Signs Of The Fed’s Era Of Secrecy Coming To An End

The Federal Reserve increasingly is attracting scrutiny across the board.  Now add to that a roller coaster of a thriller, using a miracle of a rare device, shining a light into the operations of the Fed — that contemporary riddle wrapped in a mystery inside an enigma: Matthew Quirk’s latest novel, The Directive.

“If I’ve made myself too clear, you must have misunderstood me,” Fed Chairman Alan Greenspan once famously said.  The era of a mystagogue Fed may be ending.  Recently, the House Government Oversight Committee passed, and referred to the full House, theFederal Reserve Transparency Act of 2014.  This legislation is part of the legacy of the great former Representative Ron Paul.  It popularly is known as “Audit the Fed.” How ironic that a mystery novel proves a device to dispel some of the Fed’s obscurantist mystery.

Novelist/reporter Matthew Quirk’s The Directive does for he Fed what Alan Drury did for Senate intrigue with his Pulitzer Prize winning Advise and Consent, what Aaron Sorkin did for the White House in The West Wing and, now, what Beau Willimon, is doing for the Congress with House of Cards.  Quirk takes the genre of political thriller into virgin territory: the Fed. Make to mistake.  Engaging the popular imagination has political potency.  As Victor Hugo, nicely paraphrased, observed: Nothing is as powerful as an idea whose time has come.

Quirk, according to his website,“studied history and literature at Harvard College. After graduation, he spent five years at The Atlantic reporting on crimes, private military contractors, the opium trade, terrorism prosecutions, and international gangs.”  His background shows. Quirk’s writings drips with the kind of eye for the telling detail that only a canny reporter, detective, or spy possesses.  (Readers will learn, just in passing, the plausible identity of the mysterious “secure undisclosed location” where the vice president was secreted following 9/11.)

If you like Ludlum you are certain to like Quirk.  And who isn’t intrigued by such a mysteriously powerful entity as the Fed?  Booklist calls The Directive a “nonstop heart-pounding ride in which moral blacks and whites turn gray in the ‘efficient alignment of power and interests’ that is big time politics.”  Amen.

The Directive describes an effort to rob the biggest bank in the world.  The object of the heist is not the tons of gold secured in the basement of 33 Liberty Street. (As Ian Fleming pointed out, in Goldfinger it logistically is impossible to move the mass of so much gold quickly enough to effect a robbery.)  Rather, Quirk uses as his literary device, with a touch of dramatic license, the interception of the Federal Open Market Committee’s directive to the trading desk of the Federal Reserve Bank of New York to raise (or lower) interest rates in order to use that insider information to make a fast killing.

Lest anyone doubt the power of such insider information consider William Safire’s report, from his White House classic memoir Before the Fall, of the weekend at Camp David before Nixon “closed the gold window.”

After the Quadriad meeting, the President remained alone while the rest of the group dined at the Laurel Cabin.   The no-phone-calls edict was still in force, raising some eyebrows of men who had shown themselves to be trustworthy repositories of events. but the 6’8″, dour Treasury Under Secretary Volcker explained a different dimension to the need for no leaks:  “Fortunes could be made with this information.”  Haldeman, mock-serious, leaned forward and whispered loudly, “Exactly how?”  The tension broken, Volcker asked Schulz, “How much is your budget deficit?”  George estimated, “Oh, twenty three billion or so — why?”  Volcker looked dreamily at the ceiling.  “Give me a billion dollars and a free hand on Monday, and I could make up that deficit in the money markets.”

Safire provides context making Volcker’s integrity indisputable lest anyone be tempted to misinterpret this as a trial balloon.

This columnist has been inside the headquarters of the Fed, including, many years ago, the boardroom.  Quirk:

Every eight weeks or so, a committee gathers near the National Mall in a marble citadel known as the Board of Governors of the Federal Reserve.  Twenty-five men and women sit at a long wooden table with an inset of black stone shined to a high gloss.  By noon they decide the fate of the American economy.

This columnist never has stepped foot inside the Federal Reserve Bank of New York, much less its trading floor(s).  Few have entered that sanctum sanctorum.  By taking his readers inside Quirk provides his readers a narrative grasp to how the Fed does what it does.


