Saturday, November 8, 2008

A bit of review on "The Mystery of Banking"

I recently finished Murray Rothbard's, "The Mystery of Banking."
That was such an eye-opening and exciting book (if you are the type of person who _can_ derive feelings of excitement from a book on economics)!

The overall aim of the book is to discredit the worth of the US Federal Reserve System, and fractional-reserve banking as facilitated by central banking in general.

In this, Rothbard puts forward some very well-reasoned and common sense practical arguments. I came away from the read with a new appreciation for economics as a field, and recognized now that the subject is perhaps overthought by most modern scholars. Economics isn't any sort of system so much as it's what results when groups of people act when influenced by just a few rather simple rules.

Anyway, Rothbard sets up his critique of the Fed and central banking by offering an easy-to-follow primer on some basic economics and history of money: how it developed, how people use it, how it is both supplied and demanded just like other products in an economy, and how those forces influence prices.

This first section of the book is crucial for non-economist folks to at least review. It assumes zero starting knowledge, and in short order will have you up to speed with a working knowledge of the mechanics of money. It also gives thorough treatment to the concepts it introduces. Once they become clear to you, it may start to feel redundant. I was able to skim over the final pages of this section. It begins historically, and you'll understand how a society gradually comes to the use of a modern coin-commodity money as its culture and technology and sheer size develop.

After the concepts primer, the following sections deal with how an evolved commodity money system is gradually influenced and ultimately usurped by government to transform into a fiat currency. This can only be done in complex societies where trust in institutions has been built up with the people for eons, or the culture will not ascribe value to the currency and merely recognize it for what it intrinsically is: valueless slips of paper (albeit with fun and artful printing).

A scholarly worth with detailed footnotes and citations, the book wonderfully fuses history with the theory to demonstrate and support concepts. The reader learns about the development of paper currency; its backing by hard money in gold and silver coin; and its use in banking to make hard money more convenient and secure.

The reader then is shown how the backing on paper currency, which makes it acceptable as money stand-in, is gradually removed via various mechanisms and interests until one is ultimately left with a money which a value "declared" by government, or fiat, rather than a thing with some intrinsic worth all on its own, the mere stand-in for hard money is declared to itself be the money, by fiat.

We then are shown how, after the conversion over to a fiat currency is complete, how now there exists possibilities for its value to be manipulated, and how these manipulative effects generally tend to harm society by subjecting it to booms of credit expansion, followed by busts as worthless credit is exposed and recessions and depressions result.

We by this point get to a crucial and cynical rub. Who benefits from a fiat currency? No one but government. Its unique properties offer levers of control which power-brokers may use to influence people and business. It also enables government to more readily pay for its operation. If all else fails, it may simply print more paper money and spend it. So long as the population continues to accept it. In this way fiat currency is the true source of inflation (along with fractional-reserve banking) and represents a hidden tax on populations as the purchasing power of their fiat paper slips is eroded.

The book does not necessarily advocate movement away from paper money or checkable deposit accounts, these do provide great security and flexibility benefits. Rothbard's concluding section does, however, advocate replacing the fiat nature of our currency with its former commodity backing in gold, re-imbueing true intrinsic worth to our dollar.

To this end, the book lays out a surprisingly straightforward plan to return our money to a gold-coin and bullion standard (note: not a gold exchange standard, which is very different). If implemented, we would wake up with the ability to go to our bank and redeem our paper dollars and checkable deposit amounts for a share of the real gold held in our treasury. This gold would be distributed to banks to back our deposits and to be offered in exchange for our paper notes.

Once done, our current paper money (in its current Federal Reserve Note form) would be redeemed for the gold and retired. The Federal Reserve System would then be liquidated and done away with. Our money would be gold on deposit with our local banks. Paper money could and probably would still exist, but as a type of gold certificate (like it had been before the Great Depression). Gold would be the real money, on deposit at a bank of our choosing (a competitive process) and used to back any contrived paper or card or electronic system we might develop to serve our desired for flexibility and convenience.

The point is that the heavy hand of government would once more be divorced from the value of money. We would be free to redeem our gold deposits and transfer them to another bank at any time and for any reason. Loan and deposit banking would again be separated. Fractional-reserve banking might not be outlawed (it would be difficult to enforce even if it was), but market competitive forces and depositor faith would keep banks honest about the redeemability of their gold reserves, lest customer fear of the irredeemability of their gold start a run and force a bank to reveal their insolvent standing.

