Color me Confused

Joe Salerno has written an article entitled “The Flipside of the Trillion Dollar Coin.”  From the first time I read the article, I have struggled with many of his conclusions and statements – both on monetary issues, as well as political issues.  You can see a small taste of my confusion in the comments section, for example, Salerno’s comments as basis for my initial question at the site:

When new money is injected into the economy via open market operations, as it is today, it expands bank reserves….In contrast, when the Treasury creates money it does so by writing checks for bureaucrats’ salaries, for entitlement payments, and to pay vendors for government purchases.

I thank vikingvista for patience in replying; however I remain unsettled regarding his replies.  As most (but not all) other comments seemed to be supportive of Salerno’s views, I have decided not to clog the thread up further with my confusion.

Additionally, I struggle with Salerno’s political conclusions as well, for example:

Last but not least, as an adjunct of the Treasury, the Fed would no longer function as bailer-outer of last resort…. A partisan Treasury under the watchful eye of the congressional opposition and in full view of the public will have to make these decisions.

In my ongoing struggle with many of the statements in this article, I have decided that the initial question (as well as follow-on questions) I asked at the Mises site, as well as the political point raised above are of secondary importance.  I will come to address these later in this article, however I would like first to focus on these two points made by Salerno that most color me confused:

Thus, at a given level of government spending, siphoning off resources from the private economy via deficits financed by money creation is no worse than extracting them through taxation….As outlandish as the idea of the $1 trillion platinum coin at first appears, it gives us a glimpse of a monetary arrangement that, although far from ideal, is superior to the current system.

I am confused by both parts of this: 1) between these two alternatives, I believe the method that government uses to extract resources does matter, with money creation being worse than taxation, and 2) if offering for the dollar relatively more credibility is of value, the realities of politics would make this system inferior, not superior.

The system that is behind the idea of the trillion dollar coin is one of money creation from nothing, just as the Fed does today, but with two twists: a) not brought on via debt, and b) controlled by the Treasury Department as opposed to a supposedly independent central bank. Salerno is arguing that inflation (of a slightly different sort than that which exists today) is better than deficits paid for or financed with actual production.

Many propose this today (most famously Ellen Brown), and I have always viewed it as a step in the wrong direction from current methods (although it would likely bring down the dollar even faster, if that is what you like).  Salerno is suggesting it is a step in the right direction, a system “superior to the current system.”  I am reeling….

Hotels and Consensual Government

I am continuing through the book “Public Goods and Private Communities,” by Fred Foldvary.  In this book, Foldvary examines and develops private, contractual means to secure and deliver what many consider to be “collective goods.”

Foldvary distinguishes the contractual community from the sovereign community:

In a contractual community, a member enters into a contract with the other free agents, and the contract provides for the ability of a member to withdraw.

In a sovereign community, unless individuals are legally independently sovereign, the membership is not contractual, since the sovereign agency may impose laws upon the member without his explicit agreement.

He identifies the litmus test for a true, contractual community:

Only when the right of individual, personal secession is constitutionally acknowledged is the membership contractual.

The member must always hold the right to personally secede.  Not to secede only with a sovereign’s permission; not to secede only for a good reason; not to secede only if he has a new place to go; not to secede only after paying an exit tax; but to secede when and if he chooses with no obligations remaining or imposed beyond that which was explicitly agree to initially..

He calls out Paul Samuelson, in his view of the delivery of collective goods:

The proposition by Samuelson and others that provision of collective goods requires government overlooks…the fact that governance can be accomplished by the contractual means as well as by an imposed political process.

As noted in my earlier post on this book, Foldvary argues that the world need not be as simplistic as Samuelson suggests, and in fact is not as simplistic as this – there are many examples of contractual communities that can be looked at as models or templates, presenting concrete examples subject to further practical development.

Foldvary notes the work of Spencer Heath, and his main work, “Citadel, Market and Altar,” appearing shortly after Samuelson’s work noted above.  This work, not surprisingly (given the viewpoints), did not attract the same academic attention.

