My Letter to National Review re: State Capitalism

From: patrickbarron@msn.com
To: letters@nationalreview.com
Subject: State Capitalism
Date: Wed, 14 Jul 2010 11:10:40 -0400

Re: Perils of State Capitalism

Dear Sirs:
In Mr. Gordon G. Chang's excellent review of The End of the Free Market: Who Wins the War Between States and Corporations? by Ian Bremmer, Mr. Chang points out that state capitalism weakens markets.

"They (the despots and dictators) can, for instance, buy off elites by granting them monopolies and placate populations with the prosperity this system can generate. By bending markets, however, rulers ultimately make them less efficient. Over time, state-capitalist systems erode."

A better explanation is that by "bending markets" the authoritarian governments consumer capital or, at a minimum, prevent its accumulation even to the small extent needed to maintain the current capital base. For awhile an economy can display the appearance of prosperity as capital is spent on bailing out unprofitable businesses and sustaining those industries, like housing, that are already over-built. This is the destructive Keynesian prescription adopted by all the world's leading governments right now in their misguided attempt to "stimulate" the economy out of recession. But economies cannot be stimulated out of recession; they must liquidate the previous malinvestment and replenish the capital base upon which to build a new, true recovery. This requires savings--so spending must be reduced, not increased. Reduced spending will result in lower prices, the dreaded "deflation" that governments under the spell of Keynes vow to fight. But deflation is part of the cure--the inflationary bubble has burst and good riddance to it. The world's economies will not recover until governments cease their fruitless interventions.

Patrick Barron

Greece Needs Capitalism and Freedom

The mainstream media would have us believe two myths about the Greek financial crisis: one, that the inability of the Greek government to meet its debt payments is a threat to the Euro and perhaps to the European Union itself; and, two, that Greek “austerity” would be a disaster for the Greek people.

The mainstream media takes it for granted that the proper “solution” is for some entity to bail out the Greeks—perhaps the European Union (EU), the European Central Bank (ECB), the International Monetary Fund (IMF), or some combination. Furthermore, the assumption is that when markets go up it is due to speculation that a bailout is imminent and that when markets go down it is due to some roadblock to an expected bailout. When the governments and their agencies agree upon the proper form of new loans, and/or loan guarantees, along with a token reduction in Greek spending, all will be well. In other words, the mainstream media portrays this financial crisis as one that can only be resolved by more government intervention.

First lets look at the so-called threat to the Euro, which is equated as a threat to the EU itself. Greece uses the Euro as its legal monetary unit. When Greece joined the EuroZone (not all EU members are members of the EuroZone, meaning they have not yet exchanged their national currencies for Euros), the Greek drachma was exchanged for Euros. Now all transactions in Greece are denominated in Euros. Greek citizens buy and sell using Euros. The Greek government spends Euros and, when it runs a budget deficit, it borrows Euros from private banks…the ECB being restricted by treaty from buying sovereign debt. The Greek crisis is simply that the Greek government is spending more Euros than it receives in tax payments, and private banks are balking at lending it more. Since the Greeks no longer have a national currency, they cannot debase it and pay off their creditors with cheapened drachmas. So, the Greek government is left with the choice of raising taxes, cutting spending, or some combination of the two that will satisfy its creditors. Now, would someone please tell me why and in what form this Greek financial crisis, serious as it is to the Greeks themselves, constitutes a threat to the Euro?

What Do Zimbabwe, Panama, and California Have in Common?

This past weekend I was a special commentator on Michael McKay’s excellent weekly radio show “Radio Free Market”. Mr. McKay interviewed Mr. Doug French, president of the Ludwig von Mises Institute, a free market think tank in Auburn, Alabama. Mr. French described the mindset and policies that brought hyperinflation and economic chaos to Zimbabwe. The central bank of Zimbabwe inflated the “Zim” out of existence. But the economy is functioning with a new currency. Can you guess what it is? The dollar! Now, is there anything that the Marxist government of Robert Mugabe’s Zimbabwe can possibly do to cause a crisis in the dollar? No! Likewise, is there any way that the Marxist government of Zimbabwe can destabilize the U.S. because its citizens voluntarily use the dollar? Again, no!