[T]he Fed is by design very friendly to large New York banks.  When the committee in DC decides what interest rates should be, they can’t simply dictate them to the banks.  They decide on a target interest, and then send the directive to the trading desk at the New York Fed to instruct them about how to achieve it.  The traders upstairs go into the markets and wheel and deal with the big banks, buying and selling Treasury bills and other government debts, essentially IOUs from Uncle Sam.  When the Fed buys up a lot of those IOUs, they flood the economy with money; when they sell them, they take money out of circulation.

They are effectively creating and destroying cash.  By shrinking or expanding the supply of money in the global economy, making it more or less scarce, they also make it more or less expensive to borrow; the interest rate.  In this way, trading back and forth with the largest banks in the world, they can drive interest rates toward their target.

The amount of actual physical currency in circulation is only a quarter of the total monetary supply.  The rest is just numbers on a computer somewhere.  When people say the government can print as much money as it wants, they’re really talking about the desk doing its daily work of resizing the monetary supply—tacking zeros onto a bunch of electronic accounts—that big banks are allowed to lend out to you and me.


Every morning, on the ninth floor of the New York Fed, the desk gets ready to go out and manipulate the markets according to the instructions laid out in the directive.  Its traders are linked by computer with twenty-one of the largest banks in the world.  When they’re ready to buy and sell, in what are called open market operation, one trader presses a button on his terminal and three chimes — the notes F-E-D — sound on the terminals of his counterparties.  Then they’re off to the races.

There are usually eight to ten people on that desk, mostly guys in their late twenties and early thirties, and they manage a portfolio of government securities worth nearly $4 trillion that backs our currency.  Without it, the bills in your wallet would be as worthless as Monopoly cash.  The traders on that floor carry out nearly $5.5 billion in trades per day, set the value of every penny you earn or spend, and steer the global economy.

As Quirk recently told Matthew Yglesias, at

I was casting about for the biggest hoards of money in the world, and you get to the Federal Reserve Bank in New York fairly quickly. But that’s been done. Then I learned more and more about the trading desk, and my mind was blown.

You get to have this great line where you say, “There’s $300 billion worth of gold in the basement, but the real money is on the ninth floor.” …

I was a reporter in Washington for a while, and I thought, “Oh, the Fed sets interest rates,” because that’s always what people say. But as you dig into it, you realize that the Fed just has to induce interest rates to where they want to be. They have to trade back and forth with these 19 or 20 banks, and they have 8‑10 guys at this trading desk, trading about $5.5 billion a day. That’s actually how the government prints money and expands and contracts the monetary supply.

It’s this high wire act. You explain it to people and they say, “Oh, it’s a conspiracy thriller.” You say, “No, no. That’s the real part. I haven’t gotten to the conspiracy yet.” But it’s a miracle that it works.

Quirk’s own dual mandate? Combine fast-paced drama with a peek behind the scenes of the world’s biggest bank, providing vivid entertainment while teaching more about the way that one of the most powerful and mysterious institutions in the world works. In The Directive Matthew Quirk shakes, rather than stirs, his readers brilliantly.

Originating at


Understanding Argentina’s Coming Default

[Editor's note: this piece first appeared on]

At the time of this writing, Argentina is a few days away from formally defaulting on its debts.How could this happen three times in just twenty-eight years?

Following the 2001 default, Argentina offered a debt swap (a restructuring of debt) to its creditors in 2005. Many bondholders accepted the Argentine offer, but some of them did not. Those who did not accept the debt swap are called the “holdouts.” When Argentina started to pay the new bonds to those who entered the debt swap (the “holdins”), the holdouts took Argentina to court under New York law, the jurisdiction under which the Argentine debt has been issued. After the US Supreme Court refused to hear the Argentine case a few weeks ago, Judge Griesa’s ruling became final.

The ruling requires Argentina to pay 100 percent of its debt to the holdouts at the same time Argentina pays the restructured bonds to the “holdins.” Argentina is not allowed, under Griesa’s ruling, to pay some creditors but not others. The payment date was June 30. Because Argentina missed its payment, it is now under a 30-day grace period. If Argentina does not pay by the end of July it will, again, be formally in default.

This is a complex case that has produced different, if not opposite, interpretations by analysts and policy makers. Some of these interpretations, however, are not well-founded.

How Argentina Became a Bad Debtor

An understanding of the Argentine situation requires historical context.

