Lessons For Winning Liberty In a World Of Statism

Friends of freedom often become despondent when it seems that every day brings another growth and intrusion of government over people’s lives. But there is no reason to be disheartened, because there are lessons for winning liberty – from the opponents of freedom.

Beginning in the last decades of the nineteenth century, through most of the twentieth century and into our own time, all ideological, political and economic trends have been in the direction of various forms of collectivism. How did this come about, and what might friends of freedom learn from it?

Let’s take the case of socialism. On March 14, 1883, a German philosopher living in exile in London passed away. When he was buried three days later in a modest grave where his wife had been laid to rest two years earlier, fewer than ten people were present, half of them family members.

His closest friend spoke at the gravesite and said, “Soon the world will feel the void left by the passing of this Titan.” But there was, in fact, little reason to think that the deceased man or his long, turgid, and often obscure writings would leave any lasting impression on the world of ideas or on the course of human events.

That man was Karl Marx.

Socialism Did Not Always Seem “Inevitable”

Advocates of liberty often suffer bouts of despair. How can the cause of freedom ever triumph in a world so dominated by interventionist and welfare-statist ideas? Governments often give lip service to the benefits of free markets and the sanctity of personal and civil liberties. In practice, however, those same governments continue to encroach on individual freedom, restrict and regulate the world of commerce and industry, and redistribute the wealth of society to those with political power and influence. The cause of freedom seems to be a lost cause, with merely temporary rear-guard successes against the continuing growth of government.

What friends of freedom need to remember is that trends can change, that they have in the past and will again in the future. If this seems far-fetched, place yourself in the position of a socialist at the time that Karl Marx died in 1883, and imagine that you are an honest and sincere – if naïve – advocate of socialism.

As a socialist, you live in a world that is still predominately classical liberal and free market, with governments in general only intervening in relatively minimal ways in commercial affairs. Most people – including those in the “working class” – believe that it is not really the responsibility of the state to redistribute wealth or nationalize industry and agriculture, and are suspicious of most forms of government paternalism.

How could socialism ever be victorious in such a world so fully dominated by the “capitalist” mindset? Even “the workers” don’t understand the evils of capitalism and the benefits of a socialist future! Such a sincere socialist could only hope that Marx was right and that socialism would have to come – someday – due to inescapable “laws of history.”

Yet within 30 years the socialist idea came to dominate the world. By the time of the First World War the notion of paternalistic government had captured the minds of intellectuals and was gaining increasing support among the general population. Welfare-statist interventionism was replacing the earlier relatively free-market environment.

The socialist ideal of government planning was put into effect as part of the wartime policies of the belligerent powers beginning in 1914, and also lead to the communist revolution in Russia in 1917, the rise to power of fascism in Italy in 1922, the triumph of National Socialism (Nazism) in Germany in 1933, and the implementation of FDR’s New Deal policies in 1933, as well.

Collectivists Triumphed Based on Individualist Methods

Socialism triumphed during that earlier period of the last decades of the nineteenth and early decades of the twentieth centuries because while socialists advocated an ideology of collectivism, they practiced a politics of individualism. They understood that “history” would not move in their direction unless they changed popular opinion. And implicitly they understood that this meant changing the minds of millions of individual people.

So they went out and spoke and debated with their friends and neighbors. They contributed to public lectures and the publishing of pamphlets and books. They founded newspapers and magazines, and distributed them to anyone who would be willing to read them. They understood that the world ultimately changes one mind at a time – in spite of their emphasis on “social classes,” group interests, and national conflicts

They overcame the prevailing public opinion, defeated powerful special interests, and never lost sight of their long-term goal of the socialist society to come, which was the motivation and the compass for all their actions.

Uncle Sam and Lady Liberty Searched cartoon

Lesson One: Confidence in the Moral Rightness of Liberty

What do friends of freedom have to learn from the successes of our socialist opponents? First, we must fully believe in the moral and practical superiority of freedom and the free market over all forms of collectivism. We must be neither embarrassed nor intimidated by the arguments of the collectivists, interventionists, and welfare statists. Once any compromise is made in the case for freedom, the opponents of liberty will have attained the high ground and will set the terms of the debate.

Freedom advocate, Leonard E. Read, once warned of sinking in a sea of “buts.” I believe in freedom and self-responsibility, “but” we need some minimum government social “safety net.” I believe in the free market, “but” we need some limited regulation for the “public good.” I believe in free trade, “but” we should have some form of protectionism for “essential” industries and jobs. Before you know it, Read warned, the case for freedom has been submerged in an ocean of exceptions.

Each of us, given the constraints on his time, must try to become as informed as possible about the case for freedom. Here, again, Leonard Read pointed out the importance of self-education and self-improvement. The more knowledgeable and articulate we each become in explaining the benefits of the free society and the harm from all forms of collectivism, the more we will have the ability to attract people who may want to hear what we have to say.

Lesson Two: Focusing on the Long Run, Not Short Run Turns

Another lesson to be learned from the earlier generation of socialists is not to be disheartened by the apparent continuing political climate that surrounds us. We must have confidence in the truth of what we say, to know in our minds and hearts that freedom can and will win in the battle of ideas.

We must focus on that point on the horizon that represents the ideal of individual liberty and the free society, regardless of how many twists and turns everyday political currents seem to be following. National, state, and local elections merely reflect prevailing political attitudes and beliefs. Our task is to influence the future and not allow ourselves to be distracted or discouraged by who gets elected today and on what policy platform.

As Austrian economist, F.A. Hayek, emphasized, current policy directions are the product of ideological and political trends from thirty or forty years ago. In other words government policies today are the lagged effect of political-philosophical and ideological trends of earlier decades. To change tomorrow’s policies, our focus today must be on influencing the “climate of opinion” reflected in people’s minds that, then, will determine how people in the future view issues such as the role of government in society based on their notion of the nature and rights of individuals.

Lesson Three: Knowing that Only Freedom Works

Let us remember that over the last hundred years virtually every form of collectivism has been tried—socialism, communism, fascism, Nazism, interventionism, welfare statism—and each has failed. There are very few today who wax with sincere enthusiasm that government is some great secular god that can solve all of mankind’s problems – at least not many outside of those currently employed in the White House!

Obama and the Declaration of Independence

Statist policies and attitudes continue to prevail because of institutional and special interest inertia; they no longer possess the political, philosophical, and ideological fervor that brought them to power in earlier times.

Political collectivism resulted in terrible and brutal tyrannies around the world. Government central planning created economic stagnation and chaos wherever tried. Interventionist-welfare statist policies have generated spider’s webs of special interest politics, intergenerational redistributive dependency, and perverse incentives and barriers to opportunity and prosperity.

There is, in fact, only one “ism” left to fill this vacuum in the face of collectivism’s failures in all its forms. It is classical liberalism, with its conception of the free man in the free society and the free market, soundly grounded in the ideas of each individual’s right to his life, liberty, and honestly acquired property in a social setting of peaceful association and voluntary cooperation and trade.

If we keep the classical liberal ideal of individual rights and laissez-faire capitalism before us, we can and will win liberty in our time – for our children and ourselves.


Beyond satire

Je ne suis pas Charlie. I am not Charlie, I am not brave enough.

“Across the world, and certainly across Twitter, people are showing solidarity with the murdered journalists of satirical French magazine Charlie Hebdo, proclaiming in black and white that they too share the values that got the cartoonists killed. Emotionally and morally I am entirely with that collective display — but actually I and almost all those declaring their solidarity are not Charlie because we simply do not have their courage.

“Charlie Hebdo’s leaders were much, much braver than most of us; maddeningly, preposterously and — in the light of their barbarous end — recklessly brave. The kind of impossibly courageous people who actually change the world. As George Bernard Shaw noted, the “reasonable man adapts himself to the world while the unreasonable man persists in trying to adapt the world to himself”, and therefore “all progress depends upon the unreasonable man”. Charlie Hebdo was the unreasonable man. It joined the battle that has largely been left to the police and security services..

“It is an easy thing to proclaim solidarity after their murder and it is heart-warming to see such a collective response. But in the end — like so many other examples of hashtag activism, like the #bringbackourgirls campaign over kidnapped Nigerian schoolchildren — it will not make a difference, except to make us feel better. Some took to the streets but most of those declaring themselves to be Charlie did so from the safety of a social media account. I don’t criticise them for wanting to do this; I just don’t think most of us have earned the right.”

“But the rest of us, like me, who sit safely in an office in western Europe — or all those in other professions who would never contemplate taking the kind of risks those French journalists took daily — we are not Charlie. We are just glad that someone had the courage to be.”