Here’s another example--Panama is a dollarized economy, meaning that it has exchanged its national currency for the dollar. If you travel to Panama, it is not necessary for you to exchange dollars for a local currency. All transactions are in U.S. dollars. Again, is there anything that the Panamanian government can do that can threaten the stability of the dollar? No. The Panamanians have linked their monetary system to that of the United States, just as the Greeks have linked their monetary system to that of the EU.

One last example, and one that is closer to home. The state government of California has run up tremendous budget deficits and may not be able to pay back its loans, all denominated in dollars, of course. Would a California default threaten the stability of the dollar or the stability of the United States? Again, no. Banks may fail. Private creditors may lose. But the dollar and the stability of the U.S. would be unaffected by this disaster. Remember, the dollar and the Euro are merely mediums of exchange. Others may choose, voluntarily, to use dollars or Euros. The countries using dollars and Euros may undergo internal crises that truly do disrupt their citizens’ lives, but none of this threatens the currency…as long as central banks refrain from printing money in order to bail out the profligate governments. In other words, a fiscal crisis need not lead to a monetary crisis.

An “Austere” Government Would Speed Recovery

Next we turn to the commonly held assumption that the Greeks would be harmed by government “austerity”. The Greek government might not be able to spend as much as in the past, whether on pensions, healthcare, defense, whatever. Again, the mainstream media treats this as a complete disaster. The New York Times runs daily articles decrying that the Greeks will have to live within their means. Now, I am certain that SOME Greeks will suffer should the Greek government reduce its spending. All those who believed that their government could pay generous retirement benefits and who planned their lives accordingly will face hard, cold reality. But, let us not forget that every penny spent by government is taken from someone else by compulsion and coercion.

The best explanation of the predatory impact of government spending is to be found in Murray N. Rothbard’s America’s Great Depression. Whereas the Keynesians view government spending as an addition to gross domestic product, Rothbard explains that the more government spends the worse the economy gets. If we think of the REAL economy as the private economy, then it is clear that every dollar or Euro spent by government must come at the expense of the private REAL economy. And not only must government spending be subtracted from private purchasing power, but all the regulatory burdens of government add even more to the negative impact of government upon civil society.

Since Keynesians add government spending to consumer spending to arrive at gross domestic product, they perpetuate the myth that government spending is good for the economy. But Rothbardian Austrian economists harbor no such illusions. We subtract government spending from private purchasing power and recognize that this spending is only part of government’s predatory impact upon the people. Every line of government regulation reduces the efficiency of the private sector to propel the nation forward, for it must prevent actions that a free people would value more highly or compel them to do something that they value much less.

How much government action is interventionist and, thusly, harmful? George Reisman has studied government action and claims that no less than eighty percent of government action as interventionist! So, reducing government spending, whether voluntarily or at the behest of creditors, is a boon for the private, real society. Wherever government cuts back, that area becomes freer, reducing its burden on society.

The Miraculous Recoveries of Germany and Japan

Many economists have chronicled the almost miraculous economic recoveries of Germany and Japan following World War II. Most have rightly focused on savings, hard work, freer trade, reduced military spending, capital loans, etc. But one area that is not appreciated is that the old order was washed away. People were truly free from the accumulated decades of burdensome government. Both Germany and Japan marveled at the productive capacity of America and adopted the best of our practices. And both countries could adopt these practices with little cultural and political resistance, because the old political and cultural order had been discredited by war.

As difficult as it may be for the Greeks to give up their cherished welfare state, that socialist/Keynesian predatory state has been discredited. The Greeks need capitalism and freedom, not socialism and the bureaucratic welfare state. Rather than being the poster boy of another failed state, by scrapping its welfare and regulatory burdens Greece could become an example of how to transition from a half-century of socialist predation to a free, prosperous, and successful nation. Greece does not need more debt from a bailout that will perpetuate the predatory welfare state as a burden upon the people.

