Wednesday, March 30, 2011

Mises and Gresham's Law

Again, quoted passages are from Human Action Chapter 17 section 12.

Gresham's Law is often stated: bad money drives out good. This is incomplete, and an incomplete statement of Gresham's Law. It is more accurately stated: Bad money drives out good if their exchange rate is set by law.

If different "money" is free to trade, without any hindrance from legal tender laws, tax preferences, etc., bad money will not drive out good, nor necessarily will good money drive out bad. Different "monies" will find their value in the market, and will trade. Period.

However, if one money is protected by legal tender, and the valuation is fixed by government, then yes, the bad money will drive out the good. All will get rid of the over-valued (by government decree) money, as it MUST be accepted by the counter-party, and accepted at a value higher than the market would determine.

Mises addresses this idea as follows:

"If, however, the things concerned are not money-substitutes and are traded at a discount below their face value, the assignment of legal tender quality is tantamount to an authoritarian price ceiling, the fixing of a maximum price for gold and foreign exchange and of a minimum price for the things which are no longer money-substitutes but either credit money or fiat money. Then the effects appear which Gresham's Law describes."

If, by decree, the "thing" that is no longer a money substitute must be accepted not at the discounted value of the market, but at the inflated value of the decree. This money will always be spent first, and it will drive the truly "good" money out of circulation. Why would someone spend a 100 cent dollar when a 90 cent dollar must be accepted by the counter-party at 100 cents? Bad money will drive out good money.

Mises then addresses what would happen in a free banking environment, where competing currencies trade freely without legal tender. In fact, he is for the more the merrier, as in the following:

"However, freedom in the issuance of banknotes would have narrowed down the use of banknotes considerably if it had not entirely suppressed it. It was this idea which Cernuschi advanced in the hearings of the French Banking Inquiry on October 24, 1865: "I believe that what is called freedom of banking would result in a total suppression of banknotes in France. I want to give everybody the right to issue banknotes so that nobody should take any banknotes any longer."

He proposes that the good money will drive out the bad. In a freely competitive environment, where multiple banknotes would be issued, he sees the entire concept of banknotes disappearing, in favor, presumably, of good coin.

I think this will be true for the absolutely worst banknotes. However, it strikes me that most will continue to trade, but not at face value. Perhaps this is what Mises is getting at with the following:

"But if any doubts exist concerning their prime character, people will hurry to get rid of them as soon as possible. They will keep in their cash holdings money and such money-substitutes as they consider perfectly safe and will dispose of the suspect banknotes."

For safety, people will keep the most secure notes, the notes issued by banks with the best reputation. They will preferably spend the suspect notes, or more likely take them to the issuing bank for 100 per cent redemption.

Such will be the check on any bank, and this I return full circle to Mises and free-banking. He sees the market perfectly capable of "policing" if you will, the various banks participating in the market. Once the reputation of a bank is in question, notes will be brought to the bank to be redeemed. Unless the bank is acting properly in its reserves, it will soon find itself depleted. The end comes quickly when the reputation is in question.

Tuesday, March 29, 2011

Mises and Real Bills

As might be obvious from several of my posts here, I enjoy a robust discussion about Real Bills / Bills of Exchange. Mises addresses this topic in this section of Human Action (Chapter 17, section 12).

"The notion of "normal” credit expansion is absurd. Issuance of additional fiduciary media, no matter what its quantity may be, always sets in motion those changes in the price structure the description of which is the task of the theory of the trade cycle."

Mises makes the statement that there is no such thing as a "normal" credit expansion. This statement strikes me to mean that there is no "rule" that can be applied to money supply growth; no standard increase that can be viewed as normal. No Taylor rule. No Milton Friedman acceptable range of 3% to 5% per year.

Inherently, this must be so. There is no formula that can better determine the necessary supply of money and credit better than the market can. The market determines appropriate supply and demand for countless products, most of which are far more complex than the "product" of money and credit. Why is it that somehow credit is too difficult to be left to market forces, when it is nothing more complex than one actor with excess savings making his savings available to another who requires credit.

