough to print paper money. Every new emission, until the delusion bursts, will appear to the nation an increase of wealth. Every merchant's coffers will appear a treasury, and he will swell with paper riches till he becomes a bankrupt.

In another essay, in which Paine defended the Bank of North America as a means of curtailing the issuance of paper money, he wrote:


However paper money may suit a borrower, it is unprofitable, if not ruinous in the end, to every other person. The farmer will not take it for produce, and he is right in refusing it. The money he takes for his year's produce must last him the year round; and the experience he has had of the instability of paper money has sufficiently instructed him, that it is not worth a farmer's while to exchange the solid grain and produce of a farm for the paper of an Assembly, whose politics are changing with every new election . . .

Paine’s most complete attack on paper money is to be found in his essay, “DISSERTATIONS on government; the affairs of the bank; and paper money”:

The only proper use for paper, in the room of money, is to write promissory notes and obligations of payment in specie upon. A piece of paper, thus written and signed, is worth the sum it is given for, if the person who gives it is able to pay it; because in this case, the law will oblige him. But if he is worth nothing, the paper note is worth nothing. The value, therefore, of such a note, is not in the note itself, for that is but paper and promise, but in the man who is obliged to redeem it with gold or silver.

Such simple truths, so long-forgotten today.

Unforgivable transgressions

Had Paine died at this point in his life perhaps he would be fondly remembered in official histories.  But he lived to write a blistering criticism of Washington and what to many was a savage attack on the Bible.

While a member of the French legislature during the French Revolution, Paine had fallen victim to Robespierre’s Terror and had been imprisoned to await execution.  He expected Washington, as his long-time friend and now president, to intervene on his behalf through the U.S. envoy to France, Gouverneur Morris.  When this didn’t happen Paine became embittered, and following his release after a ten-month incarceration, he composed an open letter to Washington dated July 30, 1796.  It was published in Philadelphia by Benjamin Franklin’s grandson, Benjamin Franklin Bache, editor of the republican journal Aurora.  Paine biographer John Keane writes:

In his open letter, Paine gave a detailed account of his imprisonment and said that he held Washington personally responsible for the fact that until [the arrival of James Monroe, who replaced Morris as envoy], he had not been considered an American citizen. . . .

Characterizing the president as “treacherous in private friendship . . . and a hypocrite in public life, Paine warned him that “the world will be puzzled to decide whether you are an apostate or an impostor, whether you have abandoned good principles, or whether you ever had any.” [John Keane, Tom Paine: A Political Life, pp. 430-431]

Paine, born in Thetford, England in 1737, answered the charge of not being an American citizen by claiming that, until July 4, 1776, there were no true Americans, only Englishmen or English-Americans.  Furthermore, Paine took an oath of allegiance to the United States on two occasions, once in 1776, and again in 1777.

Nevertheless, Washington’s reputation as “father of his country” was already too well established for his letter to go over well.  Around the same time he published Age of Reason Part II, in which he wrote, referring to the Old Testament:

To believe, therefore, the Bible to be true, we must unbelieve all our belief in the moral justice of God; for wherein could crying or
smiling infants offend? And to read the Bible without horror, we
must undo everything that is tender, sympathizing, and benevolent in the heart of man. Speaking for myself, if I had no other evidence that the Bible is fabulous than the sacrifice I must make to believe it
to be true, that alone would be sufficient to determine my choice.

But in addition to all the moral evidence against the Bible, I
will in the progress of this work produce such other evidence as even a priest cannot deny, and show, from that evidence, that the Bible is not entitled to credit as being the word of God.

In Age of Reason Part I he had written:

Whenever we read the obscene stories, the voluptuous debaucheries, the cruel and torturous executions, the unrelenting vindictiveness, with which more than half the Bible is filled, it would be more consistent that we called it the word of a demon, than the word of God. It is a history of wickedness, that has served to corrupt and brutalize mankind; and, for my part, I sincerely detest it, as I
 detest everything that is cruel.

Though Paine wrote Age of Reason because of his conviction that false systems of religion were encouraging the spread of atheism, he has been often regarded as an atheist ever since.

