Choose: the Fed or a free market
Gene Epstein nails it in Barron's:
TWO QUITE DIFFERENT BOOKS on the economic crisis share the same one-word title: Meltdown. The first is a collection of articles from The Nation -- "America's leading progressive weekly." The second was written by Ludwig von Mises Institute senior fellow Thomas E. Woods Jr., and includes a foreword by libertarian Rep. Ron Paul of Texas.
I found Meltdown II a must-read. Writing with remarkable clarity and occasional mordant humor, Thomas Woods makes a compelling argument for a radical turn to the free market as the only way to prevent meltdowns from recurring. Not that The Nation reporters don't contribute a few nuggets. For example, their general feeling that something radical should be done about the way the Federal Reserve operates -- that we should no longer be "subservient to the Fed mystique" -- is surely progressive in spirit. But when they go on to urge that the Fed make itself subservient to "democratic discourse," we have to remind ourselves that the term "progressive" is a code word for greater government control of the economy, which generally leads to retrogression.
As Woods says, in creating the housing bubble, the Fed was already far too subservient to pressure from Democratic congressmen like Barney Frank, mentioned favorably in Meltdown I. At the same time Frank was disavowing "any kind of financial crisis," Ron Paul was warning of "the long-term damage" from "the government's interference in the housing market."
What Paul understood, and The Nation reporters clearly don't, is that the Fed isn't a product, as they declare, of "market ideology," but of a very different way of thinking. "Instead of planning the production of steel and concrete," writes Woods, the central bank "plans money and interest rates, with consequences that necessarily reverberate throughout the economy."
According to Austrian business-cycle theory, boom-and-bust is caused by the feckless expansion of money and credit that can come only from government intervention. By beginning his story with the Panic of 1819, nearly a century before the Fed was created, Woods makes it clear that government-initiated credit expansion can also occur without the Fed.
But the central bank does help systematize the process. The Fed operates in the dark, in precisely the way any planning agency would that sets prices in the absence of a market. When the interest rate is set too low, "malinvestment" results, eventually leading to bust. One key difference in the case of malinvestment in housing was that the credit mania was actively supported by government-sponsored enterprises, most notably Fannie Mae and Freddie Mac, underwritten by the central bank.
Some now see more regulation as the ultimate solution. And in the abstract, certain forms of regulation might have helped. But, Woods asks rhetorically, with George W. Bush in league with Democrats to push the "ownership society," what regulator "would have...dared tell the regime something other than what it obviously wanted to hear?"
Besides, more regulation won't prevent boom-and-bust; only true free-market banking can accomplish that. Woods again: "If you believe in the free market, you cannot support the Fed, one of the most intrusive interventions into the market." Now, there is a truly progressive idea.
Comments (12)
Deefburger
@ Dr. Tucker
I am addressing the issue of money in a new way. I have realized that the main power of money is not the value it carries, but the trust that carries it.
I asked myself the question:
If I don't trust the money I'm holding, or the bank that issued it, is it real money?
This evaluation of money is deeply personal. Money is money when it is trusted. If it can't be trusted, then it can't be a conveyance of value.
Gold and any other commodity can always convey value based upon their intrinsic value, the value of the substance that makes them up. Their elemental value. This is why gold and silver are a threat the the central banking system. Gold and silver are trusted intrinsically, by the fact of their existence as a rare and useful substance, whereas the bank must be trusted by choice, even if it is trusted by law, the choice is still in the mind of the individual.
This is why the words "In God We Trust" are printed on the money. The idea being to equate trust in God with Trust in the Bank that issued the money.
Blasphemy.
Instead, as Capitalists, we must trust in each other intrinsically, in order to have a free market and a free money. So, the motto must be "In Each Other We Trust".
But how do we bank? How do we know who and how to trust? How do we create money that can be trusted by all and still used widely and freely in this world of electronic funds transfer? How do we do all of this without a bank? We don't. We simply all do what the bank does.
What does the bank do? They store and record value and trust information on each and every entity they deal with. Someone's check is good only if the bank says it is good. Then you choose to make it money by trusting it's message. The check is not the money. The TRUST is the money! The check says who and how much only. The Bank extends it's trust to the check, which you then trust as well, and viola! The check is money!
Money and Banking are a Trust relationship.
They are not nessesarily institutional. If we could trust in each other, and verify that trust in each other electronically, in a manner similar to the EFT we use for money now, then we could in essence be banks for each others trust, without a central authority corrupting the system of trust, or concentrating it in the hands of a few. Not E pluribus unum - but E pluribus pluribus.