"The Banking School taught that an over issuance of banknotes is impossible if the bank limits its business to the granting of short-term loans. When the loan is paid back at maturity, the banknotes return to the bank and thus disappear from the market."

From what I understand from proponents of Real Bills, the over issuance is not impossible; banks can over issue notes, but will soon be disciplined by the market when it becomes clear that this is the practice, or when the notes cannot be redeemed.

"However, this happens only if the bank restricts the amount of credits granted. (But even then it would not undo the effects of its previous credit expansion. It would merely add to it the effects of a later credit contraction.)"

Here Mises recognizes that the bank must remain disciplined in its issuance of notes. The more important point is in the second sentence. Proponents of Real Bills do not see inflation because they state the notes are redeemed within a short period; in the case of Real Bills, 90 days.

Mises makes the point that expansion is expansion. The negative ramifications of expansion may be limited, due to the short time window, but it is still expansion, with all of the potential distortions this will cause.

"The regular course of affairs is that the bank replaces the bills expired and paid back by discounting new bills of exchange. Then to the amount of banknotes withdrawn from the market by the repayment of the earlier loan there corresponds an amount of newly issued banknotes."

But it is worse. The individual notes may disappear in 90 days, but the expansion does not end. Redeemed notes are replaced with new notes; this, the expansion is permanent.

In these few sentences, Mises lays bare what should be obvious to all about Real Bills. They are expansionary to the money supply and credit. The expansion, even if of a limited duration, will result in all the negative consequences of any credit expansion. Further, the expansion is not limited, and redeemed bills are constantly replaced by newly issued notes.

I go into much greater detail about these criticisms in many of my previous posts at this site. I feel it would be redundant to go further in this post reviewing the work of Mises. For those interested, look under labels for Fekete or real bills.

I am pleased that Mises agrees with me!

Monday, March 28, 2011

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.

Wednesday, March 23, 2011

Poor Barry Bonds

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

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....

Tuesday, March 22, 2011

Why the Wars? part 2

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


"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:

Tuesday, March 8, 2011

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

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.

Sunday, March 6, 2011

Ingo Bischoff, Part Two

I was asked a series of questions by one of the feed-backers at the Daily Bell, the same Ingo Bischoff interview as referenced in my previous post.

Following are my responses:

@Not Anti-military Per Se

Thank you for your kind comments.

“If Real Bills are like credit who gets the interest?”

Who says credit must come with interest? Credit can be created with or without interest, depending on the desires of the one granting the credit, I imagine.

“Real Bills seem to arrise from production and consumption which seems to be analagous to non fractional credit from savings…”

Fekete is quite clear, to quote him: “I made the central point that the source of commercial credit is not saving but consumption.”

Two people cannot eat the same meal. Something cannot be consumed and used in production at the same time. It is fractional reserves on its face.

“With consumption the Real Bill was in existence only along side the unsold product. This is not credit from nothing.”

From where did the means arise to produce something? Funny money and funny credit can be created from nothing; the worker producing goods financed by Real Bills must eat something while he works for 90 days.

“Inflation transfers wealth, true? Who is the beneficiary of this transfer with Real Bills? Production apparently.”


“Real Bills seems to decentralize wealth and power….In any event, Real Bills seem to limit the role of bankers generally and central bankers specifically.”

If arising from a free market, certainly. Ingo continues to indicate a role for the state, and this causes me to hesitate. I do not state anywhere that Real Bills offer no benefit to the current.

“But could Real Bills cause a misallocation of capital?”

Yes, as production is demanding resources that would not have gone into that which it was used absent Real Bills.

“Inflation causes rising price level, true? Real Bills may when the come into existence but then they disappear after ninety days.”

Inflation of the money supply may or may not result in a general increase in prices. Many other factors are also involved, technology improvements for example. That real bills are inflationary only for the time they exist makes them no less inflationary. They no less distort the market and send false signals for this period of time.