–       Robert Shrimsley in the Financial Times, 8 January 2015.


“Your right to swing your arms ends just where the other man’s nose begins.”

–       Zechariah Chafee , Jr.


“I do not agree with what you have to say, but I’ll defend to the death your right to say it.”

–       Voltaire.


On All Saint’s Day, 1st November 1755, an earthquake measuring roughly 9 on the Richter scale struck the Portuguese capital, Lisbon. At least 30,000 people are estimated to have perished. A little over half an hour after the original quake, a tsunami engulfed the lower half of the city. Those not affected by the quake or the tsunami were then beset by a succession of fires, which burned for five days. 85% of Lisbon’s buildings were destroyed. Ripples from the earthquake were felt far afield. Finland and North Africa felt aftershocks; a smaller tsunami made landfall in Cornwall.


Such destruction had a follow-on impact, in both philosophical and theological terms. In June 1756, the Inquisition responded with an auto-da-fé – a witch-hunt, effectively, for heretics.


One, much-loved, novel happens to cover both of these events, along with a third, from March 1757, when the British Admiral John Byng was executed for cowardice in the face of the French enemy at the battle of Minorca. This inspired the famous line, “Dans ce pays-ci, il est bon de tuer de temps en temps un amiral pour encourager les autres”: “In this country, it is wise to kill an admiral from time to time to encourage the others.”


That novel was written by a Frenchman, François-Marie Arouet, in 1758. We know him better today by his nom de plume: Voltaire. And his satirical magnum opus that catalogued these various disasters was called ‘Candide’.


‘Candide’ is a triumph of the style of novel best described as ‘picaresque’. It’s crammed with eminently quotable lines – the ‘Pulp Fiction’ of its day, if you will. Candide himself is a naïf who wanders with wide-eyed innocence through a savage and corrupt world. But in its Professor Pangloss it offers us the perfect encapsulation of today’s rogue economist, the unworldly and confused academic whose misguided practice of a false science has dreadful implications for the rest of us. A good modern-day example would be Martin Wolf, the FT’s chief economics correspondent, who on Friday complained about the UK’s property planning regime being “Stalinist”. Mr Wolf should try looking in the mirror more often – he is an ardent supporter of Stalinist monetary policy, for example.


As investors we are all now the subjects of a grotesque monetary experiment. This experiment has never been tried before, and its outcome remains uncertain. The unproven thesis, however, runs something like this: six years into a second Great Depression, the only “solution” is for central banks to print ever greater amounts of money. Somehow, gifting free money to the banks that helped precipitate the crisis will lead to a ‘trickle down’ wealth effect. Instead of impoverishing those with savings, inflation will be some kind of miraculous curative, and it must be encouraged at all costs.


It bears repeating: we are in an extraordinary financial environment. In the words of the fund managers at Incrementum AG,


“We are currently on a journey to the outer reaches of the monetary universe.”


On January 25th, Greece goes to the polls. Greek voters face the unedifying choice of re-electing the buffoons who got the country into its current mess or electing rival buffoons issuing comparably ridiculous economic promises that cannot possibly be fulfilled. Voltaire would be in his element. But Greece is hardly alone. Just about every government in the euro zone fiddled its figures to qualify for membership of this not particularly exclusive club, and now the electorate of the euro zone is paying the price. Not that any of this is new news; the euro zone has been in crisis more or less since its inception. If it hadn’t been for sterling’s inglorious ethnic cleansing from the exchange rate mechanism in September 1992, the UK might be in the same boat. Happily, for once, the market was allowed to prevail. The market triumphed over the cloudy vision of bewildered politicians, and the British chancellor ended up singing in the bath. (That he had been a keen advocate of EMU and the single currency need not concern us – consistency or principles are not necessarily required amongst politicians.)

But the market – a quaint concept of a bygone age – has largely disappeared. It has been replaced throughout the West by bureaucratic manipulation of prices, in part known as QE but better described as financial repression. Anyone who thinks the bureaucrats are going to succeed in whatever Panglossian vision they’re pursuing would be well advised to read Schuettinger and Butler’s ‘Forty centuries of wage and price controls’. The clueless bureaucrat has a lot of history behind him. In each case it is a history of failure, but history is clearly not much taught – and certainly not respected – in bureaucratic circles these days. The Mises bookstore describes the book as a “popular guide to ridiculous economic policy from the ancient world to modern times. This outstanding history illustrates the utter futility of fighting the market process through legislation. It always uses despotic measures to yield socially catastrophic results.”

The subtitle of Schuettinger and Butler’s book is ‘How not to fight inflation’. But inflation isn’t the thing that our clueless bureaucrats are fighting. The war has shifted to one against deflation – because consumers clearly have to be protected from everyday lower prices.

Among the coverage of last week’s dreadful events in Paris, there has been surprisingly little discussion about the belief systems of religions other than Islam. We think that Stephen Roberts spoke a good deal of sense when he remarked to a person of faith:

“I contend that we are both atheists. I just believe in one fewer god than you do. When you understand why you dismiss all the other possible gods, you will understand why I dismiss yours.”

There is altogether too much worship of false gods in our economy and what remains of our market system. Some hubris amongst our technocratic “leaders” would be most welcome. Until we get it, the requirement to concentrate on only the most explicit examples of value remains the only thing in investment that makes any sense at all.



Excerpt from Lord Acton’s “Essays on Freedom and Power”

The history of freedom in antiquity


NEXT TO religion, has been the motive of good deeds and the common pretext of crime, from the sowing of the seed at Athens, two thousand four hundred and sixty years ago, until the ripened harvest was gathered by men of our race. It is the delicate fruit of a mature civilisation; and scarcely a century has passed since nations, that knew the meaning of the term, resolved to be free. In every age its progress has been beset by its natural enemies, by ignorance and superstition, by lust of conquest and by love of ease, by the strong man’s craving for power, and the poor man’s craving for food. During long intervals it has been utterly arrested, when nations were being rescued from barbarism’ and from the grasp of strangers, and when the perpetual struggle for existence, depriving men of all interest and understanding in politics, has made them eager to sell their birthright for a mess of pottage, and ignorant of the treasure they resigned.

At all times sincere friends of freedom have been rare, and its triumphs have been due to minorities, that have prevailed by associating themselves with auxiliaries whose objects often differed from their own; and this association, which is always dangerous, has been sometimes disastrous, by giving to opponents just grounds of opposition, and by kindling dispute over the spoils in the hour of success. No obstacle has been so constant, or so difficult to overcome,as uncertainty and confusion touching the nature of true liberty. If hostile interests have wrought much injury, false ideas have wrought still more; and its advance is recorded in the increase of knowledge, as much as in the improvement of laws. The history of institutions is often a history of deception and illusions; for their virtue depends on the ideas that produce and on the spirit that preserves them, and the form may remain unaltered .when the substance has passed away.


A few familiar examples from modern politics will explain why it is that the burden of my argument will lie outside the domain of legislation. It is often said that our Constitution attained its formal perfection in 1679, when the Habeas Corpus Act was passed. Yet Charles II succeeded, only two years later, in making himself independent of Parliament. In 1789, while the States-General assembled at Versailles, the Spanish Cortes, older than Magna Carta and more venerable than our House of Commons, were summoned after an interval of generations, but they immediately prayed the King to abstain from consulting them, and to make his reforms of his own wisdom and authority. According to the common opinion, indirect elections are a safeguard of conservatism. But all the Assemblies of the French Revolution issued from indirect elections. A restricted suffrage is another reputed security for monarchy.

But the Parliament of Charles X, which was returned by 90,000 electors, resisted and overthrew the throne; while the Parliament. of Louis Philippe, chosen by a Constitution of 250,000, obsequiously promoted the reactionary policy of his Ministers, and in the fatal division which, by rejecting reform, laid the monarchy in the dust, Guizot’s majority was obtained by the votes of 129 public functionaries. An unpaid legislature is, for obvious reasons, more independent than most of the Continental legislatures which receive pay. But it would be unreasonable in America to send a member as far as from here to Constantinople to live for twelve months at his own expense in the dearest of capital cities. Legally and to outward seeming the American President is the successor of Washington, and still enjoys powers devised and limited by the Convention of Philadelphia. In reality the new President differs from the Magistrate imagined by the Fathers of the Republic as widely as Monarchy from Democracy, for he is expected to make 70,000 changes in the public service; fifty years ago. John Quincy Adams dismissed only two men.