The first section of the book shows you why such a state would be a good thing, if you don't see now the advantage. Among the claims by Rothbard is the notion that the business cycle is a side-effect of fiat money and fractional-reserve banking's ability to create new money out of thin air. Without this, all money has real worth, so business cannot be puffed up by "Monopoly" money for the relatively short boom periods when we ascribe this "thin-air" money the same temporary worth as money backed by real reserves. The waking up we do to the true valuelessness of this thin-air credit expansion is what drives the bust which follows.

After reading the book, my cynical nature cannot believe a time where we might ever return to hard money from government fiat money. Nothing short of a revolution and formation of a new nation could achieve this, in my view. Once government aquires the power to print a fiat money from its people, the vast new power this confers makes it a practical impossibility for government to then be asked to give up. It's like the "One Ring to Rule Them All".

To the government it is, "the precious." Even the honest reformers within government would come under grave pressure to keep the scope of their ideal reform strictly limited. What government voluntarily gives up its own power? The best we could hope for would be some sort of "custodial" relationship where government merely pledges not to use the power it will still have. That'd be like letting the alcoholic keep their Scotch bottle if he agrees never to take the cap off again. At some point he'd have himself a three-fingers of the delicious liquid, and he'd have a great excuse why.

"The Mystery of Banking," makes a great, entertaining, and enlightening introductory book to the Austrian School of Economics.

Wednesday, November 5, 2008

Duality of States

I am amazed sometimes by the duality of our nature, in ourselves and in our institutions.

This evening, after waking up to a stock market party with a clear Obama hangover, I catch the evening's Investor's Business Daily and read about California's measures.

California is universally known to the rest of the nation as the archetypal liberal state. After all, it's home to Hollywood and San Francisco. And while it's true that they fulfilled their role in renewing their liberal voice to the nation in yesterday's voting, internally it's a different voice.

Voters had previously voted in legislation which clarified and asserted the definition of marriage, as being between a man and a woman. It was a big issue at the time, and achieved significant popular support at the polls, and general detraction in the press.

Rebuffed by the apparent will of their fellow Californians, those affected by the statute mounted challenge, and ultimately the State's supreme court rule the new law contrary to the State's constitution, and struck it down. Rebuffing the rebuffers.

Last night, Californians dug in their heels and took their will a step further, voting passage of Proposition 8 to amend the California constitution such that the effect of that previously passed, then struck, statute can be finally the law of their land.

This was a rather conservative move, and so the development of this story from a state with outspoken liberal representation nationally, and a sure win for the New New Deal Obamanians. And they kept it up too, striking down two rather liberal alternative energy proposals.

Contrast this to my home state, North Dakota. Recognized as a state filled with common sense conservative thinking self-reliant rural stalwarts. You want steady hands on so many tillers? We're your people!

We in North Dakota generally send-up Republican presidents and tend to favor conservative principles in our internal government as well. We do favor Democrats for national representation, but more the blue-dog type. We're mostly farmers, and we're acting in our own self-interest to bring home the farming pork. Dems are usually good at this.

In a second major surprise to me, my fellow North Dakotans acted largely liberally at the polls. We did send up our electoral votes for McCain, and Gov. Hoeven and his Republican administrators received large reapproval to go back to work. But in four ballot measures which affect our internal politics, in contrast to liberal California, conservative North Dakota took a liberal tack.

We had a measure to deal with future oil-industry tax revenue in a fiscally responsible way, setting it aside in trust and trying to only spend the interest on that trust, in the knowledge that while the state's blessed with oil, as a nation we won't use it forever: defeated.

A measure to rebalance our tax revenue (which has been generating steady real surplusses of cash) and lower our personal and corporate income taxes: defeated (what sane conservative vetos a tax cut? Not a credit either, but a real rate reduction?).

A measure to establish a new government program devoted to campaigning against tobacco use: passed.

And a measure to take the independent and corporate-style running of our state's workforce safety and insurance program (which had been saving we taxpayers money), and bring it back under the direct control of the state: passed. (Folks I talk to largely blame this one on allegations of a culture of corruption within the non-government board overseeing WSI's operations.)

All actions rather unlike the reputation for conservatism we're outwardly known for to the rest of the nation.

It's a strange and interesting duality. You might say Californians now have a little taste of what it's like to be a North Dakotan, and the same is true for me of them.

