Blame Governments, Not Speculators for High Oil Price, by Stefan M.I. Karlsson

Since August 2007, the price of oil has nearly doubled from under $70 per barrel to more than $135 per barrel. This is of course a big problem for the world economy. Not only will it cause massive redistribution of resources from consumers to producers, but by making transportation and production that uses petroleum products as an input, it will slow economic growth. And many consumers, particularly in America, are shocked and angered by the high prices. And since it is election year in America, this means the politicians all say they will try to fix the problem.

But as we will see, it is politicians which have caused the problems in the first place, and as no prominent politician except for Ron Paul recognize this and wants to abolish these policies, they instead create false scapegoats. The most popular scapegoats right now are speculators. Investing in commodities has in recent years been increasingly popular and certainly a very successful investment strategy, the case for which libertarian investment superstar Jim Rogers laid out in his book Hot Commodities that I reviewed on the Ludwig von Mises Institute web page. The politicians and their collaborators now charge Jim Rogers and others who have followed his strategy of causing the commodity price boom they predicted and profited from.

Yet this accusation is based on a complete misunderstanding of how commodity markets function, whether intentional or not. Considering how complex the functioning of these markets in fact is, it cannot be ruled out that it is unintentional. And even if it isn’t, people need to learn this in order to be able to see through the deception.

Starting with the basics, commodity markets can be divided into spot markets and futures markets. Spot markets are the markets for immediate delivery, futures markets are the markets for delivery at some future point in time, usually not more than a year or so in advance. As futures contracts are constantly traded, it should be noted that someone who buys a commodity with a futures contracts need not necessarily be the one that buys it at the expiration date. But this is not dissimilar to how someone who bought a commodity with a spot contract can sell the commodity to someone else.

And just as there is always both a buyer and a seller in a spot contract, there is always a buyer and a seller in a futures contract. Usually though, the buyer is referred to as having a long position while the seller is referred to as having a short position, but that is basically just semantics. People with long positions are in effect buyers while people with short position are in effect sellers.

What should further be realized is that first of all most commodity speculators invest in futures while what matters for the price of petroleum actually used in the economy is primarily the spot price. Note further that commodity speculators can take both long position and short positions. This implies that commodity speculators may not in fact be contributing to higher prices. If speculators as a group have equally large long and short positions then they will have no effect on futures prices, and if they as a group have larger short positions than long positions then their speculations will in fact lower futures prices.

Moreover, even if speculators as a group have a net long position, the speculators that pushed up the futures price in the first place will, once the futures contract approaches expiration date, face two choices. Choice number one is to sell the contract or sell the underlying commodity to some consumer once the contract expires. Choice number two is to put the commodity in some physical inventory and keep it there.

If the speculators choose the first alternative, then this will push down the price back to the level where it would have been in the absence of the original purchase. In this case, speculation will thus have no effect on the spot price.

If on the other hand the second alternative is chosen, then speculation will indeed contribute to higher prices, at least temporarily. But while that is a possible theoretical scenario, that does not mean it is applicable to the current situation. The fact is that there is no evidence of increased inventories. Indeed, according the Energy Information Administration, U.S. crude oil inventories were 14 % lower in the week ending June 20 than a year ago.

Some have replied to this argument by saying stock building for speculative purposes need not be above ground, it could also come in the form of producers choosing not to pump oil from the ground. But first of all, oil-producing governments is not what is typically meant by speculators. And the issue being discussed was the role of professional speculators acting on the futures markets, not what the governments of Saudi Arabia or Kuwait choose to do, so this argument is basically a case of changing the subject. And secondly, as it happens, no evidence exist that oil producers are choosing to reduce production for speculative purposes. Spare capacity among oil producers is relatively low, especially if you exclude spare capacity caused by, for example terrorist attacks against oil facilities in Nigeria.

What then is the cause of high oil prices and what could be done about it? As I indicated in the aforementioned review, the boom is primarily driven by structural long- or medium-term factors. Demand is growing rapidly because of the rise of China and fast growth in other emerging economies. Meanwhile, while global oil production is actually growing, growth is inhibited in the short term both because of various political factors that stop drilling and because of the fact that even where such political obstacles does not exist, it takes several years to actually extract the oil. Brazil has recently found vast new oil reserves, and no political obstacles exist there to prevent drilling, yet it will be several more years before that oil reaches the world market.

These political factors differ somewhat in their form, but none of them seems likely to go away anytime soon. In Nigeria, as was previously stated, constant attacks against oil facilities are holding down production there, and these attacks looks unlikely to cease. In countries like Venezuela, Mexico and Russia, hostility against foreign investments combined with governments and bureaucrats starving government run oil companies of competence and cash, means that potential oil production is held back. And in the United States, opposition to drilling for environmentalist reasons, mainly by Democrats, prevents increases in oil production.

Another factor that in the short term has contributed to the sharp increase in the price of oil is the Fed’s inflationary monetary policies. Because the price of oil is much more flexible than most other prices and it is immediately affected by, for example, exchange rate effects, the short-term effect of an inflationary monetary policy is much greater than the short-term effect on the more sticky prices of regular goods in the supermarkets. That the oil price increased so much after the Fed started its aggressive interest rate cuts was not really a coincidence.

What then can be done about the high oil price? The long-term solution is to reduce or abolish taxation on oil production and to abolish all regulatory restrictions (whether motivated for environmentalist reasons as in the U.S. or nationalist reasons as in Mexico) on oil drilling. Opponents of drilling often reply to this that it won’t provide any short-term relief. But while that is true, but there won’t be any short-term relief without drilling either and the point of drilling is to provide long-term relief. Moreover, their preferred solution of having the government invest in research to invent more so-called renewable sources of energy is likely to take even longer to provide relief (if it ever provides relief).

To provide short-term relief, different solutions are needed. This means, for example, that the U.S. government should start releasing the oil held in the so-called Strategic Petroleum Reserve, while the Fed should stop its inflationary policies.

Unfortunately, I don’t think any of these solutions are likely to be implemented anytime soon, which is one of the reasons why I am not as optimistic as Don Armentano about the possibility of a significant price decline in the near future. However, while the oil price is unlikely to go down, we should always remember that it is governments and not speculators that are responsible for the all-too-high oil price we suffer from now.

June 28, 2008

Stefan M.I. Karlsson [send him mail] is an economist working in Sweden. Visit his blog.
Copyright © 2008 LewRockwell.com

Mayor Bloomberg, Stop Being a Statist!

Mayor Bloomberg's suggestion is to raise the gasoline taxes to curb gas consumption.

Mr. Mayor, you have become a billionaire by behaving like a capitalist. Why are you now behaving like a Socialist?

Mr. Mayor, we don't need a tax to curb our gas consumption. When gas prices are too high, people cut back on gas consumption. When gas prices are lowered, people consume gas normally. It's as simple as that! Stop interfering in the economy and let the Free Market do its job!

Do you need to go back to Economics 101? If so, then please admit your ignorance. I'd hate for you to rather admit to a belief in Statism, Socialism or any other stupid collectivist ideology!

Is there a pattern in this article?

The article below reveals a fact that many people simply do not realize. Can you make the connection? Hint: The key phrases are boldened by me.

New York Post, 6/25/2008, entitled, "Shoppers get milked"

For some reason, the online version of the article was cut short. I've quoted the entire article from the newspaper itself:

--------------------
June 25, 2008

Holy cow, milk prices are going through the barn roof!

The state-controlled price for a gallon of milk in New York City will rise to $4.37 next Tuesday, state regulators said, in the wake of rising fuel costs and diminishing corn supplies.

