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By Steven Baker MP, on 18 April 11
 In October 2009, Toby and I attended the Ludwig von Mises Institute’s Supporters Summit in Salamanca, the birthplace of economic theory:
One of the great discoveries of the 20th century concerns the origins of economic science in the late middle ages in Spain and Italy. Long before Adam Smith wrote, many scholastics from the 14th through the 17th centuries were writing systematic economic theory.
No spot on the planet was as fruitful as the School of Salamanca in Spain. Here was the world center of economic research. The writings by the intellectuals gathered here explained price, value, money and its function, saving, entrepreneurship, inflation, contract and exchange, and so much more – and they closely engaged the modern world that was being born at that time, providing at theory and a rationale for the rise of prosperity.
For me, it was a particularly memorable and moving trip. I took the call informing me that I had been shortlisted for the Wycombe Parliamentary selection procedure, against all expectations, while sitting in the departure lounge at Girona after a week’s skydiving in Empuriabrava. I arrived at the Summit, knowing it was suddenly possible I would be an elected politician within the year.
Moreover, it’s no secret that I am a Christian, so it was reaffirming to discover that classical liberalism can be traced to men of God who developed their theory on the basis of morality, jurisprudence, theology and reason. An early speaker at the Summit was a contemporary Spanish friar whose passion for the poor and whose commitment to liberalism transcended the barriers of language. He knew as I know that the proper formula for widespread prosperity and the improvement of mankind is the doctrine of liberty: peace, equality before the law, freedom from arbitrary government, property and the family. In Cobdenite language, we might call for honest money, free markets, free trade, peace and the classical rule of law.
And so as I write on this Palm Sunday, we come to the Telegraph’s report “Catholic church: Big Society is failing“:
The Archbishop of Westminster, Vincent Nichols, criticised the Prime Minister’s flagship policy as lacking “teeth”. The archbishop has been one of the most prominent supporters of the Big Society, but he told The Sunday Telegraph that he feared communities hit by the economic downturn would suffer if they did not get support.
The head of the Catholic Church in England and Wales said Catholics were afraid the Coalition was “washing its hands” of its responsibilities to communities and expecting volunteers to fill the gap.
“It is all very well to deliver speeches about the need for greater voluntary activity, but there needs to be some practical solutions,” he said.
The Archbishop asks,
“Has the Conservative part of the Coalition simply seized the economic crisis as an opportunity to push through the unfinished neoliberal agenda of the last Conservative administration? We should not forget the enormous social division that was entailed in this. It signalled the end of a humanist and humane consensus in British society.”
How far the Archbishop has come from the scholastics of Salamanca. Yet the Archbishop is on to something:
“The poorest are taking the biggest hit while at the same time you see huge bank bonuses and profits and this is not right,” he said.
Now we have a point of agreement. We know we have the worst of all possible banking systems – the Governor of the Bank of England has told us so – and one of its effects is to distort the economy into unsustainable patterns thereby unjustly widening wealth inequality, driving the business cycle and precipitating banking crises, such as the one from which we are apparently recovering and at enormous cost to society. It is a statist banking system characterised by government monopoly, central planning, legal privilege and the socialisation of risk.
That very statism is the origin of the injustice the banking system is meting out to the rest of us.
The various doctrines of statism have failed. For those of us who wish to live in an ethical society which benefits all its members, it is time to rediscover that moral tradition of social thinking which began formally in Salamanca. It is time to refine and apply the doctrine of justice, peace, prosperity and fulfilment which is humble about the uses of coercive power and optimistic about the potential of individuals cooperating in society.
It may be true that those who wear the badges of ethical authority reach often for the coercive power of the state, but those of us with an intellectual, moral and practical basis for another way would do well to remember both the origins of our school of thought and the motto of one of our inspirations, Ludwig von Mises:
Do not give in to evil but proceed ever more boldly against it.
By James Tyler, on 4 March 11
Another classic article, brought forward. This is a speech by James Tyler to the Adam Smith Institute Next Generation Group on 6 October 2009. This speech is also available on hedgehedge.com.
I have spent the best part of the last two decades pitting my wits against the market. It’s an unforgiving game: I’ve seen ups and downs, and many of my rivals buried under an avalanche of hubris, passion, illogical thought and unchecked emotion.
I have witnessed the sheer folly of the ERM crisis, the Asian crisis, the failure of the Gods at Long Term Capital Management and the insanity of the tech boom.
I have enjoyed the ‘NICE’ decade (Non-Inflationary Constant Expansion), and scared myself silly during the credit crisis.
I am a trader.
I risk my own money and live or die by my decisions, and face the threat of personal bankruptcy every time I switch my screens on. I get no salary – indeed I turn up at the start of the month with a large office overhead – a ‘negative’ salary. I have no fancy company pension scheme, no lucrative monopoly or franchise.
I eat what I kill.
Mistakes cost me my livelihood, so, above all, my decisions have to be rooted in practical and logical decision making.
Some have called my kind parasitic, but I would have said that I bring order, efficiency, predictability, stability and deep liquidity to a crucial process: a process that makes the whole world keep ticking.
I make money work.
I make the market in interest rate derivatives: a market born out of the neo classical revolution in finance fostered in Chicago during the 1970s. I am a child of Friedman, Fisher Black, Myron Scholes and the modern international financial system.
My analysis was steeped in the neo-classical, efficient markets paradigm.
Friedman’s ideal was working. Enlightened central bankers guided the free market with gentle nudges and short term liquidity infusions, free floating currencies gently adjusted themselves to the constant flow of new information and efficient and rational markets took all in their stride.
Credit flowed, people got wealthier, economies developed and all was well.
And then the crisis struck.
Continue reading “My Journey to Austrianism via the City”
By James Tyler, on 1 March 11
A speech to the Policy Exchange on 31st March 2009 by Cobden Centre sponsor James Tyler. This article first appeared on hedgehedge.com but it remains as relevant today.
I want to talk about two things today;
Number 1: Free markets did NOT cause this crisis… Governments did.
Number 2: Inflation targeting has failed. Money has failed. What should we do?
Free markets did not cause this problem.
In theory, markets work by reacting to prices and direct capital towards where it will be most productively used. This is how wealth is created. Usually this works well, but markets are made up of humans, and can be fooled into overshooting by false signals.