The purchase of judicial appointments is manifestly indefensible; yet in the old French monarchy that monstrous practice created the only corporation able to resist the king. Official corruption, which would ruin a commonwealth, serves in Russia as a salutary relief from the pressure of absolutism. There are conditions in which it is scarcely a hyperbole to say that slavery itself is a stage on the road to freedom. Therefore we are not so much concerned this evening with the dead letter of edicts and of statutes as with the living thoughts of men. A century ago it was perfectly well known that whoever had one audience of a Master in Chancery was made to pay for three, but no man heeded the enormity until it suggested to a young lawyer that it might be well to question and examine with rigorous suspicion every part of a system in which such things were done. The day on which that gleam lighted up the clear, hard mind of Jeremy Bentham is memorable in the political calendar beyond the entire administration of many statesmen. It would be easy to point out a paragraph in St. Augustine, or a sentence of Grotius that outweighs in influence the Acts of fifty Parliaments, and our cause owes more to Cicero and Seneca, to Vinet and Tocqueville, than to the laws of Lycurgus or the Five Codes of France.


By liberty I mean the assurance that every man shall be protected in doing what he believes his duty against the influence of authority and majorities, custom and opinion. The State is competent to assign duties and draw the line between good and evil only in its immediate sphere. Beyond the limits of things necessary for its well-being, it can’ only give indirect help to fight the battle of life by promoting the influences which prevail against temptation, – religion, education, and the distribution of wealth. In ancient times the State absorbed ‘authorities not its own, and intruded on the domain of personal freedom. In the Middle Ages it possessed too little authority, and suffered others to intrude. Modern States fall habitually into both excesses.

The most certain test by which we judge whether a country is really free is the amount of security enjoyed by minorities. Liberty, by this definition, is the essential condition and guardian of religion; and it is in the history of the Chosen People, accordingly, that the first illustrations of my subject are obtained. The government of the Israelites was a federation, held together by no political authority, but by the unity of race and faith, and founded, not on physical force, but on a voluntary covenant. The principle of self-government was carried out not only in each tribe, but in every group of at least 120 families; and there was neither privilege of rank nor inequality before the law.

Monarchy was so alien to the primitive spirit of the community that it was resisted by Samuel in that momentous protestation and warning which all the kingdoms of Asia and many of the kingdoms of Europe have unceasingly confirmed. The throne was erected on a compact; and the king was deprived of the right of legislation among a people that recognized no lawgiver but God, whose highest aim in politics was to restore the original purity of the constitution, and to make its government conform to the ideal type that was hallowed by the sanctions of heaven~ The inspired men who rose in unfailing succession to prophesy against the usurper and the tyrant, constantly proclaimed that the laws, which were divine, were paramount over sinful rulers, and appealed from the established authorities, from the king, the priests, and the princes of the people, to the healing forces that slept in the uncorrupted consciences of the masses. Thus the example of the Hebrew nation laid down the parallel lines on which all freedom has been won – the doctrine of national tradition and the doctrine of the higher law; the principle that a constitution grows from a root, by process of development, and not of essential change; and the principle that all political authorities must be tested and reformed according to a code which was not made by man. The operation of these principles,·in unison, or in antagonism, occupies the whole of the space we are going over together.


The Occult Wars Of Kim Jong-un, Smaug, Paul Krugman And Gold

Pyongyang, evidence shows, effected a spectacular data breach of Sony Pictures to express its wrath over Evan Goldberg and Seth Rogan’s The Interview, a movie about an attempt to assassinate Kim Jong-un. Neither the United States Secret Service nor the North Korean authorities take portrayals of the assassination of our respective incumbent supreme leaders lightly.  But there is something more going on here.

North Korea’s actions were characterized by RedState as “unequivocally an act of 21st-century state-sponsored cyberwarfare and, indeed, state-sponsored terrorism.” This is overstated. North Korea really upped the ante by vigilante (rather than vandalism) action.

The lashing out against The Interview presents as an “occult war” by the pre-modern culture (and government) of Pyongyang. The Interview Incident has strong echoes of an almost forgotten event, from the 1960s, when Indonesia’s President Sukarno also acted out. As recounted by the late (and very wise) British career civil servant Austin Coates, in his book China, India and the Ruins of Washington:

Konfrontasi consisted principally of creating continuous threatening uproar by radio, by hostile speeches and clamor in the Indonesian newspapers. Minor disturbances were created along the frontiers of Sarawak and Sabah … and acts of sabotage occurred…. … … The entire thing was in fact a modern version of the medieval practice whereby kings endeavored to overcome their rivals by occult means; and in that Sukarno succeeded by these occult means (radio, press, and speeches in the United Nations) in restoring Irian Barat, or West New Guinea, to Indonesia, the method revealed itself as being not entirely ineffective in the twentieth century.

In fact, Sukarno is the most interesting survival phenomenon in the contemporary Orient. His speeches at the time of Konfrontasi were so imbued with the simulated concept of centrality as to sound like an echo from another age.

It would be flying in the face of historical evidence to imagine that this will be the last attempt to imitate the center. … But all such endeavors will be pointless.

Without, in any way, exonerating international vigilantism — by the modern “occult” means of black hat hacking and “threatening uproar” — this implies, among other things, that Sony Pictures acted responsibly.  It had not intended, and was not prepared to fight, an “occult war” with Pyongyang.

“Occult” — primarily, here, meaning symbolic, or psychological — warfare hardly is unknown in the West, ballots having replaced bullets. For instance, an “occult war” has been and continues to be waged by a “threatening uproar” in the media over the gold standard. Entirely coincidentally, around the time the donnybrook over The Interview began North Korea itself briefly enlisted, sotto voce, in the “occult war” against the gold standard.

The North Korea Times (the “Oldest online newspaper in North Korea”) engaged under the dramatic headline Spectre of gold standard banished on December 2, 2014. The Times republished this letter from Thailand’s The Nation:

Thanong Khanthong delivers an excellent insight on gold but offers the scary conclusion that “Europe is tilting towards a gold standard of some sort [and] the days of the fiat currency regime could be numbered”.

Fortunately, on Sunday, 77 per cent of Swiss voters overwhelmingly rejected the call for their currency to be anchored by gold reserves. Switzerland’s finance minister hailed the vote as a show of confidence in the central bank and a realisation that “gold is no longer as important as it once was as a tool to back up paper money”. In other words, gold is important only if people do not trust their central bank. In the modern world, trust is the basis of the fiat currency regime that superseded the long-gone gold standard. The return of that standard will come only when the end of the world is nigh.

Thanong Khanthong, managing editor of the Nation Multimedia Group in Thailand, had written a column entitled Gold rush in Europe as concern over money printing rises, subheadlined “Many European countries are now moving to repatriate their gold holdings from storage abroad.  They are also looking to increase the proportion of gold in their international reserves to assure currency and financial stability.”  The North Korean Times‘s echo of a riposte against a growing trend away from central, to decentralized, monetary policy assuredly was meant to help exorcise this phenomenon.

Kim Jong-un’s regime quietly adds its voice to that of other potent “occult” adversaries on the left of the gold standard. These adversaries include Paul Krugman, Brad DeLong, Nouriel Roubini, Charles Postel, Thomas Frank, Think Progress’s Marie Diamond, the Roosevelt Institute’s Mike Konczal, Brookings Institutions’ Barry Bosworth, The New York Times’s economics blogger Bruce Bartlett, the Washington Post’s Matt O’Brien, Slate’s Christopher Beam, andUS News & World Report’s Pat Garofalo, and … 40 out of 40 elite academic economists polled some time ago by the Booth School.

It is not unfair to call the left’s opposition to gold “occult.” Our elite intelligentsia, relying on dogma, unleashes hostile words in the media — rather than engaging in reasoned argument — to assassinate the reputation of the gold standard. Our own culture is not always so modern as usually supposed.

In a recent interview at the Lehrman Institute’s gold standard website, which I edit, the estimable economic historian Prof. Brian Domitrovic made these observations:

Academic economic history has hitched its wagon to a particular star, the trashing of the gold standard. The funny thing is that this stuff really didn’t intensify, in academic economic history, until the 1980s, when the conditions were actually beautiful for a return to the gold standard. Students of economic history were not so foolish as to endorse fiat currency in the 1940s, as Bretton Woods was gathering, even though Keynes was urging just that. Paul Samuleson and a few others were trashing gold in the 1950s and 60s, but that was not the norm. …

The publication of Barry Eichengreen’s Golden Fetters, his essays from the 1980s, was a decisive event in cementing the anti-gold standard position in the academy. And Ben Bernanke was such a lionizer of Eichengreen’s that it would prove very fateful if he were accorded high governmental office, which happened twice (Chair of the Council of Economic Advisors and the Fed). So the anti-gold view became part of the dominant political culture.