Tuesday, November 4, 2008

Living The American Dream

As the last of the votes are counted tonight, it appears clear that we awake Wednesday, to an historic new era in America.

It is a truly cool thing to see it proven true (as I've always believed so) that race doesn't matter in America. Obama's election is resounding proof of this, and that's very heartening.

On that historic achievement of his election, I'd just like to cheer up the fact that Obama achieved this victory by his own merits and by winning the hearts and minds of the electorate. He did not have help from a contrived, government-sponsored multicultural initiative. He was not assisted through policies of affirmative-action, nor minority preference.

He got here on his own merits, his own effort, his own belief in our unique American ideal that this nation affords the same opportunities for all its citizens. We care more about what you're about and what you want to do, than what you look like or what life situation you've come from. He took that ideal and set about convincing enough of you that his ideas for leadership were what our government needed, and he achieved.

This is laudable and sweet, and that he now stands as proof of this ideal's reality cheers me up about the enduring promise of America.

I hope now too, that it's instructive to us to look to his example and others like him, and realize that we don't need crutches. People of parts of American society and culture can and do stand on their own. If we, their fellow Americans, like what they're about, we let them show us what they can do, we elect them, we hire them, we accept them on their merits. It's not about race or ethnicity or anything like that. Do not stand for any such mind pollution from here forward. It does not matter. And we can each embrace the freedom of that delicious realization. No crutches.


Well if you've read my other posts or internet detritus or encountered me in real life, you know that my personal politics do not mesh with those of our new President-elect, or most progressive Democrats or even a number of popular Republicans.

I've been on my own journey of self-discovery, and am a student of history. The more I absorb and experience, the more refined my views become. I am a Libertarian with some conservative sentiments. My philosophy holds that individuals should succeed or fail on their own merits; that our nation's framers struggled mightily to grant us enormous freedom, and a duty to ourselves and our nation to learn about and protect them, accepting the solemn responsibilities upon which those freedoms rest, and without which they would evaporate.

In keeping with that, my philosophy holds that our government ought to mostly act as referee, handing down standards and enforcing a rule of law so that the free market can work and we can be held to account for our promises to one another.

We are about to take a striking turn, now, to the left in this nation. America is redefining herself. I think we've been down some of these roads before, but we're going to take them again, and this time perhaps travel further along them.

Our culture has been shifting. I am not sure we any longer support the notions of personal achievement and self-reliance as we once have. We were founded on those principles. The emphasis now is on the community; that no one may stand alone. We used to trust one another, with government as arbiter. We now mistrust one another, and see government as provider.

In this culture, we desire to be unburdened. We are willing to exchange freedom for leisure. Responsibility is exchanged for a calmed mind. Freedom means choice and making the best choices require effort, responsibility, education, and critical thinking. I think many of us would just like a rest, to be absolved from the heavy responsibilities and consequences that stem therefrom. Let someone else (government) shoulder the burden. Designate and delegate and set your mind at ease that your hard problems will be solved for you.

I think also that we've grown a (to me surreal) trust and faith in our government, begrudging as it seems to be. We lament it nostalgically on the one had, but then turn round a look to it in the next moment. We trust and have faith in our government to protect us from harms (real, imagined, large, small, practical, individual or societal), establish the solutions to our problems, because we don't trust each other through markets anymore.

In my philosophy, government is not the answer. It can be severely malicious and impersonal, but even when well-intentioned, its actions always have unintended consequences which often make matters worse, or create a new and separate problem elsewhere. But it seems our culture would rather roll the dice on an imperfect government, than hang on to its freedoms and free choice and place trust in ourselves and in individuals around us.

I believe that this way be dragons. My reading of history informs me that such is the easy choice. In our worldwide experience, more pain and less of everything is the result. America and the freedoms her citizens yet enjoy are a precious and unique thing, known scarcely to any other population and then only in fragments.

The culture will go where it thinks best, and it feels as though, whether the majority of individuals within the culture realize it, socialism and relying on society instead of onesself is the proper path.

If we try this path and realize we've made a mistake, will we have the power to go back? Will the institutions of government to which we abdicated and delegated our liberty, allow us to resume it?

I believe the Democrat philosophy in this country is once of progressivism a/k/a socialism (semantics are important to socialists as they must always battle to win your heart over from the natural order of things). The individual and her desires or needs are subordinate to the state and society as a whole, as viewed from the perspective of the government, not from the perspective of the people governed.