Bubbles build up, expanding until people lose confidence. Bubbles then burst. It’s a corrective process that, relatively benignly, irons out imbalances.
The problem only comes when bubbles go on for too long, because once they get too big, the pop can be terrifying. And that’s what we’ve got now – one hell of a big bang.
False signals have caused a spectacular mal-investment in real estate and its derivatives.
But these false signals did not come from the market, but from government.
False signals.
False signals came from Greenspan’s introduction of welfare for markets. Markets were taught that no matter how much risk they took, they would always be saved. 1987, 1994, 1998, 2001. Each bust bigger than the last, and disaster was only staved off with aggressive rate cuts and increased money supply.
Clearly this was not laissez faire. Just think if events had been allowed to take their course. I bet if LTCM had gone bust then a badly burned Wall Street would have learned a lesson and Lehman’s would still be around today.
In 1999 Clinton mandated that Fannie Mae and Freddie Mac reduce lending standards. The poor were encouraged into debt. This intervention triggered a race to the bottom of lending standards as commercial banks were forced to compete against the limitless pockets of Uncle Sam.
False signals came from deposit insurance. Deposit your money in a boring mutual? Why bother when you can lend it to a lump of volcanic rock in the Atlantic at 7% and be guaranteed to get your money back.
The Basle banking accords required banks to replace rock solid reserves with maths.
Government protected and regulated ratings agencies produced negligent ratings duping pension funds, who were obligated to buy high quality paper, into buying junk cleansed by untested mathematical models.
Central banks create boom-bust.
But most damaging of all was the absurdly low interest rates set between 2001 and 2004.
The resultant glut of cheap money fueled an unsustainable boom encouraging more mortgages to be taken out, and pushing property prices ever higher.
The market responded by pushing scarce economic capital towards highly speculative property development.
As prices rose people remortgaged, and borrowed to consume more. This unchecked process tended to be destructive, as scarce economic capital flowed out of our economy and headed to those economies efficiently producing consumer goods, such as China. Rampant asset inflation clouded our ability to see this depletion process in action.
Everyone had a great time whilst the party lasted, not least Governments who were incentivised to let it run, blinded by ever larger tax revenues.
But all parties come to an end, and central banks had to prick the bubble eventually. Interest rates went too high, and sub prime collapsed, and then all property prices plummeted. Trillions of dollars were ripped out of the financial system, and the credit crunch began.
It’s happened before.
But, despite its complexity, there was nothing new or unpredictable about this process. All the great busts of the 20th century were preceded by a Government sanctioned fiat currency booms.
In the 1920’s, the Fed pursued a ‘constant dollar’ policy. This was the era of the innovation, Model T Fords, radios and rapid technological advancement.
Things should have got cheaper for millions of people, but money supply was boosted to try and keep prices constant. All that extra money flowed into the stock market, pushing prices to crazy levels, and we all know how that ended.
In the modern day, targeting price changes has been an utter disaster for us too.
It let the Bank of England pretend they were doing their job, when money supply was growing at a double digit rate. It let the authorities relax whilst an economy threatening credit bubble was building up.
And it gave Gordon Brown the leeway to convince people that boom and bust was over.
Things should have got cheaper.
Inflation targeting made no allowance for globalisation, the rise of India and China, and the benign falls in general prices that should have been triggered. Think about it; if all those cheap goods were to become available, consumer prices should fall. We would have had greater purchasing power, and become wealthier for it.
But, the Bank of England was aiming at a symmetrical plus 2% target. Falling prices in some goods necessitated stimulating rises in others. They unleashed an avalanche of under priced debt and we had our own crazy asset boom.
Inflation targeting was a myopic policy.
Governments make terrible farmers.
When a central bank sets interest rates, they set the price of credit. Inevitably they create distortions.
Consider this; Governments cannot set food prices without causing a glut -or- painful shortages. Now, food is a pretty simple commodity, yet we all understand that central planners simply cannot gather enough information to set the price accurately.
It has to be left to the spontaneous interaction of thousands of buyers and sellers to set the price.
So, why do we think that enlightened bureaucrats can put an exact price on something as vital, yet complicated, as credit?
In a nutshell, if I can’t tell how much my wife will spend on Bond Street this weekend, how can they?
Let’s wake up from this fantasy.
There is a better way.
What’s the cure? Let the invisible hand to do its time honoured job. Leave interest rates to be set by the millions of suppliers and users of capital.
Get the central planners out of the way.
It’s the way it used to happen. The period of fastest economic growth the world has seen was America between the civil war and the end of the 19th century. Money was free and private and the Fed did not exist.
So, how do we get back to freedom in money? Fredrich Hayek – the great Austrian economist – did the best thinking on this. What he proposed was that private firms should be allowed to produce their own currencies, which would then be free to compete against each other. People would only hold currency that maintained its value, firms that over-issued would go bust Producers of ‘sound’ money would prosper.
History gives us plenty of successful examples of private money working well, 18th Century Scotland had competing banks, all with their own bank notes. People weren’t confused. It worked. There are many other examples.
In the modern age, technology makes the prospect of monetary competition even more tantalising. Mobile phones, oyster cards, smart tags, embedded chips, wireless networks. The internet. Prices could flash up in the shopper’s preferred currency.
A proposal.
Here’s an idea of how to kick the process off;
Tesco’s want to get into banking. Why not currencies as well? Tesco would print one million pieces of paper. Let’s call them Tesco pounds. It would be redeemable at any time for £10 or $15. They would then be auctioned, and the price of a Tesco set.
Anyone who owns a Tesco has a hedge against either the £ OR $ devaluing therefore the Tesco has an additional intrinsic value. Maybe they’ll auction at £12.
Tesco would specify a shopping basket of goods that cost £60. It would promise that 5 Tesco Pounds would always buy that weekly shop. The firm would use its assets to adjust the supply of Tesco Pounds so that they kept this stable value.
They would need to otherwise their shelves would be cleaned out!
As central banks inflated the £ and $ away over time, the convertibility into these currencies would matter less. We would be left with a hard currency that meant something.
There would be other competitors and a real choice about which money to hold your wealth in.
McDonalds has a better credit rating than Her Majesties Government, so maybe people would be happy to hold Big Mac tokens? I don’t know – it will be a free choice.