"It's a vicious cycle," said Henry Beyer, president of Beyer Farms and Tuscan Dairy, based in Jamaica, Queens.

"The cost of just producing the milk on the farm is going up...and it eventually gets passed down to the consumers."

State agriculture authorities set the loose ceiling of milk prices, based on the cost of farm production. Individual stores can top the milk-price threshold - now at $3.93 a gallon - if they can show financial hardships, such as extraordinarily high wholesale, rent or delivery costs.

So in practice, the state-set threshold generally applies to the large supermarkets, while neighborhood bodegas tend to have higher prices, officials said.

An industry analyst predicted the price of a gallon of milk should stay in the $4.37 range for the rest of 2008.
--------------------

When are politicians going to stop screwing around with the economy by price fixing? When are they going to wise up and allow the Free Market to work its magic, so that supply and demand could meet naturally and prices will drop? Of course, there are too many factors involved in our economic mess to post here, but the finger of truth points to the government as the cause of all our economic woes. Statism will be the death of us.

Are We Really Living in a Free Country?

Below is a cartoon, designed to be funny, yet based on a disturbing fact.

Question: Is this the kind of government action the Founding Fathers had in mind for America, and can we honestly say we are living in a free country?
After a good hearty laugh, read it over again and decide the best answer.

What is a Patriot?

There is a website, www.ProBush.com, that defines a "patriot" in the following way:

"Patriot: If you support our presidents decisions you are a patriot."

The website also defines a traitor in the following way:

"Traitor: If you do not support our President's decisions you are a traitor."

My response to the owner of this website is as follows:

In the Greek language, the word "patrida" means "country". The word "Patrioti" means someone from the father land, a "patriot", where "patris" is derived from the word "father". In a nutshell, a patriot is a fellow countryman, one who is proud of his country, its heritage, etc.

Being proud of one's country, the land, the people, the culture, the heritage--this is what it means to be a patriot. A patriot would die for his country--more specifically, he would die to protect his land, his heritage, his culture, etc.

America's heritage is unique in the world. Though this land was populated by immigrants who have contributed their own individual European, Asian and other heritage, the mixture of all their heritages comprise what is known worldwide today as the uniquely American culture.

Another thing that distinguishes America and sets it apart from every other nation in the world, is our Constitution. America was the first nation to adopt the notion of liberty, non-interventionism, free trade and capitalism. Our Founding Fathers left their brutal European governments to start fresh with a different type of government--one that is the opposite of that which they fled from--kings, despots, monarchs, dictators, tyrants and totalitarians.

The uniquely American heritage is one where the government is the servant of the People, not the European way of the populace being the property of the State. While private property, individualism, Capitalism and the Free Market are uniquely American qualities, Socialism, Communism, Fascism and all other forms of Collectivism and Statism are firmly un-American.

The Supreme Law of the land is the Constitution. The Constitution is the only document that protects the People from the tyranny of government. So important is this document, that every politician--from the lowliest to the President--must swear an oath to uphold and protect this document under any and all circumstances. The contents of the Constitution, which guarantees our liberties, can never be infringed upon. This is universally understood.

The Constitution is clear, that when a government endangers the Constitution by infringing upon the liberties expressed within it, that the People have the right and a moral obligation to overthrow that government. Tyranny is the result of a government that no longer believes in the Constitution, and wants to anull it.

To disagree with the views of the President is not unpatriotic. It is patriotic. For when a President ignores the Law, disregards the Constitution as "just another goddamn piece of paper", all Americans are in danger of losing that great American heritage. When a President and his government enact laws and pass bills that go against the Constitution, they are going against America and all it stands for. The government then becomes unpatriotic, un-American. The Constitution tells us that we the People have the right and moral obligation to reverse this danger to America.

As a patriotic American, one who appreciates America, its heritage and culture and history, I wonder in disbelief at your definition of a patriot:

"Patriot: If you support our presidents decisions you are a patriot."

Someone who supports a government no matter what that government does, is a fool. A true patriot is one who places the Constitution above all laws, above all politicians, and above all Presidents. Any President who abandons the American Constitution is abandoning America, and this is un-patriotic.

We--and there are many of us proud Americans, who do not tolerate attacks against the Constitution, for it is an attack against America--We need to remove the Statists from power, to remove socialism and fascism from our government; to bring about the Founding Father's ideal of a laissez-faire capitalist free market economy; to engage in free trade with all nations, while not entangling us in their business.

The tragedy of September 11, 2001, was payback. It was, as the CIA has admitted, "blow back" for our foreign policy of committing terrorism all over the world. This was revenge for our part in the death and misery we have inflicted on other nations. We have deposed leaders of sovereign nations, instituted regime change, we've trained terrorists, and have supported terrorists who have oppressed and killed hundreds of thousands, if not millions of people worldwide. And our leaders have the audacity to think we proud patriotic Americans are stupid enough to believe that "they hate us because of our freedoms." No, they hate us because we have become a global bully, a sponsor of terrorism, and a global military empire, with troops stationed in 137 countries. If other nations had deposed our leaders and forced troops onto American soil, we'd be outraged. So why is it OK when we do it to others? Hence, nine-eleven.

No, many Americans are too smart for Big Brother's propaganda. If we support a President who cares little for the Constitution then we are not patriots.

Let's be true American patriots and start demanding the government protect and uphold the Constitution they swore and oath to.

The Dictatorship Joke.

A few interesting and thought-provoking videos:

Dictator Shrub? Joking or Not?

A Dictatorship would Be Easier, No Doubt About It.

The Dictatorship Wish and its Consequences. Also, Ayn Rand Speaks.

TSA Peepshow Now In Session.

According to a 7/11/2008 article in TheAge.com.au, entitled "New airport scanners see through clothes," the ever-intrusive and ever-aggressive Transportation Security Administration (TSA) will now be able to ogle the private parts of airport travelers.

"While it allows the security screeners - looking at the images in a separate room - to clearly see the passenger's sexual organs as well as other details of their bodies, the passenger's face is blurred, TSA said in a statement on its website."

Oh, thank goodness! While my face (public part) will not be violated, my private parts will. What a wonderful consolation!

'Besides masking their faces, the TSA says on its website, the images made "will not be printed stored or transmitted".

"Once the transportation security officer has viewed the image and resolved anomalies, the image is erased from the screen permanently. The officer is unable to print, export, store or transmit the image."'

Is there any more proof needed to understand that We the People are considered stupid, naive and gullible by our politicians and lawmakers?

Is it so hard to imagine the next President suddenly declaring that he suspects there are terorists living among us, and that we now need to record the TSA's nudie-pic scans into a national database? Or, better yet, that they've been doing it all along, for our own security and protection?

Here is what the highest Law of our Land says about this TSA Adult Toy:

Amendment IV

The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no warrants shall issue, but upon probable cause, supported by oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.


The TSA (a government beaurocracy) has clearly violated our 4th Amendment!

Here is what Tom Chartier has said in an article on this same topic:

"would you feel secure in your person while standing in a peep booth at the airport during your holiday trek across country to grandmother’s house? Do you think see through scanners might be unreasonable searches? And where’s the probable cause, warrant and oath or affirmation describing the place to be searched? Do we have to go to the dirty bookstore to find it? Do you suppose you might feel violated?"

Has anyone noticed that our Constitutional rights are being ever-increasingly violated under the pretext of terrorism? If this trend continues, one day soon the Constitution in whole will be suspended, along with all of the liberties and protection from tyrannical government inherent within it!

