Do We Really Want a Single World Currency?

Is a Single World Currency Really Desirable?

By Patrick Barron

In his recent letter-to-the-editor of The Bulletin, Philadelphia, in response to Mark Hendrickson’s essay on exchange rate manipulations, Mr. Morrison Bonpasse advocates a single world currency as the antidote not only to exchange rate shenanigans but also to many other perceived ills that derive from the multiplicity of world currencies.

Avoiding the nuisance and admitted cost of changing currencies when traveling from one monopolized currency zone to another and conducting trade with countries in different monopolized currency zones certainly has attractions. But the rest of Mr. Bonpasse’s benefits are suspect indeed and he fails to recognize the dangers involved. First a little history.

The history of the struggle for man to be free has been accompanied by his struggle to break governments’ attempts to monopolize and then debase the currency. Governments have never proven to be good stewards of sound money, our own Federal Reserve Board included. (The dollar is worth only five cents of it 1913 value, the last full year before the Federal Reserve Board’s formation.) Government have always sought ways to hide from the people the true cost of its expenditures, something that is impossible when it does not control the money supply but must tax the people or borrow honestly in the open market.

At one time the world did have an international currency. It was called the gold standard. All of the world’s major currencies were tied to a precise weight of gold. This allowed easy conversion from one currency to another, since everyone in the world knew the exchange ratio between the different currencies and gold. It was the adoption of the gold standard that made international trade possible. Here is one of my favorite quotes from Ludwig von Mises’ magnum opus Human Action:

The gold standard was the world standard of the age of capitalism, increasing welfare, liberty, and democracy, both political and economic. In the eyes of the free traders its main eminence was precisely the fact that it was an international standard as required by international trade and the transactions of the international money and capital market. It was the medium of exchange by means of which Western industrialism and Western capital had borne Western civilization into the remotest parts of the earth’s surface, everywhere destroying the fetters of age-old prejudices and superstitions, sowing the seeds of new life and new well-being, freeing minds and souls, and creating riches unheard of before. It accompanied the triumphal unprecedented progress of Western liberalism ready to unite all nations into a community of free nations peacefully cooperating with one another. (Fourth Revised Edition, page 472-3)

Under the gold standard, private banks could issue currency as long as it was backed by gold, although the U.S. mints issued gold coins of certain precise weights or issued tokens that represented small denominations that were backed one hundred percent by gold on deposit in the government’s vaults. Private citizens were always empowered to present these token coins at U. S. Treasury offices in exchange for gold. Banks that issued currency were required to hold gold reserves in their vaults and to exchange the currency for gold upon presentment of their currency. When the public got wind that a bank was acting fraudulently by issuing more currency than it could redeem in gold, a bank run ensued, forcing the bank to either honor its promise or go out of business.

So a private currency became a check upon government profligacy and exposed fraudulent banking practices. But all that changed in the twentieth century when the fiat money concept swept the world. Fiat money means money backed by nothing, only the full faith and credit of the government. In a private money system, fiat money was fraudulent, as we have seen. But the formation of central banks, to start, and then by forbidding all private currency, government gradually monopolized the nation’s currency. It was the same processes everywhere. The purpose of a central bank was to become the “lender of last resort”; thereby allowing the banks to issue fiduciary credit to an almost unlimited extent. Banking became not an honest business like any other but a cartel with the government’s guarantee of solvency, no matter how irresponsible the banker.

But the biggest beneficiary of fiat money is government itself. Having removed the need to redeem its notes in gold, government could print money and spend it, without taxing the people or borrowing in the open market. This is the definition of inflation—not rising prices, which are merely a symptom of a deeper problem—but an expansion of the fiat money supply.

This is what Mr. Bonpasse fails to consider—that an entity that monopolizes the nation’s currency and criminalizes all other exchange media is the peoples’ master not their servant.

It is the dream of all adherents of big government that there be one world currency. But a world government monopoly on money would place enormous power in the hands of the political class to confiscate through inflation all of the world’s resources to its own use and enslave the world. At least under a multitude of fiat currencies, it becomes apparent when one government has inflated its currency at a rate greater than the rest—we see the exchange rate fluctuations that Mr. Bonpasse finds so inconvenient. But these exchange rate fluctuations are one of the few checks remaining upon government’s ability to inflate to its heart content…and its heart will never be contented.

Bailing Out the Sub Prime Lending Market

In his 1994 book Money of the Mind: Borrowing and Lending in America from the Civil War to the Age of Milken (New York Noonday Press) James Grant presents a tour de force of the role finance played in the building of modern America. The author traced two trends in American finance, one good and one bad. American finance has been characterized by the democratization of credit (the good trend) and the socialization of risk (the bad trend).

The Larger Trend

America was the first modern country in which credit instruments of all sorts became available to the common man, whereas in the rest of the world credit had been reserved for the wealthy few. But the democratization of credit merely reflected a larger trend in America. America was the first country in which the common man could build wealth through a system of meritocracy. Unlike the rest of the world, the accident of one’s birth did not determine an American’s place in society. What followed was an unprecedented explosion of entrepreneurship in which the common man benefited as never before. But why did this happen only in America?