“Thru DB interviews it appears that by way of Geo Mason U Econ "Austrians" support fractional banking and even consider it sacrosanct apparently. At the same time these "Austrians" are clear in their denunciation of Real Bills.”

Generalizing the GMU crowd is probably not safe, but my overall read is that there are some there who support FRB only to the extent that it is fully left to the market, not supported by the state. I cannot disagree with this, although some affiliated with the Mises Institute take strong exception. I note that Ludwig von Mises himself seems to indicate acceptance of the possibility of fractional reserve banking within the context of a fully free market in competitive banking and that the market will discipline this to the extent necessary.

”Perhaps most notably Real Bills apparently do not lead to intertest charges as a drag on production or consumption.”

I do not see interest as a drag on production or consumption. All activity must be financed somehow, be it by debt capital or equity capital. Either type of capital will demand a return, which the user of capital owes to the provider of capital. Why isnt it said that equity capital is a drag on production? Does not the provider of equity also demand a return?

One of the issues that doesn’t hold water for me is the difference to the businessman of interest vs. discount. Both reduce from the source of fund (being revenue). Both reduce the bottom line (being profit). In both cases, a third party is taking a cut for carrying paper. All the pretty words in the world do not change these facts. I am quite certain this makes me too stupid for the Real Bills crowd, but to the businessman the distinction is meaningless.

More on Real Bills, with Ingo Bischoff

The interview with Mr. Bischoff can be found here:

I posted the comments below at the Daily Bell site as well.

Real Bills are inflation. They expand the money supply beyond the savings available. Setting aside the other (possible) merits of Real Bills, it cannot be ignored that they are inflation. I have demonstrated this before, using the words of both Fekete, and Bischoff, I will do so again.

IB: These surplus goods where exchanged via a "barter system". When the barter system proved too localized and lacking in a fixed standard of value, the "money system" evolved….Gold is "Money", because it is the one commodity with constant or near constant marginal utility.

BM: from these statements, gold represents the value of the “surplus goods.” Therefore, gold represents the “savings” produced and available within an economy.

IB: Gold as a medium of exchange lost its usefulness when the demand for goods outstripped the ability of physical gold to finance the production of goods.

BM: Is the concern the loss of the ability of gold to finance the production of goods? Are we talking about a solution for a lack of credit? There is only a lack of true credit if there is a lack of savings. By definition this is so. Any creation of credit beyond savings illegitimately transfers wealth from one party to another through inflation.

IB: Gold as a medium of exchange to separately finance each step in the production of consumption goods in a modern economy is completely unworkable.

BM: Gold as a medium of exchange ESPECIALLY in a modern economy is completely workable. We don’t need images of tradesmen carting bags of gold to the town market. With modern computers and telecommunications, gold can be used as a medium of exchange instantaneously, countless times per day. The infrastructure is already in place.

IB: The solution was found by using Real Bills as "clearing instruments" to finance the production of consumption items.

BM: Clearing instruments or financing instruments? They are not necessary to clear, and if a financing instrument, they are utilized because, as IB says above “Gold as a medium of exchange lost its usefulness when the demand for goods outstripped the ability of physical gold to finance the production of goods.”

To be clear, IB states clearly that the surplus produced by society is represented in the gold. But when there is not enough gold (surplus, or savings) to finance production, Real Bills are utilized. It is fractional reserve banking. Credit despite lack of savings. This is inflation.

IB: Real Bills function as "clearing instruments." They are not "credit instruments", as is widely asserted.

BM: This is widely asserted only because proponents of Real Bills go back and forth, as IB does often in this interview, for example: “The solution was found by using Real Bills as "clearing instruments" to finance the production of consumption items.” Can IB blame the critics for this misunderstanding?

IB: “Soon, the use of gold as a medium of exchange proved insufficient to finance the production of goods and also facilitate their exchange.”

BM: Once again, are they clearing or are they credit?

IB: Only producers of consumption items which are sold within ninety days are acceptable to a drawer of Real Bills.

