Friday, March 27, 2009

The Corruption of Civil Society

A few weeks ago I wrote of the Jacksonian meaning of corruption and compared it to our modern definition. Our modern definition, which equates corruption with criminal activity, fits our modern, shallow culture of voyeurism. It seems we love nothing more than to see that the mighty have fallen prey to padding their expense accounts, taking specious tax deductions, and even dipping their beaks into the public trough. This is criminal behavior and there is no justification for it; it will be with us as long as people have access to other peoples’ money. But this really isn’t a very strenuous definition of corruption. Real corruption does its work in the full light of day, corrupting the morals to the point that society stagnates, shrinks, and finally succumbs altogether. This was the Jacksonian definition of corruption.
Madoff Corruption vs. Government Corruption
For an example of the difference between the two, consider the personal corruption of renowned financial criminal Bernie Madoff. Apparently he stole $50 billion of money entrusted to him by individuals, rich and not so rich, and even public bodies. This is theft, and Madoff engaged in all kinds of subterfuges to hide this fact for years. Now $50 billion is a large chunk of change, but its loss will not bring down the American economy. In fact, I do not call what Madoff did "corruption". I call it theft. The fact that he engaged in a massive campaign of deception is testament to his guilt—there is no reason to cover up what he did if he thought he was engaged in a legal activity. Yet this is what we today call corruption.
Compare this to the recent bank bailout of the departed Bush administration and the various stimulus plans of the Obama administration. We are talking about over a trillion dollars in new public spending, twenty times the size of the Madoff theft, in just one year! Our federal government’s debt already exceeds ten trillion dollars, and that is just its external debt—that is; debt for which people hold government debt obligations, such as treasury bills—and not its unfunded liabilities. Its unfunded liabilities—for example, promises it has made to those who have paid into the Social Security and Medicare Systems—exceed fifty trillion dollars. No one really knows the true number. Now here is what marks this as corruption in the Jacksonian sense—it is conducted in the light of day. In fact its sponsors are proud of what they have done, as are many of our own citizens. Yet neither the smiling politicians nor their admiring followers consider the source of this expenditure.
Methods of Public Plunder—Price Controls and Fiat Money Expansion
In his 1959 classic The Rise & Fall of Society, Frank Chodorov explains how seemingly invincible societies fail. The simple answer is that over time--sometimes over very long periods of time, such as the centuries it took for Rome to fall—more and more citizens figure out how to live at the expense of others by seeking and obtaining special privileges from the state. Eventually society reaches a tipping point and fails. Although there are many explanations for Rome’s fall, modern historians agree that the invasion of the barbaric tribes was more a symptom than a cause. Something had so weakened Rome’s economy that formerly inferior forces overran her. The number one cause of Rome’s decline was price controls of essential commodities. This is a common theme of all socialist schemes—pretend that a scarce resource really is not scarce by interfering with its price. Price controls in the ancient world caused starvation and the abandonment of cities, as the common folk fled to the countryside in a futile attempt to grow their own food. The benefits of specialization, which gave rise to the cities in the first place, were destroyed by government interference in the marketplace. This lower level of specialization reduced the production possibility frontier of the ancient world until total production was insufficient to support Rome’s population.
This sad scenario has been played out for centuries. The Mises Institute offers a fascinating and instructive book about the effects of price controls over the millennia. Written by Robert Schuettinger and Eamonn Butler, Forty Centuries of Wage and Price Controls explains the destructive influence of this method of government intervention in the market economy, all in the name of attempting to make scarce resources—labor and commodities—not quite so scarce via government coercion. But modern man has invented something even better, worse actually—the modern fractional reserve banking system backed by a central bank issuing fiat money.
Jorg Guido Hulsmann of the University of Angers, France has tackled our modern banking system in The Ethics of Money Production. Also available from the Mises Institute, it belongs in the library of every citizen who values his freedom and searches for the source of our current problems. Well, search no more. Hulsmann explains that all money not backed by a commodity is theft. Seen from this perspective, which Hulsmann explains with irrefutable logic, we now comprehend the real source of modern corruption. Fractional reserve banking, in which the bank takes money that has been entrusted to its safekeeping and lends it to others as if it were its own, violates the law of property. Unlike other market participants who must offer something of value in order to receive money, banks CREATE money while offering nothing in return. Now we see why banking has always been so popular and why bankers are usually some of society’s crème de la crème. You would be a popular swell, too, if you were allowed to create your own money in broad daylight and pass it as legitimate!
In the absence of central banking a bank run ensues when the market learns that the bank does not have sufficient reserves with which to honor all presentments. Governments aid and abet the banks periodically by passing legislation allowing them to suspend payments; that is, avoid bankruptcy by legally denying to the depositor either his property or his share of the remaining assets of the bank itself. This interference with the law of property was bad enough in the days before central banking. Then central banking added another layer of corruption by creating a "lender of last resort" in order to remove this market discipline to excessive lending.
In addition to giving cover to the bankrupt practices of fractional reserve banks, the central bank is authorized to buy the government’s own debt. Called "monetizing the debt", the central bank creates money for the government to spend; it does not have to tax or borrow from the citizenry. Now the government’s spending appears to be limitless! Of course, this sleight of hand merely masks theft of the purchasing power of money already in the peoples’ hands and is nothing more than counterfeiting. This is the corruption that stirred Andrew Jackson to run for president in the early days of our republic--corruption out in the open; corruption that stole stealthily and silently from the masses of the people; corruption that pulled men into its inflationist schemes with the promise of riches for doing nothing of real value except be the first receivers of the counterfeit money.
With the advent of our third central bank in 1913 this form of corruption on a massive scale started anew. When the market saw that the new central bank could not honor its obligations to redeem its paper, President Franklin Roosevelt solved this knotty problem by confiscating the peoples’ gold at less than market prices. When the government blew through this gold, plus gold that had been entrusted to it by its allies in World War II, President Nixon simply reneged on the government’s promise to redeem dollars for gold. Now nothing can stop government corruption to steal the peoples’ wealth through printing counterfeit money…money based upon nothing at all; money that was never earned; money that was not even taxed by a vote of the peoples’ representatives in Congress.
Corrupting and Weakening Civil Society
This is corruption on a scale and with an audacity that is without precedence. This is corruption that forces us to line up at the government’s trough to get our share of the loot before the dollars that we currently hold become worthless. It corrupts our morals by diverting us from honest exchange to scheming for ways to plunder our fellow man through government coercion. Man can survive only by offering value in the market place or by plundering the value created by others. Fractional reserve banking, made bankrupt-proof by the central bank’s issue of fiat money, enables more and more of us to live via the plunder of others. Our current government would have us believe that those who create value are deserving of having it plundered. Too many of us are ready to believe this lie, because it provides a rationale for accepting this plunder. We have become corrupted by the limitless power of the government to use the banking system to reward its friends and punish its enemies. We no longer accept personal responsibility. Government must remove our excessive indebtedness, for example, and allow us keep what we cannot afford. It must print more money to prop up the stock market and save our 401K retirement plans. It must bail out auto companies that will never again turn a profit. It must reflate an overbuilt housing market. It must provide universal healthcare. It must do all this—and more!—without raising taxes on the mass of the citizenry and without crowding out private investment. Fractional reserve banking, protected by a central bank issuing fiat money, leads us to the ridiculous conclusion that all this is possible. It is not. It is corruption in the Jacksonian sense, and it will destroy our society as surely as wage and price controls have destroyed civilizations for centuries.

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