…Heath wrote that the value of public services is manifested as the rent ‘which attaches to exclusive locations in proportion to benefits received by or at those locations.’ 

In other words, the better the services, the higher the potential rent.

This central idea he obtained from Henry George….But…Heath turned George’s political paradigm on its head.  Whereas George regarded the landowner qua landowner as a passive receiver of rent which he has no part in creating, to Heath the landowner as an entrepreneur has the potential of becoming a ‘producer of and restorer of land values.’

Heath saw this in this an entrepreneurial possibility, where the landowner had the opportunity to increase his rent and therefore his profits by becoming a more efficient provider of more valued services.

…Heath adds, ‘the balance of the rent not required for [public services] will be the clear earnings of the proprietors who have administered and supervised the enterprise.’

Heath offers as an example, the hotel:

‘In a modern hotel community…the pattern is plain.  It is an organized community with such services in common as policing, water, drainage, heat, light and power, communications and transportation, even educational and recreational facilities such as libraries, musical and literary entertainment, swimming pools, gardens and gold courses, with courteous services by the community officers and employees.’

Courteous services…by the department of water and power.  That is a novel concept.

Unlike sovereign governance, proprietary administration is subject to a market discipline.  As Heath put it, ‘the slightest neglect of the public interest or lapse in the form of corruption or oppression would itself penalize them by decline in rents and values.’

Spencer Heath MacCallum carries further the work of his grandfather:

‘The hotel has its public and private areas, corridors for streets, and a lobby for its town square.  In the lobby is the municipal park with its sculpture, fountains, and plantings… its public transportation system, as it happens, operates vertically instead of horizontally.’

The entire organization of a hotel is based on contract, some explicit, some tacit.  Employee agreements, guest agreements, and articles of incorporation: these would constitute the constitution of the hotel and define the law.  Such is the root of contract law: not to be found in a search of law regarding contract, but in the medieval ‘law’ which contracting parties bring into existence by their agreement.

It is clear that the agreements and contractual structures governing guests and employees of a hotel do not address every issue taken on under the term “government” as understood today.  For this reason, Foldvary develops several case studies, broadening the concept with actual examples of contractually-based communities.

The second half of Foldvary’s book constitutes these case studies, casting the net farther and wider than the example of the hotel. For these, I will quote extensively from his summary of each study:

Walt Disney World was selected as an example of a proprietary community.  Although typical of resorts and hotels, its autonomous legal status makes it a prime case study for the commercial provision of collective goods.

Arden Village was chosen as a prime example of a community financing its collective goods from site rents on privately owned land.  It also demonstrates a high degree of voluntary activity.

Fort Ellsworth is an example of a condominium, a common type of contractual community which provides a limited range of goods, and implements the economic principles of funding them from rent.

The Reston Association is an example of a large civic association, resembling a sovereign town, demonstrating that such large-scale operations can be run as contractual communities.

Finally, the St. Louis ‘private places’ show how neighborhoods within a metropolitan area have associations which own the streets and utilities, providing protection and a sense of community.

Together the case studies demonstrate the feasibility of contractual governance and the provision of civic goods under different conditions, each being an example of a more general type of community.

I may write further on this general topic from the case studies.  However, my purpose is not to cover the book in its entirety, but to present his work as a model for contractually organized communities.   For me, the key takeaways include the idea that the relationships are voluntary and that the structure can be disciplined by market forces via profit and loss.  I can imagine associations of many small groups coming together for certain needs (broader defense, for example), and remaining independent for others (streets, community parks, etc.).

I find Foldvary’s work to offer real food for thought, worthy of consideration in the dialogue of voluntary governance with the individual in control of his agreements and relationships.  Whether or not I write further regarding the book, I will at some point offer another post on this topic, summarizing my views on the possibilities.

And for those who say there is no example today of a society governed purely by voluntary means, I will now offer the hotel as my counter.

Ban Interest via Democracy (a Global Force for Good)

Here is the link with Mr. Ilink’s responses to the questions I posed regarding his views on monetary systems including the banning of interest.  I thank him for providing such thorough explanations, and I will explore these further here.