At the beginning of the 1990s, Argentina implemented the Convertibility Law as a measure to restrain the central bank and put an end to the hyperinflation that took place in the late 1980s. This law set the exchange rate at one peso per US dollar and stated that the central bank could only issue pesos in fixed relation to the amount of US dollars that entered the country. The Convertibility Law was, then, more than just a fixed-exchange rate scheme. It was legislation that made the central bank a currency board where pesos were convertible to dollars at a “one to one” ratio. However, because the central bank had some flexibility to issue pesos with respect to the inflow of US dollars, it is better described as a “heterodox” rather than “orthodox,” currency board.

Still, under this scheme, Argentina could not monetize its deficit as it did in the 1980s under the government of Ricardo Alfonsín. It was the monetization of debt that produced the high inflation that ended in hyperinflation. Due to the Convertibility Law during the 1990s, Carlos Menem’s government could not finance the fiscal deficit with newly created money. So, rather than reduce the deficit, Menem changed the way it was financed from a money-issuance scheme to a foreign-debt scheme. The foreign debt was in US dollars and this allowed the central bank to issue the corresponding pesos.

The debt issued during the 1990s took place in an Argentina that had already defaulted on its debt six times since its independence from Spain in 1816 (arguably, one-third of Argentine history has taken place in a state of default), while Argentina also exhibited questionable institutional protection of contracts and property rights. With domestic savings destroyed after years of high inflation in the 1980s (and previous decades), Argentina had to turn to international funds to finance its deficit. And because of the lack of creditworthiness, Argentina had to “import” legal credibility by issuing its bonds under New York jurisdiction. Should there be a dispute with creditors, Argentina stated it would accept the ruling of New York courts.

Many opponents of the ruling today claim that Argentina’s creditors have conspired to take away Argentine sovereignty, but the responsibility lies with the Argentine government itself, which has established a long record of unreliability in paying its debts.

The Road to the Latest Default

These New York-issued bonds of the 1990s had two other important features besides being issued under New York legal jurisdiction. The incorporation of theparipassu clause and the absence of the collective action clause. The paripassuclause holds that Argentina agrees to treat all creditors on equal terms (especially regarding payments of coupons and capital). The collective action clause states that in the case of a debt restructuring, if a certain percentage of creditors accept the debt swap, then creditors who turn down the offer (the “holdouts”) automatically must accept the new bonds. However, when Argentina defaulted on its bonds at the end of 2001, it did so with bonds that included theparipassu clause but which did not require collective action by creditors.

Under the contract that Argentina itself offered to its creditors, which did not include the collective action clause, any creditor is entitled to receive 100 percent of the bonus even if 99.9 percent of the creditors decided to enter a debt swap. And this is precisely what happened with the 2001 default. When Argentina offered new bonds to its creditors following the default, the “holdouts” let Argentina know that under the contract of Argentine bonds, they still have the right to receive 100 percent of the bonds under “equality of conditions” (paripassu) with those who accepted the restructuring. That is, Argentina cannot pay the “holdins” without paying the “holdouts” according to the terms of the debt.

The governments of Nestor Kirchner and Cristina Kirchner, however, in another sign of their contempt for institutions, decided to ignore the holdouts to the point of erasing them as creditors in their official reports (one of the reasons for which the level of debt on GDP looks lower in official statistics than is truly the case).

It could be said that Judge Griesa had to do little more than read the contract that Argentina offered its creditors. In spite of this, much has been said in Argentina (and abroad) about how Judge Griesa’s ruling damages the legal security of sovereign bonds and debt restructuring.

The problem is not Judge Griesa’s ruling. The problem is that Argentina had decided to once again prefer deficits and unrestrained government spending to paying its obligations. Griesa’s ruling suggests that a default cannot be used as a political tool to ignore contracts at politician’s convenience. In fact, countries with emerging economies should thank Judge Griesa’s ruling since this allows them to borrow at lower rates given that many of these countries are either unable or unwilling to offer credible legal protection to their own creditors. A ruling favorable to Argentina’s government would have allowed a government to violate its own contracts, making it even harder for poor countries to access capital.

We can simplify the case to an analogy on a smaller scale. Try to explain to your bank that since it was you who squandered your earnings for more than a decade,you have the right to not pay the mortgage with which you purchased your home. When the bank takes you to court for not paying your mortgage, explain to the judge that you are a poor victim of evil money vultures and that you have the right to ignore creditors because you couldn’t be bothered with changing your unsustainable spending habits. When the judge rules against you, try to explain to the world in international newspapers how the decision of the judge is an injustice that endangers the international banking market (as the Argentine government has been doing recently). Try now to justify the position of the Argentine government.