Currencies would sink or swim depending on how well they performed. What’s more, firms issuing the currencies would come up with different ways of maintaining their value. Some would offer Gold. Manufacturers may use notes backed up by steel, copper and oil.
Let’s see what a free market chooses. Somebody might have a brainwave and come up with an idea that nobody has thought of.
That is what free markets are best at.
I can guess the reactions that my proposal might inspire in some. How would the man on the street cope? Well, nobody would outlaw the Government’s money, and people could carry on as before. Through the operation of the market, we would find out what worked best . Step-by step, the economy would be transformed and standards driven up.
In economics, spontaneous orders are always so much more rational and stable than planned ones. Always.
Conclusion.
This is not a crisis caused by free markets. A free and unregulated market in money has not existed for over a century.
This is a Government crisis. A crisis over the monopoly of money.
Inflation targeting seemed so persuasive…. but it was a false God, and we deserve better. Stability and sound money can only come if we put the money supply back where it belongs…
Under the control of the free market.
By Andy Duncan, on 26 February 11
The world centre of gravity of the Austrian Economics movement has long been the United States, especially since Ludwig von Mises arrived there on August the 3rd, at the age of fifty-eight, in a turbulent 1940.
The 1998 Spanish publication of Money, Bank Credit, and Economic Cycles, by Jesús Huerta de Soto — followed by the English translation in 2006 — then helped to revive European claims of an Austrian equality with the United States, particularly with the trans-Atlantic returns of Hans-Hermann Hoppe and Guido Hülsmann, after long periods of residence in North America.
In particular, a burgeoning growth of the Spanish echelon of the global Austrian movement — initially under the wing of Professor Huerta De Soto — may be starting to prove that a few years in the United States is becoming an option, rather than a requirement, for an Austrian academic to be taken seriously as a heavyweight intellectual force.
Thus we discover the rising talent of Philipp Bagus, and the publication of his landmark book, The Tragedy of the Euro.
This brilliant monograph, written in crisp classical English, flows like a rising tide.
It begins with a description of the rise of the European Union, which was always a dialectic, claims Bagus, with four classical liberal freedoms of movement on one side of a divide; these liberal freedoms covered goods, capital, people, and the provision of services. These four virtues then clashed up against the many vices of socialism, and particularly the desire for new imperial satrapies, especially given the WWII fall of colonial European empires and their replacement by the all-embracing and invisible empire of the American government, particularly after the Suez crisis.
Just before his first chapter, Two Visions for Europe, Bagus removes his gloves and goes straight for the throat, in the best uncompromising style of Von Mises himself; this is perhaps a delight to all of the writers at The Daily Bell, in Switzerland:
“In reaction to the [recent financial] crisis, the political class has tried desperately to save the socialist project of a common fiat currency for Europe.”
Once he has established his outright grip in this manner, Bagus refuses to let go throughout the entire book. Essentially, he claims that the fundamental schism at the heart of the EU project is one of a classical liberal Roman Catholic Church model engaged in a do-or-die struggle with a socialist Roman Empire model. From its Capitoline Hill inception in Rome, in 1957, upon the very site of the Temple of Jupiter Optimus Maximus, the EU project has thus always been doomed to be one of conflict and strife, driven by a perpetually unsatisfactory compromise between these two bitter rival forces of the human condition; liberty and tyranny.
On top of this conflict comes the later antagonism between the Austrian-influenced post-war Germans and their economic miracle, combined with the Saint-Simon socialist French and their desire to rebuild the empire they had lost when the Wehrmacht crushed their Napoleonic republic in 1940 (a military conflict in which Mises himself was swept up as he managed somehow to keep just one bus journey ahead of the Panzers on his terrifying road to New York). Bagus is uncompromising:
“The real reason the German government, traditionally opposed to the socialist vision, finally accepted the Euro, had to do with German reunification. The deal was as follows: France builds its European empire and Germany gets its reunification. It was maintained that Germany would otherwise become too powerful and its sharpest weapon, the Deutschmark, had to be taken away — in other words, disarmament.”
After this first layer of his intellectual pyramid is built, Bagus delves into The Dynamics of Fiat Money, in his next chapter. In a Michelin-starred culinary mix of monetary history, contemporary politics, and Austrian Economics, Bagus makes a bold prediction:
“Governments started to get heavily involved in banking. Unfortunately, interventions are a slippery slope, as Mises pointed out in his book, Interventionism. Government interventions cause problems from the point of view of the interventionists themselves: begging for additional interventions to solve these additional problems, or the abolition of the initial intervention. If the course of adding new interventions is chosen, additional problems may arise that demand new interventions and so on. The road of interventions was taken in the field of money, finally leading to fiat money and the Euro. The Euro begs for political centralization in Europe. The end result of monetary interventions is a world fiat currency.”
God forbid that should happen, though the world elites may try it on with us for a while before that power-grab collapses too, just as their precursor fiat currencies are collapsing today in the face of their endless money printing to bail themselves out from a gigantic mess of their own greed-fuelled creation.
After explaining this end-game strategy, Bagus details how we got to this point, in one of the clearest expositions of the Austrian Business Cycle Theory that I have yet to read. Indeed, he leads us towards the intriguing idea that the intertwining of central banking and fiat currency, with expansive state war, epitomised by both world wars, is much more than a coincidence:
“After the collapse of Bretton Woods, the world was dealing in fluctuating fiat currencies. Governments could finally control the money supply without any limitations to gold, and deficits could be financed by central banks. The manipulation of the quantity of money has only one aim: the financing of government policies. There is no other reason to manipulate the quantity of money.”
Yes, the diamond-hard spirit of Von Mises is alive and well, and living in the home of Francisco de Vitoria and the other Spanish Scholastics, from which Mises and the other early Austrians, such as Menger, also drew much inspiration.
But one impregnable bastion still stood between the nascent world government elites and their rotten self-serving dream of unlimited money printing and a world Soviet financial gulag — which in my opinion is a hopeless dream anyway, as it will quickly go the way of the Soviet Empire — and that was the post-war Wirtschaftswunder Germany of Konrad Adenauer and Ludwig Erhard, and the semi-granite rock upon which this economic miracle was built, the German Bundesbank.