The central command and control management of the dollar by the Fed, in place since President Nixon, has done and is doing vastly more damage to the American (and world) economy than the hacking and harassment of Hollywood by another command-and-control power. This does not exonerate Pyongyang, nor does it imply that Paul Krugman is receiving secret overnight telegrams from Kim Jong-un. It simply observes that our own intelligentsia consistently ignores the empirical data and behaves in pre-modern ways.

The left, whether based in Pyongyang or City College, too often relies very much on “occult means” — such as vituperation — to make its points. “But all such endeavors will be pointless.”

Meanwhile, back in the realm of the “occult,” skirmishing continues. The Hobbit’s dragon Smaug — from Peter Jackson’s movie — recently gave Steven Colbert his endorsement of the gold standard (and Rand Paul):

Stephen Colbert: Now Smaug, I think that we both have a lot in common. We both live in gated communities, and we’re both fiscal conservatives who sleep on giant piles of money.

Smaug (voiced by Benedict Cumberbatch): Quite right! Time to return to the gold standard. Rand Paul 2016 Yea! Get some Rand!

While this was meant as public ridicule — am “occult” technique — by Colbert it bears an interesting subtext. As Kenneth Schortgen Jr wrote of this exchange in

Although scripted and made for television, the interview between a fictional dragon from ancient times and a comedic pundit in the 21st century was fascinating in many aspects, and in many ways showed that the real time events we experience in our modern world are no different than similar events that were played out by different characters and plot lines from hundreds or thousands of years ago. …

They say that history doesn’t just repeat itself, but it also rhymes, and watching this fictional made for television interview shows that indeed, there is nothing new under the sun. And while technologies may be different, and the stock of human existence may be better or worse today than in the past, what occurred during the lifetime of a storybook dragon and civilization proves the old axiom that truth is quite often stranger than fiction, or perhaps, it simply mirrors it in imagination and reality.

Back in the real world, The Nation‘s Mr. Khanthong has written about another “dragon,” China, quoting the president of the China Gold Association in a piece headlined The gold standard bandwagon is rolling — Thailand must climb aboard:

“The word is slowly, if almost unnoticeably, moving back to embrace the gold standard.  Russia, China and India are leading the drive by accumulating gold reserves” and Song Xin, president of the China gold Association … wrote in Sina Finance in July this year: ‘Gold is money par excellence in all circumstances and will help support the renminbi [yuan] to become an international currency, as gold forms the very material basis for modern fiat currencies.’”

Dogma really is medieval. Reality — the very fine track record of the gold standard in establishing equitable prosperity — surely will, in time, prevail. “The world is slowly, if almost unnoticeably, moving back to embrace the gold standard.”

“Occult” means will not for long prevail.

Originating at


The Unpredictable Future And Winning Liberty

As a new year begins, it is easy to consider that the prospects for freedom in America and in many other parts of the world to seem dim. After all, government continues to grow bigger and more intrusive, along with tax burdens that siphon off vast amounts of private wealth.

Extrapolating these trends out for the foreseeable future, it would seem that the chances for winning liberty are highly unlikely. There is only one problem with this pessimistic forecast: the future is unpredictable and apparent trends do change.

Many years ago the famous philosopher of science Karl Popper pointed out, “If there is such a thing as growing human knowledge, then we cannot anticipate today what we shall only know tomorrow.” What does this mean?

When I was in high school in the 1960s, I came across an issue ofPopular Science magazine published in the early 1950s that was devoted to predicting what life would be like for the average American family in the 1970s. It had a picture of a wife and child standing on an apartment building roof waving good-bye to dad as he went off to work—in his one-seat mini-helicopter!

Dad Going Off to Work in Future

As best as I can recall, the authors talked about such things as color televisions, various new household appliances, robots that would do much of our household work, and the use of jet planes for commercial travel. What was not mentioned, however, was the personal computer or the revolution in communication, knowledge, and work that it has brought about. When that issue of Popular Science was published, one essential element of the computer revolution had not yet been invented: the microchip.

We Cannot Predict Tomorrow’s Knowledge Today

Those authors could not imagine a worldwide technological revolution before the component that made it all possible was created by man. Our inescapably imperfect knowledge means we can never predict our own future. If we could predict tomorrow’s knowledge and its potentials, then we would already know everything today—and we would know we knew it!

This applies to social, political, and economic trends as well. Most people in 1900 expected the twentieth century to be an epoch of growing international peace and harmony. In 1911, the British free trader and peace advocate, Norman Angell (who won the Nobel Peace Prize in 1933), argued in The Great Illusion that war had become so costly in terms of financial expense and wasteful destruction that it would be irrational for the “Great Powers” of Europe or America to be drawn down that path any longer.

But, instead, in 1914, there began the First World War, that went on for four years, took the lives of at least 20 million soldiers, and cost (in 2014 dollars) over $3 trillion. And the relatively classical liberal and free market world that prevailed before the “Great War,” was shattered.

The twentieth century, as a whole, was the bloodiest and most destructive in modern history due to the rise of political and economic collectivism, in the forms of socialism, communism, fascism, Nazism and the interventionist-welfare state. The conflicts that collectivism brought in its wake have cost possibly 250 million lives over the last one hundred years. No one anticipated this turn of events in 1900.

The Unpredictability of Future Political-Economic Trends

When I was an undergraduate in the late 1960s the book assigned in my first economics class was the seventh edition of Paul Samuelson’s Economics (1967), the leading Keynesian-oriented textbook at the time.

There was a graph that tracked U.S. and Soviet Gross National Product (GNP) from 1945 to 1965. Samuelson then projected American and Soviet GNP through the rest of the century. He anticipated that possibly by the early 1980s, but certainly by 2000, Soviet GNP would be equal to or even greater than that of the United States. Notice his implicit prediction that there would be a Soviet Union in 2000, which in fact disappeared from the map of the world in December 1991.

Which of us really expected to see the end of the U.S.S.R. in our lifetimes, without either a nuclear cataclysm or a devastating and bloody civil war? In the mid-1980s the often perceptive French social critic Jean-François Revel published How Democracies Perish, in which he expressed his fear that the loss of moral and ideological commitment to freedom by intellectuals and many other people in the West meant that the global triumph of communism under Soviet leadership was a strong possibility. Instead it was Soviet communism that disappeared from the map of the globe.

Who in January 1990 anticipated that Saddam Hussein would invade Kuwait in August of that year, setting in motion a chain of events that resulted in two American invasions and a ten-year occupation of Iraq?

Who in 2000 would have anticipated that Bill Clinton’s eight years in office would seem, in retrospect, an era of restrained government compared to the explosion in government spending and intervention during the George W. Bush and Barack Obama administrations?


Historical Chronology Does Not Mean Future Causality

And who today knows what the whole twenty-first century holds for us? Let me suggest that the answer is: nobody.

As the late Robert Nisbet, one of America’s great social thinkers, once pointed out, “How easy it is, as we look back over the past – that is, of course, the ‘past’ that has been selected for us by historians and social scientists – to see in it trends and tendencies that appear to possess the iron necessity and clear directionality of growth in a plant or organism . . . But the relation between the past, present, and future is chronological, not causal.”

The decades of relative global peace and market-based prosperity that preceded 1914 did not mean that war and destruction were impossible for the rest of the twentieth century. The ascendancy of Soviet communism, Italian fascism, and German Nazism in 1920s, 1930s and 1940s did not mean that freedom and democracy had reached their end, though the books and articles of some of the most insightful advocates of individual liberty and limited government in the years between the two World Wars carried the despair and fear that totalitarianism was the inescapable wave of the future.

The persistent and current growth in government intervention and the welfare state does not mean that a return to the classical-liberal ideas of individual liberty, free markets, and limited government is a pipe dream of the past.

Human Events are the Result of Human Action

Human events are the result of human action. Our actions are an outgrowth of our ideas and our will and willingness to try to implement them. The stranglehold of Big Government will persist only for as long as we allow it, for as long as we accept the arguments of our ideological opponents that the interventionist welfare state is “inevitable” and “irreversible.”

That is, the present trend will continue only for as long as we accept that the chronologically observed increase in government power over the last decades is somehow causally determined and inescapable in the stream of human affairs.

This could have been equally said about human slavery. Few institutions were so imbedded in the human circumstance throughout recorded history as the ownership of some men by others. Surely it was a pipe dream to suggest that all men should be free and equal before the law.