In describing how Paine has been remembered, biographer Jack Fruchtman, Jr. notes that

On the occasion of the one hundredth anniversary of the Declaration of Independence, the city of Philadelphia refused to allow a bust of Paine to be placed in Independence Hall.  In 1933, a New York radio station first invited, then refused, to allow a City College professor to give a short talk on Paine because the old radical was regarded as “a dangerous subject and not suitable for radio discussion.”  The station later relented. [Jack Fruchtman, Jr., Thomas Paine, Apostle of Freedom, pp. 441-442]

The victors, in writing the histories, tell us who should be remembered and why.  Paine, critic of Washington and the Bible, has been shunned to the back of history’s bus.

The Pope joins the chorus in blaming free markets

On Thursday, May 16 Pope Francis delivered a short speech on economics and finance, blaming the “cult of money” for the millions of people suffering in poverty.  He addressed the New Non-Resident Ambassadors to the Holy See, calling for “financial reform along ethical lines.”

He describes the problem thusly,

While the income of a minority is increasing exponentially, that of the majority is crumbling. This imbalance results from ideologies which uphold the absolute autonomy of markets and financial speculation, and thus deny the right of control to States, which are themselves charged with providing for the common good.

This is taken to mean the world is at the mercy of “unchecked capitalism” (Guardian), and States therefore “should impose more control over their economies . . . to provide ‘for the common good’.” (Telegraph)

It’s hardly novel for a world leader to blame economic crises on the free market.  When was the last time you heard one cast aspersions on government deficits and central banking?   But this intellectual defect isn’t limited to leaders.  Browsing the comments posted on the Pope’s speech, I have yet to find one that finds fault with his assertion that “the absolute autonomy of markets” is the devil driving more people into misery.

The cult of fiat money and central banking  

There is indeed a growing disparity between the haves and have-nots, and there is indeed something like a “cult” of money ruling the economies of the world.  If “cult” is taken to mean a movement at odds with the beliefs of the larger society and membership in which is closely guarded, then today’s central banking/fiat money systems could be viewed as a cult.  As the existing order’s most important institutions, central banks are not in this sense very cult-like.  But as secular altars erected against the market’s retribution, with secret meetings and an aura of mystery surrounding their pronouncements, they bear a close likeness to cults.

And this brings us to a crucial point, so obvious it hurts to mention it: Central banks are not free market institutions.  Nor are they a kind of pacemaker that protects the market from shocks.  On the contrary, because central bank operations are essentially a counterfeiting process that quite intentionally distorts prices, they are the creators of shocks.  In today’s world they are a government-enforced cartel with a monopoly on the production of money, specifically paper money or its digital equivalent.  Left to the market, money becomes a store of value; consigned to a monopoly producer, money undergoes a reverse transubstantiation and becomes a way of stealing value. 

Banks once issued banknotes as a way of certifying ownership of a certain weight of precious metal, usually gold or silver.  Banks have never liked precious metals because their supply cannot be increased at will.  Metal put a practical limit on loans, which in turn limited profits.  It also safeguarded the value of a worker’s wage.  In fact, real wages increased under a metal standard because of gains in production efficiency.  Under the federal reserve system, the redemption requirement was removed yet the Fed still issued notes called “money.”  The former bank substitutes - banknotes - became money itself, by fiat.  Economist Guido Hulsmann explains:

The suspension of payments that turns banknotes into paper money entails various “reverse transubstantiations”—an expression we use because the phenomenon at issue bears a certain resemblance with the central liturgical event of the Catholic mass. We have to speak of a reverse transubstantiation, however, because the transubstantiation that results from human hands in the economic sphere cannot be said to sanctify things or otherwise improve them in any sense.

Where there are central banks we don’t have free markets, and central banks sit at the center of virtually every economy on earth.

The political way is not the market way

Everyone understands that central banking only works with the coercive power of government behind it, yet almost everyone insists we have a market that’s free.  Perhaps we can clear this up with the aid of a catechism:

Q: What is the free market?
A: Murray Rothbard, the foremost advocate of a free market, tells us that “free market” is a summary term for the array of voluntary exchanges that take place in society.  “Trade, or exchange, is engaged in precisely because both parties benefit; if they did not expect to gain, they would not agree to the exchange.”  Mercantilists old and new argue that trade involves exploitation, that there are always winners and losers.  “We can immediately see the fallacy in this still-popular viewpoint: the willingness and even eagerness to trade means that both parties benefit. In modern game-theory jargon, trade is a win-win situation . . .” Both parties benefit from an exchange because each “values the two goods or services differently, and these differences set the scene for an exchange.”