Yes, although the Bundesbank did inflate its currency, like all other central banks, its intimate knowledge of the consequences of Weimar caused it to inflate a lot less than the rest, with perhaps its only rival to fiat currency hardness being the Swiss National Bank. Bagus explains how the destruction of this bastion was approached, in his third chapter, The Road to the Euro:
“Not surprisingly, governments and central banks wanted to escape the ‘tyranny’ of the Bundesbank. The system finally failed. The declaration of surrender was made when the [European Monetary System] corridor was amplified to ±15 percent in 1993. The Bundesbank had won; it had forced the others to declare the bankruptcy. It had followed its hard money philosophy and not succumbed to the pressure of other governments. Anyone who inflated more than the Bundesbank was showing its citizens a weak currency. The Deutschmark, in turn, was respected throughout the world and very popular among Germans. It brought relative monetary stability not only to Germany, but to the rest of Europe as well. The Deutschmark, of course, only looked stable in comparison to the rest. It itself was highly inflationary and lost nine tenths of its purchasing power from its birth in 1949 to the end of the EMS.”
Of course, this begs a simple question about all of the various intellectual pygmies who call themselves ‘servants of the people’ within the various European governments. If they truly wished to serve their peoples — rather than serve themselves as masters — then instead of being jealous about German financial success and the relative prosperity of the German people, they should simply have copied German policies rather than deriding the Bundesbank for being too effective at making ordinary people wealthier and happier, at the cost of preventing politicians from engaging in their endless dreams of aggrandising themselves, at the cost of everyone else, via unlimited money printing.
In fact, Bagus makes this point clear in his final paragraph in his second chapter:
“If Europeans had just wanted monetary stability and a single currency in Europe, Europe could just have introduced the Deutschmark in all other countries. But nationalism would not allow for this. With a single currency, there were no embarrassing exchange rate movements that would reveal a central bank’s inflating faster than its neighbors. For the first time there was a centralized money producer in Europe that could help to finance government debts, and open new dimensions for government interventions, and redistribution of wealth.”
However, the ‘problem’ remained of how to get the German people to give up their ‘evil’ independent Bundesbank and its relatively honest-money policies? Obviously, German politicians would go along with the plan. Exploitative elites in different countries have always felt more at home with other exploitative elites, rather than with the exploited hoi polloi who pay the taxes to make their lives comfortable, who share merely a language and a physical geography with ruling elites, rather than the same attitude towards life; the politicians and civil servants of our current EU may require translators — if they lack fluency in the lingua franca of English — but they get on much better with each other at their cloistered conferences than they do with their respective peasant rabbles beyond the gates.
This is the trick Bagus believed the elites settled upon:
“The implicit blaming of Germany for World War II and making gains as a result was a tactic that the political class had often used. Now the implicit argument was that because of World War II and because of Auschwitz in particular, Germany had to give up the Deutschmark as a step toward political union. Here were paternalism and a culture of guilt at their best.”
Indeed, you may have noticed yourself that for several years it almost became a Rite of Passage for world elite members to make the required pilgrimage to Auschwitz, to really nail the point home, with Gordon Brown, of course, being several years too late.
More, however, was needed than the promised removal of a continual drip-feed of collective guilt (as if people born decades after WWII should ever really consider themselves blameworthy for what other people did before they themselves were alive). The endless drone about Auschwitz was the stick; but what about a carrot to sweeten the bitter pill of the Euro?
This was constructed in the form of the ‘Stability and Growth Pact’, in which other non-German members of the Euro would be forced to jump rigorous financial hurdles and to pass continuing acid tests, to prevent the Mediterranean La Dolce Vita lifestyle — fuelled by the printing presses of the peseta, the lira, and the drachma — from diluting the iron-hard rules of the soon-to-be ex-Bundesbank.
It was all a despicable sham, of course, and nobody believed any of it, especially the lying politicians of Germany, even when it was being put together. But as they say with the eternal hope of marriage; proceed in haste and repent at leisure. The German people were thus hoodwinked into giving up their precious Bundesbank, which had served them so well since 1948:
“The Stability and Growth Pact was not as harsh as Theo Waigel had suggested. When the SGP was finally signed in 1997 it had lost most of its disciplinary power. The result prompted Anatole Kalteksky to comment in The Times that the outcome of the Treaty of Maastricht represented the third capitulation of Germany to France within the century, citing as well the Treaty of Versailles and Potsdam Agreement.”
As Mark Twain said, history usually fails to repeat itself, but it does often rhyme.
Moving into his fourth chapter, Why High Inflation Countries Wanted the Euro, Bagus gets much more technical and produces lots of charts and graphs to detail and highlight his developing thesis. He does, however, continue in the same refreshing Misesian vein within the text:
“Governments of Latin countries, and especially France, regarded the Euro as an efficient means of getting rid of the hated Deutschmark. Before the introduction of the Euro, the Deutschmark was a standard that laid bare the monetary mismanagement of irresponsible governments.”
In the fifth Chapter — Why Germany Gave Up the Deutschmark — Bagus drills deeper into the cunning plan to part the German people from their wealth and their independence, via the machinations of their rapacious and power-hungry politicians, eager to seek further baubles from the EU bureaucracy and a luxurious financial independence from their rotten capricious voters.
The Bundesbank thus had to be destroyed, to allow the dreams of Keynesians within governments everywhere, to flourish and prosper:
“Mitterand, France’s president from 1981–1995, had hated Germany in his youth and despised capitalism. The French patriot was a staunch defender of the socialist vision of Europe and geared his policies toward defending France against the economic superiority of its Eastern neighbor. Germany’s superiority was based on its currency. Mitterrand’s intention was to use Germany’s monetary power for the interest of the French government.”
So, a relationship built on love and trust then. It was surely bound to last.
Of course, the plan would never have worked without the duplicity of German politicians:
“The Euro allowed German politicians to rid themselves of stubborn Bundesbankers, promising the end of the bank’s ‘tyranny.’ More inflation would mean more power for the ruling class. German politicians would be able to hide behind the ECB and flee the responsibility of high debts and expenditures.”
As you might say in a high quality jazz club after listening to a particularly dense and interwoven melody; “Nice”.