When one tracks the ever increasing violations against the Constitution, it is not hard to fathom the idea that the complete eradication of this document is the main goal of our government; that government is removing the Constitution (gradually so as not to completely shock us into rebellion) from the place of power where it belongs.

If this idea is hard to swallow, then let's consider President Bush's sentiment towards the Constitution, where he angrily spewed that the Constitution is "just a goddamn piece of paper!"

No, Mr. President. Toilet paper is just a goddamn piece of paper. The Constitution is the Supreme Law of the United States of America! You're not allowed to wipe your ass with it.

Here are a couple of interesting videos of interest concerning the destruction of the Constitution:

http://www.youtube.com/watch?v=wTP2gs-NUtc&NR=1
http://www.youtube.com/watch?v=eIbNymjsDvA&feature=related

Taking Money Back -- by Murray N.Rothbard

Taking Money Back

by Murray N. Rothbard

This article originally appeared in The Freeman, September and October 1995.

Money is a crucial command post of any economy, and therefore of any society. Society rests upon a network of voluntary exchanges, also known as the "free-market economy"; these exchanges imply a division of labor in society, in which producers of eggs, nails, horses, lumber, and immaterial services such as teaching, medical care, and concerts, exchange their goods for the goods of others. At each step of the way, every participant in exchange benefits immeasurably, for if everyone were forced to be self-sufficient, those few who managed to survive would be reduced to a pitiful standard of living.

Direct exchange of goods and services, also known as "barter," is hopelessly unproductive beyond the most primitive level, and indeed every "primitive" tribe soon found its way to the discovery of the tremendous benefits of arriving, on the market, at one particularly marketable commodity, one in general demand, to use as a "medium" of "indirect exchange." If a particular commodity is in widespread use as a medium in a society, then that general medium of exchange is called "money."

The money-commodity becomes one term in every single one of the innumerable exchanges in the market economy. I sell my services as a teacher for money; I use that money to buy groceries, typewriters, or travel accommodations; and these producers in turn use the money to pay their workers, to buy equipment and inventory, and pay rent for their buildings. Hence the ever-present temptation for one or more groups to seize control of the vital money-supply function.

Many useful goods have been chosen as moneys in human societies. Salt in Africa, sugar in the Caribbean, fish in colonial New England, tobacco in the colonial Chesapeake Bay region, cowrie shells, iron hoes, and many other commodities have been used as moneys. Not only do these moneys serve as media of exchange; they enable individuals and business firms to engage in the "calculation" necessary to any advanced economy. Moneys are traded and reckoned in terms of a currency unit, almost always units of weight. Tobacco, for example, was reckoned in pound weights. Prices of other goods and services could be figured in terms of pounds of tobacco; a certain horse might be worth 80 pounds on the market. A business firm could then calculate its profit or loss for the previous month; it could figure that its income for the past month was 1,000 pounds and its expenditures 800 pounds, netting it a 200 pound profit.

Gold or Government Paper

Throughout history, two commodities have been able to outcompete all other goods and be chosen on the market as money – two precious metals, gold and silver (with copper coming in when one of the other precious metals was not available). Gold and silver abounded in what we can call "moneyable" qualities, qualities that rendered them superior to all other commodities. They are in rare enough supply that their value will be stable, and of high value per unit weight; hence pieces of gold or silver will be easily portable, and usable in day-to-day transactions; they are rare enough too, so that there is little likelihood of sudden discoveries or increases in supply. They are durable so that they can last virtually forever, and so they provide a safe "store of value" for the future. And gold and silver are divisible, so that they can be divided into small pieces without losing their value; unlike diamonds, for example, they are homogeneous, so that one ounce of gold will be of equal value to any other.

The universal and ancient use of gold and silver as moneys was pointed out by the first great monetary theorist, the eminent 14th-century French scholastic Jean Buridan, and then in all discussions of money down to money and banking textbooks until the Western governments abolished the gold standard in the early 1930s. Franklin D. Roosevelt joined in this deed by taking the United States off gold in 1933.

There is no aspect of the free-market economy that has suffered more scorn and contempt from "modern" economists, whether frankly statist Keynesians or allegedly "free market" Chicagoites, than has gold. Gold, not long ago hailed as the basic staple and groundwork of any sound monetary system, is now regularly denounced as a "fetish" or, as in the case of Keynes, as a "barbarous relic." Well, gold is indeed a "relic" of barbarism in one sense; no "barbarian" worth his salt would ever have accepted the phony paper and bank credit that we modern sophisticates have been bamboozled into using as money.

But "gold bugs" are not fetishists; we don't fit the standard image of misers running their fingers through their hoard of gold coins while cackling in sinister fashion. The great thing about gold is that it, and only it, is money supplied by the free market, by the people at work. For the stark choice before us always is: gold (or silver), or government. Gold is market money, a commodity which must be supplied by being dug out of the ground and then processed; but government, on the contrary, supplies virtually costless paper money or bank checks out of thin air.

We know, in the first place, that all government operation is wasteful, inefficient, and serves the bureaucrat rather than the consumer. Would we prefer to have shoes produced by competitive private firms on the free market, or by a giant monopoly of the federal government? The function of supplying money could be handled no better by government. But the situation in money is far worse than for shoes or any other commodity. If the government produces shoes, at least they might be worn, even though they might be high-priced, fit badly, and not satisfy consumer wants.

Money is different from all other commodities: other things being equal, more shoes, or more discoveries of oil or copper benefit society, since they help alleviate natural scarcity. But once a commodity is established as a money on the market, no more money at all is needed. Since the only use of money is for exchange and reckoning, more dollars or pounds or marks in circulation cannot confer a social benefit: they will simply dilute the exchange value of every existing dollar or pound or mark. So it is a great boon that gold or silver are scarce and are costly to increase in supply.

But if government manages to establish paper tickets or bank credit as money, as equivalent to gold grams or ounces, then the government, as dominant money-supplier, becomes free to create money costlessly and at will. As a result, this "inflation" of the money supply destroys the value of the dollar or pound, drives up prices, cripples economic calculation, and hobbles and seriously damages the workings of the market economy.

The natural tendency of government, once in charge of money, is to inflate and to destroy the value of the currency. To understand this truth, we must examine the nature of government and of the creation of money. Throughout history, governments have been chronically short of revenue. The reason should be clear: unlike you and me, governments do not produce useful goods and services that they can sell on the market; governments, rather than producing and selling services, live parasitically off the market and off society. Unlike every other person and institution in society, government obtains its revenue from coercion, from taxation. In older and saner times, indeed, the king was able to obtain sufficient revenue from the products of his own private lands and forests, as well as through highway tolls. For the State to achieve regularized, peacetime taxation was a struggle of centuries. And even after taxation was established, the kings realized that they could not easily impose new taxes or higher rates on old levies; if they did so, revolution was very apt to break out.

Controlling the Money Supply

If taxation is permanently short of the style of expenditures desired by the State, how can it make up the difference? By getting control of the money supply, or, to put it bluntly, by counterfeiting. On the market economy, we can only obtain good money by selling a good or service in exchange for gold, or by receiving a gift; the only other way to get money is to engage in the costly process of digging gold out of the ground. The counterfeiter, on the other hand, is a thief who attempts to profit by forgery, e.g., by painting a piece of brass to look like a gold coin. If his counterfeit is detected immediately, he does no real harm, but to the extent his counterfeit goes undetected, the counterfeiter is able to steal not only from the producers whose goods he buys. For the counterfeiter, by introducing fake money into the economy, is able to steal from everyone by robbing every person of the value of his currency. By diluting the value of each ounce or dollar of genuine money, the counterfeiter's theft is more sinister and more truly subversive than that of the highwayman; for he robs everyone in society, and the robbery is stealthy and hidden, so that the cause-and-effect relation is camouflaged.

