Dubious Banknotes

From Human Action, Chapter 17 section 12

"A lot of nonsense has been written about a perverse predilection of the public for banknotes issued by dubious banks. The truth is that, except for small groups of businessmen who were able to distinguish between good and bad banks, banknotes were always looked upon with distrust. It was the special charters which the governments granted to privileged banks that slowly made these suspicions disappear. The often advanced argument that small banknotes come into the hands of poor and ignorant people who cannot distinguish between good and bad notes cannot be taken seriously. The poorer the recipient of a banknote is and the less familiar he is with bank affairs, the more quickly will he spend the note and the more quickly will it return, by way of retail and wholesale trade, to the issuing bank or to people conversant with banking conditions."

"If the governments had never interfered, the use of banknotes and of deposit currency would be limited to those strata of the population who know very well how to distinguish between solvent and insolvent banks."

I am finding with Mises that there is little for me to add when it comes to his writing. This is true with these passages as well. In these passages he makes a valuable point: by their very nature banknotes will only be used to any great extent by reasonably sophisticated businessmen, those qualified to make a distinction between good and bad notes. For many of the rest, they will go to redeem notes quickly, not being always sure of the quality of the institution behind the note.

Faith was increased only as the government became involved, making users of notes less concerned about the true backing. Of course, government did it for the good of the poor and less capable clients...but these were the same people who avoided keeping notes for any length of time anyway.

We see this same complacency in spades today, for example with FDIC insurance: how many people think at all about the solvency of their bank? Absent such "insurance", how long would troubled banks stay in business? How much more sophisticated would depositors be about the home for their funds?

Here again, Mises does not call for a banishment of any practice (other than by implication the practice of government interference). Instead, he sees in the free market certain built-in mechanisms to minimize the likely abuses by less-than-scrupulous businessmen.

The Art of NOT Being Governed: Defense Benefits of Being a Non-State

"Acephalous communities like the gumlao were subversive to British - or any other - administration; they provided no institutional levers or handles with which to enter the community, negotiate with it, or govern it....Egalitarian acephalous peoples on the fringes of states are hard to control.They are ungraspable. To the command "Take me to your leader" there is no straightforward answer. The conquest or co-option of such peoples is a piecemeal operation - one village at a time and, perhaps, one household at a time - and one that is inherently unstable."

It is often wondered how a society can defend itself against outside aggressors absent an all-powerful state providing such defense. I do not take the above quoted passage as the last word on this topic, however an interesting idea is presented. Without a leader, without central levers of command and control, it becomes rather difficult for anyone to take power. This is quite effective as it relates to an outside aggressor.

It may seem such a strategy can only work in small, isolated pockets. I don't know. However it seems it could be quite effective even in a large geographic region like the United States.

Imagine no central control or bureaucracy via which to exercise victory or subsequent control. What might this mean to a would be conqueror? The first hurdle would be (for many) several thousand miles of ocean on two sides. Inherently a logistical nightmare. Beyond this, what to do when you land? Is it feasible to conquer the continent one home at a time, over an area 3000 by 1200 (more or less) miles? Other than a few large cities, the entire continent is sparsely populated. No small feat.

Consider the hundreds of millions armed, each of whom must be overcome. Yet no central machine to do the heavy lifting of coordination and control. Each victory, one person at a time.

You might choose to make a threat: "We will nuke you." With whom will you negotiate terms? What if no one came to talk to you?

This was one of the strategies of the tribes, in Zomia and I would assume elsewhere. Combined with mobility and hidden underground crops, it served independent minded people quite well for countless centuries. It would seem there are lessons that could be applied today as well.

Poor Barry Bonds

http://thedailybell.com/1917/Bonds-and-BALCO-Again.html

Posted by Bionic Mosquito on 3/23/2011 11:59:02 AM

The primary reason the government is after Bonds is for allegedly lying to the government. Just like Martha Stewart. The underlying "crime" of ingesting something is secondary; it is only the means to an end, the tool of control used to entrap and ensnare. This is one "crime" (lying) the government cannot abide, and an example is always made of any public figure believed to have done so.

Any so-called "fraud" perpetrated by Bonds on the baseball world has been dealt with in baseball. He will likely never get elected to the Hall of Fame; his name will always have the taint of steroids associated with it. There is no reason for the state to get involved in this, and certainly this is NOT why the state is involved, although some might proclaim it as the noble purpose.