BM: Says who? Some law passed by parliament a few hundred years ago? As DB points out in the afterthoughts, IB shows a faith in the state to protect trade that has little basis in history.

IB: Strong supervision by the State over commercial bank operations is essential to prevent rogue bankers from creating havoc.

BM: See my comment immediately above.

IB: Contrary to the widely held perception that the Federal Reserve Act was the result of lobbying and manipulations by the big money center banks, the Federal Reserve Act was really an attempt by the states to rein in the violation of good banking practices by the big money center banks and to preserve the application of the "Real Bills Doctrine" for commercial banking.

BM: What?

IB: The original FRA of 1913 authorized a "redeemable" Federal Reserve Note to be created only against Real Bills and gold within the system. "Anticipation Bills" or U.S. Treasury debt instruments were specifically banned from monetization under the original 1913 FRA.

BM: I have no idea if this was what was in the original legislation. I will grant that it is true. With that, is it not possible that the camel just wanted to get his nose under the tent? The big banks worked out a law that had some teeth, only knowing that, once under the tent, they could manipulate it to their liking?

IB: When in the early 1920s the national economy experienced a recession, the NY FED under Benjamin Strong promptly violated the prohibition against the monetization of U.S. Treasury debt by initiating Federal Open Market Operations (FOMO).

BM: As I said above, perhaps this was the plan all along. Getting the nose under the tent is a useful strategy for actions that must be shrouded in stealth.

IB: With the prohibition of gold ownership, the Real Bills market was destroyed. Businessmen will simply not draw Real Bills that would only be settled with irredeemable currency.

BM: It is done today, every day, in a different form. Revolving credit, which is exactly what Real Bills represented when used.

IB: With the ratification of the 17th Amendment, individual States as governing entities lost their seat at the table of power in the federal government.

BM: No, the states lost their seat at the table in 1865. After proving the point with 600,000 dead, the federal government had little trouble convincing states to tow the line. BTW, wasn’t the 17th amendment ratified at a time when the states controlled the selection of senators?

IB: I assume that by this question is meant, could Real Bills coexist with central banking? The answer is yes. They can, as long as the central bank currency is not protected by a "legal tender" provision.

BM: I am fully supportive of competitive currencies and banking in a free market.

IB: Of course, the ideal is to have a redeemable "National Reserve" currency based on the Real Bills Doctrine similar to the redeemable "Federal Reserve" currency created under the original Federal Reserve Act of 1913.

BM: No, the ideal is to allow competitive banking and currencies, with no one method or system supported by legal tender or other state mandated preferences over any other.

IB: It does not matter whether a "U.S. Dollar" is valued to be 1/20.65, 1/35 or 1/42.22 of an ounce. Any reasonable amount of gold that could be struck into a workable coin would do.

BM: EXACTLY. So when would there never be enough gold? The value of gold relative to the things gold would buy would adjust regularly with the supply / demand characteristics of the various commodities.

IB: Real Bills in and of themselves are non-inflationary. Their volume can expand and contract without causing any inflation whatsoever. It must be remembered that Real Bills are not "credit instruments". They are "clearing instruments" which facilitate that consumption items get to the consumer without first having to pay separately for every step in the production process.

BM: One more example of the reason for the confusion. They are clearing instruments (not needed certainly given today’s technology), but they are not credit instruments (although they came about because there was not enough gold, gold representing the value of the surplus). In and of themselves, Real Bills are inflationary to the money supply.

IB: The criticism I seem to detect is that the free-market quarter views Real Bills as credit instruments and therefore deems them inflationary. Real Bills are not credit instruments and inherently are non-inflationary.

BM: I hate to keep repeating myself, but must because IB keeps repeating himself. See my comment immediately above.

IB: I must correct you. I favor a "land value tax" which is fundamentally different from a "land tax".

BM: In one of our earlier conversations, IB introduced me to this concept. As much as I abhor all taxes, this bears some study. I maintain some interest because I can see it not as a tax paid to a state, but as a system that could likely be supported by a free market.