Recently, we saw the scare headline: "Iranian Government Tries to Destroy U.S. Economy by Counterfeiting $100 Bills." Whether the ayatollahs had such grandiose goals in mind is dubious; counterfeiters don't need a grand rationale for grabbing resources by printing money. But all counterfeiting is indeed subversive and destructive, as well as inflationary.

But in that case, what are we to say when the government seizes control of the money supply, abolishes gold as money, and establishes its own printed tickets as the only money? In other words, what are we to say when the government becomes the legalized, monopoly counterfeiter?

Not only has the counterfeit been detected, but the Grand Counterfeiter, in the United States the Federal Reserve System, instead of being reviled as a massive thief and destroyer, is hailed and celebrated as the wise manipulator and governor of our "macroeconomy," the agency on which we rely for keeping us out of recessions and inflations, and which we count on to determine interest rates, capital prices, and employment. Instead of being habitually pelted with tomatoes and rotten eggs, the chairman of the Federal Reserve Board, whoever he may be, whether the imposing Paul Volcker or the owlish Alan Greenspan, is universally hailed as Mr. Indispensable to the economic and financial system.

Indeed, the best way to penetrate the mysteries of the modern monetary and banking system is to realize that the government and its central bank act precisely as would a Grand Counterfeiter, with very similar social and economic effects. Many years ago, the New Yorker magazine, in the days when its cartoons were still funny, published a cartoon of a group of counterfeiters looking eagerly at their printing press as the first $10 bill came rolling off the press. "Boy," said one of the team, "retail spending in the neighborhood is sure in for a shot in the arm."

And it was. As the counterfeiters print new money, spending goes up on whatever the counterfeiters wish to purchase: personal retail goods for themselves, as well as loans and other "general welfare" purposes in the case of the government. But the resulting "prosperity" is phony; all that happens is that more money bids away existing resources, so that prices rise. Furthermore, the counterfeiters and the early recipients of the new money bid away resources from the poor suckers who are down at the end of the line to receive the new money, or who never even receive it at all.

New money injected into the economy has an inevitable ripple effect; early receivers of the new money spend more and bid up prices, while later receivers or those on fixed incomes find the prices of the goods they must buy unaccountably rising, while their own incomes lag behind or remain the same. Monetary inflation, in other words, not only raises prices and destroys the value of the currency unit; it also acts as a giant system of expropriation of the late receivers by the counterfeiters themselves and by the other early receivers. Monetary expansion is a massive scheme of hidden redistribution.

When the government is the counterfeiter, the counterfeiting process not only can be "detected"; it proclaims itself openly as monetary statesmanship for the public weal. Monetary expansion then becomes a giant scheme of hidden taxation, the tax falling on fixed income groups, on those groups remote from government spending and subsidy, and on thrifty savers who are naïve enough and trusting enough to hold on to their money, to have faith in the value of the currency.

Spending and going into debt are encouraged; thrift and hard work discouraged and penalized. Not only that: the groups that benefit are the special interest groups who are politically close to the government and can exert pressure to have the new money spent on them so that their incomes can rise faster than the price inflation. Government contractors, politically connected businesses, unions, and other pressure groups will benefit at the expense of the unaware and unorganized public.

---

We have already described one part of the contemporary flight from sound, free-market money to statized and inflated money: the abolition of the gold standard by Franklin Roosevelt in 1933, and the substitution of fiat paper tickets by the Federal Reserve as our "monetary standard." Another crucial part of this process was the federal cartelization of the nation's banks through the creation of the Federal Reserve System in 1913.

Banking is a particularly arcane part of the economic system; one of the problems is that the word "bank" covers many different activities, with very different implications. During the Renaissance era, the Medicis in Italy and the Fuggers in Germany, were "bankers"; their banking, however, was not only private but also began at least as a legitimate, noninflationary, and highly productive activity. Essentially, these were "merchant-bankers," who started as prominent merchants. In the course of their trade, the merchants began to extend credit to their customers, and in the case of these great banking families, the credit or "banking" part of their operations eventually overshadowed their mercantile activities. These firms lent money out of their own profits and savings, and earned interest from the loans. Hence, they were channels for the productive investment of their own savings.

To the extent that banks lend their own savings, or mobilize the savings of others, their activities are productive and unexceptionable. Even in our current commercial banking system, if I buy a $10,000 CD ("certificate of deposit") redeemable in six months, earning a certain fixed interest return, I am taking my savings and lending it to a bank, which in turn lends it out at a higher interest rate, the differential being the bank's earnings for the function of channeling savings into the hands of credit-worthy or productive borrowers. There is no problem with this process.

The same is even true of the great "investment banking" houses, which developed as industrial capitalism flowered in the 19th century. Investment bankers would take their own capital, or capital invested or loaned by others, to underwrite corporations gathering capital by selling securities to stockholders and creditors. The problem with the investment bankers is that one of their major fields of investment was the underwriting of government bonds, which plunged them hip deep into politics, giving them a powerful incentive for pressuring and manipulating governments, so that taxes would be levied to pay off their and their clients' government bonds. Hence, the powerful and baleful political influence of investment bankers in the 19th and 20th centuries: in particular, the Rothschilds in Western Europe, and Jay Cooke and the House of Morgan in the United States.

By the late 19th century, the Morgans took the lead in trying to pressure the US government to cartelize industries they were interested in – first railroads and then manufacturing: to protect these industries from the winds of free competition, and to use the power of government to enable these industries to restrict production and raise prices.

In particular, the investment bankers acted as a ginger group to work for the cartelization of commercial banks. To some extent, commercial bankers lend out their own capital and money acquired by CDs. But most commercial banking is "deposit banking" based on a gigantic scam: the idea, which most depositors believe, that their money is down at the bank, ready to be redeemed in cash at any time. If Jim has a checking account of $1,000 at a local bank, Jim knows that this is a "demand deposit," that is, that the bank pledges to pay him $1,000 in cash, on demand, anytime he wishes to "get his money out." Naturally, the Jims of this world are convinced that their money is safely there, in the bank, for them to take out at any time. Hence, they think of their checking account as equivalent to a warehouse receipt. If they put a chair in a warehouse before going on a trip, they expect to get the chair back whenever they present the receipt. Unfortunately, while banks depend on the warehouse analogy, the depositors are systematically deluded. Their money ain't there.

An honest warehouse makes sure that the goods entrusted to its care are there, in its storeroom or vault. But banks operate very differently, at least since the days of such deposit banks as the Banks of Amsterdam and Hamburg in the 17th century, which indeed acted as warehouses and backed all of their receipts fully by the assets deposited, e.g., gold and silver. This honest deposit or "giro" banking is called "100 percent reserve" banking. Ever since, banks have habitually created warehouse receipts (originally bank notes and now deposits) out of thin air. Essentially, they are counterfeiters of fake warehouse receipts to cash or standard money, which circulate as if they were genuine, fully backed notes or checking accounts. Banks make money by literally creating money out of thin air, nowadays exclusively deposits rather than bank notes. This sort of swindling or counterfeiting is dignified by the term "fractional reserve banking," which means that bank deposits are backed by only a small fraction of the cash they promise to have at hand and redeem. (Right now, in the United States, this minimum fraction is fixed by the Federal Reserve System at 10 percent.)