Gold price fix: enter the lawyers

First we had a glut of gold. “We Buy Your Gold” on every street corner.

Then the accusations of price rigging (having a “spot fix” with five banks on conference call doesn’t exactly inspire confidence that there won’t be collusion).
Continue reading “Gold price fix: enter the lawyers”


Timely call to open up UK legal tender laws

According to some media sources Douglas Carswell MP is today bringing a bill to the House of Commons that aims to demonopolise the UK’s legal tender laws. Very much a sign of the times, I believe you will hear a lot more about this idea in the days and weeks ahead. Already, the BBC has picked it up here.

A Conservative MP is to call for a basket of foreign currencies to be made legal tender in the UK.

Such a move would protect savers by allowing them to hold the currency least likely to be devalued, Douglas Carswell will argue in the Commons.

And it would allow consumers to shop around for the best currency deal – perhaps via a smart phone application – when buying goods in shops or online.

Read the whole article.


Stephan Kinsella goes from strength to strength

Back in 1995, I came across this fabulous journal article written by Stephan Kinsella called Legislation and the Discovery of Law in a Free Society. It made a huge impression on me and I will never forget its insights and teachings.

Sixteen years on, I am not only in contact with Stephan but I have just become aware of his latest book, Louisiana Civil Law Dictionary, described here.  No doubt having an esoteric interest for Louisiana practitioners and lawyers, my understanding is that this work will also be of interest to anyone interested in the continental, Roman, civil, Spanish and French legal traditions.


Libertarian Legal Theory

We are pleased to promote this upcoming course from the Mises Academy:

Stephan Kinsella, a libertarian attorney and writer, Senior Fellow with the Mises Institute and editor of Libertarian Papers, is teaching his second Mises Academy course later this month, entitled “Libertarian Legal Theory: Property, Conflict, and Society.”

This is a 6 week course to be held on Monday evenings, 9pm-1030pm EST (New York time) (Jan. 31-Mar. 11, 2011), with “office hours” later in the week for followup questions at an earlier time more suitable for students in Europe and elsewhere.

Kinsella describes the course in his article “Introduction to Libertarian Legal Theory,” Mises Daily (Jan. 3, 2011), and what the Mises Academy is like in “Teaching an Online Mises Academy Course,” Mises Daily (Jan. 10, 2011).

His previous Mises Academy course, Rethinking Intellectual Property: History, Theory, and Economics, was very popular with students, one noting:

Thank you so very much for all the excellent work — very few classes have really changed my life dramatically, actually only 3 have, and all 3 were classes I took at the Mises Academy, starting with Rethinking Intellectual Property (PP350) (the other two were EH476 (Bubbles), and PP900 (Private Defense)). …The IP class was a total blast — finally (finally) sound reasoning. All the (three) classes I took dramatically changed the way I see the world. I’m still digesting it all, to tell the truth. Very few events in my life have managed to make me feel like I wished I was 15 all over again. Thank you. …

Further description of the Mises Academy may be found in Daniel Sanchez’s Mises Daily article The Significance and Success of the Mises Academy.

More information on the Libertarian Legal Theory course may be found at


What is the Legal Relationship Between the Banker and his Customer?

In Parliament this Wednesday, there is a Ten Minute Rule Bill being introduced into Parliament by the inspirational and principled MP for Clacton, Douglas Carswell, with support from my co-Director at TCC, Steve Baker, the Member for Wycombe.  Carswell described the proposal in a post on Friday entitled ‘How should we reform the banks?‘, and Steve promoted it earlier today on CentreRight.

This web site has had many articles on this matter and a survey, conducted on our behalf by ICM, showed great confusion on the part of the British public concerning the legal relationship between banker and customer.

The Current State of the Law

The key case is Carr v Carr 1811 (reported in Merivale (541 n) 1815 – 17). A testator in making his bequest said “whatever debts might be due to him…at the time of his death”, the key question in this case being whether “a cash balance due to him on his banker’s account” passed by this bequest. The Master of the Rolls, Sir William Grant held that it did. He reasoned that it was not a depositum; a sealed bag of money could be, but this generally deposited money could not possibly have an ‘earmark’. Grant concluded on this point, “when money is paid into a banker’s, he always opens a debtor and creditor account with the payor. The banker employs the money himself, and is liable merely to answer the drafts of his customers to that amount.” For the legal scholars among you, Vaisey v Reynolds 1828 and Parker v Merchant 1843 both affirmed this position.