Bagus finishes his fifth chapter with a summation of what the Euro has really been about all along:
“In sum, the introduction of the Euro was not about a European ideal of liberty and peace. On the contrary, the Euro was not necessary for liberty and peace. In fact, the Euro produced conflict. Its introduction was all about power and money. The Euro brought the most important economic power tool, the monetary unit, under the control of technocrats.”
Bagus is particularly scathing about the political gnomes and bureaucratic dwarves of the various exploitative tax-eating classes, who are currently trying to rescue their own miserable political careers by wrecking the economic futures of their exploited tax-paying classes. For instance, he has a lot to say about that quisling betrayer of the German people, Angela Dorothea Merkel:
“Merkel herself stated that: ‘If the Euro fails, the idea of European integration fails.’ Her argument is a non sequitur. Naturally, one can have open borders, free trade and an integrated Europe without a common central bank. Here Merkel showed herself to be a defender of the socialist version of Europe.”
The rest of the book then contains a brilliant and detailed analysis of the relationship between the Federal Reserve and the European Central Bank, and the political interconnections between the two, as well as an up-to-date breakdown of how the Euro crisis has developed over the last three years. Bagus also explains how the ECB is stoking up the fires of future European conflict in its bid to help the EU create a strait-jacket Force majeure political union.
At the end of his tenth chapter, The Ride Towards Collapse, Bagus neatly summarises the current situation after an interesting discussion of the concept of ‘qualitative easing’, the evil twin of ‘quantitative easing’:
“The European Union has become a transfer union. Interest rates that most governments have to pay on their debts remain at a high level. Sovereign debt levels are still on the rise. The future will tell us if the situation was sustainable.”
In the next chapter, The Future of the Euro, Bagus clearly and succinctly answers the following set of questions:
“Have we already reached the point of no return? Can the sovereign debt crisis be contained and the financial system stabilized? Can the Euro be saved? In order to answer these questions we must take a look at the sovereign debt crisis, whose advent was largely the result of government interventions in response to the financial crisis.”
No stone is left unturned, as they say, though Bagus does it in as few words as possible.
In summation, most living Austrian authors fall into one of three broad camps; the Misesian traditionalists, the Hayekian cerebralists, or the Rothbardian essentialists. I can only say that if forced to pick one of the three, I believe the spirit of Von Mises still lives on within the pen of Bagus. For example, was this written by Mises or Bagus? (The clue is in the last sentence):
“As Austrian business-cycle theory explains, the credit expansion of the fractional-reserve-banking system caused an unsustainable boom. At artificially low interest rates, additional investment projects were undertaken even though there was no corresponding increase in real savings. The investments were simply paid by new paper credit. Many of these investments projects constituted malinvestments that had to be liquidated sooner or later. In the present cycle, these malinvestments occurred mainly in the overextended automotive, housing, and financial sectors.”
Or is the directional style of Bagus a combination of all three broad camps, plus something new? Are we going to have to invent a new term, such as ‘Bagusian’, to create an evolving fourth camp? If we get three books of this quality, in sequence, then I feel we may be forced to deploy such a term.
To wrap up, in his conclusion, Bagus outlines all of the various possible futures he believes the Euro may possess in various different random universes. Its outcome is in the lap of the Gods, he thinks, as to which one of these universes the Euro will finally enter, though he outlines one or two of the more likely predictions and why he thinks these will be favourite with the bookmakers.
I will let you download, buy, or in some way imbibe this required-reading book, to find out what the details of these predictions are. However, I think we all know the general conclusion; all fiat monies ultimately end up as worthless. The interesting part of the story is how they get there.
And if you want to know the illuminating and interesting history (and future) of the Euro, and how it interconnects with the planned world fiat money — which you can call ‘the Bancor’ or ‘the SDR’, though I prefer ‘the Soviet’ — then you must read this book.
By Toby Baxendale, on 25 February 11
Most people have one principle “asset”: the house they live in. Long gone are the days when your physical house was simply your home and nothing to do with your financial assets.
Indeed, as the last boom was manufactured by the low interest rate policies of most of the central banks in the Western World, cheap credit pushed up asset prices, notably houses, which you could then cash in, spending this newly minted credit, drawn down as money to buy the goods and services you desired.
House prices, perversely, are one of the few key costs of living to be celebrated when they rise. If a man from Mars came down to earth, he should surely conclude that this trend was mad and that people supporting a cost of living increase, on such a stupendous scale, were surely punch drunk on inflationist ideology.
Now governments around the world are fully committed to a policy of inflationism. This is when a policy of more cheap money, via exceptionally low interest rates and blatantly “printing” electronic money, is used to create a “recovery.”
Please note: like some doctor of old prescribing a leech to suck out your blood if you had a disease and then doing so again when you started to faint as a result of blood loss, we have the cure of easy money being advocated as the cure for a past easy money policy blunder on a spectacular scale. This policy of inflationism ensures that the creditors of the world will eventually get their debts paid back in nominal terms, but with money of lower purchasing power.
This fleecing of the thrifty, sensible and prudent is thoroughly dishonest. I would prefer to meet a highway robber who at leasts offers me a choice – “Your money or your life?” – rather than the theft of my purchasing power that is taking place now.
Is honest money a lost cause?
I recently read the Bullion Report of 1810, which has a fantastic introduction from the great economist and holder of the Economics Chair at the London School of Economics from 1895 to 1924, Edwin Cannan, prior to Lionel Robbins. He wrote his introduction to this most famous of House of Commons reports in 1919, after the end of the First World War.
Then, our money was debased and the policy solutions were inflationism: dishonestly paying off debt by trying to pass it to the next few generations, covering the misdeeds of the current generation. This was a time in history very similar to the end of the Napoleonic Wars when our money, hitherto being indestructible gold, was replaced by inconvertible paper money and then switched back into convertibility at a lower rate after the conclusion of the peace.
I will leave you with some quotes from Cannan in his Introduction,
But no government involved in a great war is willing to give up so potent an engine for surreptitiously fleecing it’s subjects as an inconvertible currency , whether in it’s own hands or in that of a bank it influences.
Joined with the determination of the public to accept notes, the Act placed in the hands of the Bank the power of creating money without limit for the benefit of it’s shareholders , or Proprietors , as they were called……the Directors had long managed the Bank with one eye indeed on the interest of the proprietors but with the other on that of the “monied interest” generally.