But exchanges are not necessarily free. Many are coerced. If a robber threatens you with "Your money or your life," your payment to him is coerced and not voluntary, and he benefits at your expense. It is robbery, not free markets, that actually follows the mercantilist model: the robber benefits at the expense of the coerced. . .

Government, in every society, is the only lawful system of coercion. Taxation is a coerced exchange, and the heavier the burden of taxation on production, the more likely it is that economic growth will falter and decline. Other forms of government coercion (e.g., price controls or restrictions that prevent new competitors from entering a market) hamper and cripple market exchanges, while others (prohibitions on deceptive practices, enforcement of contracts) can facilitate voluntary exchanges.

Q: What is a central bank?
A: In the U.S., the federal reserve, as Rothbard notes, is a government-created and -sanctioned cartel device that allows the nation's banks to inflate in a coordinated fashion.  It was sold to the public as a way "to provide the nation with a safer, more flexible, and more stable monetary and financial system," according to the Fed's website.  What can we say about the Fed's stewardship when the dollar has lost 96 percent of its buying power over the last century?

Establishing a central bank requires coercion and gross deception.  It is a grant of privilege from government to special interests - large commercial banks - that are seeking protection from market forces. 

Q: What market forces?
1. Competition.  Through its government-privileged monopoly to print money, a central bank in effect becomes a monopoly counterfeiter.  Printing money is a regressive tax, meaning the poor suffer the most.  But people within the jurisdiction of the government are not allowed to choose a better money, as government attacks on market alternatives such as Bitcoin, e-gold, and the Liberty Dollar have made clear.

2.  Protection from losses.  A free market implies the possibility of profits and losses.  A market where government protects businesses from losses is not free.

Commercial banks choose to operate on a fractional-reserve basis, meaning they normally loan much more money than they actually have.  Clearly, it is both a shady and a shaky operation.  In the absence of institutional protections, if a fractional-reserve bank gets too extravagant in its loans, it can fail.  The failure of one bank can create a panic that shuts the doors of other banks.  Banks could abandon fractional reserve banking, but they don’t because it can be very profitable, in the same way counterfeiting can be profitable for the counterfeiter.

A central bank takes control of the reserves of all banks within its system, so that one bank won’t over-inflate and bring the roof down on the others.  Governments also provide deposit insurance to ease the minds of the depositors.  (In the U.S., banks insured by the FDIC “are required to place signs at their place of business stating that ‘deposits are backed by the full faith and credit of the United States Government.’”)  Deposit insurance and the central bank also ease the minds of bankers, who are freed from a significant degree of market retribution.

3.  Has this system worked?
Until 2008 it seemed to most observers to be working effectively for all market participants.  The FDIC had kept depositors from scrutinizing their banks’ activities, and the government, by redefining the dollar as a piece of paper, had given the Fed a green light on the creation of money.  The result was a boom in financial markets and housing that most pundits thought was sustainable.

4. What happened in 2008?
The banking system, released from the discipline of market forces and ordered by government to issue a mortgage to any applicant with a pulse, experienced a meltdown.

The government and the Fed then did something. 

According to Bloomberg news, as of March 31, 2009, the U.S. government and the Federal Reserve "spent, lent or committed $12.8 trillion," an amount that approached the GDP of the year before, “to stem the longest recession since the 1930s.”

Has this massive intervention worked?  The Washington Post, May 31, 2013:

American households have rebuilt less than half of the wealth lost during the recession, leaving them without the spending power to fuel a robust economic recovery, according to a new analysis from the Federal Reserve.

From the peak of the boom to the bottom of the bust, households watched a total of $16 trillion in wealth disappear amid sinking stock prices and the rubble of the real estate market. Since then, Americans have only been able to recapture 45 percent of that amount on average, after adjusting for inflation and population growth, according to the report from the St. Louis Fed released Thursday.

In addition, the report showed most of the improvement was due to gains in the stock market, which primarily benefit wealthy families. That means the recovery for other households has been even weaker.

Call it cronyism.  Call it corporatism.  Call it interventionism.  Call it mercantilism.  Call it a system rotten to the core. 

But don’t call it free market capitalism.  That’s the last thing these guys want.

 

Would you watch a movie about a counterfeiting cartel?