Yet in the eighteenth and nineteenth centuries a new political ideal was born – that declared that all men are created equal and endowed with certain unalienable individual rights to life, liberty and honestly acquired property, which no other mortals could take away. So slavery, which Aristotle considered to be the natural condition of some men, was brought to an end before the close of the nineteenth century through the power of ideas and human purpose.

In the 1700s, mercantilism – the eighteenth-century version of central planning – was considered both necessary and desirable for national prosperity. Even Adam Smith, in the Wealth of Nations(1776), believed that its hold over men’s minds and actions was too powerful to ever permit the triumph of free trade. Yet in one lifetime following Adam Smith’s death in 1790, freedom of trade and enterprise was established in Great Britain and the United States, and then slowly but surely through much of the rest of the world.

This was all made possible because of the rise and partial triumph of a political philosophy of individual rights that argued for the banishment of violence and oppression in the relationships among men.

Future-Past Picture

Liberty’s Winning Ideas are Out There

We cannot imagine, today, how freedom will successfully prevail over our current paternalistic governments, any more than many people could imagine in 1940 a world without German Nazism and Soviet communism, or FDR’s New Deal. But that does not mean it’s impossible.

Precisely because the future is unknown, we may be confident that trends can and will change, just as they have in the past. We cannot fully know today what arguments friends of freedom will imagine and successfully articulate tomorrow to end government control of our lives. But those arguments are out there, waiting to be better formulated and presented, just as earlier friends of freedom succeeded in making the cases against slavery and mercantilism.

In 1951, Austrian economist Ludwig von Mises pointed out, “Now trends of [social] evolution can change, and hitherto they almost always have changed. But they changed only because they met firm opposition. The prevailing trend toward what Hilaire Belloc called the servile state will certainly not be reversed if nobody has the courage to attack its underlying dogmas.”

There is one thing, therefore, that we can predict: patience, persistence, and belief in the power of ideas and a well articulated defense of individual rights and free markets will provide the best chance we have to achieve the free society many of us so much desire.

[This first appeared at]


Yes, Virginia, There Is No Political Santa Claus

At a time of the year when gift giving and charitable good spirit fills the air, please allow me to be the one who rains on the parade: “Yes, Virginia, there is no Santa Claus!”

I don’t mean the Santa who comes down the chimney with toys for every girl and boy. This is the Santa who really is Mom or Dad, Grandparent or other family members or close friends who out of their own earned income choose to purchase, wrap and give gifts to those little ones on Christmas morning.

The small child may have been told the fairy story about an jolly, fat man in a red suit who lives in the far north, working with his elves all year long so the toys and other presents are ready to be miraculously delivered to every “good boy and girl” around the world in one night.

But we “adults” all know that is all just a story for the children at an early and gullible age when the fantasy of it all seems possibly real. And many of us cherish those early years of wonder and make-believe, before the reality breaks through that it just does not and cannot happen that way.

The Redistributing and Regulating Political Santa

I mean the Uncle Sam “Santa” that, not just at Christmas time, but year-round, is believed by many people to have the ability to bring them many of the good things they want from a mythical North Pole called Washington, D.C., or any governmental capital around the world.

This is the political Santa who delivers subsidies of various sorts to farmers or “alternative energy” manufacturers. The Santa who redistributes vast sums of money for educational expenditures, or public housing, welfare and food stamps, or government defense contracts, and even “bridges to nowhere.”

This is also the political Santa who can magically fill the global skies with unmanned drones for surveillance and death, or fund decade-long trillion-dollar wars in far-off lands, or bankroll “friendly” governments in other places around the world while punishing “bad” countries for what Uncle Sam defines as “misbehavior.”

This is the Santa who claims the power and ability remake human nature, control human thought, and redesign some or even all of human society into various preferred shapes and forms.

This political Santa works hard to create the illusion that prosperity and improvement in the human condition cannot happen if not for the guiding, regulating, and manipulating hand of “benevolent” government.

The Political Myth of Something for Nothing

But while almost all children grow out of their belief in a Santa Claus with his home at the North Pole who “somehow” succeeds in manufacturing all those “goodies” that he carries on his sleigh on Christmas Eve, many people go through their entire life convinced of the Santa-like abilities of a paternalistic government that can “somehow” assure many, if not all, of the desired good things of life.

However, just as “Santa” is really Mom and Dad who buy the presents, and wrap them to put under the Christmas tree, governmental “Santa” are those in political office who have no ability to bestow desired benefits on “all” without, in fact, first taking from some to give to others.

Mom and Dad work. They assist in producing goods or in performing services for others in the marketplace, which earns them a salary or nets them a profit. They have had to first produce to, then, through the income they earned, have the ability to consume, including on the goods that their children find on Christmas morning.

The governmental Santa must, first, tax away the income and wealth of some to, then, redistribute it in one form or another to others in the country over which those in political power assert fiscal and regulatory authority.

For the mythical Santa at the North Pole there are no costs for anything he does. The resources, raw materials and tools with which his Christmas goodies are made just appear. The elves work, apparently, for nothing and their food and clothes do not need to be produced, either.

For our political Santa Claus to rain redistributive “gifts” on those he considers deserving and “nice,” he must take from those found to be “naughty” and not nice.

Santa vs. Government Giveaway cartoon

Political Santa’s “Gifts” Carry High Costs

Our political Santa Claus imposes real and meaningful costs on many in society to do his magical “social work.” First, he must appropriate part of the material wealth produced by those productive members of society. People who, in a free market, only earn what they have by peacefully offering to others things those others desire and value enough to pay an agreed-upon price to acquire.

A portion of the intellectual and material effort of real men and women are seized from them through compulsory taxation. The government classifies these net taxpayers in society as having more than they “really” need, and usually don’t ethically “deserve.”

They get “sack of coal” for being “bad” in the form of being left with less than the full value of their creative and hardworking effort. They are denied the opportunity and the right to enjoy the complete fruits of their mental and physical labors. Their choices to spend what they have honestly earned are narrowed to what the political Santa decides they should have available to spend.

The “good” little political citizens who are given the redistributive benefits, therefore, are the net recipients of what others have produced, and which they have received due the ideological and pressure group power they can bring to bear in collaboration with the political Santa in the municipal, state, and national halls of governmental control.

But the costs of political Santa’s generosity do not come just in the form of direct redistributions. They also come in the form of regulations, restrictions, and licensing requirements that determine who may allowed to compete, work, and earn a living in a particular line of enterprise, production, and trade.

This “sack of coal” for the “bad” citizens also comes in the form in the inability to start a business or expand and successfully run an enterprise as the result of the regulatory hand of political Santa. The costs also take the form of closed opportunities for those with little or no skills to find work or be hired at a starting wage that would give them a chance at improving their own lives through honest employment in the free marketplace.

It also costs the consumers who find their choices and options are more limited or nonexistent than the free market would have provided, if only the government had not imposed these barriers, walls, and hurtles in the way of those who merely wish to be left alone to go about their private and personal affairs of life by offering new, better, and less expense goods and services to their fellow men through honest, peaceful, and mutually agreed terms of trade.

The “good little citizens” in this case are those on the supply-side of the market who are sheltered from the competition of real or potentially more efficient and productive rivals. Their larger market shares, greater profit margins, and costly inefficiencies are protected by the political Santa’s regulatory power; he, in turn, receives the campaign contributions and implicitly bought votes on election days that keep him in office.

The Myth of Needing a Political Santa for Life

For political Santa to pursue his mythical game in governmental plunderland, he must do all in his power to persuade and convince his citizen “children” that they do not have a right to their own life and to live it in their own chosen way. They must be indoctrinated to either passively accept the role of life-long dependent upon the political Santa, or to serve as the self-sacrificing elves who must do the work to produce all the goods and services in the world that will be redistributed out of the political Santa’s sack of taxed and regulated benefits.

Santa will educate you; he will see that you have a job and that you receive a “fair” wage. He will make sure that you are safe and satisfied by controlling what is produced, how it produced, and the terms under which the “bad” business children under his regulatory supervision market and sell many of those “goodies” to you.

When sick or disabled, political Santa will give you medical care; and he will guarantee you a retirement free from the need for planning for these things yourself.

All you need to do is accept your status as a lifetime adolescent needing supervision, care, and oversight in everything and in all things that you do. The spirit and psychology of being political Santa’s dependent was captured in that government website cartoon during the first Obama Administration called “The Life of Julia.”