But the bank had found itself comfortable under the Suspension, and felt no enthusiasm for a return to a system which did not guarantee it against being asked to pay it’s debts at a possibly inconvenient moment.
Much as this was written 90 years ago, referring to events of 200 years ago, we should not become despondent that the cause of honest money is doomed: we certainly have sound economic reasoning on our side. We must find better and more persuasive ways to stick up for hard work, thirty management of your affairs and in general for liberty.
This is a core part of the Cobden Centre’s mission and indeed why we set it up.
By James Tyler, on 15 February 11
Forty years ago today, Britain moved to decimal currency. A 1971 penny was worth the equivalent of today’s 10p. In recognition of this dramatic debasement, and its devastating effects, we are bringing forward this classic article, originally published in December 2009.
Mr Smith works hard, plans carefully, and saves what he can, putting his money into a building society. He pays his credit card bills off each month, and tries to overpay his mortgage when he can.
Mr Smith got a 3% pay rise last year – inflation was only 2% – so he felt good about that. But… he doesn’t feel any wealthier.
Year after year, the government had said that the economy was growing strongly, but still, things seemed harder for his family and him. Train ticket prices up again. Heating bills rocketed when the price of oil went up, but never seemed to come down. He swears a loaf of bread and a pint of milk were much cheaper in years gone by.
When he changes his cash for Euros, he realises that his holiday in France is now unbearably expensive. His tax rates didn’t go up, but still, after all his bills were paid, he seemed to have less and less spare cash than he remembers a few years ago.
There are Mr Smiths everywhere. Careful folk, who plan, save for a rainy day and have a sense of personal responsibility.
Smith is the target.
It is Mr Smith who is going to pay for the banking crisis.
His saved wealth will pay the national debt.
His prudence will bail out Gordon Brown’s profligacy.
His forgone holiday will pay the banker’s bonuses.
His careful spending will pay for the vast number of quangos.
His financial planning will bail out the failed NHS computer project, over-budget military programs and ID cards.
His sense of responsibility will end up funding the destruction meted out in Iraq and Afghanistan.
It won’t be the politicians or the bankers who pay for global warming – he will.
He knows he pays tax… but what is hard for him to comprehend is that there is another pernicious process draining his wealth and subverting his hard work towards paying for the misjudgement of others. Whether he likes it or not, he naively pays for the decisions made by the political class.
He has no choice. No option. He was never asked to vote for it. And for the most part, the act of theft is so subtle he doesn’t even know it is happening.
Why does he feel poorer?
Why is it that Mr Smith seemed to miss the ‘boom’, yet is hurting more in the bust? Why doesn’t life get easier for him? What is going on?
Inflation.
As technology produces things more cheaply, Mr Smith should have been able to reap the rewards – except that things don’t get cheaper for him. Society cheats him when the government opens the spigot of new money, washing this value away as the torrent of new money chases prices higher beyond his reach.
The winners are always those close to the gusher – the banks, financiers and politicians. These are the ones who get to spend the new money first, thus chase prices up before Mr Smith gets any sniff of what is happening.
To save or to invest?
Think about your personal circumstances. Every time your payslip comes in, you have a choice of how much to spend and how much to save. Every rational person knows that there is a balance to be struck between current enjoyment (consumption) and future enjoyment (savings – or deferred consumption).
This choice is exactly the same for society as a whole. As a country, we must decide how much to consume, and how much to defer consumption in order to allow our children and us to enjoy things in the future.
The choice for us all is simple. Defer consumption and invest for the future, or consume and enjoy now.
What is the process by which we save for the future? There are two ways.
- Voluntary saving. If society needs to invest for the future, but people prefer to consume, then the savings rate – the profits paid on investments and/or the interest rate paid on deposits, rises until people choose to defer consumption and invest.
- Forced saving. Government policy forces a decrease of the purchasing power of money via inflation of the money supply. The net effect is a transference of wealth from savers and fixed income groups towards net borrowers (itself included). It also creates an artificial pool of liquidity into which the government can sell its IOUs.
The evil of Forced Saving
The natural state of affairs in a free market, with a more consistent supply of money, is that general prices fall as technology advances. The prudent are rewarded, and borrowers have to carefully evaluate and moderate their flights of fancy, only investing borrowed funds carefully in sound projects.
When the value of money declines, savers find that their money buys less, whilst borrowers are happy to find that they can repay their debts with money of a decreased value. It’s like borrowing five books from the library and finding that you are only required to give four back!
By setting a target for rising prices and then pulling levers to increase the supply of money in the economy to achieve it, the government prevents the natural response of general prices to competition, increased efficiency and innovation: they stop prices from falling.
Entrepreneurs, innovators, inventors and new businesses exist because they believe that they can satisfy society’s wants better than they have been served before. They have ideas, innovations and take risks in order to provide goods that are cheaper than they otherwise would be. Businesses operating in a competitive environment always seek to reduce costs, be that one step more efficient and produce a cheaper or better widget. As group of people, entrepreneurs bring efficiency and innovation, and they make stuff cheaper.
The benefit to Mr Smith should be that his income goes further. As time progresses, technological innovation should mean he can buy more with the same cash. But that’s not what happens, as any pensioner knows. Saved money buys far less now than it did at the time it was saved.
Governments achieve rising prices by encouraging the supply of new money. This new money comes from the central bank via its control of the banking system. The first users of this new money are invariably politicians, finance capitalism and big business. These guys get to use the newly minted money first, and thus spend it first. This process bids up prices, leaving everyone else chasing behind, and poor old Mr Smith last in the queue.
What an evil system it is then, when government can control money in such a way as to give it a first user advantage that penalises all those in the general population whose wealth is being rapidly diluted. A process that systematically violates and loots pensions, savings, fixed incomes and the actions of prudent, and rewards the profligate, the speculative borrowers and above all, rewards the biggest borrower of all: Government.
Let’s be clear. The current system is a process that diverts the benefits of innovation and technological advancement that should accrue to the general population, and thrusts it towards the desired spending of the well connected and the political class.
We need to stop this continual violation of the little man. Mr Smith has to start realising what is happening to him.
That’s why I’m proud to support the efforts of the Cobden Centre.