Land for All

America became the first modern nation in which the common man could become economically independent, because he could easily own land. In all other societies the common man’s livelihood was a gift from the aristocracy, and the foundation of aristocratic power was ownership of land. Few commoners in Europe owned land freely, called freeholds. Most worked as rural laborers, rented land, or a few held long-term ninety-nine year leases. But even rented or leased land did not make the common man independent. All was different in America. Ownership of the immense North American continent was open to homesteaders–those who, in John Locke’s famous words, mixed their labor with the land resource to produce something of value. From this mixture of labor and land came legal land ownership. When a man owns the tools necessary for his survival he is independent and can become rich. He is no longer a vassal. (That is one of the reasons that I am so opposed to the current “Taxation for Open Space” craze. It taxes the common man to pay large sums of money to current holders of land for their promise not to improve it by building homes or businesses. I cannot conceive of a more anti-capitalistic tax. How can land be placed at the disposal of those who can place it in its most productive form, if government locks it away with our tax money for the dubious benefit of allowing the common people to gaze upon it? This is the old government-enforced aristocratic system painted in new colors. Lipstick on a pig, but a pig nevertheless.)

The widespread ownership of land created a huge customer base for credit that was impossible elsewhere. Hernando De Soto explains this process in The Mystery of Capital. De Soto uses America as an example of the proper way to perfect title in land for the benefit of the commoner. This did not happen in the Spanish colonies, where even today only a small percentage of land is legally protected by perfected title. De Soto calls such land “dead capital”, because it cannot be used for more capital intensive businesses and no one dares build a valuable abode upon it only to see corrupt authorities evict the builder as a trespasser.

The Socialization of Risk

But in Money of the Mind James Grant traced the less advantageous trend in the history of American credit—the socialization of risk. Almost from the beginning, those who were granted unprecedented access to credit clamored for government assistance when their plans went awry and they could not repay their loans. This process repeated itself over and over again. The first lenders to a new class of borrowers, often using new credit instruments, would attract the best credit risks and suffer few credit losses. As pioneers in this new area of lending, they would make extraordinary profits. Copycat financiers were quick to jump into this new market, but the best credit risks were already gone. Nevertheless, it was felt that a new age of finance had dawned (it is always a new age!) Recent experience had shown that previously uncreditworthy borrowers could be lent to profitably using new credit instruments. Grant shows that over and over the last in the new market, whether lender or borrower, were always those who suffered the worst losses when economic reality could no longer be ignored.

The Market Teaches, But Governments Waste

Bankruptcy is a hard but wonderful teacher, and eventually the market learned its lesson, at least for the newly introduced credit instrument. The credit markets settled down to the mundane task of doing good financial analysis of business plans and taking realistic collateral to protect lenders and instill a sense of responsibility in borrowers. But the lesson had to be learned again and again with the introduction of each new credit instrument.

Foolish businessmen and their customers have always lobbied for taxpayer bailouts.

The bailout of Chrysler is the most well-know case, but the bailout of Continental Illinois National Bank of Chicago in the early ‘80s set the tone for the massive bailout of the savings and loan industry later in the decade.

So we have arrived at the year 2007 and what do we read in each day’s headline? Sub prime lenders are going bust. Sub prime borrowers are shocked at the size of their new payments, as variable teaser rates expire and higher ones take effect. And what do these creditors and borrowers demand? That government bail them out with taxpayer funds. You could have read the same headlines in almost any twenty-year period since the Civil War. Our pandering politicians are there with the money. Not their own money, of course, but with our money. These poor bankers and their customers must not be allowed to go bankrupt. Oh, the Humanity! We must show them mercy and charity! Now, I am all for mercy and charity, but I prefer that everyone show such displays with his own money and not mine.

Creating a Moral Hazard

The evils that flow from these government bailouts are seldom discussed. There is the equity problem. By what right does anyone have to my money to keep himself in a home that he cannot afford? I had nothing to do with his transaction, into which he entered voluntarily if foolishly. The same for the lender and the lender’s investors. They lent the money and expected to make a profit. They miscalculated. The market will learn the lesson. But let’s not create what economists call a “moral hazard”, which means that similar transactions will happen again and again because both borrower and lender expect the government to bail them out if things don’t go as planned.

Unfortunately, that IS the lesson from previous bailouts and that is why we have the sub prime lending bailout today. In fact both PA and NJ have institutionalized the creation of moral hazard. In PA we have the Housing Finance Agency. In NJ it is the New Jersey Housing and Mortgage Finance Agency. Neither agency should exist, but spokesmen for both are demanding more “rescue” funds. What else should we expect from bureaucrats whose jobs depend upon rescuing financial disasters with public money? Expect more of the same.

When a Reporter Is Just a Reporter

Mark Bowden, author of the popular book and movie Blackhawk Down and the highly acclaimed Killing Pablo, spoke to members and guests of The Middle East Forum yesterday about his new book Guests of the Ayatollah. Speaking at the law offices of Pepper Hamilton in Center City, Mr. Bowden gave a highly interesting and entertaining talk about the cultural differences that led up to America’s first clash with radical Islam—the Iranian seizure of our embassy in Tehran in 1979—and the experiences of the hostages and their captors. Mr. Bowden has interviewed personally many of the hostages and some of the Iranian hostage takers, plus many American officials from that time. I enjoyed his talk immensely, but I was struck how easy it was to spot when he moved from reporting, where he is a master craftsman, and into analysis and opinion, where he is less adept.

