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By Toby Baxendale, on 30 April 10
I have written a short article over at the IEA blog:
The elephant in the room: debasement of our purchasing power
Enjoy.
By Andy Duncan, on 30 April 10
Peter Schiff’s new book is now available to pre-order with free delivery for less than £10, on Amazon.co.uk; it is due out on the 12th of May. This book, I’m sure, will be essential reading for all UK-based Austrians.
If you’re unable to wait that long, you can check out the two books it is based upon, on Scribd, by Peter Schiff’s father, Irwin Schiff; the first of these describes the story of inflation, the second follows the same path as the early chapters of Human Action:
By Toby Baxendale, on 30 April 10
The brilliant economist Ewen Stewart of Arden Partners sadly shows we are going the way of Greece, not Ireland:
We call the UK the ‘tixylix society’ after the sugary-sweet medicine used to mask the symptoms of a chill in young children. The nation has become lethargic on easy credit asset inflation and delusory levels of public sector debt. The choice ahead is essentially political, although not party political. We can either choose the Irish option of austerity but maintain bond market support and a platform for longer-term growth, through regained competitiveness and a reversal of the trend to crowd out the private sector, or this tixylix society can continue to pretend that there is not a problem and we can spend beyond our means. The consequences of this latter option could well prove catastrophic.
 Read the full report.
By Andy Duncan, on 29 April 10
If What Has The Government Done To Our Money? is an hors d’oeuvre, then The Mystery of Banking is the main appetiser in our quest to understand how the current financial global crisis arose. Far meatier than its predecessor, The Mystery of Banking paints the Mona Lisa’s face, where the earlier book simply sketches out the smile.
There are some who say that Murray N. Rothbard’s greatest work is Man, Economy, and State, which some hail as the successor to Human Action. Others say that the mantle of his greatest work lies with The Ethics of Liberty, the pulsating heart of the American libertarian movement. Yet more people declare that it must be Conceived in Liberty, the stunning four-volume series describing the genesis of the American revolution.
Everyone, of course, is right. Because all choices are subjective. However, if I were to be forced to become a Robinson Crusoe and made to occupy a desert island, with hopefully an inexhaustible supply of Gin & Tonic, and only allowed by some great Dictator in the sky to take just one Rothbard masterpiece to the island, then it would have to be The Mystery of Banking, in the same sense that if given the choice of whether to take Beethoven or Mozart, I would have to take Mozart, because although Beethoven is much deeper than our Salzburgian hero, Mozart carries a good tune which I could whistle on the beach. (Though I might also be tempted by The History of Economic Thought, but that’s a different thread in a different story.)
The Mystery of Banking has become an underground classic, with dog-eared copies of the book recently fetching hundreds of dollars on Amazon before the Mises Institute re-published a new edition, also making available a lovingly-produced PDF of the book online. (There is also a stunning version available on Scribd.)
The book has gained a hard-core underground following because it is simply amazing in the sense that it maps out the incredibly dense maze of fractional reserve banking, the Aladdin’s nest of myth and fantasy which since the Florentine banking domination of the Medici clan, has taken the western world to the brink of absolute financial collapse more times than Madonna has re-engineered her underwear. Man, Economy, and State and Conceived in Liberty are perhaps the greater works, due to their sheer undiluted mass, but pound for pound, The Mystery of Banking packs a far more devastating power-to-weight ratio as a water-slashing racing boat skating between high-momentum supertankers.
From its opening, with its dedication to three hard money champions — Thomas Jefferson, Charles Holt Campbell, and Ludwig von Mises — The Mystery of Banking is a remorseless Austrian dissection of what lies at the heart of the western world’s financial system; which some might say is “absolutely nothing at all” and which others might say is “fractional reserve banking”. (Or do I repeat myself?)
Professor Rothbard spends the first hundred pages of his incisive book describing money, its origins out of barter, its purposes, its uses, and its evolution, eventually leading towards the creation of loan banking and free banking from the late medieval period onwards.
Rothbard then describes a more developed world in which twenty dollars became a fixed weight of gold just under one ounce, and how the mathematical genius Isaac Newton defined the pound as a fixed weight of gold just under a quarter of an ounce. (From these fixed weights and their stable exchange rate, the division of labour between the two currency areas can thus be easily integrated into a single wealth-creating whole.)