Fractional Reserve Banking

Let's see how the fractional-reserve process works, in the absence of a central bank. I set up a Rothbard Bank, and invest $1,000 of cash (whether gold or government paper does not matter here). Then I "lend out" $10,000 to someone, either for consumer spending or to invest in his business. How can I "lend out" far more than I have? Ahh, that's the magic of the "fraction" in the fractional reserve. I simply open up a checking account of $10,000 which I am happy to lend to Mr. Jones. Why does Jones borrow from me? Well, for one thing, I can charge a lower rate of interest than savers would. I don't have to save up the money myself, but can simply counterfeit it out of thin air. (In the 19th century, I would have been able to issue bank notes, but the Federal Reserve now monopolizes note issues.) Since demand deposits at the Rothbard Bank function as equivalent to cash, the nation's money supply has just, by magic, increased by $10,000. The inflationary, counterfeiting process is under way.

The 19th-century English economist Thomas Tooke correctly stated that "free trade in banking is tantamount to free trade in swindling." But under freedom, and without government support, there are some severe hitches in this counterfeiting process, or in what has been termed "free banking."

First, why should anyone trust me? Why should anyone accept the checking deposits of the Rothbard Bank?

But second, even if I were trusted, and I were able to con my way into the trust of the gullible, there is another severe problem, caused by the fact that the banking system is competitive, with free entry into the field. After all, the Rothbard Bank is limited in its clientele. After Jones borrows checking deposits from me, he is going to spend that money. Why else pay for a loan? Sooner or later, the money he spends, whether for a vacation, or for expanding his business, will be spent on the goods or services of clients of some other bank, say the Rockwell Bank. The Rockwell Bank is not particularly interested in holding checking accounts on my bank; it wants reserves so that it can pyramid its own counterfeiting on top of cash reserves. And so if, to make the case simple, the Rockwell Bank gets a $10,000 check on the Rothbard Bank, it is going to demand cash so that it can do some inflationary counterfeit pyramiding of its own.

But, I, of course, can't pay the $10,000, so I'm finished. Bankrupt. Found out. By rights, I should be in jail as an embezzler, but at least my phoney checking deposits and I are out of the game, and out of the money supply.

Hence, under free competition, and without government support and enforcement, there will only be limited scope for fractional-reserve counterfeiting. Banks could form cartels to prop each other up, but generally cartels on the market don't work well without government enforcement, without the government cracking down on competitors who insist on busting the cartel, in this case, forcing competing banks to pay up.

Central Banking

Hence the drive by the bankers themselves to get the government to cartelize their industry by means of a central bank. Central banking began with the Bank of England in the 1690s, spread to the rest of the Western world in the 18th and 19th centuries, and finally was imposed upon the United States by banking cartelists via the Federal Reserve System of 1913. Particularly enthusiastic about the central bank were the investment bankers, such as the Morgans, who pioneered the cartel idea, and who by this time had expanded into commercial banking.

In modern central banking, the central bank is granted the monopoly of the issue of bank notes (originally written or printed warehouse receipts as opposed to the intangible receipts of bank deposits), which are now identical to the government's paper money and therefore the monetary "standard" in the country. People want to use physical cash as well as bank deposits. If, therefore, I wish to redeem $1,000 in cash from my checking bank, the bank has to go to the Federal Reserve, and draw down its own checking account with the Fed, "buying" $1,000 of Federal Reserve Notes (the cash in the United States today) from the Fed. The Fed, in other words, acts as a bankers' bank. Banks keep checking deposits at the Fed and these deposits constitute their reserves, on which they can and do pyramid ten times the amount in checkbook money.

Here's how the counterfeiting process works in today's world. Let's say that the Federal Reserve, as usual, decides that it wants to expand (i.e., inflate) the money supply. The Federal Reserve decides to go into the market (called the "open market") and purchase an asset. It doesn't really matter what asset it buys; the important point is that it writes out a check. The Fed could, if it wanted to, buy any asset it wished, including corporate stocks, buildings, or foreign currency. In practice, it almost always buys US government securities.

Let's assume that the Fed buys $10,000,000 of US Treasury bills from some "approved" government bond dealer (a small group), say Shearson Lehman on Wall Street. The Fed writes out a check for $10,000,000, which it gives to Shearson Lehman in exchange for $10,000,000 in US securities. Where does the Fed get the $10,000,000 to pay Shearson Lehman? It creates the money out of thin air. Shearson Lehman can do only one thing with the check: deposit it in its checking account at a commercial bank, say Chase Manhattan. The "money supply" of the country has already increased by $10,000,000; no one else's checking account has decreased at all. There has been a net increase of $10,000,000.

But this is only the beginning of the inflationary counterfeiting process. For Chase Manhattan is delighted to get a check on the Fed, and rushes down to deposit it in its own checking account at the Fed, which now increases by $10,000,000. But this checking account constitutes the "reserves" of the banks, which have now increased across the nation by $10,000,000. But this means that Chase Manhattan can create deposits based on these reserves, and that, as checks and reserves seep out to other banks (much as the Rothbard Bank deposits did), each one can add its inflationary mite, until the banking system as a whole has increased its demand deposits by $100,000,000, ten times the original purchase of assets by the Fed. The banking system is allowed to keep reserves amounting to 10 percent of its deposits, which means that the "money multiplier" – the amount of deposits the banks can expand on top of reserves – is 10. A purchase of assets of $10 million by the Fed has generated very quickly a tenfold ($100,000,000) increase in the money supply of the banking system as a whole.

Interestingly, all economists agree on the mechanics of this process even though they of course disagree sharply on the moral or economic evaluation of that process. But unfortunately, the general public, not inducted into the mysteries of banking, still persists in thinking that their money remains "in the bank."

Thus, the Federal Reserve and other central banking systems act as giant government creators and enforcers of a banking cartel; the Fed bails out banks in trouble, and it centralizes and coordinates the banking system so that all the banks, whether the Chase Manhattan, or the Rothbard or Rockwell banks, can inflate together. Under free banking, one bank expanding beyond its fellows was in danger of imminent bankruptcy. Now, under the Fed, all banks can expand together and proportionately.

"Deposit Insurance"

But even with the backing of the Fed, fractional reserve banking proved shaky, and so the New Deal, in 1933, added the lie of "bank deposit insurance," using the benign word "insurance" to mask an arrant hoax. When the savings and loan system went down the tubes in the late 1980s, the "deposit insurance" of the Federal Savings and Loan Insurance Corporation (FSLIC) was unmasked as sheer fraud. The "insurance" was simply the smoke-and-mirrors term for the unbacked name of the federal government. The poor taxpayers finally bailed out the S&Ls, but now we are left with the formerly sainted Federal Deposit Insurance Corporation (FDIC) for commercial banks, which is now increasingly seen to be shaky, since the FDIC itself has less than one percent of the huge number of deposits it "insures."

The very idea of "deposit insurance" is a swindle; how does one insure an institution (fractional reserve banking) that is inherently insolvent, and which will fall apart whenever the public finally understands the swindle? Suppose that, tomorrow, the American public suddenly became aware of the banking swindle, and went to the banks tomorrow morning, and, in unison, demanded cash. What would happen? The banks would be instantly insolvent, since they could only muster 10 percent of the cash they owe their befuddled customers. Neither would the enormous tax increase needed to bail everyone out be at all palatable. No: the only thing the Fed could do – and this would be in their power – would be to print enough money to pay off all the bank depositors. Unfortunately, in the present state of the banking system, the result would be an immediate plunge into the horrors of hyperinflation.