I have not read either of these books, but I am certain that the reader would find Guests to be a fairly factual account of what happened. This is the mark of a good journalist. Mr. Bowden told us amazing stories from his many interviews, such as a thumbnail sketch of the failed American rescue mission. He also explained the political forces that acted upon the Carter administration and caused it to feel that there really was nothing that could be done. Most important of these were the fear that escalating the crisis might bring in the Soviets and start World War III and the fact that our military really had no capability to rescue the hostages, who were being held in the middle of a huge city hundreds of miles from our nearest bases and fleet.

But during his talk one could easily discern when Mr. Bowden veered from reporting to inserting his own judgement and analysis. He was excellent at telling us what DID happen and less astute when he told us WHY it happened and even less so when told us what SHOULD have happened. For instance, Mr. Bowden told us that the Carter administration handled the situation rather well by refusing to escalate the crisis militarily. Well, that is a value judgement that others may debate. As one attendee stated in the Q&A period, the U.S could have punished the Iranians militarily rather easily and that we played into the Iranians’ hands by placing the welfare of the hostages above all other national interests. This is a lesson that we should have learned from the many Israeli experiences. In the ensuing decades Iran has been responsible for mayhem world wide, from funding and arming Hezbollah in Lebanon to the recent capture of the British sailors and marines. It is certainly arguable that an overwhelming military response in 1979 to an attack upon our embassy, which was an attack upon American territory under international law, might have prevented these warlike actions and even caused the Iranian people to discard the reign of the radical mullahs.

This is all speculation, of course, but the point is that Mr. Bowden was merely speculating, too. He is not an expert in international affairs and admits to being completely ignorant of America’s military capability, telling a humorous anecdote that he had to admit in a talk to Army officers that he didn’t know what a Bradley Fighting Vehicle was. This admission early in his talk indicated to me that Mr. Bowden was just a reporter, a good reporter, but just a reporter nevertheless.

U.S. Senate to Sick People: Drop Dead!

Early last week the U.S. Senate made it illegal for Americans to buy medication from foreign sources, by requiring that the FDA certify that such all medications are safe and effective. Since the FDA has stated that it cannot meet this requirement, our government has condemned millions of Americans to misery, poverty, and even death.

Reputable sources claim that foreign medications, which are often the very same medications sold in the U.S. and produced by the same manufacturer, can cost as little as one-third the price as the identical medication sold here. Of course, the drug companies mounted a massive disinformation campaign to switch the topic from drug cost to drug safety. We are only thinking of the best interest of the consuming public, they pontificate, who cannot be trusted and, therefore, cannot be allowed to make these decisions themselves. Pardon my French, but what a crock!

A New Kind of Protectionism

There are many fine sources that will explain the marketing strategies of the drug companies that result in price gouging of American consumers. Now, I am all in favor of the drug companies selling their product for whatever price they think they can get anywhere in the world. But what I adamantly oppose is the drug companies lobbying our government to insure a captive market here at home. This is protectionism of a new kind—preventing the re-importation into America of one’s own product after one has sold that product oversees to third parties. There is no rationale for such abusive and coercive measures, regardless of the drug companies’ crocodile tears. Our drug makers and our politicians who pander to them surely deserve a few extra million years in purgatory to atone for the unnecessary and senseless suffering they are inflicting on their fellow Americans—suffering from pain, suffering from immobility, and suffering from a diminished standard of living, to say nothing of the suffering from premature death.

But what of the drug companies’ and the politicians’ claims that they have only our best interest in mind? Surely not all of those who labored to pass this disreputable bill truly desired to harm their fellow Americans. Probably not. But they do labor under a false understanding of man’s natural rights, from which all law flows. The very foundation of our nature rights is the right of ownership of our own bodies and all that that entails.

Who Owns Our Bodies?

Who owns one’s body if not oneself? Does some other person own it? By what right does he claim ownership? And if he owns my body, why do I not own his? Let us hope that this theory was vanquished from America at the end of the Civil War. How about the claim of the socialists that we all are responsible to one another and, therefore, all have a right to decide what one may do with one’s body. That founders on the shoals of impracticality. Shall I canvass everyone in America or even everyone in the world before I consume some substance? That means that everyone must canvass everyone else continuously.

Well, then, how about the idea that we ELECT certain people to make these decisions for the rest of us? That is the nature of this ban on foreign drugs. But by what natural right do these representatives make such a claim except that a majority has voted them into office? That is no explanation. What if a majority wants to re-enslave all persons of color or some other despicable act? The fact that a majority desires it is no justification. I doubt that my neighbor would acquiesce if I told him that my son and I held a vote and decided to take ownership of his new car. Plus we already said that one person cannot own another, the definition of slavery, so by what twisted logic do we say that a group may own a person or, in this case, all persons in America and make such life and death decisions as prohibiting the purchase of medications from foreign sources? For this is the issue. If the U.S. government can deny Americans this right, then it has made us slaves.

If ever there was a law that called for civil disobedience, this is it. No court in the land should accept a case from a government prosecutor attempting to enforce this law. No jury should convict a defendant should a court accept such a case, regardless of the facts and the letter of the law. No law can stand if citizens refuse to obey it. This is such a law.