However, there is the bigger question of "why" there is so much money in sports, especially in the US, where three major sports can support athletes making tens of millions per year. (And, by the way, two major college sports could do so as well, except the athletes are not allowed to be paid, an entirely different scam.)

It starts with anti-trust exemption. The government allows special exemption (exemption to a law that shouldn't exist anyway, but that is a different subject) to baseball and other sports, allowing owners to collude with each other and exclude others from participating in their markets.

Second is the public financing of stadiums and arenas. Almost all major sports venues are subsidized with tax dollars.

Third is the impossibly lucrative broadcast-rights fees paid by major networks to telecast the events, media being one of the more regulated industries in the US.

Fourth, the truly unique skills required by the athlete to achieve "making it" in this field. The talents of any professional athlete cannot be replaced by Joe the Plumber, and the talents of a Barry Bonds cannot be replaced by 98% of any of the other players in professional baseball.

Fifth, none of this money is possible without the luxury of the world's reserve currency.

Is it any wonder that athletes can be paid tens of millions per year in such a system? Take only one of the above items: the public funding of stadiums: imagine if your employer / business owner did not have to fund the land, buildings, and improvements of capital facilities and capital stock.

Now, add a second feature from my list above: to become employed by this employer / business owner you had to be in the top one-one hundredth of one percent of your field ' in other words, there is no real competition to you because of the uniqueness of your skills. Now throw in the unbelievable revenue from broadcast rights and the ability to be free from rules that other industries must follow, unlimited funny money, and what do you get? Fat salaries and fat profits for all.

Government enabled Barry Bonds. The entire structure is set up to allow for unfathomable oversize income, and the set up is by the government. The state must ensure an oversize incentive to get the best athletes to turn to athletics for a career.

But why? The overriding purpose of the state in professional is at least two-fold, and quite obvious:

1) it is the "circus" part of bread and circuses, and

2) to replace what was historically known as religion (with its binding set of morals, ethics, culture, family, etc.) with a new religion controlled by the state.

Any who have witnessed American sports, with military flyovers, crying fans, fantasy sports, etc., sees full well how effective the state has been in achieving its purpose.

We should not be surprised that any individual reacts to such incentives with any means available, especially when those means were NOT even proscribed by the employer (which they were not at the time of Bonds' alleged malfeasance).

The trial is a scam, the alleged crime is the one the state hates most, and the system itself is enabled by the state. I say: poor Barry Bonds. Even at his level, just one more pawn.

Germany and the EU

http://thedailybell.com/1916/EU-Troubled-Titan.html

Posted by Bionic Mosquito on 3/23/2011 11:13:24 AM

DB: ...a provocative editorial claiming that the European Union still hasn't been able to come up with a financial or political formula to alleviate the stresses caused by the unfolding sovereign debt crisis of the EU's Southern PIGS.

BM: They haven't come up with one because there isn't one to be had. They cannot save both the bonds/banks and the currency. Choose one or the other.

DB: ...we are not averse to analyzing articles that provide "pushback" as regards these same themes. They can certainly illuminate the underlying dialogue and provide further insights. Rachman makes some good points about the EU's ongoing difficulties.

BM: Perhaps Rachman's role is to point out to the technocrats and the people where they are falling short, and just "get on with it."

DB: Rachman's verdict: "I am skeptical about the pledge that they will do 'whatever it takes' to save the euro. That may turn out to be the ultimate phantom giant."

BM: They can save the bonds/banks or save the Euro. They cannot do both. My guess is in the end they will save the currency, as it allows much more control. They can leave the bonds/banks to each separate country to deal with.

DB: Is Brussels willing to invade Germany?

BM: It is quite interesting; Germany went its separate way on the Libya vote. Go to sleep and rise again in about 30 years. Would you be terribly surprised to find Germany in an alliance with Russia and China (perhaps Australia as well)? Economically a wonderfully perfect fit for all parties. Militarily, also able to hold their own. Not so difficult to fathom, once the dollar loses it role of prominence.

Posted by Bionic Mosquito on 3/23/2011 12:18:29 PM

DB: If you buy off on the idea that the Anglosphere went to war twice with Germany because that was the culture that worried the City of London elites the most...