Although Man, Economy, and State remains the more powerful book, The Mystery of Banking is far more dangerous to the establishment, because it blows the gaffe on their monopoly of money management and reveals who always benefits first from their nefarious practices of printing money directly from thin air (i.e. the government and its friends) and who pays for this benefit (i.e. everyone else).
Although this is obvious to all when a private counterfeiter spends his ill-gotten “money” in local stores, government has wrapped so many emerald-coloured curtains around the alchemy of their nationalisation of the money supply, that this wealth transference effect is much harder to discern with government-regulated fractional reserve banking.
Rothbard shreds these curtains, making it clear how the government always benefits first and why they are motivated to do it — even given an ability to tax — and how they have escaped detection for so long, with otherwise intelligent economic commentators in recent times demanding that governments engage in quantitative easing, to “help” the rest of us, which is like a householder demanding that a burglar steal his possessions in order to help with his insurance claim.
Rothbard blows away the rulers of the emerald city through clear analogy and example, such as beaming down the Angel Gabriel from heaven to double the supply of money in everyone’s pockets overnight, before examining the results of such an action in the morning, thus revealing that any supply of money is equally optimal; this leads to some startling implications.
However, this is just one example. There are many others like it, in the book.
Having carefully used historical precedent to reveal the history of money, in the second half of the book, Rothbard then gradually un-weaves the most insidious double-blind deception in history, which is the rise of central banking and the creeping nationalisation of the banking industry, to follow the nationalisation of money. Starting in England, and then spreading like a virus to the rest of the world, Rothbard lifts stone after stone in his unrelenting mission to expose the light-shy creatures underlying central banking, allowing none of these segmented arthropods to escape back into the darkness and the slime before he scores them with his acidic pen.
The final section of the book examines a Rothbardian seven-part plan, in the Cobden and Bright tradition, to return us all to a hard money standard. The annotated highlights of this plan are:
- Redefining money to be a fixed weight of gold
- Government gold deposits to be returned to their rightful owners, i.e. the holders of government paper money
- Central banks to be abolished
- Fractional reserve banking to be replaced by 100% gold reserve banking for all demand deposits
- Banks to become free to issue their own gold-certificate cash notes
- The complete de-nationalisation of money and the removal of government guarantees on bank accounts, to re-introduce the ‘healthy gale’ of bank runs back into the banking industry — one of Rothbard’s alleged favourite movie scenes is the collapse of the bank of Danglars in The Count of Monte Cristo!
- The abolition of government-mints to be replaced once again by the private minting of gold money
For all true followers of hard money, The Mystery of Banking is thus an essential element on the pathway to understanding how and why we can achieve the goal of honest money, which even the former alchemist Isaac Newton knew was impossible to manipulate over the long term. Let us also hope that if the Rothbardian plan outlined above comes to pass, that the new international name for the fixed weight of gold will be “The Rothbard”, in memory of this hero of hard money, whether this is one gramme, 10 grammes, or a good old-fashioned one Troy-ounce of gold.
By Toby Baxendale, on 26 April 10
Corrigan once again treats us to his analysis of the debt levels facing us here in the UK, how desperate it is, and what denial all our politicians seem to be in.
Download the report here.
By Toby Baxendale, on 22 April 10
My fellow trustee Steve Baker has just forwarded me this speech by Mark Littlewood, the new Director General of the IEA.
I was inspired by the IEA in the mid-to-late 80′s to deepen my understanding of how society works. It is with great hope that I sense there is a true desire to promote the classic economic works of F. A. Hayek, who was of one of the inspirations to IEA founder Sir Anthony Fisher. Hayek’s economics are much neglected. He foresaw the booms and busts of the 20′s and 30′s, unlike his Chicago and Keynesian School contemporaries, who were building ever more remote and abstract, beautifully mathematical, but utterly irrelevant and downright dangerous models of the economy. Their heirs continue in that tradition, and are still in amazement as to why we are in the state we’re in today. Only an Austrian School economist can shed any light on these grave matters.
Mark’s fable of heaven and hell will stick in my mind. It touches on both our Health and Safety culture and the reticence of our politicians, and is sadly very apt for today.