Why We Tsk, Tsk Poor Governor Corzine

In his most recent “Wednesday Gems” in The Bulletin, Philadelphia, Frank Diamond berated we critics of Governor Corzine for his hypocrisy in refusing to use his seatbelt even though he made public service announcements advising the rest of us to do so. Mr. Diamond said, “A reservoir of “tsk, tsk” strains against the better impulse to let the poor man be.”

Please, Frank, everyone wants the governor to recover from his very serious injuries. But you fail to understand the true nature of our tsk, tsking. It is the brazen demonstration by the governor that he considered himself above the law. If telling us to wear a seat belt were just another public service announcement like advising us to wear plenty of sunscreen on those first trips to the shore, we would view the governor’s actions differently. He would have been seen as foolish to refuse to wear his seatbelt, but it would have been his personal choice. But failing to wear a seatbelt in New Jersey is against the law and carries serious sanctions. The state police fine citizens for failing to conform to this law. Try refusing to pay such a fine and you will find yourself facing state troopers with guns in their hands rather than ticket books.

Equally disturbing is the assumption that the governor has a right to speed, risking not only his own life but the lives of innocents with whom he shares the road. Ninety-one miles per hour?! This is an incredible rate of speed anywhere outside of Montana. No one, not even the governor, (especially not even the governor!), has the right to travel at this speed. It is reckless endangerment of innocent people.

And one more thing. We really aren’t impressed with the flimsy excuse that the governor was so burdened by the duties of his office that he couldn’t be bothered to obey the law. Try that excuse the next time you get a speeding ticket and let us know how it works.

The Transformation of American Government from Protector to Provider

The 2008 election season has begun and the presidential candidates are running their campaign themes up the old flagpole to see who salutes them. There is a cognitive dissonance that pervades the entire scene. Our soldiers are being slaughtered in Iraq and Afghanistan, British sailors and marines have been kidnapped by Islamofascists, and what is the most important issue from just about all the campaigns? Government delivery of social services!Pay close attention to all major candidates’ campaign themes. One of these people will be our next president and will attempt to implement his campaign promises. (Before my email box fills with hate mail, I have used “his” in the gender-neutral form in order to avoid the annoying “his/her” practice that is all the rage today. I know full well that a woman just may be our next president.) Look for any indication that a candidate at least acknowledges the fact that our nation is at war and that radical Islam is a serious problem in the world. Since it is difficult for the candidates to avoid the subject entirely, try to glean a consistent policy from their few statements on the matter. If anyone discovers anything, let me know. I haven’t found diddly yet.

George Washington Protected—George Bush Provides

At one time—oh, right around the time our Founders were writing the Constitution—it was the general consensus of statesman that the purpose of government was to protect life and property from criminals at home and enemies abroad. That was it. Government was our servant and we were the masters. We formed he government and we could discard it if it became tyrannical. Don’t believe me? Read the Declaration of Independence. But somewhere around the turn of the last century the idea took root that government could and should do more. Today we revere FDR’s Four Freedoms speech as the foundation of this movement, but it really had been percolating among the elite for decades. Teddy Roosevelt was an early advocate of a vigorous, activist government. Misinterpreting normal business consolidation of major industries like oil, coal, railroads, and finance for some kind of conspiracy, he became a trust buster, hamstringing the very businesses that were lowering prices and raising the standard of living of the ordinary American to unprecedented levels.

The Great Depression and the Great Transformation of Government

But the transformation of government from protector to provider didn’t really get started until the Great Depression. Of course, there are many interpretations of its cause and why it lasted so long. The Austrian school of economics’ interpretation, of which I subscribe, puts the blame on the newly formed Federal Reserve System, which pumped money into the economy after World War I, giving us the unsustainable boom of the Roaring Twenties, before turning a fairly normal corrective recession into a depression by collapsing the money supply. FDR can take credit too, for trying every crackpot, socialist idea that crossed his desk, most of which destroyed production. Gross Domestic Product failed to achieve pre-Depression levels until well into World War II, when the government finally discarded the worst of the New Deal regulations in order to crank up war production.

After a breather from war and outmaneuvered by a conservative President Eisenhower who knew the purpose of the president’s veto power, the transformation of the federal government from protector to provider got another boost with LBJ’s Great Society in the 1960’s. Ever since, conservative presidents have been content with attempting to keep the growth of government spending at the inflation level, having given up any real attempt at rolling back spending much less scrap programs.

Can’t Fool the People under a Gold Standard

A little known consequence of abandoning the gold standard in favor of a fiat currency, which is what all countries have today, is a universally held misperception that government spending does not involve a sacrifice of real resources by the people. Government gives us nothing that it does not take from someone else. This was abundantly clear under a gold standard, whereby the government could not print money—it had to tax it or borrow it on the open market. Not so today. Our government can simply print the money that it spends. Thus most Americans think that they can have their cake and eat it too—that both the people and the government can spend the same dollar. It does appear that way, but it is an illusion. Government commands real resources with the dollars that it prints, and these real resources are provided by the people at the expense of their present and future consumption.

When asked what would be the one thing that he would change in order to reign in the expansion of government, Ludwig von Mises Professor George Reisman said it would be a return to the gold standard. The source of government spending and all the evils that go with it cannot be hidden under a gold-backed monetary system. The people know that they are being deprived of real resources. But under a fiat monetary system, it can appear that no resources are sacrificed in order to feed the rapacious maw of government. Our taxes do not go up; the interest rate appears to be low; all seems right with the world. We have entered a new era with a new economy! How lucky we are to be alive in such times with such wonderful tools with which our government can fine-tune the economy! Wait a minute. What is that grumbling from the subprime lending market? Why has gasoline gone to three dollars a gallon? Surely this is temporary and limited to a small portion of the economy. Surely no REAL resources, resources that can never be retrieved, were thrown down the sub prime lending rat hole. Surely gasoline will return to a more reasonable level.