One of the biggest strangleholds on our freedom is the money and banking system we’re forced to endure.  I wrote a novel about it in 2008.  It’s good, especially for a first novel, but good isn’t good enough.  It doesn’t have the broad appeal I wanted.  It steps hard on some cherished postulates such as the legitimacy of U.S. entry into World War I.  It was supposed to be the war to end all wars, not an expedient to save Morgan’s investments.

World War I was a classic example of the wealth transfer effect of monetary inflation.  When wealth is shifted to a government eager to go to war, the country goes to war, and millions of people die, most of them young.  Even when bundled snugly within a tense plot, the connection of fiat money to war and other government adventures is not something the general reader cares about.  Evil bankers they readily accept, but an evil banking system leaves them cold.  

Nevertheless, I’ve always thought the story’s tagline - that of a Fed chairman who sparks a grass-roots movement to bring the roof down on our money and banking system - could serve as the backbone for a good movie.

I therefore set about to develop a screenplay based on that premise, using the book as a rough guideline while re-structuring the plot to incorporate more suspense and action.  Omitting certain characters and scenes helped sharpen the storyline.  I also allow the characters to use profanity as they see fit, though there’s still very little.   Along with most of the world, I’ve learned a few things since 2008 and wanted to reflect that in the story as well.  As it stands the script is 99 pages long, which translates to about 99 minutes of run time. 

A producer reads a script for one reason: to decide if it could make money.  Can a story about a topic few people find interesting be injected with enough adrenaline to make it profitable?  Without diluting the message?  Some pro-liberty movies have been financially successful, others have not.  Antiestablishment financial success depends on many things, but chief among them is the manner in which the writer exposes the problems.  Does the writer work up a case against bad people in a good system?   Or does he argue that the system itself is flawed and only attracts bad people?   

Most people cling tightly to the belief that the system that rules them is fundamentally good but subject to corruption.  They accept corruption.  Corruption can be corrected.  They don’t accept being told the system is inherently bad.  They can’t correct the system without a revolution, and people are not revolutionaries.  With few exceptions the ones who claim they’re revolutionaries can be bought off. 

V for Vendetta was a strong anti-state film set in a dystopian future, with a production budget of $54 million and worldwide gross receipts of $132,511,035.  V strikes a blow against totalitarianism but is vague on what should replace it.  The black comedy Wag the Dog in which a Hollywood producer is hired to create a fake war to distract attention from a presidential sex scandal had a budget of $15 million and pulled in $64,256,513.  Unlike V, Wag the Dog had marquee stars to help boost sales.  Wag the Dog hits hard against democracy and the manner in which voters can be manipulated, but does not even hint that democracy should be replaced.

In both movies government flaws were exposed while providing strong entertainment value, though of a categorically different nature. Both movies made money without providing answers to the problems they exposed.  People don’t go to the movies for answers.  If they walk out of the theater with an answer it is not an answer to a question the movie explicitly raised.

Hollywood follows the advice Samuel Goldwyn once gave a producer: “If you want to send a message, use Western Union.”  Don’t make movies that lecture.  Make movies that entertain.  A movie that lectures might appeal to critics but it turns most movie-goers off.  Check the list of top grossing films.  Avatar, Titanic, The Avengers, Harry Potter, Transformers, The Lord of the Rings -- it is not a lecture series.

Atlas Shrugged is a novel that does a lot of lecturing.  How do you make it into a movie people will pay to watch?  Answer: You omit the lectures, or at least scale them down considerably.  But if you omit the lectures, what will you have?  An entertaining something that’s not Atlas?  Even with the lecturing at a minimum, Atlas parts I & II have lost money.  There are other reasons for the losses - low budget, lack of big stars, splitting it up into parts - but without the lectures libertarians were disappointed, and they’re the ones who had to be fired up enough to drag others to see it.

Given that a recent poll found that “banks and financial institutions are still the least trusted sectors in the whole global economy,” there’s a plausible train of thought that says people would have a strong interest in a movie that shows them why their distrust is well-placed -- provided it’s also highly entertaining.  It’s not as if people are distrustful of certain banks or bankers; it’s the institution of banking they don’t trust.   Superficially, at least, this suggests people are ripe for a drama about a counterfeiting cartel.  Maybe they are, and maybe this is an idea a scriptwriter could sell to Hollywood.  (That’s what I’m attempting.)  Or maybe it’s not in Hollywood’s domain, since it has to answer the question: What’s wrong with banks and financial institutions?