In Davaynes v Noble 1816 it was argued in front of Grant that a banker is a bailee rather than a debtor. Rejecting that argument, Grant said “money paid into a banker’s becomes immediately a part of his general assets; and he is merely a debtor for the amount.”

In Sims v Bond 1833 the Chief Justice of the Queens Bench Division affirmed in judgement “sums which are paid to the credit of a customer with a banker, though usually called deposits, are, in truth, loans by the customer to the banker.”

The House of Lords, then the highest court in the land, had its say on the matter in Foley v Hill and Others 1848, duly reported in the Clerk’s Reports, House of Lords 1847-66 (pages 28 and 36-7). In summary, the appellant in 1829 opened a bank account with the respondent bankers. Two further deposits we added in 1830 and in 1831 interest was still added. In 1838 the appellant brought proceedings against the respondent bankers seeking recovery of both the principle and interest. The counsel cleverly tried to argue that it was the duty of the respondent bankers to keep all the accounts up to date at all times and thus there was more to this relationship than that of debtor and creditor.

The Lord Chancellor Cottenham said the following in judgement

Money, when paid into a bank, ceases altogether to be the money of the principal; it is by then the money of the banker, who is bound to return an equivalent by paying a similar sum to that deposited with him when he is asked for it. The money paid into a banker’s is money known by the principal to be placed there for the purpose of being under the control of the banker; it is then the banker’s money; he is known to deal with it as his own; he makes what profit of it he can, which profit he retains to himself, paying back only the principal, according to the custom of bankers in some places, or the principal and a small rate of interest, according to the custom of bankers in other places. The money placed in custody of a banker is, to all intents and purposes, the money of the banker, to do with it as he pleases; he is guilty of no breach of trust in employing it; he is not answerable to the principal if he puts it into jeopardy, if he engages in a hazardous speculation; he is not bound to keep it or deal with it as the property of his principal; but he is, of course, answerable for the amount, because he has contracted, having received that money, to repay to the principal, when demanded, a sum equivalent to that paid into his hands.

That has been the subject of discussion in various cases, and that has been established to be the relative situation of banker and customer. That being established to be the relative situations of banker and customer, the banker is not an agent or factor, but he is a debtor.

Thus the settled position of the law is that when you deposit, the bank becomes the owner of the money deposited and you become a creditor to the bank.

The Carswell Bill

This seems to seeks to align the law to mirror what people actually think happens: that they deposit money and it is theirs. It also seeks to allow savers to save in a term deposit, by which they knowingly and indeed willingly allow the bank to lend their money to borrowers. This relationship will then be that of a depositor lending to the bank and the bank being the debtor to the lender.

The honesty of this approach is refreshing indeed. The economic consequences are that credit granted to borrowers is from real savings and the leveraging of loans (multiple on-lending of the same deposit) that has caused such financial destruction ceases to happen. Real savings lent to borrowers will produce goods and services, and once the loans are repaid, the lenders will be in a position to buy the goods and services. This will have the very positive effect of smoothing out the credit-induced boom and bust cycle, providing us with greater sustainable financing. Credit created out of nothing only supports activities that could not get funding out of real saved resources. Think of all those nutty projects, and more recently the nutty finance projects embarked upon.

I hope this Bill gets a second reading so that Honest Money can become a major taking point in the banking reform debate.


Labour laws should be abolished

In 2006, the European Court of Justice ruled that the Department of Trade and Industry has misinterpreted clauses 3 and 5 of the Working Time Directive. Clause 3 states: “Member states shall take the measures necessary to ensure that every worker is entitled to a minimum daily rest period of 11 consecutive hours per 24-hour period”. Clause 5 says that workers are additionally entitled to at least one uninterrupted rest period of 24 hours every week.

The tricky word here is “entitled”. The DTI interpreted it to mean entitled. They instructed employers that they must allow, but need not require, employees to take these rest periods. According to the ECJ, however, “entitled” actually means obliged. Employees may not choose to take shorter rest periods, and employers must not give them this option.