Trying Not to Think About It

The parallels to the 1930s are chillingly valid. Once again Western politicians just don’t want to think about, much less prepare for, the biggest challenge of a generation. The challenge from radical Muslims is all the more difficult because it mimics all the grievances promoted by modern leftists from multi-culturalism to cultural relativism. Claiming preferred status that they would never allow foreigners in their mother countries, Muslims around the world feign shock and demand apologies at the slightest suggestion that there is something fundamentally wrong with Islam. Add to this the increasing awareness that the West has eviscerated its military power in favor of an unsustainable but seemingly unstoppable welfare state and we have all the elements for societal suicide.

Our politicians–especially our would-be presidents–refuse to think about such things. They live in a Never Never Land of ever increasing social benefits that cost nothing. Can we voters be so gullible as to believe that everyone will receive more than he pays? Do we really believe that politicians and government bureaucrats can direct the economy so that everyone is happy with the choices? Are we really so lazy that we don’t even want to think about them? And what about those pesky Islamofascists? Oh, let’s just not think about them either. OK?

The Transformation of American Government from Protector to Provider

The 2008 election season has begun and the presidential candidates are running their campaign themes up the old flagpole to see who salutes them. There is a cognitive dissonance that pervades the entire scene. Our soldiers are being slaughtered in Iraq and Afghanistan, British sailors and marines have been kidnapped by Islamofascists, and what is the most important issue from just about all the campaigns? Government delivery of social services!

Bulletin readers should pay close attention to all major candidates’ campaign themes. One of these people will be our next president and will attempt to implement his campaign promises. (Before my email box fills with hate mail, I have used “his” in the gender-neutral form in order to avoid the annoying “his/her” practice that is all the rage today. I know full well that a woman just may be our next president.) Look for any indication that a candidate at least acknowledges the fact that our nation is at war and that radical Islam is a serious problem in the world. Since it is difficult for the candidates to avoid the subject entirely, try to glean a consistent policy from their few statements on the matter. If anyone discovers anything, let me know. I haven’t found diddly yet.

George Washington Protected—George Bush Provides

At one time—oh, right around the time our Founders were writing the Constitution—it was the general consensus of statesman that the purpose of government was to protect life and property from criminals at home and enemies abroad. That was it. Government was our servant and we were the masters. We formed he government and we could discard it if it became tyrannical. Don’t believe me? Read the Declaration of Independence. But somewhere around the turn of the last century the idea took root that government could and should do more. Today we revere FDR’s Four Freedoms speech as the foundation of this movement, but it really had been percolating among the elite for decades. Teddy Roosevelt was an early advocate of a vigorous, activist government. Misinterpreting normal business consolidation of major industries like oil, coal, railroads, and finance for some kind of conspiracy, he became a trust buster, hamstringing the very businesses that were lowering prices and raising the standard of living of the ordinary American to unprecedented levels.

The Great Depression and the Great Transformation of Government

But the transformation of government from protector to provider didn’t really get started until the Great Depression. Of course, there are many interpretations of its cause and why it lasted so long. The Austrian school of economics’ interpretation, of which I subscribe, puts the blame on the newly formed Federal Reserve System, which pumped money into the economy after World War I, giving us the unsustainable boom of the Roaring Twenties, before turning a fairly normal corrective recession into a depression by collapsing the money supply. FDR can take credit too, for trying every crackpot, socialist idea that crossed his desk, most of which destroyed production. Gross Domestic Product failed to achieve pre-Depression levels until well into World War II, when the government finally discarded the worst of the New Deal regulations in order to crank up war production.

After a breather from war and outmaneuvered by a conservative President Eisenhower who knew the purpose of the president’s veto power, the transformation of the federal government from protector to provider got another boost with LBJ’s Great Society in the 1960’s. Ever since, conservative presidents have been content with attempting to keep the growth of government spending at the inflation level, having given up any real attempt at rolling back spending much less scrap programs.

Can’t Fool the People under a Gold Standard

 

A little known consequence of abandoning the gold standard in favor of a fiat currency, which is what all countries have today, is a universally held misperception that government spending does not involve a sacrifice of real resources by the people. Government gives us nothing that it does not take from someone else. This was abundantly clear under a gold standard, whereby the government could not print money—it had to tax it or borrow it on the open market. Not so today. Our government can simply print the money that it spends. Thus most Americans think that they can have their cake and eat it too—that both the people and the government can spend the same dollar. It does appear that way, but it is an illusion. Government commands real resources with the dollars that it prints, and these real resources are provided by the people at the expense of their present and future consumption.