But even if a script could be written that wows a few people in Hollywood, who would finance it?  Certainly not Ben Bernanke.  Certainly not his banking cohorts.

I told a friend my script would need at least three miracles to complete the transformation from caterpillar to butterfly.  They’re the standard requirements for any script, but in this industry it is miracles that a speculative scriptwriter needs.  And they are:  Getting at least one producer to fall madly in love with it, getting financing for it, getting it produced. 

I’m at the pre-miracle stage, looking for a producer. 

Political Purity Arrives in Cyberspace

Flight of the Barbarous Relic is a novel about a renegade Fed chairman that the author is adapting as a screenplay.   With the usual amount of luck and perseverance, it may someday see life as a movie on the big screen. 

What follows is a short segment from the novel - chapter 23.  At this point in the story certain websites have gained a strong following by exposing the flaws in the official account of the death of the Fed chairman.  The government decided it cannot afford to let this continue, so it claimed monopoly power over web browsing.  To this end, it hired nerds to develop a “purposeful collection of government bytes” called the Liberty Browser.   As a reporter in the story describes it,

. . . Liberty Browser will only recognize sites that have been approved by the government, much like the only drugs we can legally obtain are those approved by the Food and Drug Administration.  Though President Gage assured us that all his “favorite critics would be alive and well” under the Liberty Browser, we need to consider what that might mean.  Certainly his “favorite” critics are not those exposing the Federal Reserve’s spurious underbelly in web-only commentary. . .

Here, then, is chapter 23, a triumph of oligarchic oppression over the subversive forces of the web. 


Gradually, as downloads proliferated over a three-week period, Liberty Browser became the eyes through which many Americans viewed the World Wide Web.  As President Gage had promised, the new browser saw no evil.  Political purity had arrived in cyberspace.  On the American version of the WWW, Preston Mathews was defined as the late Fed chairman and no more.  He had been an outstanding public servant whose life was tragically cut short in a private plane accident.  There was no trace of corrupted dollars, suicide missions, or money drops.  The lunatic fringe that fostered such nonsense had been snipped off in the public interest.

It had been a fight for freedom – freedom for government versus freedom for those under it – with the victor proclaiming the other side had won.

With Winston Marlowe standing behind him off to the side, Gage was basking in a press conference in a White House briefing room.  For once, his smile actually reflected his feelings.  He was carefree, light, joke-cracking.

“I don’t know the exact figures off the top of my head,” he was saying to a reporter, “but I know the number of websites that weren’t invited to the Big Dance is on the order of one in ten thousand.” He flicked a quick glance at Marlowe as if to confirm the statistic, then turned to the audience again. “So we’re not doing anything Draconian. Most sites made the cut, a small handful didn’t. This is a far better percentage than we see in the sports world or private enterprise when selections are made.”

Hands shot up amid calls of “Mr. President!” Gage picked one out.

“The government browser lets us access numerous sites dedicated to gold investing and promoting a gold standard, yet barbarous-relic.com is not one of them. Can you comment on that?”

“Barbarous-relic.com was dedicated to subversion and malicious slander. Gold was merely its cover.”

“Are you saying barbarous-relic.com was non-factual or misleading?”

Gage had his hand raised, ready to pick someone else.  “Yes, I am saying that.”  He pointed to a man standing on the far side of the room.  “Yes.”

“President Gage, some anti-war sites have been excluded from the browser’s acceptance list.  What criteria was used in determining whether to include them or not?”

“There’s a fine line between responsible criticism and subversion.  As you’ve noticed, I’m sure, you can still find plenty of sites calling for my head.  A lot of heat goes with this job, and anyone who can’t take it shouldn’t apply.  But there were sites, for example, that went beyond common decency, such as those showing the mutilated corpses of American soldiers after an ambush, and I don’t think that furthers the cause of our nation in the least.  Our military personnel are thousands of miles from home defending our freedom, and they need all the support we can give them.  They don’t need reminding that war has its dangers.”

“But sir, don’t the people back home need reminding?  If war isn’t portrayed accurately how will people understand what it is they’re supposed to support?”

“I think every adult American realizes that war is sometimes a necessary evil.  Even that great critic of government, Thomas Paine, conceded as much in his famous Common Sense pamphlet.  I don’t think our cause is furthered by showcasing hideous details.  Certainly, the families of the fallen don’t need it.”