I now understand his idea of “Natural Money” comes with three components: 1) the banning of interest on loans, 2) no fractional-reserve-lending, and 3) a currency with demurrage.  This should be kept in mind when reading his comments.

Will it be implemented by force?

I asked this question (repeatedly) because advocates of this concept either ignore or talk away from how the system will be implemented.  It seems to me that the only way this will gain any meaningful traction in the market is if force of some significant amount is applied – in other words, I don’t see a significant number of individuals with capital voluntarily rushing to a system that promotes that they will not earn interest if they lend a portion of their capital.

Whether or not something is implemented by force is the central theme of libertarian thinking. If it is implemented by force then libertarians think that it must be wrong.

It is a libertarian thing, but not only a libertarian thing.  The initiation of force is wrong for many people, not only libertarians.  Forgive my bluntness….

Walk up to a stranger and shoot him in the head for no reason.  Is this wrong?  I will assume you answer yes.  Then for what reason, short of shooting someone in the head for no reason will you draw the line – where is it “right” to initiate force?  Why?

Specifically here, we are speaking of commercial transactions.  Why should force be introduced by a third party if two others agree to a commercial transaction, a transaction that does not initiate force against an unwilling third party?  I find no justifiable reason, and the possibility that the borrower might not be able to repay the lender or that the borrower must be protected from himself is not a justifiable reason.

There are two domains: the public and the private.

This is political thinking.  There is truly only one domain when it comes to human interaction, that of the acting individual.  The “public” sector is made up of acting individuals, empowered to act in ways not allowed for private citizens, up to and including acts of pre-meditated murder.  There is no ethical justification for this distinction. 

In my opinion, the public domain should be ruled by democratic decision making. I am strongly in favour of referendums like in Switzerland so the government can be completely controlled by the citizens. Referendums should be implemented on all levels: municipality, state/province and country.

Again, forgive my bluntness…

What if you and two others vote to decide which of the three of you will receive the bullet in the head, and you lose?  What if the two of them believe that there is a really good reason to shrink the population by one-third?  Is this wrong?  Again, I will assume you answer yes.  Then for what reason short of taking a bullet to the head because of majority vote will you draw the line on the initiation of force approved by democratic means?  Why?  What makes your opinion on this more valid than mine? 

That a majority votes for an act might legalize it, but a majority cannot legitimize it.  That a majority voted for pre-meditated murder cannot provide an ethical justification for the act.  Majorities have acted in tyrannical ways against minorities many times in history, and even in current times.

Assuming that a country decides after a referendum to implement a specific type of money, make it legal tender and ban other types of money, is this force?

A country cannot decide anything – a country is lines on a map, often without even a common heritage.  Individuals can decide things.  If an individual cannot opt out of an act with which he does not agree, it is force.  If the specific type of money subject to vote was of good quality, a referendum would not be necessary – in a free market, such a money would find willing takers.  

A referendum on voluntary economic matters is silly.  Why not a referendum on the type of bread we eat?  Or the type of cigarettes to smoke?

Market participants have the option to buy gold or foreign currencies….

Why can the world survive with multiple currencies, but a community cannot? Why must a participant buy a foreign currency for diversification, one that is not accepted in his home town?  Why not competing currencies within a jurisdiction – none of these given force or preference by government action?  Why not let individuals decide on this in the manner that each one feels is most beneficial for his purpose?

….so if it is a bad plan then markets will end it.

If the plan is enforced by the government because the democratic majority approved it, it will only end after it has done systematic and horrendous damage.  See the world around you today, and tell me I am wrong.  We all live under a “bad plan” for money.  You are correct, the markets will end this.  But because government actors fight against the market, thus delaying the end and enlarging the problems, we are all going to suffer tremendously in the meantime and in the end – as opposed to the relatively minimal suffering if markets are allowed to perform the cleansing one bad decision at a time.

If the market ends the plan, is this force?

No, it is the sum of individual choice – with each individual left free to enjoy or suffer the consequence of his choice.  Unlike force through democracy.

The statement that "centrally planned solutions can never be justified – neither for the means nor the ends" is a political view.