My Tax Day Tea Party Speech in Iowa City re: National Healthcare

It will come as no surprise to this group that national health care cannot work. It cannot work because it violates economic law…and no, Mr. President, these are not laws that you can rescind. They are immutable laws of human action. You may ignore these economic laws, but these economic laws will not ignore you.

Like any socialist enterprise, National healthcare will bring excessive cost, shortages, and degraded quality of service. In short, it will fail to achieve all of its vaunted goals.

Since it makes healthcare a so-called free entitlement, demand will soar. It cannot do otherwise. This increased demand will swamp our healthcare providers—the hard working doctors, nurses, medical technicians, plus all the support services that accompany modern medicine. Some may believe that, yes, this may be so, but supply will catch up. Sadly they are mistaken.

The supply of all things related to healthcare actually will shrink, due to the other great evil—price controls. The law promises to hold down costs the old-fashioned way, by setting government-mandated maximum prices. So demand will increase while supply will decrease, creating all manner of shortages in the delivery of healthcare services.

This supply shortage will be exacerbated by the rising costs of healthcare. The elimination of private healthcare will remove the profit-and-loss incentive that is necessary for controlling costs of all kinds. The healthcare system will suffer from the same high costs as the Postal System and Amtrak. Without private owners with their own capital at risk, government bureaucrats will have little incentive to hold down costs.

Of course, a shortage of anything that cannot be relieved by price adjustments will mean that healthcare will be rationed. How? Perhaps it will be rationed by bureaucrats, as it is in every other country with a national healthcare system. Or it might be rationed by those who can wait the longest, which means that many will suffer and some will die before they receive proper care. This is the situation with our neighbor to the north. There is a reason that Canadians come to America for healthcare services and few Americans go to Canada, or Britain, or France, or Germany…

But it gets worse. Shortages, price controls, and rationing are just the near term problems. A long-term problem will be the diminished level of care and the end of medical innovations. How many here would like to return to the quality of care of 1950? Well, get sick in England and you will find out what decades of national healthcare can do to a once fine medical system. We have become accustomed to medical breakthroughs, new medical devices, and improved procedures. But with the medical system strapped for funds simply to keep things at their current level, much less will be spend on new and, initially at least, expensive care.

One last, but by no means final, problem is that of economic calculation. The healthcare system will not know how to treat patients most efficiently. And efficiency is just as important as is quality, because an efficient system will bring better quality care to more people. But price controls and government rationing will destroy all economic cues from the price system that are necessary to keep ANY service alive.

There are many, many more problems with national healthcare…I have not even mentioned the impact on business profits and worker employment…but here’s a hint…it will all go South.

All in all, national healthcare will throw America’s premier healthcare system into chaos…racked by corruption and incomprehensible government rules. It will go the way of all other national healthcare systems—it will become more expensive, access will diminish (even for the poor, who are served very well right now), and quality will diminish. This process will NOT stop, either. It is not as if our healthcare system will deteriorate to some new, lower plateau. It will deteriorate until, like government schools in our inner cities, even the poor will be afraid to utilize it. And, wasn’t it to aid the poor that is supposed to be the rationale for all this nonsense?

Real healthcare reform would eliminate current regulations on our healthcare system. Healthcare is a scare resource that must be integrated into the market to serve the peoples’ needs as expressed by their private expenditure of money. This is the process that has brought us unprecedented prosperity AND great healthcare. Now we are throwing it all away to pursue the discredited socialist dream of state control of what Lenin called “the commanding heights” of the economy. It worked so well for poor Russia that our own socialists just have to try it here in America. This law must be rescinded!