Mark is right about the size of the hole we are in. It will not be possible to deal with it in conventional terms. Mark says that only new thinking will address our economic problems, and I agree. However, I prefer actually to say we can apply the long-standing wisdom of our great intellectual forefathers, whose work has much been neglected even in the halls of the IEA. We must recall the wisdom and vision of Edwin Cannan, the founder modern economics at the LSE. It was Cannan’s students W H Hutt, and Lionel Robbins who brought Hayek to London, where he furthered the work of his own mentor, Ludwig von Mises, perhaps the greatest of all Austrian thinkers.
At the Cobden Centre we promote Honest Money as a solution, and there are a variety of radical suggestions. There is the proposal by De Soto, and a similar one by George Reisman. We also promote others that we think will work, such as Kevin Dowd’s, Paul Birch’s, and most recently Laurence Kotlikoff’s.
We welcome any new suggestions, and will continue to contribute to the debate. The IEA will have a central role to play in furthering Honest Money and responsible government, just as it did in the 70′s when it inspired the Thatcher revolution. For that alone we are eternally grateful, and also hopeful that the IEA will prosper under Mark Littlewood’s fresh and capable stewardship.
By Jamie Whyte, on 22 April 10
Federal Reserve Chairman Ben S. Bernanke has given testimony before the Committee on Financial Services of the U.S. House of Representatives.
If you thought things were moving our way, look at the remarks at the end of note nine.
The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system.
By Andy Duncan, on 22 April 10
A few weeks ago, eagle-eyed readers of the Cobden Centre will have spotted that the doyen of the UK Hedge Fund industry, Hugh Hendry of Eclectica Asset Management, was reading Jesús Huerta de Soto’s epic magnum opus, Money, Bank Credit, and Economic Cycles, a mighty publication deeply embedded within the firmament of the Austrian School.
If you want to check out Hugh Hendry’s reading preferences for yourself, UK residents can watch the BBC Newsnight piece entitled A Day in the Life of a Financial Speculator. At five minutes and forty seconds, you’ll see a brief clip of the book in question.
The clear lesson of the Newsnight report is that if you want to possess the economic understanding of a leading Hedge Fund operator, then you need to read this magnificent book. However, this recommendation comes with a caveat; because Money, Bank Credit, and Economic Cycles is a very Big book. It needs to be, because it covers in fluid detail the precise history of the entire financial system of the western world for the last two thousand years, from Roman contract law all the way through to the present day. Although it is as small as it can possibly be, it is therefore a necessarily large work requiring a firm commitment from its readers before they begin their mighty voyages through its enlightening pages.
This then is the bible of economic understanding towards which we are headed. Braver souls may feel like leaping straight into the task, and good luck to you if you do. However, before we attempt this daunting pinnacle, some of us may need to establish a lower base camp and a series of lesser targets, to help us on our way towards the summit. I have therefore mapped out a possible route for you. This route map is designed for those who perceive that the current global financial world is a series of disasters waiting to happen and for those who sense that the last 40 years of economic development in the western world has been a crumbling papier-mâché edifice built upon a soft foundation of fiat currency sand.
Having prepared yourself for this task with either Economics in One Lesson or Economics for Real People, as a basic training programme in ropes and crampons, this superb ladder of books can take us straight into Money, Bank Credit, and Economic Cycles, and from there into a world in which it all starts making sense:
- What Has The Government Done To Our Money (Rothbard)
- The Mystery of Banking (Rothbard)
- Early Speculative Bubbles (French)
- Meltdown (Woods)
- Money, Bank Credit, and Economic Cycles (de Soto)
We begin first with Murray N. Rothbard’s What Has The Government Done To Our Money?.
In the classic David Gordon joke, the world’s shortest book is perhaps Your Duties to Other People, by Ayn Rand. Murray Rothbard’s classic on money is slightly longer than that, but it is still a very quick read.
Broken down into three main sections, What Has The Government Done To Our Money? is a breathless Blitzkrieg of the story of money, from its inception in the free market as a precious metal medium of exchange, right through to its usurpation and debasement by government and its eventual replacement by paper fiat currency, endlessly printed by the world’s central banks to give us all of the malinvestment distortions of the present age, along with all of their associated bursting financial bubbles:
- Money in a Free Society
- Government Meddling With Money
- The Monetary Breakdown of the West
As the hardest of hard-money men, Rothbard is unrelenting and unequivocal in his criticism of those who took us from a solid money system based upon gold or silver, towards a fractional reserve system based upon paper, though he is forensic in his analysis of how they did it, taking centuries in the process to accomplish this unfeasible goal. However, he tells the story with a twinkle in his eye and his scalpel-like prose flows like a hand through silken water.