“Julia” needed government to supply the hospital in which she was born; to provide the pre-school education with which her political indoctrination began; too see that Julia was given not only a government high school diploma, but got taxpayer subsidies and special quotas to make it into a preferred college or university; to see that gender affirmative action laws guaranteed a “fair chance” to a good paying job and career that she otherwise could never get on her own; and to see that in later years Julia has the safety-net of government Social Security, without having to bear the responsibility of carrying for this herself.

President Santa Claus cartoon

Self-Sacrificing “Elves” to Serve Political Santa

The other side of political Santa’s plunderland is the indoctrination of the productive and producer “elves” who are needed to do the work that supplies all that government can give away. This requires convincing everyone that “society” comes before the individual; that anything that the individual has is not due to his own effort and his peaceful and voluntary associations with others, or as President Obama asserted, “You did not built it.”

Instead, what you have is due to the collective efforts of all, so that you cannot claim a right to anything or any more than what the collective deems you to deserve. And it is political Santa who represents and acts for the social collective in determining what shall be expected from you and in what form, and what you shall be allowed to have from “society” (or that you are allowed to keep) as bestowed by the government’s redistributive and regulatory activities.

But just as there is no Santa at the North Pole, there is no political Santa in society. Political Santa is really those who run for political office to gain and retain governmental control and power over other people’s lives. Political Santa is really all the special interest groups who wish to use the halls of governmental power to obtain through regulation and taxation what they cannot honestly earn in the open competition of the free marketplace.

Ethical Benevolence vs. Political Immorality

Benevolence and voluntary charity, and a properly understood spirit of “giving” to those you value and love at Christmas time are right and virtuous sentiments of free people in the open society.

But belief in and actions based upon the idea of a “political Santa” only succeeds in weakening and finally destroying the spirit and ethical health of a free and prosperous society.

So, yes, Virginia, there is no Santa Claus. Neither a North Pole Santa who comes down the chimney in a red suit, nor a political Santa who can give people “something for nothing” in a world in which all that people want and desire must be creatively produced by someone before it may used to satisfy those wants and desires.

What makes the mythical belief in a political Santa far worse than the short-lived childhood belief in the North Pole Santa, is that the idea of a political Santa challenges and destroys the spirit of individualism upon which the good, free and prosperous society ultimately rests.


Spare dollars

Last week I wrote that contrary to the prevailing mood US dollar strength could reverse at any time. This week I look at another aspect of the dollar, which almost certainly will become a significant source of supply: a global shift out of it by foreign holders.

As well as multinational corporations that account in dollars, there are non-US entities that use dollars purely for trade. And so long as governments intervene in currency markets, governments end up with those trade dollars in their foreign reserves. Some of these governments are now pushing hard to replace the dollar, having seen its debasement, which is beyond their control. This has upset nations like China, and that is before we speculate about any geopolitical angle.

The consequence of China’s currency management has been a massive accumulation of dollars which China cannot easily sell. All she can do is stop accumulating them and not reinvest the proceeds from maturing Treasuries, and this has broadly been her policy for at least the last year. So this problem has been in the works for some time and doubtless contributed to China’s determination to reduce her dependency on the dollar. Furthermore, it is why thirteen months ago George Osborne was summoned (that is the only word for it) to Beijing to discuss a move to urgently develop offshore renminbi capital markets, utilising the historic links between Hong Kong and London. Since then, it is reported that last month over 22% of China’s external trade was settled in its own currency.

Given the short time involved, it is clear that there is a major change happening in cross-border trade hardly noticed by financial commentators. But this is not all: sanctions against Russia have turned her urgently against the dollar as well, and together with China these two nations dominate and carry with them the bulk of Asia, representing nearly four billion rapidly industrialising souls. To this we should add the Middle East, most of whose oil is now exported to China, India and South-East Asia, making the petro-dollar potentially redundant as well.

In a dollar-centric currency system, China is restricted in what she can do, because with nearly $4 trillion in total foreign exchange reserves she cannot sell enough dollars to make a difference without driving the renminbi substantially higher. In the past she has reduced her dollar balances by selling them for other currencies, such as the euro, but she cannot rely on the other major central banks to neutralise the market effect of her dollar sales on her behalf. Partly for this reason China now intends to redeploy her reserves into international investment to develop her export markets for capital goods, as well as into major infrastructure projects, such as the $40bn Silk Road scheme.

This simply amounts to dispersing China’s dollars into diverse hands to conceal their disposal. Meanwhile currency markets have charged off in the opposite direction, with the dollar’s strength undermining commodity prices, most noticeably oil, very much to China’s benefit. And while the talking-heads are debating the effect on Russia and America’s shale, they are oblivious to the potential tsunami of dollars just waiting for the opportunity to return to the good old US of A.


The Truth Behind The Swiss Gold Referendum

A recent column in US News & World Report, The Swiss Gold Rush by Pat Garofalo, its assistant managing editor for opinion, is subtitled “A push for the gold standard in Switzerland is symbolic of Europe’s rising right wing.” US News & World Report hereby descends from commentary to propaganda. Who edits its editors?

To begin with, the Swiss referendum, decisively and sensibly rejected by the Swiss electorate, was not about “the gold standard.” It was a vote on a proposition requiring its central bank to increase its gold reserves from around 8% to 20% — implying the acquisition, over five years, of 1,500 tons (“costing at about $56.3 billion at current prices,” reports Bloomberg), never to sell gold, and to hold that federation’s gold within Switzerland.  That had nothing to do with the gold standard.

The Swiss voted 77% – 23% to reject this proposition. The Swiss National Council had rejected the initiative by 156 votes to 20 with 22 abstentions, and the Council of States by 43 votes to 2 abstentions. And the referendum may well have been a bad, or at least silly, idea.

With a Swiss GDP of around $650 billion (USD) per year the requirement to acquire $10B/year of this iconic shiny-and-ductile commodity while not insignificant, at less than 2% of annual GDP, hardly would have been crippling.  That said, the gold standard was not on the ballot.

As for the gold markets themselves, according to a 2011 report by the FT, reporting on a study by the London Bullion Market Association, there was a $240bn average daily turnover in the London bullion market. The annual mandated Swiss acquisition, then, apparently would have amounted to about … half an hour’s trading volume on one of the world’s major gold marketplaces.  Commodity investment, however, has nothing to do with the gold standard.

Demonetized (as at present), gold merely is a commodity. The gold standard is a quality standard, not a quantity standard, and is about maintaining the integrity of the currency, not limiting its supply. This Swiss referendum substantively was irrelevant to monetary policy. As’s own Nathan Lewis perceptively has pointed out the amount of gold held, under the gold standard, as reserves by banks of issue fluctuated dramatically and immaterially.

The Swiss referendum generated a modicum of international attention and considerable criticism. The referendum presented, in fact, as misguided. It did not, however, even imply a restoration of the gold standard much less prove itself, as Garofalo presented it, as a symptom of “Europe’s rising right wing.”

Garofalo stated that “the gold standard is the idea that a nation’s money supply should be tied to gold, rather than being fully controlled by its central bank.”  This is not even a crude approximation of the gold standard. The gold standard simply holds that the value of a currency shall be defined by, and legally convertible into, a fixed weight of gold.

Garofalo implies, and cites other writers who claim, that the gold standard constrains the money supply.  Not so.  As Nathan Lewis has pointed out, for instance, from 1775 to 1900 the amount of gold in the U.S. monetary system increased by 3.4x while the currency increased by 163x without causing a depreciation in value of the currency.

The gold standard is a qualitative, not quantitative, standard. It does not constrain growth of the money supply, merely calibrating it reasonably well (albeit imperfectly, perfection having never been attained by any monetary system) to the real economy’s money demand. Lewis:

between 1880 and 1900, the monetary base in Italy actually shrank by 4.8%.  However, the monetary base in the U.S. grew by 81% over those same years. Both used gold standard systems. So, the “money supply” not only has no relation to gold mining production, but two countries can have wildly different outcomes during the same time period.

As for whether the gold standard is superior to fiduciary management there is abundant evidence that the organic nature of the gold standard consistently outperforms the synthetic nature of central bank discretion.  Garofalo references a poll of 40 academic economists who dismiss the (admittedly unfashionable) gold standard.

In criticizing the performance of the gold standard Garofalo relies on The Atlantic’s Matt O’Brien.

Indeed, when it was in force, the gold standard brought with it a whole host of negative effects, and as Matt O’Brien wrote in The Atlantic, “was a devilish device for turning recessions into depressions.” It ensures that a central bank can’t respond to a crisis by putting more money into the financial system, greasing the wheels of the economy, since the money supply is restricted by an outside factor.