By Steven Baker MP, on 1 January 11
 The following is Jesús Huerta de Soto’s foreword to The Tragedy of the Euro by Philipp Bagus, a friend of The Cobden Centre. You can buy or download the book here. Philipp Bagus is a professor of economics at Universidad Rey Juan Carlos in Madrid.
It is a great pleasure for me to present this book by my colleague Philipp Bagus, one of my most brilliant and promising students. The book is extremely timely and shows how the interventionist setup of the European Monetary system has led to disaster.
The current sovereign debt crisis is the direct result of credit ex- pansion by the European banking system. In the early 2000′s, credit was expanded especially in the periphery of the European Monetary Union such as in Ireland, Greece, Portugal, and Spain. Interest rates were reduced substantially by credit expansion coupled with a fall both in inflationary expectations and risk premiums. The sharp fall in inflationary expectations was caused by the prestige of the newly created European Central Bank as a copy of the Bundesbank. Risk premiums were reduced artificially due to the expected support by stronger nations. The result was an artificial boom. Asset price bubbles such as a housing bubble in Spain developed. The newly created money was primarily injected in the countries of the periphery where it financed overconsumption and malinvestments, mainly in an overextended automobile and construction sector. At the same time, the credit expansion also helped to finance and expand unsustainable welfare states.
In 2007, the microeconomic effects that reverse any artificial boom financed by credit expansion and not by genuine real savings started to show up. Prices of means of production such as commodities and wages rose. Interest rates also climbed due to inflationary pressure that made central banks reduce their expansionary stands.
Finally, consumer goods prices started to rise relative to the prices offered to the originary factors of productions. It became more and more obvious that many investments were not sustainable due to a lack of real savings. Many of these investments occurred in the construction sector. The financial sector came under pressure as mortgages had been securitized, ending up directly or indirectly on balance sheets of financial institutions. The pressures culminated in the collapse of the investment bank Lehman Brothers, which led to a full-fledged panic in financial markets.
Instead of leading market forces run their course, governments unfortunately intervened with the necessary adjustment process. It is this unfortunate intervention that not only prevented a faster and more thorough recovery, but also produced, as a side effect, the sovereign debt crisis of spring 2010. Governments tried to prop up the overextended sectors, increasing their spending. They paid subsidies for new car purchases to support the automobile industry and started public works to support the construction sector as well as the sector that had lent to these industries, the banking sector. Moreover, governments supported the financial sector directly by giving guarantees on their liabilities, nationalizing banks, buying their assets or partial stakes in them. At the same time, unemployment soared due to regulated labor markets. Governments’ revenues out of income taxes and social security plummeted. Expenditures for unemployment subsidies increased. Corporate taxes that had been inflated artificially in sectors like banking, construction, and car manufacturing during the boom were almost completely wiped out. With falling revenues and increasing expenditures governments’ deficits and debts soared, as a direct consequence of governments’ responses to the crisis caused by a boom that was not sustained by real savings.
The case of Spain is paradigmatic. The Spanish government subsidized the car industry, the construction sector, and the bank- ing industry, which had been expanding heavily during the credit expansion of the boom. At the same time a very inflexible labor market caused official unemployment rates to rise to twenty percent. The resulting public deficit began to frighten markets and fellow EU member states, which finally pressured the government to announce some timid austerity measures in order to be able to keep borrowing.
In this regard, the single currency showed one of its “advantages.” Without the Euro, the Spanish government would have most certainly devalued its currency as it did in 1993, printing money to reduce its deficit. This would have implied a revolution in the price structure and an immediate impoverishment of the Spanish population as import prices would have soared. Furthermore, by devaluing, the government could have continued its spending without any structural reforms. With the Euro, the Spanish (or any other troubled government) cannot devalue or print its currency directly to pay off its debt. Now these governments had to engage in austerity measures and some structural reforms after pressure by the Commission and member states like Germany. Thus, it is possible that the second scenario for the future as mentioned by Philipp Bagus in the present book will play out. The Stability and Growth Pact might be reformed and enforced. As a consequence, the governments of the European Monetary Union would have to continue and intensify their austerity measures and structural reforms in order to comply with the Stability and Growth Pact. Pressured by conservative countries like Germany, all of the European Monetary Union would follow the path of traditional crisis policies with spending cuts.
In contrast to the EMU, the United States follows the Keynesian recipe for recessions. In the Keynesian view, during a crisis the government has to substitute a fall in “aggregate demand” by increasing its spending. Thus, the US engages in deficit spending and extremely expansive monetary policies to “jump start” the economy. Maybe one of the beneficial effects of the Euro has been to push all of the EMU toward the path of austerity. In fact, I have argued before that the single currency is a step in the right direction as it fixes exchange rates in Europe and thereby ends monetary nationalism and the chaos of flexible fiat exchange rates manipulated by governments, especially, in times of crisis.
My dear colleague Philipp Bagus has challenged me on my rather positive view on the Euro from the time when he was a student in my class, pointing correctly to the advantages of currency competition. His book, The Tragedy of the Euro, may be read as an elaborated exposition of his arguments against the Euro. While the single currency does away with monetary nationalism in Europe from a theoretical point of view, the question is: just how stable is the single currency in actuality? Bagus deals with this question from two angles, providing at the same time the two main achievements and contributions of the book: a historical analysis of the origins of the Euro and a theoretical analysis of the workings and mechanisms of the Eurosystem. Both analyses point in the same direction. In the historical analysis, Bagus deals with the origins of the Euro and the ECB. He uncovers the interests of national governments, politicians and bankers in a similar way that Rothbard does in relation to the origin of the Federal Reserve System in The Case against the Fed. In fact, the book could also have been analogously titled The Case against the ECB. Considering the political interests, dynamics and circumstances that led to the introduction of the Euro, it becomes clear that the Euro might in fact be a step in the wrong direction; a step towards a pan-European inflationary fiat currency aimed to push aside limits that competition and the conservative monetary policy of the Bundesbank had imposed before. Bagus’s theoretical analysis makes the inflationary purpose and setup of the Eurosystem even clearer. The Eurosystem is unmasked as a self-destroying system that leads to massive redistribution across the EMU, with incentives for governments to use the ECB as a device to finance their deficits. He shows that the concept of the Tragedy of the Commons, which I have applied to the case of fractional reserve banking, is also applicable to the Eurosystem, where different Euro- pean governments can exploit the value of the single currency.