The European judges are surely correct on the matter of interpretation. If the words of European legislators are open to several interpretations, then deciding which was intended is simple; it must be the one that most restricts freedom of choice. And if you think that obliged is not a possible interpretation of “entitled”, then there is much you could learn from the judiciary about post-modern semiotics.

If not surprising, the ruling may still seem unfortunate. British employees already enjoyed the right to these rest periods. When it suited them, however, they were free to take shorter breaks – perhaps to earn overtime or to negotiate a longer break for another occasion. This option was surely valuable to them. Why should the manufacturing union Amicus have asked the ECJ to eliminate it? And why should the TUC have welcomed the ECJ’s ruling?

To see why, note that in the labour market employees are the suppliers and employers are the consumers. Employers buy the labour offered for sale by workers. The Working Time Directive, as now interpreted, is a regulation about the kind of service workers may offer for sale.

Product regulations usually impose minimum standards. When it comes to labour, however, we get maximum standards. The ECJ’s ruling means that, with respect to the flexibility of hours worked, employees may not offer a product exceeding a certain quality. And that is precisely why unions support this interpretation. Maximum standard regulations are required by suppliers attempting to fix their prices above the market price.

Consider a different example. Suppose you manufactured a basic type of bicycle. If the most efficient bike-maker could produce such a bike at a cost of £100, then this would soon be its market price. In a free market, price competition between suppliers drives the price of goods down to the cost of producing them. This is nice for consumers but not for suppliers. How might you avoid this unpleasant consequence of competition?

You could try collusion. Create the British Association of Bike-Makers and, at your annual conference, agree that no one will sell bikes for less than £200. Or lobby the government to set a minimum bicycle price of £200.

Alas, a minimum price will not work on its own, because it does not stop competition on quality. If everyone must sell bikes at £200, and my competitors’ bikes are worth £100, then I can get an advantage by producing better bikes at a cost of £110. My competitors will then retaliate with a yet better bike that costs £120 to make. This process will continue until we are all making bikes at a cost of £200, and none of us is better off than when they cost £100. To keep the benefits of our minimum price, we also need to restrict the quality of the bikes on sale: we need maximum standards.

Trade unionists and employment regulators are devoted to keeping the price of labour higher than its market value. So they must also stop the suppliers of labour from competing on quality. The endeavour is corrupt in principle – indeed, it would be illegal if the product were anything except labour – and futile in practice. The legislation they favour does not eliminate competition between workers; it simply benefits some at the expense of others.

I recently managed a team of two consultants. They were of roughly equal value. John was brighter but Don worked harder, often violating the Working Time Directive. If I had stopped him, who would have benefited? Not Don. He would have been robbed of his ability to compete with John, and his chance of promotion would have been reduced. A ban on hard work benefits not those who work “too hard” but those with other qualities to offer. It rigs the competition in their favour.

It is impossible to eliminate competition between the suppliers of labour. Rule it out in one respect, such as effort, and it will merely shift to something else, such as talent. Rule it out in all economically relevant respects – allow no price or quality competition – and it will shift onto irrelevant preferences of the employer. A bigot might employ foreigners if they came at a discount. But why would he otherwise? Immigrants do better in America than in France, not because Americans are less racist, but because their labour market is less regulated.

Labour laws are intended to protect employees from employers. But no such protection is needed. Feudalism ended long ago, and the labour market is not a monopsony (a market with only one buyer). No one is forced into any particular job. Indeed, unemployment benefits mean that no one need work at all. Labour laws merely distort the allocation of labour and arbitrarily bestow costs and benefits across the population. They should not be interpreted more stringently; they should be repealed.


The Ethics of Capitalism: A Secular and a Theological Justification

The current debate about bankers’ bonuses is often seen as one of fairness pitted against the greed of those nasty capitalists,.

To me, bankers are lawfully working within the system – one  that is rotten to the core. The banking system is the greatest of all examples of State corporate capitalism. We have a central bank that is State owned, we have a legal tender law that prevents competition in the provision of the production of money, and we have private sectors banks which are licensed by the State to be its agent when it wants to monetise its very own debts and create inflation at the expense of its citizens: people who have been prudent and thrifty as well as those on fixed income.