I think Germany did not just worry them the most, but the Germans (and Japanese) with the most productive middle-class, were the most valuable to co-opt under the control of the PE.

Neither the Germans nor Japanese would be easily subsumed if they remained as equal partners to the British, so they had to be forced to submit through violence.

Why did England turn its back on Japan after WWI? In the first war, they were allies, and rightly so (from an empire perspective). Japan watched over British interests in Asia. But perhaps as partners, Japan would not submit, so they needed to be turned into an enemy.

Why did Britain choose to fight against Germany instead of fighting against Russia? Stalin was the far bigger evil in the 1930s, having killed tens of millions of his own whereas Hitler maybe killed a couple of thousand of his own.

If Stalin was made the enemy (as Hitler appropriately and apparently felt Britain would do), the war would have gone MUCH easier for Britain. The Germans would have done all of the heavy lifting, with Britain only ensuring the sea lanes for trade.

But Britain chose to fight Hitler....

Japan and Germany, two of the most productive societies of the 20th century, could not be brought under the control of the PE by treaty or by compromise and diplomacy with Britain. They could only be brought under control by military domination. Thus Britain made two seemingly stupid decisions: 1) turning its back on Japan, and 2) fighting Germany instead of joining Germany.

With military victory, the elite received two of the most valuable middle-classes in the history of man to exploit, at the cost of shifting some power from London to Washington. An easy trade-off, as both governments were compromised.

Churchill, as the one man in the center of Britain's demise, is hailed as Britain's hero. He can only be called a hero if viewed from a level above the state (he was at the center of the destruction of Britain). He was a hero to someone or something higher than the British and the British people, because he did Britain no favors.

Who might that "someone" or "something" be? I will wait for an invitation to the staff meeting before I decide....

Why the Wars? part 2

http://thedailybell.com/1913/US-Kill-Teams-Target-Afghan-Civilians-as-Trophies.html

Posted by Bionic Mosquito on 3/22/2011 12:05:21 PM

@JeffC

"Damn those who put our children in these places, for these reasons."

I agree with the sentiment of your post. I only use this one quote of yours to make a point: it is the parents of those children that will be most answerable for the children being put in these places.

The track record of falsities and lies behind war is so long and obvious to anyone even casually interested in discovering the truth. Even if one believes all the propaganda for the wars through 1945, how is it possible to accept the stories behind Korea, Vietnam, Lebanon, Kuwait, Iraq, or Afghanistan?

There is nothing of protecting the US behind any of these wars. No such interpretation is possible.

For thirty years or so, every child sent overseas to murder others they have never previously met (and who have never done a thing to harm an American) has gone voluntarily. No compulsion, no draft. They have done so knowing the track record of the war machine, and if they didn't know it...well, ignorance is no defense.

The burden is on the parents. They raise the children this way. They teach them that this is honorable. Do not be mean to Sally next door, but go 10,000 miles away and destroy the lives of countless people who never did you harm.

I have posted this here before, it is a good time to post it again. A scene from "The Americanization of Emily." James Garner gives a wonderful explanation of the concept I am struggling so hard to convey in this post:

http://www.youtube.com/watch?v=i00Jiiak0UE

Free Banking, Part Two

Human Action, Chapter 17 Section 12

“Free banking is the only method available for the prevention of the dangers inherent in credit expansion. It would, it is true, not hinder a slow credit expansion, kept within very narrow limits, on the part of cautious banks which provide the public with all information required about their financial status. But under free banking it would have been impossible for credit expansion with all its inevitable consequences to have developed into a regular - one is tempted to say normal - feature of the economic system. Only free banking would have rendered the market economy secure against crises and depressions.”

What a powerful statement. In this paragraph, Mises makes clear that free banking is the best check on un-backed credit expansion, yet also in a free market, credit expansion is to be expected, and presumably tolerated within the context of a competitive market environment.

Both statements are worthy of further examination. Free banking – unregulated and fully competitive banking – is the best check on credit expansion. Most would see the opposite. Unregulated banks, it is often believed, would be most likely to exceed prudent levels of credit and leveraged. The greed and profit motives in the bankers must be checked by regulation and government oversight to ensure that prudence is maintained in the sector.