It's a philosophy of personal choices and freedoms replaced with government dicta, impressed upon you for your own good, as the government sees you (not as you might see yourself), and for the good of all (not as we might see each other). It may be easier to let government handle the tough and sticky issues, to rely upon it for the things which require courage and self-determination from you. But, when it's left for government to decide, how can government thereafter keep itself in check.

In my opinion, such is a misguided philosophy doomed to fail. Proven to have failed time and again, but so outwardly temping, alluring, addictive. We seem destined to keep flirting with it, experimenting with it, convinced that this time it can be different. It never is, has been, or will be.

Freedom is not free. American liberty is very hard work. It's also the most unique and rewarding gift. You can exchange it for "free" things, but such things always have a hidden cost which you will pay somehow. That cost is always more expensive than had you held onto your freedom and choice and achieved what you wanted on your own.

For socialism to work, eventually dissenting voices and ideas must be eliminated. In a system contrived and apart from what arises natually, dissent is corrosive to the unity and harmony required to make the system turn. People who ultimately do not submit willingly will need to be punished or set apart for the good of the whole, as viewed by the government. After inception, you can't simply allow people to do what they want.

Isn't this the very sort of tyranny our framers sought to protect us from?


I believe in the simple truth of free markets. Restrictions, subsidies or other impediments or attempts to control the free market, by government or by other market participants, merely distort the outcomes generated by the market. Within that contrived structure, the market is still operating. It cannot be stopped, because it's not a thing to be accepted or rejected, but a law of nature, like gravity.

Apply the distortion of subsidy, and the free market will adjust to the new operating environment. Costs of various things will merely move about to positions they would not occupy had there been no external or contrived intervention.

As a quick example: if President-elect Obama's tax proposals he's campaigned on are enacted, the result will be new costs everyone will bear. To take what was earned by one group and give it to another, means the group which earned it has experienced a cost which didn't previously exist. If that's a successful small business now paying a higher income tax, it represents a cost which will be passed onto its customers in the form of higher prices. The business's customers will pay for the "wealth" which was taken and given to another group.

If that business was supplying a thing which served as an input to another business product or service, well, now its costs have increased (not to mention that that business itself may pay the same higher tax which the first business did)...the free market will continue to work with costs being passed along directly or indirectly toward the customers, the free market mechanisms natually finding a new equilibrium, and the thing which appeared to be "free" is still being purchased...but with less efficiency.

Take a look at your phone/cable bill (or utility bill in many locales) sometime. Study it carefully. These industries are rather heavily regulated. Government taxes them directly for the privilege of doing business or for certain regulatory services of the government, or indirectly by forcing them to operate in a manner which would not have come about in an unperturbed free market.

It may grant subsidy on certain firms at the expense of others. These all show up as increases in the costs for the firms to provide you with your services and are not eaten altruistically by the companies but passed on to you. So many special levies exist that many of them are called out directly on your bill, itemized in dollars and cents for you.

All business eventually comes down to the individual, no matter how large the business is, so one way or another, you will pay when companies are asked to.

Heck, even higher taxes on the wealthy are bourne mostly by you as individuals. The higher tax represents a higher cost on the part of the wealthy CEO to provide the work or services for which they are paid so highly. As a result of the tax, he will thus demand more from the business which employs him, increasing the cost of products and services to you or to other businesses, but you.

In conclusion, I ask all Americans to do me this favor: keep score. If you believe in the campaign ideals forwarded by President-elect Obama and supported him, so much the better. You folks keep score too. If, as his campaign suggests, and a new Democrat supermajority congress enables, we begin to implement socialist policies with expanded government services and new forms of tax and subsidy, everyone of us regardless of relative economic standing will become more impoverished. Everything else being equal, some may see themselves lifted into a higher class from a lower class, but my bet is that these folks will at the same time be able to afford less than before, or have fewer choices available than before.

America is about aspiring to be your best. Until you reach an arbitrary limit set upon you by your socialist government. Beyond this point, it declares that you did not earn the fruits of your hard work, and confiscates the excess to be distributed inefficiently and often corruptly (when has any subsidy not involved a dose of scandalous pork?) to someone who did nothing to earn it.

In the final analysis, socialism enslaves by defining limits to your success and achievement in life. It removes freedom and choices by fiat or by causing them to be artificially uneconomic. It serves by an iterative process to bring everyone down to the lowest common denominator.

That's not change to hope for. Keep score.

For Americans to "wake-up" from the glittering promises of the campaign, it may first take a nightmare.