The State has one important central intention: to hide its prolific over spending.  We have private sector banks that have legal privilege granted to them so they can use their depositors’ money to lend out many times over to entrepreneurs. They are the only type of business in the whole country  permitted do this. All other commercial enterprises at all points in time need to keep their current creditors whole, otherwise they are insolvent. There is no requirement at all in this country for any bank to keep even one penny in reserves against their depositors’ funds. In fact, it has been a stated fact of law since 1811 in Carr V Carr that “his” deposited funds are not his, but are in fact the banks’.

This fractional reserve banking system we have can only work with a lender of last resort i.e. the State owned central bank with legal tender laws. This means that in partnership with the State, the State can monetise its debts (at the expense of you and me) and the banks can keep as little reserves as they can get away with to make a return on capital that you and I in the real capitalist private sector could never do.  This encourages risk. Indeed with the banks now able to borrow at the taxpayers’ expense via the discount window (heavily subsidised short term central bank funding) and know there is a guarantee of a bail out should their gambles go wrong makes the state and the bankers two equal partners in a very unjust process.

The resulting situation is what I call ‘corporate capitalism’  (thoroughly amoral) as opposed to ‘capitalism’, which is totally moral.  This needs some explaining, as I suspect worthy people are shooting arrows at the wrong target.

We know that the free market capitalist system is without doubt the most efficient creator and allocator of resources. Adam Smith taught us that “It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest” in his Wealth of Nations. Self interest or the profit motive drives man to create and to provide all the multiplicity of goods and services we have enjoyed and will enjoy.

Mises in his famous book Socialism, showed us that if Society was run by planners, the price system which allows resources to flow to their most desired uses would not function. Indeed it would impoverish anyone nation that tried it. If, say. the planner could not correctly witness all the competing bids and resource allocations for metals that were capable of being used in the construction of railroad tracks (that involves many companies competing for scarce resources) he would never know which metal would be the most cost effective to build his railroad.  No one planner would be able to economically calculate, or indeed, no army of planners would be able to calculate and allocate all the resources of Society in the socialist economy better than the many millions of participants in the economy allocating resources via the price mechanism. The experiment in the Soviet bloc with socialism impoverished at least three generations and lead to wide scale death and a general shortage of life, and misery.

Hayek, in his very famous essay “The Use of Knowledge in Society” added to the critique of Mises by pointing out that absenting the price system would mean that the central planning officials would need to absorb the entire knowledge of all the people in society to effectively plan their needs. This was absurd and impossible.

All State planned schemes, from the provision of money to the provision of health and education – even in our cosy mixed economy – could be done better by an unhampered market.  We are thus weary of all bloated government departments and officials who say they can do something better for us – they can’t.

The efficiency case for an unhampered market, or free market capitalism is clear and unchallengeable. The subjective actions of freely consenting adults in a capitalist system produce the most amount of goods in the most efficient way.  But is there an objectively moral case for the capitalist system? I attempt to answer it in the remaining part of this Insight article.

First Principles: Secular Argument

I Argue

One thing that distinguishes human beings from all other life forms is our ability to communicate with each other via talking. Only human beings can make a proposition. The question of what is just or unjust only arises because I can debate or argue this point with another person.  To be able to argue my position I must be in control of my physical and mental self. I must own myself in order to be to be a human being.  I have the total right to use all my physical and mental faculties to participate in life, otherwise I cannot even exist as a human being expressing an opinion. I do not know many people who would argue with this. If I did not own my own faculties I could not participate in life except under the command of who owned me.  This also implies that just so much as I own myself, I do not own anyone else. It also follows that if I do something that violates another human being without their consent I violate their right to express their very humanness.

Thus, I deduce that by my very being , I own myself , I own my own property as me, I have a right not to be interfered with so long as I do not interfere with anyone else.  It clearly follows that if I were to interfere with someone else’s property, they would not own it.  This would deprive them of their own humanity, I suggest. This is a deduction from the axiom that to exist I need to argue. I come to this conclusion via the Haberrmasian axiom of interpersonal argument that has been so cleverly adapted by Hans Herman Hoppe in his book The Economics and Ethics of Private Property.

To argue against this you explicitly acknowledge control of your faculties, at the very least. Following Kant’s Golden Rule that a norm should be universal in its applicability should it be objectively valid, this proposition surely fulfils this requirement to be a totally objective axiomatic principle.

All ethical propositions, such as socialism, that say that you owe a duty to the State to provide for others,  are violations of the very distinguishing thing that makes you a human being and not a rock or a colony of ants.  To advocate any form or socialism, be it of the democratic variety, the communist variety, or indeed the mixed economy is to violate your very essence of being a human.