As for another celebrity on whom Garofalo relies, Nouriel Roubini, his ill-founded hysteria on the gold standard has been critiqued here and here. O’Brien and Roubini are entitled to their own opinions but not to their own facts.

As economic historian Professor Brian Domitrovic, also at, relates, The Gold Standard Had Nothing To Do With Panics and Busts,

Looking at the 19th century, before the gold standard became a ghost, a dead-letter in the early era of the Federal Reserve from 1913-33, there is no evidence that the good old thing was implicated in any panic or bust.

Rather than relying on commentators and academics, pro or anti gold, it might be pertinent to turn to the thoughts of central bankers. Herr Dr. Jens Weidmann, president of the Bundesbank, in a 2012 speech referred to gold as “in a sense, a timeless classic.”

And Garofalo makes no reference to the 2011 Bank of England Financial Stability Paper No. 13, summarized and hyperlinked by contributor Charles Kadlec here. This study by the prudential Bank of England — not for nothing called “the Old Lady of Threadneedle Street” — provides an empirical assessment of the fiduciary management approach ushered in by Presidents Johnson and Nixon and, at the time of the study, in effect for 40 years.

Financial Stability Paper No. 13 contrasts the world economy’s real performance under the Johnson/Nixon protocols relative to the Bretton Woods gold-exchange standard and the classical gold standard. The Bank of England analysis, based on the empirical data, concludes that fiduciary management greatly underperformed (for economic growth, financial stability, inflation, recession, and all other categories assessed) its predecessor systems.

Garofalo legitimately cites the weight of elite academic economic opinion against the out-of-fashion gold standard. That said, this august collection of economists, few if any of whom foresaw the panic of 2007 and ensuing Great Recession, seem to be guided by former U.S. Treasurer Ivy Baker Priest’s motto, “Often wrong, never in doubt.” Readers deserve to be provided with the weight of the evidence to, at least, supplement the weight of elite opinion.

More troubling are Garofalo’s innuendos tying gold standard proponents to sinister “right-wing” politics. There is no meaningful correlation between advocacy for the gold standard and, for example, anti-immigrant sentiment. I, a gold standard proponent, am very much on record for a generous, inclusive, immigration policy (including a path to citizenship for undocumented aliens). So is American Principles In Action, the gold standard’s most prominent advocacy group in Washington, DC (which I professionally advise).

The figure most synonymous with right-wing totalitarianism, Adolf Hitler, virulently opposed the gold standard.  The gold standard then was, as it now is, intrinsic to a liberal republican order. Hitler is recorded as saying:

I had no interest in gold— either natural or synthetic.Our opponents have not yet understood our system. We can be easy in our minds on that subject; they’ll have terrible crises once the war is over. During that time, we’ll be building a solid State, proof against crises, and without an ounce of gold behind it. Anyone who sells above the set prices, let him be marched off into a concentration camp ! That’s the bastion of money. There’s no other way.

Garofalo states that “In 2012, Republicans kowtowed to their more extreme members by including a call to return to the gold standard in their party platform.”   This, flatly, is wrong.  The 2012 GOP platform did not call to return to the gold standard.  It simply called for a ““commission to investigate possible ways to set a fixed value for the dollar.”  (Nor did it represent a “kowtow” to “more extreme members.”)

Instead of reciting the platform language Garofalo relied on a distorted description of it by commentator Bruce Bartlett, to which he links.  (Bartlett’s reference, in his New York Times Economix blog, to a “metallic basis” was to platform language referencing a commission established by Reagan, not the call to action in the 2012 platform.)

Garofalo states that “Kentucky Sen. Rand Paul – has mentioned the possibility of a return to the gold standard.”  The source to which he links states shows the Senator entirely noncommittal:  “Paul wouldn’t comment on whether a gold standard is needed or not….”  Sen. Paul, pressed by a questioner, simply called for a commission to study the matter, which has a subtle yet materially different connotation from having “mentioned the possibility.”

Garofalo’s misrepresentations are, at best, sloppy, giving readers good cause to wonder about the integrity of this writer’s work. His collected writings are a compilation of progressive nostrums: complaining that gas prices are too low, opposing corporate tax reform, criticizing President Obama for refusing to propose a gas tax, supporting the mandated minimum wage, throwing bouquets to the IRS, and so forth.

Garofalo is a propagandist rather than a commentator. Good on him: the discourse is made spicier by propaganda.

That said, the readers of US News & World Report deserve much better quality propaganda than this. The Swiss referendum may have been silly but it was not about the gold standard. The gold standard neither is “ugly” nor evidence of a “rightward lurch.” And, in the words of its foremost living proponent, Lewis E. Lehrman (whose eponymous Institute I professionally advise), “By the test of centuries, the true gold standard, without reserve currencies, is the least imperfect monetary system of history.”

Originating at


Russia’s monetary solution

The hypothesis that follows, if carried through, is certain to have a significant effect on gold and the relationship between gold and all government-issued currencies.

The successful remonetisation of gold by a major power such as Russia would draw attention to the fault-lines between fiat currencies issued by governments unable or unwilling to do the same and those that can follow in due course. It would be a schism in the world’s dollar-based monetary order.

Russia has made plain her overriding monetary objective: to do away with the US dollar for all her trade, an ambition she shares with China and their Asian partners. Furthermore, in the short-term the rouble’s weakness is undermining the Russian economy by forcing the Central Bank of Russia (CBR) to impose high interest rates to defend the currency and by increasing the burden of foreign currency debt. There is little doubt that one objective of NATO’s economic sanctions is to harm the Russian economy by undermining the currency, and this policy is working with the rouble having fallen 30% against the US dollar this year so far with the prospect of further falls to come.

Russia faces the reality that pricing the rouble in US dollars through the foreign exchanges leaves her a certain loser in a currency war against America and her NATO allies. There is a solution which was suggested in a recent paper by John Butler of Atom Capital, and that is for Russia to link the rouble to gold, or more correctly put it on a gold exchange standard*. The proposal at first sight is so left-field that it takes a lateral thinker such as Butler to think of it. Separately, Professor Steve Hanke of John Hopkins University has alternatively proposed that Russia sets up a currency board to stabilise the rouble. Professor Hanke points out that Northern Russia tied the rouble to the British pound with great success in 1918 after the Bolshevik revolution when Britain and other allied nations invaded and briefly controlled the region. What he didn’t say is that sterling would most likely have been accepted as a gold substitute in the region at that time, so running a currency board was the equivalent of putting the rouble in Russia’s occupied lands onto a gold exchange standard.

Professor Hanke has successfully advised several governments to introduce currency boards over the years, but we can probably rule it out as an option for Russia because of her desire to ditch US dollar relationships. However, on further examination Butler’s idea of fixing the rouble to gold is certainly feasible. Russia’s public sector external debt is the equivalent of only $378bn in a $2 trillion economy, her foreign exchange reserves total $429bn of which over $45bn is in physical gold, and the budget deficit this year is likely to be roughly $10bn, considerably less than 1% of GDP. These relationships suggest that a rouble to gold exchange standard could work so long as fiscal discipline is maintained and credit expansion moderated.

Once a rate is set, the Russians would not be restricted to just buying and selling gold to maintain the rate of gold exchange. The CBR has the power to manage rouble liquidity as well, and as John Butler points out, it can issue coupon-bearing bonds to the public which would be attractive compared with holding cash roubles. By issuing these bonds, the public is in effect offered a yield linked to gold, but higher than gold’s interest rate indicated by the gold lease rates in the London market. Therefore, as the sound-money environment becomes established the public will adjust its financial affairs around a considerably lower interest rate than the current 9.5%-10% level, but in the context of sound money it must always be repaid. Obviously the CBR would have to monitor bank credit expansion to ensure that lower interest rates do not result in a dangerous increase in bank lending and jeopardise the arrangement.

In short, the central bank could easily counter any tendency for roubles to be cashed in for gold by withdrawing roubles from circulation and by restricting credit. Consideration would also have to be given to roubles in foreign ownership, but the current situation for foreign-owned roubles is favourable as well. Speculators in foreign exchange markets are likely to have sold the rouble against dollars and euros, because of the Ukrainian situation and as a play on lower oil prices. The announcement of a gold exchange standard can therefore be expected to lead to foreign demand for the rouble from foreign exchange markets because these positions would almost certainly be closed. Since there is currently a low appetite for physical gold in western capital markets, longer-term foreign holders of roubles are unlikely to swap them for gold, preferring to sell them for other fiat currencies. So now could be a good time to introduce a gold-exchange standard.