Incorrect.  

Someone Will ALWAYS Own the Land

I have previously presented my thoughts on the matter of land as something that can be owned by an individual – it must be owned by someone, after all; why is not everyone eligible?  There are some who claim that this is not possible – that land cannot be owned, or that only the sovereign (king, government, etc.) can own land.  Where does this idea come from?

Some background is in order:

Allodial title constitutes ownership of real property (land, buildings and fixtures) that is independent of any superior landlord….Allodial lands are the absolute property of their owner and not subject to any rent, service, or acknowledgment to a superior. Allodial title is therefore the opposite of feudal land tenure.

Allodial describes title that is absolute.  The opposite of feudal land tenure…interesting.

Allodium, meaning "land exempt from feudal duties", is first attested in English-language texts in the 11th-century Domesday Book, but was borrowed from Old Low Franconian…in the Salic law (ca. A.D. 507-596) and other Germanic laws.

The concept of allodial title pre-dates English common law with roots in medieval law – the so-called dark ages that we are not supposed to know about.  “Land exempt from feudal duties” sounds like title completely free and clear, with no encumbrance.

But this is not the situation under common law:

Most property ownership in the common law world is fee simple.

What is fee simple?

In English law, a fee simple (or fee simple absolute) is an estate in land, a form of freehold ownership. It is the way that real estate is owned in common law countries, and is the highest ownership interest possible that can be had in real property. Allodial title is reserved to governments under a civil law structure.

This is a bit confusing.  If fee simple is the highest ownership interest possible, what is allodial title?  Is it lower than fee simple title?  Can there be something higher than “the highest ownership interest possible?”  This seems not possible.

Why is allodial title reserved to government? 

Fee simple ownership represents an ownership interest in real property, though it is limited by government powers of taxation, eminent domain, police power, and escheat, and it could also be limited further by certain encumbrances or conditions in the deed.

So fee simple is the highest ownership interest possible to the people.  Doesn’t this seem a little fishy?

The word "fee" is derived from fief, meaning a feudal landholding.

What does this mean?

Feudal land tenures existed in several varieties, most of which involved the tenant having to supply some service to his overlord, such as knight-service (military service).

So, you own the land as long as you serve the king.  (Later, we will see that the service is not for some duty owed, but because the king claimed ownership of the land.  The payment was a tax, independent of any duty owed.)

In English common law, the Crown has radical title or the allodium of all land in England, meaning that it is the ultimate "owner" of all land.

See!  Someone always owns the land.

How is it that title was more absolute in medieval times through Germanic law than is possible through English common law?  What changed?  When and how?  (I think I can guess the “why”?)

Ban Interest!

One of the monetary ideas that regularly pops up in discussions is the idea that the charging of interest is destabilizing to the economy, and therefore interest should be banned.

Through my post regarding Wörgl at Mises, I was contacted via email by Bart Klein Ikink.  After sharing one or two emails, I asked him if I could use his emails in a post, to which he agreed.

I have wanted to explore this for similar reasons that I have explored Wörgl.  This is another monetary theory that seems to fly in the face of the nature of man, one that likely cannot be sustained without the introduction of force by a state actor.  It also seems faulty from a standpoint of economic efficiency.

With this in mind, I begin to explore this theory.  I don’t know how far I will dive into this subject beyond this one post.  I will caveat that I am following Mr. Ikink’s use of the term “money” although in most cases I believe his intent is “currency.”

I believe some of Mr. Ikink’s concerns to be legitimate in the context of the current system under central banking and the compounding of leverage this allows – in other words, in a system where far more credit is extended than would occur in a free market.  However, I disagree with his solutions (this shouldn’t be a surprise to regular readers).  I address his points in the context of a free-market – no government enforced central banking, and no government subsidies to banks in any form.  In other words, I do not intend to use the current system as the measuring stick, but a free-market system.

I have highlighted specific questions and criticisms I have of Mr. Ikink’s statements.  For there to truly be a productive dialogue I will expect specific replies to these, in the context of the highlighted text.  Most fundamentally, many of the highlights regard the issue of how such a system is to be implemented.  Will it be by force?  If so, this proposal fails on its face as centrally planned solutions can never be justified – neither for the means nor the ends.  If not implemented by force, how will human behavior be made to conform to this unnatural act?