“One last question: Some people maintain defending our freedom thousands of miles from home makes no sense since there are no ostensible threats at that distance.  How would you—“

“—That’s a very narrow, parochial view that American statesmen abandoned long ago.  We are not an ostrich with our head in the ground.  We are not isolationists.  We have a moral mandate to bring freedom and democracy to every land where it is missing.  Furthermore, our freedom is threatened by their lack of it, because countries in which freedom is missing tend to be belligerent.  That’s why it is perfectly correct to say our soldiers are defending our freedom.  In bringing freedom to oppressed peoples they are defending ours.  I want to thank—“

“—Sir, excuse me, but do you think a policy of perpetual war and foreign intervention is compatible with freedom at home?  As our civil liberties are necessarily eroded through war-time measures, some claim we’re a threat to world freedom instead of a defender of it.”

Gage managed a smile. “Only people who have given up on America consider that argument plausible.  I certainly do not.  As everyone knows, we’re still the freest country on the planet, and we intend to stay that way.

“I want to thank you for your questions and add one final comment.  We sometimes hear people say government doesn’t deliver on its promises.  Do me a favor.  Next time you hear someone say that, ask them to log on to the internet.  We promised the American people a respectable web experience, and with Liberty Browser, we have delivered.  The Liberty Browser has cleaned up a segment of our social life in desperate need of attention and thereby has strengthened the freedom and morals of our nation.  I expect that other countries will look at what we’ve accomplished with some admiration.  Thank you.”

Gage and Marlowe left the dais with the reporters on their feet, applauding.

The $59 Recession Solution

Joseph Salerno, professor of economics at Pace University and author of Money, Sound and Unsound, recently taught a course in Austrian Macroeconomics at the Mises Academy.  For a $59 registration fee that included all the reading material, anyone with access to the internet could sign up. As with all Academy courses, the lectures were recorded and are made available to students indefinitely.

In his final lecture Salerno presented the Austrian Business Cycle Theory and showed how, during a recession, the policy prescriptions of the Austrians differs from those of the Keynesians.  The chart below summarizes and contrasts the policies.

What follows is my understanding of the chart, and any errors of interpretation are mine alone.  In English, the chart reads as follows:

Fiscal policy, Austrians: Lower Taxes (down-arrow T), reduce government spending (down-arrow G), and balance the budget (Taxes minus government spending equals zero).  Note: Paul Krugman would likely condemn this policy as “fiscal austerity,” and it is - for the government.  But obviously not for the taxpayers.

Fiscal policy, Keynesians: Lower taxes, increase government spending, and run deficits (government should spend more than it collects in taxes).  Note: Lowering taxes in a recession is the one area where Austrians and Keynesians agree, though President Obama, who in other ways follows the Keynesian playbook, has raised taxes.

Monetary policy, Austrians: Freeze the money supply M (delta M equals zero), let the interest rate adjust according to the time preference of market participants.

Monetary policy, Keynesians: Goose the money supply (up-arrow M), annihilate the interest rate (down-arrow i).

Microeconomic policy, Austrians: Repeal all laws keeping the market from clearing, including policies that prevent wages W and prices P from adjusting to supply and demand.

Microeconomic policy, Keynesians: Use the power of government to keep wages and prices from adjusting to market conditions.

Regulatory policy, Austrians: Remove government regulations and allow the market to perform its regulatory function instead.

Regulatory policy, Keynesians: More government regulations, especially in the financial sector.

No one in the seats of power saw the financial crisis coming because, we’re told, financial crises are a lot like “earthquakes and flu pandemics,” difficult to predict.  Not coincidentally, none of those in power are Austrians.  After five years of Keynesian and other anti-market “remedies,” Europe overall is in recession, while U.S. growth in the last quarter of 2012 declined by $4.9 billion even with a $165 billion “stimulus” behind it.  Before the Fed and the government decided to “do something” about a floundering economy, crises lasted on average 18 months to two years.  Although this last one was officially over in 2009 - see Robert Murphy's take on what this means - unemployment is still high, while optimism among consumers and small business owners remains very low.

I don't recall reading any restrictions that would've prevented central bankers and senior government officials from registering for Salerno's course.  It's too bad for them but especially for us, because given their track record we can expect even bigger calamities down the road.  If they found the registration fee too pricy but would otherwise be willing to take the course, I would be glad to empty my piggy bank on their behalf the next time it's offered.

We need to let the market breathe before the Keynesian maestros put us out of business.