The greatest threat to a rouble-gold parity would probably arise from bullion banks in London and New York buying roubles to submit to the CBR in return for bullion to cover their short positions in the gold market. This would be eliminated by regulations restricting gold for rouble exchanges to legitimate import-export business, but also permitting the issue of roubles against bullion for non-trade related deals and not the other way round.

So we can see that the management of a gold-exchange standard is certainly possible. That being the case, the rate of exchange could be set at close to current prices, say 60,000 roubles per ounce. Instead of intervention in currency markets, the CBR should use its foreign currency reserves to build and maintain sufficient gold to comfortably manage the rouble-gold exchange rate.

As the rate becomes established, it is likely that the gold price itself will stabilise against other currencies, and probably rise as it becomes remonetised. After all, Russia has some $380bn in foreign currency reserves, the bulk of which can be deployed by buying gold. This equates to almost 10,000 tonnes of gold at current prices, to which can be added future foreign exchange revenues from energy exports. And if other countries begin to follow Russia by setting up their own gold exchange standards they likewise will be sellers of dollars for gold.

The rate of increase in the cost of living for the Russian population should begin to drop as the rouble stabilises, particularly for life’s essentials. This has powerfully positive political implications compared with the current pain of food price inflation of 11.5%. Over time domestic savings would grow, spurred on by low welfare provision by the state, long-term monetary stability and low taxes. This is the ideal environment for developing a strong manufacturing base, as Germany’s post-war experience clearly demonstrated, but without her high welfare costs and associated taxation.

Western economists schooled in demand management will think it madness for the central bank to impose a gold exchange standard and to give up the facility to expand the quantity of fiat currency at will, but they are ignoring the empirical evidence of a highly successful Britain which similarly imposed a gold standard in 1844. They simply don’t understand that monetary inflation creates uncertainty for capital investment, and destroys the genuine savings necessary to fund it. Instead they have bought into the fallacy that economic progress can be managed by debauching the currency and ignoring the destruction of savings.

They commonly assume that Russia needs to devalue her costs to make energy and mineral extraction profitable. Again, this is a fallacy exposed by the experience of the 1800s, when all British overseas interests, which supplied the Empire’s raw materials, operated under a gold-based sterling regime. Instead, by not being burdened with unmanageable debt and welfare costs, by maintaining lightly-regulated and flexible labour markets, and by running a balanced budget, Russia can easily lay the foundation for a lasting Eurasian empire by embracing a gold exchange standard, because like Britain after the Napoleonic Wars Russia’s future is about new opportunities and not preserving legacy industries and institutions.

That in a nutshell is the domestic case for Russia to consider such a step; but if Russia takes this window of opportunity to establish a gold exchange standard there will be ramifications for her economic relationships with the rest of the world, as well as geopolitical considerations to take into account.

An important advantage of adopting a gold exchange standard is that it will be difficult for western nations to accuse Russia of a desire to undermine the dollar-based global monetary system. After all, President Putin was more or less told at the Brisbane G20 meeting, from which he departed early, that Russia was not welcome as a participant in international affairs, and the official Fed line is that gold no longer plays a role in monetary policy.

However, by adopting a gold exchange standard Russia is almost certain to raise fundamental questions about the other G20 nations’ approach to gold, and to set back western central banks’ long-standing attempts to demonetise it. It could mark the beginning of the end of the dollar-based international monetary system by driving currencies into two camps: those that can follow Russia onto a gold standard and those that cannot or will not. The likely determinant would be the level of government spending and long-term welfare liabilities, because governments that leech too much wealth from their populations and face escalating welfare costs will be unable to meet the conditions required to anchor their currencies to gold. Into this category we can put nearly all the advanced nations, whose currencies are predominantly the dollar, yen, euro and pound. Other nations without these burdens and enjoying low tax rates have the flexibility to set their own gold exchange standards should they wish to insulate themselves from a future fiat currency crisis.

It is beyond the scope of this article to examine the case for other countries, but likely candidates would include China, which is working towards a similar objective. Of course, Russia might not be actively contemplating a gold standard, but Vladimir Putin is showing every sign of rapidly consolidating Russia’s political and economic control over the Eurasian region, while turning away from America and Western Europe. The fast-track establishment of the Eurasian Economic Union, domination of Asia in partnership with China through the Shanghai Cooperation Organisation, and plans to set up an alternative to the SWIFT banking payments network are all testaments to this. It would therefore be negligent to rule out the one step that would put a stop to foreign attempts to undermine the rouble and the Russian economy: by moving the currency war away from the foreign exchanges and into the physical gold market were Russia and China hold all the aces.

*Technically a gold standard is a commodity money standard in which the commodity is gold, deposits and notes are fully backed by gold and gold coins circulate. A gold exchange standard permits other metals to be used in coins and for currency and credit to be issued without the full backing of gold, so long as they can be redeemed for gold from the central bank on demand.


Swiss Gold Initiative: Good Idea with Unintended Consequences

[Editor’s Note: The Swiss voted no to the “semi-gold standard” that was proposed. However, important issues were raised that are relevant to all nations and any future consideration of the gold standard, or something similar. Here is published Keith Weiner’s perceptive analysis from last week. Please also see today’s article by Tim Price on the Swiss decision]

There is now a very interesting initiative on the Swiss ballot, which will require the Swiss National Bank (SNB) to hold 20 percent of its reserves in gold. The voters will decide on November 30. I won’t predict the vote, but I want to discuss the likely impact of a yes vote.

Much of the analysis of this initiative is about the price of gold. A typical prediction is that it will go up, as SNB buying will exceed supply. However Mike Shedlock notes that, “Nearly all of the gold ever mined is available…” That’s because gold is not consumed. The SNB is small compared to worldwide gold inventories, so it won’t move the price much. Shedlock adds, “It is entirely possible that SNB purchases could significantly alter perceptions…” I agree sentiment is ripe for a change.

The price isn’t very interesting, unless you’re a gold trader. It’s much more important that the referendum brings the first positive monetary change in decades. It reintroduces a link between gold and banking, and imposes a barrier to currency debasement. For this, the Swiss are heroes.

There is a key flaw in our system of floating currencies. Every financial asset is someone’s liability. When a currency moves, it creates winners and losers. Big moves can harm banks with loan portfolios outside their home.

That’s why the SNB currently doesn’t allow the euro to fall below 1.2 francs. To maintain this currency peg, the central bank sells francs and buys euros. There is no limit to this deliberate franc devaluation, which robs Swiss savers, investors, and businesses.

Big exporters, like Swatch and Nestle, may have lobbied for a weaker franc, hoping to make their products more competitive, but that’s a sideshow. The real purpose of franc devaluation is to shield the Swiss banks from euro devaluation. They’re vulnerable, because they do a lot of lending outside the country. They have assets denominated in euros and liabilities denominated in francs. They suffer losses when the euro falls, or the franc rises.

Two examples help illustrate the problem. First, say Jens in Germany borrows a million euros from Credit Suisse. As the euro falls, Jens repays the bank in smaller and smaller euros. On the franc-denominated books of Credit Suisse, the value of the loan drops like a stone. Jens is happy but Credit Suisse is not.

Second, let’s look at Adriana in Italy who also borrows money, but not in euros. She gets a million francs from UBS. As the euro falls, Adriana experiences it as a rising franc. Her monthly payment goes up and up. UBS is happy, at least initially, because Adrian’s loan is in francs. However Adriana is getting squeezed. When she defaults, then UBS becomes unhappier than Credit Suisse.

Either way, the capital of the Swiss banks is eroding. If the euro falls enough, then the banks could go bust. Only they know where the line is, but it’s likely not too far below the current peg of 1.2 francs.

Depositors won’t feel the currency pain, at first. They are happy to own Swiss francs, especially if the franc is rising. Instead, they should worry about the unintended consequences of breaking the euro peg. Their strong francs will not be good in the case of bank insolvency.

Unfortunately the regime of paper money imposes a bitter dilemma on the Swiss people. They have a choice of slow losses by devaluation, or total losses by bankruptcy. They deserve a better option, a practical roadmap to the gold standard.

It’s great that the Swiss people are striving to move towards gold. I am a passionate advocate of the gold standard, and I want to cheer for my Swiss friends. Yet I must caution them today. I realize they have spent a lot of money and political capital to come so far, but I don’t want to win this battle and lose the war. They need a new initiative, which takes into account the banks’ euro-denominated loans.