From his email:

Under normal conditions the borrower is servant to the lender.

It is inappropriate to speak of a “servant” (with a negative connotation) when the relationship is voluntary.  Both the borrower and the lender are receiving some benefit in such a situation.

I think free money is more efficient if applied in the right way. If this is true then any argument is useless and Natural Money, which is a specific type of free money that includes a ban on charging interest, will become the dominant type of money in the future.

If your concept is truly more efficient, the market will discover this if left free.  But you don’t seem to advocate that this can come about in a market left free.  Who is to define “the right way”?  How would you propose to enforce “a ban on charging interest”? What if some choose to use a different way?

There are a few things to consider regarding Natural Money:

1. There is a holding fee on the money at a rate of 0.5% to 1.0% per month.

This is consistent with the theory of Silvio Gesell.

7. Because banks can only lend at 0% or lower, and because banks cannot create money, all loans must be made out of savings, and banks will choose the best borrowers with lowest risk profiles.

What if a borrower is willing to pay interest because he believes it is the best option in the given circumstance?  What if a bank will only lend to some borrowers with interest?  Would you stop the willing borrower and the willing lender?  By what means?

8. Corporations and projects that are risky will be financed with equity and not with loans… 

Why must such projects be financed with equity?  What if management and shareholders believe it is preferable to finance such a project with debt?  What if a bank is willing to lend?  How would you stop this?

…so business risks will be taken out of the financial system, and consequently there will be no financial crises.

There is nothing that can be done to take “business risks…out of the financial system,” unless you somehow plan to outlaw “loss” from “profit and loss.”  Do you plan to outlaw “loss”?  How?

As to “no financial crises,” I will come to this later.

All the Wrong Reasons

Simon Johnson has written an article entitled “Germany’s Gold Delusion.”  In this article, he examines the various possible reasons why Germany might want to move it gold from New York and Paris to Germany. 

Who is Simon Johnson?

Simon Johnson, a former chief economist of the IMF, is a professor at MIT Sloan, a senior fellow at the Peterson Institute for International Economics….

Additionally, he was Chief Economist at the IMF during 2007-2008.

Back to Germany and moving its gold.  Johnson asks all the wrong questions, and not the only (likely) correct one:

One possibility is that German policymakers believe that we are approaching an every-country-for-itself scenario – and only gold guarded by one’s own police is worth anything.

He concludes this cannot be the reason: if the world moves to raising large walls, the location of gold might be the least concern.

Does Germany think that its gold will be subject to sanctions or some form of confiscation – as sometimes happens to rogue nations?

He concludes no.  Germany isn’t Iran or Venezuela, he suggests.  There is no reason such sanctions would be applied to Germany.

Perhaps German central bankers sense a longer-term shift in international preferences away from the dollar and want to be ready in some fashion.

He concludes this also cannot be the reason – moving the gold will have no impact on the mix of Germany’s holdings.  Germany owns the gold, regardless of the location.

It is as if German political elites think that they are back in the era of the gold standard.

This can’t be it either.  In a gold standard, what matters is that you own the gold, not where it is held.

The broader and more worrying trend is the politicization of central banking.

This is true, but I don’t believe this has anything to do with the underlying reason.  Johnson raises it in the context of Germany not trusting the ECB.  Again, he concludes that the physical location is not important; the ownership is.

He concludes that the Germans must be delusional:

German politicians would thus seem to be suffering from some serious delusions about the importance of gold and the effects of shifting its location.

Isn’t it reasonable to keep looking for reasons instead of attributing delusion as the cause?  Why would Johnson stop here?  He examines every possible reason except the likely correct reason – the elephant in the room that Simon Johnson either doesn’t see himself or doesn’t want his readers to see. 

I have no idea why Germany decided to take this action.  However, there is one possibility Johnson did not suggest to his readers.  What if Germany wants to see its gold, to be sure it exists, to have complete control over its use and disposition?  In other words, what if Germany doesn’t trust the Fed as a depository institution?