I think I know how to do this. I'm writing up a detailed outline of function and protocol for just such a system of exchange.
Interested? I could use some help in evaluating the efficacy of the protocols. The software will be free and open source. The only design restriction is in the implementation of the trust protocols. The rest is open to expansion and innovation. So far, it is even conceivable to do it manually on paper. The protocols are methods only, and they can be implemented in any number of ways, so long as those ways follow the protocol. I call it "Individual Trust Exchange System" or ITES for short.
Published: March 23, 2009 11:20 AM
bearing01
Money is a commodity, whether fiat or gold.
When the central bank, who has a monopoly to create this commodity out of thin air, states to the public that it intends to create another 1,250,000,000,000 units of this commodity and inject it into the economy over the next six months, how can you have trust and faith in the value of this commodity anymore? It is clearly not a store of value in this case considering demand for a commodity that is growing in supply will go down compared to demand for other goods and commodities in the economy.
Published: March 23, 2009 11:40 AM
Deefburger
The Central bank, indeed any bank, does not have a monopoly by ability, only by the trust given to it by law (Fiat) and by the trust given to it by those who trade with it (Use).
The power to create money lies in the individuals ability to rationally judge trust. Money is created when trust is given. Money is exchanged when trust is exchanged. If there is no trust in the exchange, then there is no money.
If I borrow something from you, you are agreeing to trust me with it, and that I will at some time in the future give it back. I am trusting you to trust me. What we did was exchange something for trust, and then pay back the exchanged item and the trust. If I pay you back, or return the thing, then you have validation of my trust and I have validation of your trust. I can trust you, and you can trust me. The thing I borrowed from you was the capital commodity. The trust I exchanged with you was the money!
The central banks as well as the governments that are owned by them are losing the trust of the market, you and me. They can print it all day long, and if you and I don't trust it, it is not money.
Look at Zimbabwe. Is the Zimbabwe Dollar money any more? It can't be trusted, so the answer is no. The crisis would not exist if another currency could be used that the poulace could trust. But the Law insists on the currency monopoly, and so forces the trust on the market in something the market does not trust. So, the market stalls. There is no real trust, only trust by decree, by fiat, and so the market stops trusting and the economy comes to a screeching halt. The market is the people, the participants in mutual exchange. The market is not a faceless entity, it is pluralistic real being made up of people, you, me and everybody else.
The economy happens when you and me and everybody else trusts and trades. The economy whithers and dies when the trust is gone. Money without trust is not money. An economy without trust is not living.
But if you and I can trust each other, then we can trade, and we can create the money ourselves, in and of our mutual trust. That is the power to create money that all of us have, even if the government passes a law that says only this one bank has that power. The truth is that the law is unrealistic.
The reality is that the power to create money never leaves us as individuals. We always have it. We choose what is money and what is not, every day of our lives. There is no real monopoly on trust, there cannot be and so to claim such a monopoly at all is like declaring oneself god. It's only true fro those who believe you!
Published: March 23, 2009 1:18 PM
ProudCapitalist
"In God We Trust". My theory i that that started as a spelling error. It should be: "In Gold We Trust"
When trading a gold coin for a good, then I'd say that it is a commodity money. No too much trust needed there. (Assuming that gold has the same "intrinsic value" even if it stopped being money, I suppose).[*]
But when paper or electronic money is traded, trust is necessary. It has no intrinsic value. One must trust that the bank will be able to exchange it for the gold they've promised for it (in on a gold standard), or that others will accept it in the future (if it's fiat money).
*) I''m not sure it's that simple. Since gold isn't chemically reactive, it is pretty useless for industrial applications, it can hardly substitute any other metal. It is only slighty worse electric conductor than copper though, so its "intrinsic value" may be that of copper. The only substantial alternative use for gold, is as jewelry. But I think one can argue that if gold wasn't money, then it wouldn't be as attractive as jewelry any more.
I think that the relative uselessness of gold makes it more ideal as money! Since it doesn't really compete for other uses, the alternative cost for using gold as money is much lower than for using copper as money. If copper were money, then electic cables would be more expensive. The price of gold is not strongly correlated with any industry's demand for metals.
The money use of gold makes gold more scarce for jewelry uses. But this, if anything, makes gold jewelrys even more attractive! Jewelry which isn't scarce, like gold painted iron rings, are not in demand. So there's a double bonus:
1) no alternative costs for the industry (since none of them demand gold), and
2) a boost to the golds usefullness as jewelry!
The "intrinsic value" of gold would then be only a fraction of its value as money. But since gold's comparative competitiveness in the function as money is superior, I don't see the reason why its "intrinsic value" as non-money would need to be considered at all. It's a what-if question that assumes that gold would not have the properties which it has. There's no need to have any trust when using gold as cash money. It is the commodity which is money in itself.