Friday, March 4, 2011

Bail Out the Banks

The original article at The Daily Bell can be found here:

The subject interview can be found here:,1518,748239,00.html

DB: “There is no head-scratching over HOW banks became undercapitalized. There is only the assumption – a nearly religious one – that banks need to be recapitalized, especially in Europe.”

In the recent Rickard’s interview, he goes through the point of the world being bankrupt. If you could prepare a balance sheet for the economies of the world, there would be no equity, in fact negative equity. I would safely speculate this is a first in modern times, likely a first ever.

DB: “For Eichengreen however, the answer is not to cut spending. The tax stimulus is very ineffective, he says, because it tears another hole in the budget and rich people are not inclined to spend the money that they save with the cuts.”

Banks need to be recapitalized, but of course we can't do it with real savings (which can only be provided in any quantity by the "rich"). One more stupid economist convinced that spending is the path to creating wealth, and savings destroys wealth.

It is simple: true savings results in investment, investment results in productivity improvements, productivity improvements result in improving conditions for man on earth. Remove savings, and man’s condition on earth worsens. We have seen visible signs of man’s worsening condition in the Western world for at least 40 years coincident with the destruction of savings. It is now becoming quite visible in the Middle-East today, and likely soon the tide will turn in China.

DB: “The idea will be to put a basket of currencies in place via the IMF's SDRs that will include the dollar.”

For 100 years the economies of the world have been on the path of wealth destruction. They are at the end of that road. A new currency does not create new capital. It does not improve the state of the balance sheet. The “real stuff” hasn’t increased. The introduction of a new currency only results in the re-allocation of the previously existing real stuff. Real assets don’t increase, liabilities stay the same (in fact, increase, because people are fooled into thinking they have new, real capital).

DB: “We would hope that the chaos that Western powers-that-be are now inflicting on the world will result not in another elite-mandated system but a general breakdown of the abysmal fiat-money system.”

They may last long enough to implement the SDR scheme or some other, although events seem to be moving so quickly that this is not an even-money bet, in my opinion. They may not make it to this point. Whether before or sometime shortly after the introduction of another fiat money scheme, the system will fail. Of this there is no doubt. Smaller communities will be left to pick up the pieces and decide, for example, what to use as money.

Eichengreen (from the Spiegel interview): “But I worry that [bond traders] will begin to distrust the US soon too.”

This is why they will fail. The laws of economics will win out over the desires of man. He worries about the “distrust” of bond traders, giving away the fact that it is all a con game. There is no bond trader that wants to be the last one out the door. Sooner or later, someone will yell “fire”.

Thursday, March 3, 2011

Coercion and Choice

@Bill Ross

Thank you for the thorough post.

When he was alive, my great-grandfather (call him “Pops”) would tell the story of his old neighborhood, where he had a small market. He lived most of his life there, and knew many of the other shopkeepers, as they all grew up together in the neighborhood.

One day the police came to see him. It turns out pops was paying $20 a week to some local guy (call him “Muggsy”) for “protection”. Of course, the “protection” offered was to be protected from further aggression by Muggsy. I think you get the picture.

The officer wanted to know why Pops was paying this to a known ruffian, in fact Pops was funding Muggsy’s illegal acts. Pops explained that he initially tried to protest, but Muggsy would have none of it. One day Muggsy showed Pops a picture of a young girl playing in the schoolyard. That girl is my grandmother. Pops got the point, especially after his fellow shopkeeper went to the hospital for six weeks with multiple broken bones. Everyone knew why he was beaten, no one had to say anything directly.

So Pops explained to the officer that he found no good way out of the situation. In fact, it was when Muggsy told Pops to avoid telling the cops when he showed Pops his daughter’s picture. Besides, Pops was no dummy. He knew that the cops were in on Muggsy’s racket. Pops knew he had nowhere to turn, so it was best to just pay and shut up.