Let us suppose that total insured bank deposits are $1,600 billion. Technically, in the case of a run on the banks, the Fed could exercise emergency powers and print $1,600 billion in cash to give to the FDIC to pay off the bank depositors. The problem is that, emboldened at this massive bailout, the depositors would promptly redeposit the new $1,600 billion into the banks, increasing the total bank reserves by $1,600 billion, thus permitting an immediate expansion of the money supply by the banks by tenfold, increasing the total stock of bank money by $16 trillion. Runaway inflation and total destruction of the currency would quickly follow.

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To save our economy from destruction and from the eventual holocaust of runaway inflation, we the people must take the money-supply function back from the government. Money is far too important to be left in the hands of bankers and of Establishment economists and financiers. To accomplish this goal, money must be returned to the market economy, with all monetary functions performed within the structure of the rights of private property and of the free-market economy.

It might be thought that the mix of government and money is too far gone, too pervasive in the economic system, too inextricably bound up in the economy to be eliminated without economic destruction. Conservatives are accustomed to denouncing the "terrible simplifiers" who wreck everything by imposing simplistic and unworkable schemes. Our major problem, however, is precisely the opposite: mystification by the ruling elite of technocrats and intellectuals, who, whenever some public spokesman arises to call for large-scale tax cuts or deregulation, intone sarcastically about the dimwit masses who "seek simple solutions for complex problems." Well, in most cases, the solutions are indeed clear-cut and simple, but are deliberately obfuscated by people whom we might call "terrible complicators." In truth, taking back our money would be relatively simple and straightforward, much less difficult than the daunting task of denationalizing and decommunizing the Communist countries of Eastern Europe and the former Soviet Union.

Our goal may be summed up simply as the privatization of our monetary system, the separation of government from money and banking. The central means to accomplish this task is also straightforward: the liquidation of the Federal Reserve System – the abolition of central banking. How could the Federal Reserve System possibly be abolished? Elementary: simply repeal its federal charter, the Federal Reserve Act of 1913. Moreover, Federal Reserve obligations (its notes and deposits) were originally redeemable in gold on demand. Since Franklin Roosevelt's monstrous actions in 1933, "dollars" issued by the Federal Reserve, and deposits by the Fed and its member banks, have no longer been redeemable in gold. Bank deposits are redeemable in Federal Reserve Notes, while Federal Reserve Notes are redeemable in nothing, or alternatively in other Federal Reserve Notes. Yet, these notes are our money, our monetary "standard," and all creditors are obliged to accept payment in these fiat notes, no matter how depreciated they might be.

In addition to cancelling the redemption of dollars into gold, Roosevelt in 1933 committed another criminal act: literally confiscating all gold and bullion held by Americans, exchanging them for arbitrarily valued "dollars." It is curious that, even though the Fed and the government establishment continually proclaim the obsolescence and worthlessness of gold as a monetary metal, the Fed (as well as all other central banks) clings to its gold for dear life. Our confiscated gold is still owned by the Federal Reserve, which keeps it on deposit with the Treasury at Fort Knox and other gold depositaries. Indeed, from 1933 until the 1970s, it continued to be illegal for any Americans to own monetary gold of any kind, whether coin or bullion or even in safe deposit boxes at home or abroad. All these measures, supposedly drafted for the Depression emergency, have continued as part of the great heritage of the New Deal ever since. For four decades, any gold flowing into private American hands had to be deposited in the banks, which in turn had to deposit it at the Fed. Gold for "legitimate" nonmonetary purposes, such as dental fillings, industrial drills, or jewelry, was carefully rationed for such purposes by the Treasury Department.

Fortunately, due to the heroic efforts of Congressman Ron Paul it is now legal for Americans to own gold, whether coin or bullion. But the ill-gotten gold confiscated and sequestered by the Fed remains in Federal Reserve hands. How to get the gold out from the Fed? How privatize the Fed's stock of gold?

Privatizing Federal Gold

The answer is revealed by the fact that the Fed, which had promised to redeem its liabilities in gold, has been in default of that promise since Roosevelt's repudiation of the gold standard in 1933. The Federal Reserve System, being in default, should be liquidated, and the way to liquidate it is the way any insolvent business firm is liquidated: its assets are parceled out, pro rata, to its creditors. The Federal Reserve's gold assets are listed, as of October 30, 1991, at $11.1 billion. The Federal Reserve's liabilities as of that date consist of $295.5 billion in Federal Reserve Notes in circulation, and $24.4 billion in deposits owed to member banks of the Federal Reserve System, for a total of $319.9 billion. Of the assets of the Fed, other than gold, the bulk are securities of the US government, which amounted to $262.5 billion. These should be written off posthaste, since they are worse than an accounting fiction: the taxpayers are forced to pay interest and principle on debt that the Federal Government owes to its own creature, the Federal Reserve. The largest remaining asset is Treasury currency, $21.0 billion, which should also be written off, plus $10 billion in SDRs, which are mere paper creatures of international central banks, and which should be abolished as well. We are left (apart from various buildings and fixtures and other assets owned by the Fed, and amounting to some $35 billion) with $11.1 billion of assets needed to pay off liabilities totalling $319.9 billion.

Fortunately, the situation is not as dire as it seems, for the $11.1 billion of Fed gold is a purely phoney evaluation; indeed it is one of the most bizarre aspects of our fraudulent monetary system. The Fed's gold stock consists of 262.9 million ounces of gold; the dollar valuation of $11.1 billion is the result of the government's artificially evaluating its own stock of gold at $42.22 an ounce. Since the market price of gold is now about $350 an ounce, this already presents a glaring anomaly in the system.

Definitions and Debasement

Where did the $42.22 come from?

The essence of a gold standard is that the monetary unit (the "dollar," "franc," "mark," etc.) is defined as a certain weight of gold. Under the gold standard, the dollar or franc is not a thing in itself, a mere name or the name of a paper ticket issued by the State or a central bank; it is the name of a unit of weight of gold. It is every bit as much a unit of weight as the more general "ounce," "grain," or "gram." For a century before 1933, the "dollar" was defined as being equal to 23.22 grains of gold; since there are 480 grains to the ounce, this meant that the dollar was also defined as .048 gold ounces. Put another way, the gold ounce was defined as equal to $20.67.

In addition to taking us off the gold standard domestically, Franklin Roosevelt's New Deal "debased" the dollar by redefining it, or "lightening its weight," as equal to 13.714 grains of gold, which also defined the gold ounce as equal to $35. The dollar was still redeemable in gold to foreign central banks and governments at the lighter $35 weight; so that the United States stayed on a hybrid form of international gold standard until August 1971, when President Nixon completed the job of scuttling the gold standard altogether. Since 1971, the United States has been on a totally fiat-paper standard; not coincidentally, it has suffered an unprecedented degree of peace-time inflation since that date. Since 1971, the dollar has no longer been tied to gold at a fixed weight, and so it has become a commodity separate from gold, free to fluctuate on world markets.

When the dollar and gold were set loose from each other, we saw the closest thing to a laboratory experiment we can get in human affairs. All Establishment economists – from Keynesians to Chicagoite monetarists – insisted that gold had long lost its value as a money, that gold had only reached its exalted value of $35 an ounce because its value was "fixed" at that amount by the government. The dollar allegedly conferred value upon gold rather than the other way round, and if gold and the dollar were ever cut loose, we would see the price of gold sink rapidly to its estimated nonmonetary value (for jewelry, dental fillings, etc.) of approximately $6 an ounce. In contrast to this unanimous Establishment prediction, the followers of Ludwig von Mises and other "gold bugs" insisted that gold was undervalued at 35 debased dollars, and claimed that the price of gold would rise far higher, perhaps as high as $70.