Why didn’t Simon Johnson ask that question?

A Strategy for Liberty

The title of this post is taken from chapter 15 of Murray Rothbard’s “For a New Liberty: The Libertarian Manifesto.”  Throughout the book, Rothbard has laid out the case for the libertarian solution to the problems of politics and government.  In this chapter, he suggests how to get from here to there.  He also deals with some of the common objections to the idea of liberty and to the approach taken by some.  For these reasons, I found this chapter to be most valuable.

Education: Theory and Movement

We face the great strategic problem of all “radical” creeds throughout history: How can we get from here to there, from our current State-ridden and imperfect world to the great goal of liberty?

On one point there can scarcely be disagreement: a prime and necessary condition for libertarian victory (or, indeed, for victory for any social movement, from Buddhism to vegetarianism) is education: the persuasion and conversion of large numbers of people to the cause. 

Sadly, this point is missed by many.  Without education – “the persuasion and conversion of large numbers of people” – there is no hope ever to see a movement toward liberty take hold.  This was the benefit of Ron Paul’s two recent presidential campaigns – through his efforts, countless millions have had the scales lifted from their eyes. 

Many individuals and organizations contribute today to this education.  Two of the most prominent are The Mises Institute and LewRockwell.com.  There are many others that contribute as well: The Daily Bell, Justin Raimondo, Economic Policy Journal, and the Future of Freedom Foundation to name a few.  I certainly am leaving off many.  Each one speaks to people in different ways, yet each makes a valuable contribution to the education of liberty.

Rothbard deals with one criticism often heard – “we” are only talking to ourselves:

Furthermore, one often hears libertarians (as well as members of other social movements) bewail that they are “only talking to themselves” with their books and journals and conferences; that few people of the “outside world” are listening. 

Keep in mind that Rothbard wrote this book more than two decades before there was even a semblance of a user-friendly internet – a world of mimeo-graphs and snail-mail lists.  With the internet, the possibility of reaching out to others has increased exponentially – and the facts have proven this out.  It is still amazing to see this in tangible results – twenty-four years ago Ron Paul received less than 1% of the vote as the Libertarian Party candidate for President.  He might draw dozens to an event.  The difference today is like night and day.  Yet, the charge is often made today, as if nothing has changed – as if all the libertarians could fit in a phone booth or something.

Rothbard finds fault in this charge; he sees value in such internal dialogue:

But this frequent charge gravely misconceives the many-sided purpose of “education” in the broadest sense.  It is not only necessary to educate others; continual self-education is also (and equally) necessary….Education of “ourselves” accomplishes two vital goals.  One is the refining and advancing of the libertarian “theory….”  Libertarianism… must be a living theory, advancing through writing and discussion, and through refuting and combatting errors as they arise.  

This charge is often made – why get into debates about oftentimes minor issues when all that this does is divide an already small movement?  Rothbard makes clear why this is helpful.  There is continual education needed amongst even those who have embraced the political ideas of libertarians. 

But there is another critical reason for “talking to ourselves,” even if that were all the talking that was going on.  And that is reinforcement—the psychologically necessary knowledge that there are other people of like mind to talk to, argue with, and generally communicate and interact with….A flourishing movement with a sense of community and esprit de corps is the best antidote for giving up liberty as a hopeless or “impractical” cause.

How true this is.  There is a remnant, and to know and be reminded that there are others of like-mind offers hope and encouragement.

Are We “Utopians”?

This comes up regularly – it has never worked, who will control the bad guys, you have to believe man is perfect if you advocate this, etc.  Libertarians are utopians.

Every “radical” creed has been subjected to the charge of being “utopian,” and the libertarian movement is no exception.

Some libertarians themselves maintain that we should not frighten people off by being “too radical,” and that therefore the full libertarian ideology and program should be kept hidden from view.

A Free Money Miracle?

I have an article published at Mises.org regarding the Miracle of Wörgl.  It is a summary of the previous work I have done on this topic.

The article can be found here.