When asked what would be the one thing that he would change in order to reign in the expansion of government, Ludwig von Mises Professor George Reisman said it would be a return to the gold standard. The source of government spending and all the evils that go with it cannot be hidden under a gold-backed monetary system. The people know that they are being deprived of real resources. But under a fiat monetary system, it can appear that no resources are sacrificed in order to feed the rapacious maw of government. Our taxes do not go up; the interest rate appears to be low; all seems right with the world. We have entered a new era with a new economy! How lucky we are to be alive in such times with such wonderful tools with which our government can fine-tune the economy! Wait a minute. What is that grumbling from the subprime lending market? Why has gasoline gone to three dollars a gallon? Surely this is temporary and limited to a small portion of the economy. Surely no REAL resources, resources that can never be retrieved, were thrown down the sub prime lending rat hole. Surely gasoline will return to a more reasonable level.

Trying Not to Think About It

The parallels to the 1930s are chillingly valid. Once again Western politicians just don’t want to think about, much less prepare for, the biggest challenge of a generation. The challenge from radical Muslims is all the more difficult because it mimics all the grievances promoted by modern leftists from multi-culturalism to cultural relativism. Claiming preferred status that they would never allow foreigners in their mother countries, Muslims around the world feign shock and demand apologies at the slightest suggestion that there is something fundamentally wrong with Islam. Add to this the increasing awareness that the West has eviscerated its military power in favor of an unsustainable but seemingly unstoppable welfare state and we have all the elements for societal suicide.

Our politicians–especially our would-be presidents–refuse to think about such things. They live in a Never Never Land of ever increasing social benefits that cost nothing. Can we voters be so gullible as to believe that everyone will receive more than he pays? Do we really believe that politicians and government bureaucrats can direct the economy so that everyone is happy with the choices? Are we really so lazy that we don’t even want to think about them? And what about those pesky Islamofascists? Oh, let’s just not think about them either. OK?

Economic Ignorance May Cause Disastrous Trade Policies

The U.S. Congress is threatening to pass legislation slapping huge tariffs and quotas on Chinese goods. For years the Democrats, and some Republicans, have complained that the Chinese are not “playing by the rules.” They cite America’s huge trade deficit with China as evidence of Chinese perfidy. How dare those Chinese sell us goods that we desire and at a cheap price, too! The Bush administration has done little to allay this incendiary talk. It especially has done virtually nothing to try to educate our legislators and the American public about the meaning of the trade deficit and whether or not it really is a harbinger of economic evils to come. So, since the Bush administration won’t do it, I will try. I will explain that the U.S. need not worry over Chinese policies. The only policies that Americans should worry about are our own.

There are two general areas of complaint about the Chinese. (By the way, twenty years ago, I could have inserted the name “Japan” wherever you now read “China”. Remember when Japan was going to supplant America economically? The same folks now complaining about China were recommending that the U.S. emulate Japan’s policies of subsidizing targeted industries. Hum. I wonder how that Japanese strategy worked out?) One, Congress and industry complain that China subsidizes its export industries and prohibits importation of some American products. And, two, these same groups complain that China intervenes in its own currency markets to keep the Yuan cheap, thereby making its export goods cheaper still.

First let’s look at subsidies and trade restrictions. Subsidies harm those who provide the subsidies, that is, the citizens of the country whose government provides the subsidy. The Chinese government must tax its own citizens in order to raise the funds that become the subsidy for favored industries. But competitors of other countries are not harmed, according to the definition of that term as promulgated by T. Patrick Burke in No Harm: An Ethical Principles for a Free Market, with which I agree. (I highly recommend that you read this book, which can be obtained from Dr. Burke at www.Wynnewood.com. My abridged description is no substitute for Dr. Burke’s complete explanation.) The “No Harm” thesis maintains that even though producers lose sales that they might otherwise have made, their position is not made worse when consumers purchase subsidized products from other countries. These consumers benefit. In fact one could say that these consumers are the final recipients of the foreign subsidy and the producers in foreign lands who first receive the subsidy are only an intermediate conduit of it. American resources formerly devoted to the production of goods that now can be imported more cheaply are now freed to meet other consumer needs. It is the economic fact of scarcity that ensures that the consumers’ needs will never be met. There will always be more needs to satisfy. Americans are especially adept, by nature and custom, to move from industry to industry and region to region as our dynamic market demands. Thus, in this time of hand-wringing over jobs lost to China (remember, yesterday it was Japan!), joblessness in America is as low as can be expected in a dynamic economy, which always experiences some small level of temporary unemployment.

If foreign subsidies cause no harm to local producers and actually benefit local consumers, it becomes irrelevant whether or not that nation buys our goods in return or creates barriers against them. What is the protectionist country to do with our dollars? If she hoards them, then she has worked for nothing, having exchanged some valuable good for pieces of paper. If she uses them on the international market to buy some other country’s goods, then that country now holds our dollars and can only use them to buy American goods or do as the first protectionist country did and exchange them for some other country’s goods, which creates the same situation. The very fact that a country will accept our currency means that she will spend them in America herself or she knows that others will spend the dollars in America. If no country were willing to accept our currency, as no one was willing to hold Soviet Rubles during the Cold War, then we would not be able to buy anything on the international market. If a country or a group of countries circulate dollars alongside their own currency, such as the Eurodollar market, that country or group of countries has inflated its money supply and prices will rise. Likewise, dollars that are held oversees reduce our money supply and prices in the U.S. will fall. So imports create lower prices in two ways–one, cheaper goods raise our standard of living, and, two, the decrease in our money supply (if the dollars are never returned to the U.S.) causes deflation.