Suffice it to say that the gold price never fell below $35, and in fact vaulted upward, at one point reaching $850 an ounce, in recent years settling at somewhere around $350 an ounce. And yet since 1973, the Treasury and Fed have persistently evaluated their gold stock, not at the old and obsolete $35, to be sure, but only slightly higher, at $42.22 an ounce. In other words, if the US government only made the simple adjustment that accounting requires of everyone – evaluating one's assets at their market price – the value of the Fed's gold stock would immediately rise from $11.1 to $92.0 billion.

From 1933 to 1971, the once very large but later dwindling number of economists championing a return to the gold standard mainly urged a return to $35 an ounce. Mises and his followers advocated a higher gold "price," inasmuch as the $35 rate no longer applied to Americans. But the majority did have a point: that any measure or definition, once adopted, should be adhered to from then on. But since 1971, with the death of the once-sacred $35 an ounce, all bets are off. While definitions once adopted should be maintained permanently, there is nothing sacred about any initial definition, which should be selected at its most useful point. If we wish to restore the gold standard, we are free to select whatever definition of the dollar is most useful; there are no longer any obligations to the obsolete definitions of $20.67 or $35 an ounce.

Abolishing the Fed

In particular, if we wish to liquidate the Federal Reserve System, we can select a new definition of the "dollar" sufficient to pay off all Federal Reserve liabilities at 100 cents to the dollar. In the case of our example above, we can now redefine "the dollar" as equivalent to 0.394 grains of gold, or as 1 ounce of gold equalling $1,217. With such redefinition, the entire Federal Reserve stock of gold could be minted by the Treasury into gold coins that would replace the Federal Reserve Notes in circulation, and also constitute gold coin reserves of $24.4 billion at the various commercial banks. The Federal Reserve System would be abolished, gold coins would now be in circulation replacing Federal Reserve Notes, gold would be the circulating medium, and gold dollars the unit of account and reckoning, at the new rate of $1,217 per ounce. Two great desiderata – the return of the gold standard, and the abolition of the Federal Reserve – would both be accomplished at one stroke.

A corollary step, of course, would be the abolition of the already bankrupt Federal Deposit Insurance Corporation. The very concept of "deposit insurance" is fraudulent; how can you "insure" an entire industry that is inherently insolvent? It would be like insuring the Titanic after it hit the iceberg. Some free-market economists advocate "privatizing" deposit insurance by encouraging private firms, or the banks themselves, to "insure" each others' deposits. But that would return us to the unsavory days of Florentine bank cartels, in which every bank tried to shore up each other's liabilities. It won't work; let us not forget that the first S&Ls to collapse in the 1980s were those in Ohio and in Maryland, which enjoyed the dubious benefits of "private" deposit insurance.

This issue points up an important error often made by libertarians and free-market economists who believe that all government activities should be privatized; or as a corollary, hold that any actions, so long as they are private, are legitimate. But, on the contrary, activities such as fraud, embezzlement, or counterfeiting should not be "privatized"; they should be abolished.

This would leave the commercial banks still in a state of fractional reserve, and, in the past, I have advocated going straight to 100 percent, nonfraudulent banking by raising the gold price enough to constitute 100 percent of bank demand liabilities. After that, of course, 100 percent banking would be legally required. At current estimates, establishing 100 percent to all commercial bank demand deposit accounts would require going back to gold at $2,000 an ounce; to include all checkable deposits would require establishing gold at $3,350 an ounce, and to establish 100 percent banking for all checking and savings deposits (which are treated by everyone as redeemable on demand) would require a gold standard at $7,500 an ounce.

But there are problems with such a solution. A minor problem is that the higher the newly established gold value over the current market price, the greater the consequent increase in gold production. This increase would cause an admittedly modest and one shot price inflation. A more important problem is the moral one: do banks deserve what amounts to a free gift, in which the Fed, before liquidating, would bring every bank's gold assets high enough to be 100 percent of its liabilities? Clearly, the banks scarcely deserve such benign treatment, even in the name of smoothing the transition to sound money; bankers should consider themselves lucky they are not tried for embezzlement. Furthermore, it would be difficult to enforce and police 100 percent banking on an administrative basis. It would be easier, and more libertarian, to go through the courts. Before the Civil War, the notes of unsound fractional reserve banks in the United States, if geographically far from home base, were bought up at a discount by professional "money brokers," who would then travel to the banks' home base and demand massive redemption of these notes in gold.

The same could be done today, and more efficiently, using advanced electronic technology, as professional money brokers try to make profits by detecting unsound banks and bringing them to heel. A particular favorite of mine is the concept of ideological antibank vigilante leagues, who would keep tabs on banks, spot the errant ones, and go on television to proclaim that banks are unsound, and urge note and deposit holders to call upon them for redemption without delay. If the vigilante leagues could whip up hysteria and consequent bank runs, in which noteholders and depositors scramble to get their money out before the bank goes under, then so much the better: for then, the people themselves, and not simply the government, would ride herd on fractional reserve banks. The important point, it must be emphasized, is that at the very first sign of a bank's failing to redeem its notes or deposits on demand, the police and courts must put them out of business. Instant justice, period, with no mercy and no bailouts.

Under such a regime, it should not take long for the banks to go under, or else to contract their notes and deposits until they are down to 100 percent banking. Such monetary deflation, while leading to various adjustments, would be clearly one-shot, and would obviously have to stop permanently when the total of bank liabilities contracted down to 100 percent of gold assets. One crucial difference between inflation and deflation, is that inflation can escalate up to an infinity of money supply and prices, whereas the money supply can only deflate as far as the total amount of standard money, under the gold standard the supply of gold money. Gold constitutes an absolute floor against further deflation.

If this proposal seems harsh on the banks, we have to realize that the banking system is headed for a mighty crash in any case. As a result of the S&L collapse, the terribly shaky nature of our banking system is at last being realized. People are openly talking of the FDIC being insolvent, and of the entire banking structure crashing to the ground. And if the people ever get to realize this in their bones, they will precipitate a mighty "bank run" by trying to get their money out of the banks and into their own pockets. And the banks would then come tumbling down, because the people's money isn't there. The only thing that could save the banks in such a mighty bank run is if the Federal Reserve prints the $1.6 trillion in cash and gives it to the banks – igniting an immediate and devastating runaway inflation and destruction of the dollar.

Left-liberals are fond of blaming our economic crisis on the "greed of the 1980s." And yet "greed" was no more intense in the 1980s than it was in the 1970s or previous decades or than it will be in the future. What happened in the 1980s was a virulent episode of government deficits and of Federal Reserve–inspired credit expansion by the banks. As the Fed purchased assets and pumped in reserves to the banking system, the banks happily multiplied bank credit and created new money on top of those reserves.

There has been a lot of focus on poor-quality bank loans: on loans to bankrupt Third World countries or to bloated and, in retrospect, unsound real estate schemes and shopping malls in the middle of nowhere. But poor quality loans and investments are always the consequence of central banking and bank-credit expansion. The all-too-familiar cycle of boom and bust, euphoria and crash, prosperity and depression, did not begin in the 1980s. Nor is it a creature of civilization or the market economy. The boom-bust cycle began in the 18th century with the beginnings of central banking, and has spread and intensified ever since, as central banking spread and took control of the economic systems of the Western world. Only the abolition of the Federal Reserve System and a return to the gold standard can put an end to cyclical booms and busts, and finally eliminate chronic and accelerating inflation.