Unfortunately, Rothbard died in 1995, but he would have loved to have been around today to tackle head-on all of the Keynesians who are currently blighting our economic futures. Alas, all of the distortions he describes and predicts in his book are visible all around us today, with zero percent central bank lending, massive government borrowing, and incipient and possibly rampant stagflation waiting to gobble us up around the corner, if hyper-depression and hyper-inflation fail to get us first.
Freely available at the Mises Institute, to share the beginnings of Rothbard’s understanding this slim introductory book on the story of money is a sure-footed stepping stone for all aspiring students of Austrian Economics.
By Tom Clougherty, on 21 April 10
The BBC reports that the IMF has unveiled its interim proposals on a new international tax on the financial sector, ahead of a meeting of finance ministers this weekend.
In fact, the IMF’s paper suggests two new taxes. The first, a ‘financial stability contribution’ would be levied on all financial institutions, initially at a flat rate, to help cover the ‘fiscal cost of any future government support to the sector’. The second, is a ‘financial activities tax’, which would be levied ‘on the sum of the profits and remuneration of financial institutions’.
The first point to be made is that justifying these taxes on the grounds that the proceeds will help governments deal with future crises is a straightforward con. The proceeds of the first tax could either ‘accumulate in a fund to facilitate the resolution of weak institutions or be paid into general revenue’ say the IMF, but you don’t need to be psychic to work out which of those is more likely – governments will just spend the money on current expenditure, as they always do. The second tax doesn’t even come with an either/or fig leaf – proceeds will go into general revenue, for governments to spend as they see fit.
So it is pretty clear that what we have here isn’t so much a policy to ensure financial stability, but rather to bail out profligate governments. Moreover, this could in itself worsen financial instability by making fiscal policy even more pro-cyclical (revenues would be highest during financial booms), and exacerbating boom and bust cycles.
There are other problems too. For example, the idea of compulsory ‘insurance’ against failure for banks (this is the direction the ‘financial stability contribution’ moves us in) is likely to make moral hazard – already a major issue – an even more severe problem. Even now, government guarantees to banks are largely implicit, but the IMF’s tax proposal would make them explicit. Indeed, the ‘financial stability contribution’ is not just an overt indication that irresponsible banks will be bailed out – it could easily be read as creating an obligation that they must be bailed out. And that’s hardly a way to encourage less risk-taking.
It is also problematic that these taxes will be applied to all financial institutions (including insurers, hedge funds and so on), most of which had little to do with the financial crisis. They are thus likely to damage the wider financial economy, without actually doing anything much to deal with the real offenders.
Which brings me neatly to the most depressing aspect of these proposals: the complete lack of understanding they exhibit about the actual causes of the financial crisis – loose monetary policy, ramped up by unrestrained fractional reserve banking, and amplified by fiscal incontinence. The saddest thing is that the world’s financial system desperately does need reform. Without a radically new approach to controlling the money supply and taming the credit cycle, history is doomed to repeat itself. But the IMF’s proposals do not even qualify as a step in the right direction.
By Toby Baxendale, on 21 April 10
Sean Corrigan reports on the crazy parallel world of Keynesian economics.
The imposition of negative interest rates is one way to totally devastate the poor, pensioners, and all people on fixed income. A Keynesian sees this as the lesser of two evils – getting out of the deflation in Japan. Thrifty people who have provided for themselves and for their future should be punished: this is the world of Keynes.
Sean also takes a swipe at GDP accounting and how 70% of the economy is actually lost to these statisticians. My take on this that to we Austrian economists, A=A, while to the mainstream Neoclassicals — the whole army of other economists — A=B, i.e. a thing is not a thing in itself. Nutty as it sounds, this is the state of economics. For a non-Austrian, if you go home and eat a nice piece of fried fish and chips, you have not consumed a fish and chip meal, but in fact only the difference between raw fish and potatoes and cooked fish and chips. This is the crazy world of mainstream macroeconomics: none of the intermediate stages of production count in GDP stats!
 Material Evidence 2010-04-09 Download the report here.
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