My Latest Letter to the NY Times

From: Patrick Barron
To: NY Times
Sent: Friday, March 26, 2010 1:55 PM
Subject: Don't Dismiss Health Care Bill's Opponents


Re: "The Fight Is Over, the Myths Remain", by Brendan Nyhan

http://www.nytimes.com/2010/03/25/opinion/25nyhan.html?scp=1&sq=The%20Fight%20is%20over&st=cse

and "Brave New Health Care World", by Gail Collins

http://www.nytimes.com/2010/03/25/opinion/25collins.html?scp=1&sq=Brave%20New%20Health%20Care%20World&st=cse

Dear Sirs:
In their defense of the health care law, Mr. Nyhan and Ms. Collins just will not recognize that there are any principled objections to this new government intervention into our lives or that there are any substantive concerns about its adverse consequences. Mr. Nyhan dismisses as "myth" the objection that the law is socialistic; he treats all such concerns as mere public relations problems. Ms. Collins portrays the Republicans' last ditch procedural efforts to delay the law's passage as "insane" and "loopy". (Maybe these are pre-existing conditions that Ms. Collins says will be "the coolest spring accessory"). But neither writer is willing to face the many legitimate patient concerns honestly and forthrightly. For example, it is a serious issue if someone besides my doctor or myself is making decisions about my care, which may mean whether I live or die. There is too much empirical evidence to suggest that citizens in countries with decades' experience with national health care do, in fact, have higher death rates from treatable illnesses as a result of rationed care. These questions deserve more adult response than the shallow answers by Mr. Nyhan and Ms. Collins.

Patrick Barron
Adjunct Instructor in Austrian Economics
University of Iowa
Iowa City, Iowa

The Swine Flu Arrived Just in Time!

The swine flu epidemic arrived just in time! What! How dare I say something so callous! Just in time for what? Well, just in time to provide an example of what government control of healthcare in America would look like. The Obama administration has attempted to sell its takeover of the healthcare industry by claiming that our admittedly imperfect system provides too little access at too high a price and, here’s the big pitch (drum roll, please), government can do better. The swine flu epidemic illustrates why government is wrong on both counts. Its control of this one, relatively small healthcare issue has demonstrated that its response is inadequate, expensive, and inhumane.

Like many unfortunate economic events, the restricted supply of the swine flu vaccine has its birth decades ago in government regulations that made it less profitable for domestic drug companies to produce vaccines of any kind. These regulations acted as forms of price controls and forced Americans to rely upon foreign suppliers, mainly in France and Australia. Now, there is nothing wrong with importing drugs that can be produced cheaper and/or more timely overseas—this would be just an example of the internationalization of the division of labor—except that the reason for this shift to overseas suppliers was neither cost nor timeliness of production. It was price controls by government that forced domestic drug companies out of the market.

Government did not limit itself to destroying the supply. Next it had to control demand, reinforcing the Austrian School of Economics’ rule that one market intervention causes unforeseen adverse consequences that lead to more market interventions until government, in desperation, takes over both supply and demand. Thusly, the federal government confiscated all the swine flu vaccine in the country and now distributes it through state health officials who, in turn, allocate it (according to their own, mysterious methods) to healthcare providers.

The healthcare providers have no control over how many doses of this vaccine they will receive. All they can do is order it from the government and take what they get, usually with no prior notification so as to plan its distribution. We have seen cases in which consumers stand in long lines on the rumor that vaccines have arrived. Armed police patrol the queue, chasing away those who they deem to be at less risk that others. Then, after hours of waiting, the armed police inform those still waiting that the supply has run out. I’ve seen this scenario first hand before--Moscow and Leningrad before the fall of Communism!—but seldom in the Land of the Free and the Home of the Brave. (Some of us remember the gas lines of the 1970s, another government-manufactured shortage caused by price controls.)

Government ineptitude is there for all to see. The details of who needs the shot and where these high risk groups reside is fairly well known, yet government sends too many doses to some areas and not enough to others. For example, university towns are shorted because the census data used by government officials does not take into account that students actually reside elsewhere than their official residence. This is even more frustrating this flu season, since young people are more vulnerable to the swine flu. Unlike older folks, they were not exposed to a similar virus decades ago. We older folks were exposed and, therefore, the vaccine does not offer us any increased immunity. This is opposite all previous flu outbreaks, where the elderly were most vulnerable. This twist adds to the public’s confusion and concern.