Those are just my own thoughts about why precisely gold has become money in competition with other metals. It challanges what is really meant with the "intrinsic value" of gold.
Published: March 23, 2009 3:57 PM
John Locke
I love this website! It is such a breath of fresh air compared to the regurgitated platitudes of the mainstream media. I would love to hear everyone's feed back on the following blog. Thanks for restoring my faith in the human intellect!
http://theanonymousamerican.com/index.php?option=com_content&view=article&id=66:in-government-we-trust&catid=35:economyblog&Itemid=61#comments
Published: March 23, 2009 4:07 PM
Deefburger
@ProudCapitalist
I agree with you and just about any other "Austrian" on the gold issue. You are right, that gold as a commodity money carries it's own level of trust that other moneis that are not commodity monies do not carry. It's this property that makes gold a good conductor of trust currency. I don't need to trust you beyond my belief in the actual value of the metal we trade, and you don't have to trust me either. So long as we agree that the gold is gold.
The problem with gold however is that it is a commodity, in that you must be in possession of it for it to be of any usefulness. You have to carry it around, store it away somewhere and take it out of hiding when you want to use it. It's a wonderful store of value if you can keep it safe!
What I'm doing is trying to formulate a method of "storing" value as trust, within a community, in such a way that it cannot be compromised, at least in a any way that can't be rectified, and can be utilized to convey trust between far flung communities. If such a system can be created, then money of any kind can be transferred between elements within the system no matter how far apart they are and whether or not they know each other personally.
I do use gold and silver and other commodities within the system to convey a common measure of value, a standard, but it is the trust relationship between the elements of the system that makes it capable of creating and conveying money.
Published: March 23, 2009 6:54 PM
bearing01
Deefburger,
You may want to checkout : http://www.goldmoney.com
Here you can buy gold stored in a vault and obtain gold credits against your holdings. This way you can transfer your gold credits to others that have a similar account to pay for transactions without having to carry physical gold.
Published: March 23, 2009 7:13 PM
Deefburger
@John Locke
Yup. Good blog. Kinda sounds familiar. The new pontiff is working miracles like it's Armageddon or something....maybe it is, for him.
I certainly do not believe in the robed suits of the Fed or any other holder of "special powers". All men are created equal, and not one of them possesses the power of creation exclusively, especially when it comes to money.
Published: March 23, 2009 7:15 PM
Deefburger
@bearing01
I did and I have an account there. The problem is getting the proof and paperwork as well as the proof of specie. The transmission of trust information is still difficult, even though I believe that what they are doing is valuable. The question of whether or not I can trust them is still "up in the air" so to speak. I can provide them with documentation that is a reasonable accounting of trust in me, but trust is a two way street. Furthermore, I can't trust in any way the context within which they operate. They could be seized by the "Authorities" at any time, for any reason, and my money is then forfeit.
Holding specie ones self or in ones own trusted community is really the only way to store value in gold and other intrinsic value commodities. This is the problem I'm trying to solve.
I'm pretty close to a solution, at least it seems so to me and some friends of mine who have heard it.
What I'm finding is that people generally get the ideas of transfer and trust in each other. The difficulty for most is recognizing thier own powers of trust and money creation. We have been led to believe that the power must rest in the hands of government, or a large central bank, and that that is the only way for people to have money. That these central authorities are the only ones with the power of money creation. This is definitely not true, and it takes quite a bit of convincing to get people to realize their own power.
Jefferson understood. He knew that we were "...endowed by our creator with certain inalienable rights, that among these are Life, Liberty, and the Pursuit of Happiness". I would add to this "the Ability to Trust and Create Money".
Published: March 23, 2009 7:56 PM
ehmoran
Anybody on this one,
I was just thinking that maybe all this so-called bail-out money authorized by Congress was used to pay Interest to Major Worldwide Money Changers for money borrowed to support the U.S. Debt.
Any comments and/or responses????
Published: March 23, 2009 10:09 PM
2nd Amendment
"In God We Trust" was put on all paper currency by an Act of Congress in 1955; the phrase was declared the national motto by an Act of Congress in 1956 and first appeared on paper currency in 1957.
Adding "In God We Trust" to the US currency was an act of religious and political propaganda, allegedly to counter the threat of "godless communism."
Published: March 24, 2009 11:56 AM
Alternatives Considered
Ok Deefburger, I'll bite... where can I find out more about ITES?
Published: March 24, 2009 7:04 PM