John Locke in his “Two Treatises of Government” spells out that property or,  if you like all resources exist prior to any government. Man mixes his labour with what he finds and it is by right his. Government cannot ‘dispose of the estates of the subjects arbitrarily’. Locke left us with a conundrum called “Locke’s proviso.” This is where if a man mixes his labour to own something that was not owned before; he must always leave a “sufficient” amount for other human beings.

Jesus Huerta de Soto, one of the greatest living polymath Austrian School teachers in his essay “The Ethics of Capitalism” , shows us how possibly the other living giant of the Austrian School, Israel Kirzner in “Discovery, Capitalism, and Distributive Justice”  has solved this proviso of Locke. And allows us to build the objective moral ethic of capitalism.

Socialist, social democrats and a large body of modern day liberals and conservatives have a distributive conception of justice that is about a top down approach of redistribution of scarce resources from those who do have to those who that have less, or nothing, or whose lobby groups has succeeded in extracting something from those that have. Kirzner shows us how as all human being are creative actor: they are always engaging in entrepreneurial activity to generate new goods and services.  All human beings are alert to opportunity, some to a greater degree than others. The fruits of this alertness arises via their actions. This is universally so. To not act would not create these things. So he proposes an axiom that all human beings have a natural right to the fruits of their own entrepreneurial creativity.  As these things are created out of nothing, it implies that the acting person has an undoubted right to the quiet and peaceful enjoyment of the fruits of his or her labour. If it did not exist before, it cannot be a negative to anyone else.  So Locke’s proviso is overcome by the understanding of society as dynamic and spontaneous constantly evolving process with alert actors constantly creating new goods and services that they must have an unquestionable right to own.

De Soto coins the term ‘Dynamic Efficiency’ to describe this process. He also points out that the free market capitalist system – that we know is the most efficient system – is also the most just and in fact, these two concepts are indeed two sides of the same one coin. Any form of intervention is immoral as it impedes the creative capacity of individuals to express their creativity and create all the wide range of goods and services we have. It should be pointed out that top down provision of health, education, transport, industry etc is inefficient and hence unjust as it suppresses the creative activity of human beings.  Absent the profit motive and you will get sub optimal results.

Do Soto points out that the last Pope, Pope John Paul II in his Centesimus Annus, which built on the earlier work of the Rerum Novarum of Pope Leo XIII, established the universal moral capitalist ethic by acknowledging the natural right (God given) to express your very creativity unhindered so long and you hinder no one else.

First Principle: Theological – God Endowed Rights

I Exist

Writing about the morality of capitalism in glowing positive terms as I have done above and setting it in the backdrop of universally applicable objective axioms is not as unfashionable as talking to any thinking person about God, but only just! Such is the secular society we live in; you are considered to be an ill informed mystic should you engage in “god bothering.”  The See of Peter would naturally see this differently and I am very grateful for De Soto to direct me to the pro capitalist teachings of the Catholic Church.

Are the above self evident axioms that are universally applicable in all times and in all places to everybody there because we are human or are they there because they are God endowed?

I can ague both, but I favour self evident God endowed over self evident secular, although the latter can stand on its own legs. Why?

I wrote an article about the proof God three years ago for In short, I take the Aristotelian inspired position that as I exist I know that other physical things exist. I know that each and every one of these physical things must have been caused by another physical thing. I know that nothing is infinite. If it was, I would not exist as for it to be infinite, it would occupy all time and space and I would not exist. As I exist, I know this cannot be the case. I know there is a beginning to the universe and that there are physical boundaries  to the universe, therefore I know there cannot be an infinite series of physical causes and effects as there would be no boundary and no beginning. Therefore what caused the first physical thing must indeed be immaterial if it cannot be a physical cause. This immaterial thing is what I label as ‘God’.  So I conclude God does exist and the only act I can attribute to God by a priori reasoning is that God created everything. As I like to exist I am very grateful for this and can only conclude that God has good intentions.  If I do not like to exist, I can choose not to and commit suicide. God is therefore good for me and objectively good for all human beings.  As God has created everything, he has endowed us with the ability to reason and engage in the formation of reasoned propositions, the latter which is undoubtedly a unique attribute to mankind the former quite possible unique to mankind, sets the foundation for the derivation of the rights of man and the very ethics of capitalism.

Further reading