Mises says the opposite – that free banking would not go to the excess of credit expansion with the subsequent booms and busts that are visible in centralized, state-controlled banking.

A few minutes of reflection makes clear why this would be so. In the current system, we have seen first-hand the privatizing of profits and the socializing of loss. In such a system, there is no natural market discipline of potential insolvency that would help regulate the banks. the possibility of banks runs, historically employed when the reputation of the bank was in question, has been virtually eliminated with the advent of deposit insurance, again a creature of the state.

Excesses today, in the cartelized monopoly system, inherently pour disease to virtually every institution given that one policy fits all. However, imagine a system where all banks are subject to profit AND loss, where contractual terms have the same meanings as with other everyday businesses, where different banks are free to institute unique currencies, loan and credit policies, etc. in other words, imagine banking to be an industry like many others.

We have no examples of import where EVERY company of an industry was at risk of simultaneous insolvency. Instead we have examples of competition bringing out better quality and lower costs, tailoring services and products in order to capture specific market segments, we have trial and error of new products, on a small scale, thus giving natural opportunity for innovation without introducing systemic risk.

This is what is in store with free banking. The market – being all of the customers and competitors of each and every bank – will regulate each bank. If lending practices are overly lenient, depositors will reduce exposure to the subject institution.

The second statement is equally important. In it Mises suggests that it is possible and even expected that some banks will practice expanding credit. He is speaking here of fractional-reserve lending. He does not call for government regulation, he does not call for criminal prosecution, he does not suggest this “evil” must be avoided at all costs. He requires that all relevant information regarding the bank’s financial condition and commitments be public, such that customers have the opportunity to make informed decisions.

He is perfectly satisfied that, to the extent the practice must be regulated, the market will regulate the practice. If one institution gets carried away, the competitive market will limit the damage to the subject institution and to its customers. He calls for no further punishment or sanctions.

In other words, at least from my read of this section, Mises leaves room for credit expansion in a free market banking regime, as long as fraud resulting from false financial or other documentation is avoided.

“Today even the most bigoted étatists cannot deny that all the alleged evils of free banking count little when compared with the disastrous effects of the tremendous inflations which the privileged and government-controlled banks have brought about.”

Even today, after the most obvious failures of financial institutions throughout the world, it is rare to hear anyone make such a statement. Almost all commentators view more or different regulation as the answer.

What a tribute to the genius and foresight of Mises, that he made these statements a century ago, while much of the world was still on some version of a gold standard, before the central banking in the United States, before the inflation of WWI, the Great Depression, the various banking calamities including the S&L crisis in the US, and most obviously the final deathblow of the crash of 2007 / 2008.

Truly a genius.

Central Banks, the ECB, and Bernanke

http://thedailybell.com/1837/ECB-Hikes-Rates-Crushes-Spain.html


AEP: The ECB's governors might usefully study Systematic Monetary Policy and the Effects of Oil Price Shocks, a seminal work in 1997 by a Professor Ben Bernanke of Princeton. The reason why such shocks often lead to slumps is because policymakers make a hash of it. "The majority of the impact of an oil price shock on the real economy is attributable to the central bank's response, not the inflationary pressures engendered by the shock," wrote Bernanke.

One more reason to fear the US Dollar, even more than the Euro perhaps. For all those who fear / feared deflation, rest at ease. Bernanke was never going to let you down, and statements such as this one attributed to him offer near certainty as to Bernanke's future actions, at least until official measures of price inflation are overwhelmingly significant (high single-digits, low double-digits maybe?).

Monetary inflation is ignored. Price inflation is usually measured via some form of CPI, and this is very likely understated and certainly manipulated. As long as the understated CPI remains benign, Bernanke will keep his foot on the accelerator. And when inflation rears its ugly head via higher commodity prices, Bernanke will ignore these signals as "shocks" as opposed to plateaus. He said so, all the way back in 1997.

However, even Bernanke will have some concern about his legacy, and he will not want to go down as the first (I believe) central banker of a modern Western economy to destroy a currency absent being on the losing end of a devastating war. But he is flying blind (as every central planner must), and he will be too late (as every politician must be), and he has already warned us that he will ignore the signs that would otherwise be significant.

Eventually, deflation may show up in prices of assets that most benefit from artificial credit expansion...maybe. Beyond this, don't worry. Bernanke is on the job.