The second complaint—that China manipulates its currency in order to sell its goods cheaply—is related to direct subsidies and home market protection in its effects. When China gives American importers more Yuan for the dollar than the free market, it sells its goods cheaply and inflates its own economy. These excess Yuan are spent in China and gradually cause prices there to rise, harming the Chinese consumer. So here is an iron rule of currencies—No nation can get rich by manipulating its own currency. All it can do is transfer resources within its own monopolized currency area to politically connected industries and individuals at the expense of all other citizens not so politically favored and who are trapped within that country’s monopolized currency area. So China funnels resources to favored export industries at the expense of the rest of the teaming Chinese masses. Again, consumers who import these artificially cheap goods are the ultimate beneficiaries.

Threatening retaliation against countries that subsidize export industries and interfere in their own currency markets is not only foolish but also self-defeating. The U.S. benefits from such actions by foreign nations. But demagogic politicians love to have an excuse for rewarding politically connected industries and their workers here at home, even though the mechanisms employed will harm all others not so politically connected. That is why I am an advocate of the U.S. unilaterally becoming a free trade nation, withdrawing from fruitless trade conferences, and welcoming goods into the U.S. without tariffs, quotas, or inspections that are not conducted on local products. We will be the beneficiaries of the foolish mercantilist policies of other nations, a fact that eventually will become apparent to all. We should welcome products even from nations who refuse to accept our goods. Such foolish policies harm only the citizens of those mercantilist countries. They will discover this fact on their own, primarily by observing the prosperity of countries, such as America, who do not engage in such destructive activity.

The last thing we should do is follow the example of the mercantilist nations and subsidize our own goods or manipulate our own currency. Nor should we erect trade barriers, penalties, and the like against their goods. In conclusion, the best policy is the one that completely forbids government interference in private economic matters. Nevertheless, I fear that we are headed down the path of reciprocal, escalating barriers to trade. This is the stuff of first depression and then war. We have been down this road before and it leads to disaster.

Much Ado About Nothing

Earlier this week Charles Plosser, the relatively new president (August 2006) of the Federal Reserve Bank of Philadelphia, took issue with his chairman, Ben Bernanke, and other members of the Federal Reserve Board when he stated that the Fed should set an inflationary target and then manage monetary affairs to meet it. At this point most readers of this column may be tempted to stop reading and turn to something that is more intellectually stimulating, such as the chances of the Phillies winning the pennant. Believe it or not, I agree with them. It is statements such as these by Mr. Plosser that drive an Austrian school economist to drink, as if any of us needed an excuse.

At first blush Mr. Plosser sounds reasonable. He recommends a slightly different monetary strategy from the one currently employed by the Fed. Under the tenure of Alan Greenspan, the Fed targeted inflation but kept its target a secret. Under Ben Bernanke the Fed has released its target but with the caveat that it feels free to deviate from it depending upon circumstances. Mr. Plosser heroically states that the Fed should meet its target regardless of circumstances. In most monetary circles this is considered a great and courageous stance.

For the Fed Inflation Means an Increase in Prices

But what does the Fed mean by the term “inflation”? And can the Fed actually do anything to manage inflation in real time; that is, before the economy has already internalized the price increases and nothing can be done? For the Fed and the public in general, the term “inflation” refers to price increases. When prices rise, we have inflation. When prices fall, we have deflation. (What’s the matter with you, Barron? Been spending too much time reading von Mises?) The Fed tries to control inflation by managing the money supply through open market operations; that is, it buys and sells treasury debt, thusly, expanding or contracting the money supply respectively. How does it know how much treasury debt to buy or sell? It really doesn’t, so it manipulates the Fed Funds rate, the cost of interbank overnight borrowing—raising it to contract the money supply and lowering it to expand it. This all sounds wonderfully scientific, doesn’t it? Well, it’s about as scientific as the pronouncements of Punxsutawney Phil.

Price Increases Are But a Symptom of an Increase in Money

The flaw in the whole system is the very definition of inflation itself as a general rise or fall in prices. But price changes are merely the symptoms of expanding or contracting the money supply, not a cause thereof. Any expansion of the money supply must cause prices to rise more than they would without the expansion. Furthermore, targeting prices assumes that all prices rise and fall in unison and by the same relative amounts. This is not the case at all. The first recipients of new money–created out of thin air, by the way—experience no inflation at all. Think of a counterfeiter, who passes his worthless paper as the genuine article. He buys at prices prevailing in the marketplace. Only later do prices rise as the increased supply works it way irregularly throughout the economy. The same is true of money supply increases generated by the Fed. The first recipients buy at prices prevalent at the time the money is introduced. Who might these first recipients be? Social Security beneficiaries, bank borrowers, U.S. government contractors, their employees and subcontractors, to name the most obvious.

The CPI Is a Poor Measure of Inflation

Since prices do not affect the entire economy all at once or in regular ways, how can the Fed determine the inflation rate? Here’s the short answer—it can’t. Oh, it may try. We all read about the Consumer Price Index (CPI) and Producer Price Index (PPI), but these are very poor models of our vast, dynamic economy.