Pops now had a problem. The officer said that Pops was under arrest for aiding a known criminal enterprise. Pops was stunned, yet at the same time resigned to this. Both feelings were caused by the same irreconcilable conflict. He was coerced, and there was no good choice for him to make in this situation. Sure, he sometimes thought about moving to another town, but even if he could scrape together the capital to do it (hard to do when Muggsy was sure to take every excess earnings, thus disallowing savings), he also knew, from stories told by his cousins who lived elsewhere, that pretty much every city he went to offered the exact same condition – every town had a Muggsy. Pops knew nothing good would come from him fighting Muggsy, as he would likely end up leave his family helpless, as the family was in no condition to care for themselves…too young, too old, etc.

End of story.

Now, there isn’t one ounce of truth in the story I just told. Just using it for an example.

Choice (and therefore responsibility for choices made) ends where coercion begins. I do not say this is an absolute, one-zero event, as even in situations of complete coercion, we make judgments about how far we are willing to go, and how much we will protest (either actively or passively). Alternatively, in cases of relatively minor coercion, individuals are not automatically excused from any and all acts thereafter committed. Even major coercion does not relieve one from receiving justice for major crimes. “I was just following orders” may be valid for cleaning the latrine or guarding prisoners of war, but not for the uses that this statement has purportedly been used for in the past.

I consider this in today’s world. There is virtually nowhere to go in this world to avoid supporting one regime or another. Yes, there are relative differences in the regimes, but even these must be weighed by evidence and personal circumstance.

Therefore I find escape by jurisdiction is not a possibility (perhaps to degrees, but you don’t seem to leave room for degrees in your statements). What about escape within a jurisdiction, as you point out you have done to some (or some great) degree? I can imagine this, but not absolutely.

Certainly, one can decide to not provide service to another of his fellows. No income tax. I got that, perhaps with independent wealth (but where did this wealth come from? Was it not taxed at one point in time?). What about no gasoline tax, no property tax, no sales tax, etc? How are these avoided? I can envision a life of complete sustenance and solitude on a farm, never transacting business with anyone else. But how does one have a farm without paying property tax on it? Perhaps lease it from the owner? But then the owner is paying property tax on it, and the tenant is funding this. The circle has no end point. What about going to the market in town? Even doing it by horse and wagon still places you on roads paid for by the public purse. What about going to court for the inevitable fight? This certainly requires a trespass of some sort, whatever fully justifiable reasons one might have. Tax on the cable bill? Internet connection? (Wait, how does one get around that one and participate in this forum? :-))

Certainly, one can choose to provide useful services to another of his fellows and not declare the income or pay the tax. I have read of such people. Cash transactions and barter can be utilized, and are certainly difficult for authorities to track. (Wait, no cash transactions, as that is using fiat currency which inherently represents stolen wealth.) Living in the underground economy is a difficult decision for anyone to make, as the risks seem significant, even more so if one has to think about caring and feeding of a family. And still I find no answer to property taxes, sales taxes, using public roads, etc. or using cash….

So I come back to judgment and degrees. Yes, I can agree that to varying degrees, all residents of a geographical region are in some way responsible for the actions of those who claim governance over that region. Either in this world or the next, there may even be judgment. To be just, this judgment must recognize: the same point where coercion begins is also the same point marking the beginning of the end of choice. And without free choice in action, it is difficult to assign responsibility. It takes…judgment. And this isn't absolute.

Wednesday, March 2, 2011

The Art of NOT Being Governed: Civilization?

"If we examine the centripetal narrative of civilization closely, it is striking how much of the actual meaning of "being civilized" boils down to becoming a subject of the padi state."

Reactions by reflex: there is the state, or there is anarchy (in the wrong definition of the word); civilization requires state enforced rules; man living outside of the control of the state is a barbarian, uncivilized.

Yet are these true? Or is the opposite so? Consider: the state is the monopoly of legalized force over a given jurisdiction. How is living under such a system described as "civilized"? Some men have authority to force others to do as ordered, to pay as ordered, to ingest as ordered. With disobedience comes punishment, up to and including death.