I am glad that this book is being made available to the public by the Mises Institute. The future of Europe and the world depends on the understanding of the monetary theory and the workings of monetary institutions. This book provides strong tools toward understanding the history of the Euro and its perverse institutional setup. Hopefully, it can help to turn the tide toward a sound monetary system in Europe and worldwide.
Today, Estonia adopted the Euro.
Copyright © 2010 by the Ludwig von Mises Institute. Published under the Creative Commons Attribution License 3.0: http://creativecommons.org/licenses/by/3.0/
By Steven Baker MP, on 30 November 10
Yesterday, Douglas Carswell and I spoke in the Chamber during the backbench banking debate.
From Douglas’ speech:
Banking is undoubtedly corporatist. To put it another way, if one were to read Ayn Rand’s “Atlas Shrugged” and to replace the words “railroad” and “rail company” with the words “credit” and “bank”, one would get a pretty good description of what has been going on in recent years. We have had a failure of the free market in the allocation of credit in this country. It is extraordinary that we compound that failure by talking ourselves into seriously suggesting that politicians and technocrats should ration credit. The absence of a pricing mechanism at the heart of the banking system is ultimately what caused the credit boom and the banking failure. In a normal market, when demand for a product increases, the price for that product goes up. That, in turn, stimulates supply.
In banking, unfortunately, things are a little different. When demand for credit increases, the price-the interest rate-is kept low or constant. Pricing does not therefore stimulate increased supply. On the contrary, a supply of additional credit is not met through higher savings. It is met by the creation of candyfloss credit-by banks being able to conjure up credit out of thin air. Banks do not meet the additional supply of credit by encouraging more people to save; on the contrary, they continue to lend IOUs on the basis of IOUs on the basis of IOUs. At the height of the credit crunch, for every pound deposited in a bank, IOUs had been written out some 44 times through the miracle of fractional reserve banking.
Banks have a legal privilege to conjure up credit out of nothing that ultimately stems from their ability-this is an extraordinary fact-to call a depositor’s deposit their own, to treat it legally as if it were their own, and to lend against it many times. It is that practice that has resulted in a credit pyramid and runaway credit booms, unrestrained by the pricing mechanism that would normally apply and would normally restrain demand and supply. The demand is unrestrained, the supply is unrestrained, and the price is low. The result is Ponzi credit bubbles. An incredibly distortive and disruptive effect is created every 20 or 30 years in supposedly free-market economies that have corporatist banking at their heart, and it leads to sugar-rush booms.
From my own:
To challenge the terrain of this debate, I should like to take the House back to a landmark in the development of British monetary and banking orthodoxy-the Bank Charter Act 1844, also known as Peel’s Act. It represented the victory of the currency school over the banking school. The former had realised that systemic crises and banking collapses were largely attributable to the excess creation of fiduciary media-that is, claims on money not backed by a fund of actual money. The Act, introduced by Peel, therefore eliminated the practice of banks issuing their own notes. Unfortunately, the currency school had not realised the economic equivalence of notes and demand deposits, so the Act left the banks virtually unmolested in their ability to issue fiduciary media.
My hon. Friend the Member for Bromsgrove (Sajid Javid) mentioned the wall of money that hit the markets, and we might reasonably ask where that wall of money came from. It has become common practice to say that interest rates were too low for so long, and therein lies the insight. When that happens, people are encouraged to borrow and the banks are encouraged to extend fiduciary media well in excess of real savings. Low interest rates ought to indicate prior production and real savings, but when central banks deliberately suppress interest rates and issuing banks pour fuel on the fire by issuing fiduciary media, what we find is that wall of money hitting the market. In our case, that money principally headed off into the housing market.
At the heart of our difficulties is the fact that there was an omission in the 1844 Act. The deposit-taking banking system is built upon that Act and a body of case law, which have left the banks with the legal privilege of treating demand deposits as their own property. That allows the system as a whole to create a wall of fiduciary media. That is the heart of our crisis, but it is not part of the mainstream contemporary debate, and I believe that it should be.
We both said much more: please follow the links above for the full text of our speeches.
By Steven Baker MP, on 27 November 10
 Via Note from Her Majesty’s Treasury on EMU (Novembre 1989):
The European Council agreed at its meeting in Madrid in June to launch the first Stage of economic and monetary union (EMU) on 1 July 1990. The Council also confirmed the objective of the progressive realisation of EMU but did not specify how that objective was to be realised. By common consent the next steps in economic and monetary integration of the twelve Member States will be crucial to the future economic development of the European Community. That development must be based on firm and durable foundations which reflect both the diversity and the unity of the economic and monetary situation in the Community. This paper suggests how such sound foundations should be laid in a way which avoids the pitfalls of other approaches now under consideration.
Follow the link above for details of how Britain thought competing European currencies would have been a better alternative to Delors’ Euro: competition would have made money honest.
It’s a fascinating read which lays aside the notion that competing currencies are far beyond the mainstream. What a pity this plan wasn’t enacted.
And a grateful hat-tip to Michael Fallon MP, who brought the existence of this paper to my attention.
See also Denationalisation of Money: The Argument Refined.
By Steven Baker MP, on 26 November 10
The escalating debt crisis on the eurozone periphery is starting to contaminate the creditworthiness of Germany and the core states of monetary union.
 via EU rescue costs start to threaten Germany itself – Telegraph. Ambrose Evans Pritchard goes on to report:
“Germany cannot keep paying for bail-outs without going bankrupt itself,” said Professor Wilhelm Hankel, of Frankfurt University. “This is frightening people. You cannot find a bank safe deposit box in Germany because every single one has already been taken and stuffed with gold and silver. It is like an underground Switzerland within our borders. People have terrible memories of 1948 and 1923 when they lost their savings.”
The refrain was picked up this week by German finance minister Wolfgang Schäuble. “We’re not swimming in money, we’re drowning in debts,” he told the Bundestag.
Now, we certainly don’t always agree with Ambrose but there is a certain weary inevitability about the worsening of financial news. Where will all this deficit financing, QE and so on end? See also Is inflation now beyond the Bank’s control? by Jeremy Warner.
I think I may revisit Mises’ The Causes of the Economic Crisis (PDF)…
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