A further complication is that many other factors affect the price of goods, not just the quantity of money. Remember that all valuations are subjective, not objective. There is no objective price of anything, only what people are willing to pay right now. Yesterday’s price means nothing and today’s price will change tomorrow. Here’s an example. Suppose that the CPI were composed only of prices of consumer electronic goods, which have been dropping for about two decades. Would we say that the U.S. economy experiences no inflation, in fact that it has experienced deflation and the Fed should pump up the money supply accordingly in order to keep the price of electronic goods from dropping? Of course not. OK, then should the CPI be composed only of the price of oil? This commodity has experienced huge price fluctuations over the last twenty years. Have all of these fluctuations been caused by the money supply? Of course not. So how can the Fed build a “market basket of goods and services”, measure their price fluctuations, and claim that it knows anything about inflation, and has the ability to control it?

Inflation is Any Increase in the Quantity of Money

Austrian school economists are not impressed by all these haughty pronouncements and ivory tower tempests in teapots. We know that ANY increase in the supply of money is inflationary. Since the Fed’s only tool is controlling the money supply, it alone has the power to control inflation in today’s fiat monetary system. But rather than do the one and only job it is capable of doing, the Fed injects money into the economy and removes money from the economy based upon information that is hardly more reliable than one would obtain from reading tea leaves. But I sure bet Messrs. Plosser and Bernanke revel in the solemnity bordering on adoration with which the financial press and the world markets greet their latest intellectual spat about nothing.

Two Views of the World

The world’s philosophers hold two competing views of mankind. The Hobbeseans view man as a grasping, violent, superstitious brute. Thomas Hobbes (1588-1679), author of Leviathan, said, “The condition of man…is the condition of war of everyone against everyone.” He famously said that “the life of man (is) solitary, poor, nasty, brutish, and short.” The Miseans hold the opposite view. Ludwig von Mises (1883-1973), author of Human Action, said “What distinguishes man from animals is the insight into the advantages that can be derived from cooperation under the division of labor.” This view was no mere opinion as to how best to grasp the riches of life. Mises understood that cooperation was essential for civilization to exist. In Liberalism he wrote that “Modern civilization will not perish unless it does so by its own act of self-destruction…It can come to an end only if the ideas of liberalism are supplanted by an antiliberal ideology hostile to social cooperation.”

Joe Murray and I may enjoy our recent repartee in these pages (I do!) and flatter ourselves that The Bulletin’s readers follow our points and counterpoints favoring protectionism (Murray) and free trade (Barron) respectively. But the issue is a very serious one being argued throughout the world, and a victory by the protectionists will have grave implications for our personal welfare and freedom. This is no academic controversy. It has real impact on average folk. The victor will decide the kind of world in which we live, a Hobbesean world of poverty and fear or a Misean world of plenty and peace.

Trade Benefits Both Parties

The foundation of these two, opposing views, is one of economic understanding. Both Joe Murray and I desire the best for America, yet we stand at opposite ends of the free trade issue. The protectionists see trade as necessarily harmful to one side and beneficial to another. Mr. Murray thinks that the U.S. has been harmed by free trade and attributes just about every social pathology to it, from a supposed deterioration in middle class living standards (not true!) to arming our enemies (mainly the Chinese) with our own money. On the other hand, I see free trade as benefiting each participant. International free trade holds the same benefits as free trade within our own borders. Each side expects to gain or one side would not participate. Peaceful neighbors engage in trade, exchanging those goods which each produces most efficiently for the benefit of both parties. Fearful neighbors produce guns. Would Mr. Murray rather employ the Chinese in producing consumer goods for the world market or tanks, ships, and planes? This is the source of the dictum that when goods fail to cross borders armies will. A billion Chinese workers will produce something—which shall it be?

The Korean Case

Mr. Murray dismisses the case of the Koreas, describing the Stalinist North as a backward country. But this begs the question—why is the North backward and the South prosperous? At one time the Korean peninsula was united. North and South started from the same regrettable position at the end of the Korean War. Now the South is prosperous and at peace and the North is destitute and at war with the entire world. How did the South become so peaceful and prosperous and the North so dangerous and backward? The North embraced the Hobbesean view of the world and structured its economic policies accordingly. The South embraced the Misean view and is now one of the most prosperous and free nations on earth. It is the foundational view of the world that has made all the difference in just half a century. South Korea has done everything imaginable to prevent war with the North, yet the North will have none of it. If war comes to the Korean peninsula once again, it will not be because of the Misean free trade policies of the South.

Free Trade—Essential But Not Sufficient

Free trade is an essential, but, unfortunately, not sufficient, requirement for peace. Furthermore, it is an essential, but not sufficient, requirement for prosperity. Taxes and regulations can hobble a free trade nation, but most free trade nations have few regulations and low taxes. At the end of World War Two Hong Kong and Singapore were grubby outposts of the fading English Empire. Given self-rule, both became wealthy, safe and (especially Singapore) clean city-states. Occupying little physical territory, they are the top two trading centers of the world. Contrary to Mr. Murray’s revisionist interpretation of the rise of English power, Great Britain was the first truly free trade nation of the modern era and rode its advantage therefrom to world dominance for a hundred years. There is no other explanation to account for the rise to power and prosperity of this tiny island nation on the edge of Europe than that it embraced the concepts of the Scottish Enlightenment and, fortunately for us, exported them to its colonies in the New World. The much greater Spanish Empire exported its Mercantilist ideology to its colonies in Latin and South America. The relatively backward experience of our southern neighbors vindicates von Mises’ assertion that ideas rule the world. So, which idea shall we embrace?