Relationships defined by force is called civilization? How is this so? If your neighbor told you to trim your hedge or he will shoot you, would you describe him as civilized? If he said he didn't want to work and that you should pay his rent, or else he has the authority to put you in jail, with what term would you define your relationship? Civilization does not come to mind.

Voluntary relationships or forced relationships: if you observed two societies, one living through voluntary exchange and the other living through force, which would you call civilized? In which would you choose to live, if offered the choice?

There is nothing civilized about using force to get what one wants. There is everything civilized about a society where voluntary relationships define the society. I avoid for now the concern of "living in utopia, it will never work." This isn't my point. The issue is what we consider as civilized, and what we consider as barbaric. Without the state, society would collapse into lawlessness and crime. I argue that, in fact, lawlessness and crime define the very nature of the state.

The Art of NOT Being Governed: Population Control via Slavery

"...none of these padi states flourished except by slave-raiding on a substantial scale."

So says the author. "...there was no state without concentrated manpower, and there was no concentration of manpower without slavery."

Such observations fly in the face of the standard history, that as the state developed, so did civilization; that people voluntarily migrated to the protection and luxury of the state. this certainly seems not to have been the case.

But is it so surprising? When offered the choice of a life free from legalized coercion, or one where your living and breathing are by permission, which choice would most people make? Even if there was likelihood that the organized state society offered some opportunity for stability, most would choose freedom.

Consider the Great Wall; was it built to keep invaders out, or to keep the subjects in?

In any case, the history of slaving is not obscure, it is well documented because the taking of captives was one of the prime public purposes of statecraft.

It is an interesting and thought provoking subject. Where people had some choice of living under a state or living outside of it, the choice was overwhelmingly to live outside of it; conversely the primary means of populating the state was by force.

Today, the options of living outside of the state are virtually non-existent. But what of this? When there was the option, it was clear that living under the state was slavery. Just because there is no "opt-out" clause today, does this make one's life under the state any less the life of a slave?

My intent is not to equate life in a Western state to slavery in the West of the 17th and 18th century. I only raise the issue: is it any less slavery today than during times past, considering that living under the state requires a captive population, one where force must be employed to keep the people subject?

Tuesday, March 1, 2011

The "Wealth" of the West
Posted by Bionic Mosquito on 3/1/2011 10:36:51 AM

"Yet the one certainty in this century of Western angst has been that despite repeated war and economic crisis, the West has remained supreme throughout." UK Telegraph/Jeremy Warner

It often strikes me that, even after at least 100 years or more of abuse, the West remains visibly "wealthy." I have concluded that this is solely due to the enormity of wealth created over several hundreds of years. Wealth not just in terms of financial assets, but culture, art, philosophy, etc.

Consider the inhabitants of the USA. Many live on this storehouse of wealth, not realizing they are consuming it daily and producing none to replace it. What storehouse? The work of Locke, Paine, Jefferson, and countless others ' the philosophy of individual freedom and liberty, all men created equal, etc. many still believe they have it, despite never having read any of it directly or in any way understanding it.

How is it being consumed? Every act of Congress, Executive Order, Patriot Act, financial bailout, public education, etc. Each one chips away at the previously stored wealth of the philosophy of freedom and liberty ' call it classical liberalism.

Yet, many still believe they live free. It speaks to a) the amount of wealth that was once stored in this idea, and b) how very long it can last even if not replenished.

What of the monasteries and universities of Western Europe. Consider the centuries of training, education, development of philosophy, etc., behind each one of these hundreds of entities. No, not all of it pointed to liberalism, but much contributed toward liberating events culminating in the 17th and 18th century.

I have mentioned before: Jacques Barzun (From Dawn to Decadence) and Martin van Creveld (The Rise and Decline of the State) cover this (in different ways) much better than I can. They both conclude the notion of state is at an end, and smaller more localized structures will replace it.