Inflation, credit expansion, business cycles, heavy government debt, and high taxes are not, as Establishment historians claim, inevitable attributes of capitalism or of "modernization." On the contrary, these are profoundly anticapitalist and parasitic excrescences grafted onto the system by the interventionist State, which rewards its banker and insider clients with hidden special privileges at the expense of everyone else.

Crucial to free enterprise and capitalism is a system of firm rights of private property, with everyone secure in the property that he earns. Also crucial to capitalism is an ethic that encourages and rewards savings, thrift, hard work, and productive enterprise, and that discourages profligacy and cracks down sternly on any invasion of property rights. And yet, as we have seen, cheap money and credit expansion gnaw away at those rights and at those virtues. Inflation overturns and transvalues values by rewarding the spendthrift and the inside fixer and by making a mockery of the older "Victorian" virtues.

Restoring the Old Republic

The restoration of American liberty and of the Old Republic is a multifaceted task. It requires excising the cancer of the Leviathan State from our midst. It requires removing Washington, DC as the power center of the country. It requires restoring the ethics and virtues of the 19th century, the taking back of our culture from nihilism and victimology, and restoring that culture to health and sanity.

In the long run, politics, culture, and the economy are indivisible. The restoration of the Old Republic requires an economic system built solidly on the inviolable rights of private property, on the right of every person to keep what he earns, and to exchange the products of his labor. To accomplish that task, we must once again have money that is produced on the market, that is gold rather than paper, with the monetary unit a weight of gold rather than the name of a paper ticket issued ad lib by the government. We must have investment determined by voluntary savings on the market, and not by counterfeit money and credit issued by a knavish and State-privileged banking system. In short, we must abolish central banking, and force the banks to meet their obligations as promptly as anyone else.

Money and banking have been made to appear as mysterious and arcane processes that must be guided and operated by a technocratic elite. They are nothing of the sort. In money, even more than the rest of our affairs, we have been tricked by a malignant Wizard of Oz. In money, as in other areas of our lives, restoring common sense and the Old Republic go hand in hand.

Murray N. Rothbard (1926–1995) was the author of Man, Economy, and State, Conceived in Liberty, What Has Government Done to Our Money, For a New Liberty, The Case Against the Fed, and many other books and articles. He was also the editor – with Lew Rockwell – of The Rothbard-Rockwell Report, and academic vice president of the Ludwig von Mises Institute.

Copyright © 2008 Ludwig von Mises Institute
All rights reserved.

Some Democrats Discover the Free Market!

In his 6/11/2008 New York Post article, entitled, "Do As Dems Say, Not as They Dine", Jonah Goldberg exposes the Democrats for the socialists they truly are, and shows us that socialist ideas are detrimental to society by focusing on the Senate cafeteria.

According to the article, the Senate cafeteria served crappy food not fit for a prisoner. "As befits a government-run commissary, the Senate cafeteria has a decidedly Soviet attitude toward variety. It has averaged only two new menu items a year over the last decade. The food is so bad, every lunch hour Senate staffers rush to the House side of the Capitol like starving New Yorkers of the future storming the last Soylent Green vendor."

This is a prime example of government running something as it believes it should be run, as opposed to what the public truly needs and demands.

"According to auditors, the chain of restaurants run by the Senate food service, including the snooty Senate Dining Room, has almost never been in the black. It's lost more than $18 million since 1993 and dropped about $2 million this year alone."

Well, there is a bit of shock within this article that might surprise many socialist-minded people out there. The Democrats plan on fixing this problem by privatizing it. No need to put on your glasses. You read correctly. Some Democrats have seen the free market in action and are looking to give it a try.

"The House of Representatives made the switch in the 1980s, and its food service is now better. And profitable. $1.2 million in commissions since 2003. The Senate has taken 20 years to follow suit."

Jonah Goldberg then said it best when he continued, "This was a painful decision for many Democrats who believe that privatization can't be justified simply because it delivers better service and higher quality for less money. 'What about the workers?' they cried. Apparently, some Democrats feel that the top priority in the restaurant business is to generate paychecks for people who are bad at their jobs."

I want to thank Jonah Goldberg for saying it so plainly.

Socialism, in all its variant forms, must be completely eradicated from government in order to make America great again. Let the free market reign everywhere!

Barack Obama -- Man in Tights.

Barack Obama wants to play the role of Socialist Robin hood, by stealing money from the rich and giving it to the poor. He wants to levy new taxes on oil companies for making too much money. He wants to raise income taxes on those earning more than $250,000. He wants to raise the capital-gains and dividends taxes on the wealthiest Americans. He also wants to raise corporate taxes. Why does Obama want tax hikes on job-creating businesses? Because he has no understanding of economics.

Has anyone noticed that Obama wants to involve himself in a massive wealth redistribution scheme? Redistribution of wealth is a Socialist idea. In the Socialist mind, the rich are evil and greedy, and because so much wealth is in their possession, it cannot be in the possession of the poor. Therefore, a brave and heroic person must step forward and become the voice of the poor and oppressed, and must shout to the rich bullies, "Stop being so greedy! Share your wealth! Give it away, or I it shall be taken from you!"

Very few people seem to understand that Robin Hood was not a hero. He was a thief, a robber, a crook. His main characteristic was not an overwhelming sense of altruism, but an overwhelming sense of vanity. For had he truly been altruistic, he would have given to the poor all that he owned. Yet, Robin Hood did no such thing; he gave to the poor all that other people owned. There is nothing heroic or admirable about that. He was a criminal in really gay clothing.

So what does this have to do with Obama? Obama is a Democrat, and Democrats have a socialist mindset. They believe in the fairy tale called Marxism. They believe in the mythology of Socialism. They believe that the rich are evil, and only good for giving money to the Democratic Party. No one should have more than anyone else, for that would be unfair. Of course, the Democrats are just like Robin Hood; they are more than willing to hand out other people's money.

So what will the Democrats do with all the money they will steal from the People through taxation? They intend to "help the People" by giving it back to them--in the form of social programs that encourage laziness, discourage entrepreneurship and promote dependence on the State for all necessities (Nanny State economics). The Democrats want to punish people for being successful, for working hard, for being entrepreneurial, and for believing in free market ideas and individualism that discourage dependence on the Nanny State.

The Democrats have no real knowledge of economics. Believing in Marxism, Socialism, Communism, and Keynesian economics makes one economically stupid.

So what will be the result of an Obama presidency? By taxing job-creating businesses, many businesses will stay alive by shedding their dead weight--unskilled workers and non-productive workers who are already being paid more than they are worth because of the socialist minimum wage law. Either businesses will shut down due to unnecessary expenditures forced upon them by government--resulting in lost jobs and unemployment, or these businesses will fire people just to stay afloat--resulting in lost jobs and unemployment, or they will outsource their job openings overseas, where a wage far below the American minimum-by-law is higher than what a foreigner would make in his own country. This, of course, would result in lost jobs and unemployment. Do you see a pattern here?

Either way, Obama will "help" average working Americans by getting them fired. Way to go, Mr. O! And don't think Hillary would have done anything different. She's also a Democrat who harbors the same socialist ideology.

But don't they know any better, one may ask? Not really. Aren't Americans aware of all this? Unfortunately, most Americans are economically stupid as well, and those who know better can't seem to get into power (e.g. Ron Paul). So, why do Democrats insist on sticking to their failed ideology? Easy, because their ideology requires a government with more power, and they like power. But won't it ruin the economy, and make it worse than it already is?

To twist a famous phrase: It's a Democrat thing. You wouldn't understand.