Nevertheless, we all seem to accept government ineptitude as par for the course and do not consider that this potentially life saving treatment could be produced and distributed any other way than by top down, bureaucratic fiat. We just assume that, although government does NOT control other necessities of life, the swine flu vaccine must be. Yet, this situation illustrates perfectly how diffusion of knowledge necessitates that we allow the free market to control vital supplies. The centralized, top down management style of government just cannot assimilate all the information that is needed to provide this product on a rational basis.

I believe that government’s confiscation of the swine flu vaccine was nothing more than grandstanding; in other words, government wanted to be seen to be doing something…anything!…about the swine flu. This is the unfortunate view of many in today’s society who have grown up under the heavy hand of the welfare state: we look to government for the answer to all of our problems. The mainstream media, who hold government responsible for all undesirable life events, reinforces this view. Government has brought this attitude upon its own head by sticking its long, bureaucratic nose into aspects of life that used to be the realm of private responsibility and initiative. Can anyone imagine that a government official would voice the opinion that the free market be left alone to ensure that an adequate supply of the swine flu vaccine was produced and distributed to those who most urgently needed it? Picture the press conference--people are dying of the swine flu and Mr. Representative proclaims that government should keep out of the way of the healthcare industry in its battle with the disease. It is hard to imagine that this scenario is possible in today’s political and media environment.

But, government does not ration food and we do not starve. We do not stand in line at government food stores while armed police walk up and down the aisles telling fat people that they don’t need food and that they should allow the skinny people to have first dibs on the limited supply. Yet this is exactly what has happened with the swine flu vaccine. Government must get completely out of healthcare or the swine flu debacle will be repeated on a daily basis for all of healthcare and all necessities of life, as it was in the Soviet Union.

New Frontier of Moral Hazard

I sent the letter below to the Wall Street Journal. Is there any sanity left in Washington? The funniest part (in a black humor sort of way) is that the White House reached this agreement with...now wait for it...Barney Frank! I am reminded of de Gaulle's response to Nikita Khrushchev when the Soviet premier told him that the Russians would sign an agreement with Erich Honecker of East Germany to come to the East Germans' aid in attempting to kick the NATO allies out of West Berlin. De Gaulle told Khrushchev that he was not impressed with agreements among communists and that everyone knew that Honecker was his puppet.

Pat

----- Original Message -----
From: Patrick Barron
To: Wall Street Journal
Sent: Tuesday, October 27, 2009 4:24 PM
Subject: A New Frontier for Moral Hazard

Re: Big Financial Firms Would Bear Cost of Failed Rivals Under Proposal
http://online.wsj.com/article/SB125667090769111065.html?mod=WSJ_hps_LEFTWhatsNews

"Under a deal hashed out between the Treasury Department and a key House Democrat, financial firms with more than $10 billion of assets would have to pay for the rescue or unwinding of a collapsed competitor..." This is a new frontier for moral hazard. At least there always was some hope that government might not want to answer to the public over bailing out big firms with taxpayer money, but now the government will force the failed firm's competitors to bail them out. So, where is there any discipline to conduct one's business in a fiduciarily sound manner, when one reaps all the rewards of success and...Oh, this is deliciously evil!...one gets to make one's competitors pay the cost of failure?

Patrick Barron
West Chester, PA

Diminished Authority and Increased Fear

The U.S. government is engaged in a policy of increasing control over the economy, starting with the banking system and major industries first and proceeding, as it inevitably must, to total control. The unprecedented takeover within the past year of major banks and General Motors, once upon a time the world’s largest corporation, has been followed by the establishment of a “pay czar” (currently Treasury Department official Kenneth Feinberg) who makes arbitrary ex post facto decisions about the compensation packages of major corporation executives.

Ludwig von Mises explained in many of his books and articles that government intervention leads to an ever expanding need for further intervention. Take price controls, for example, of which executive pay is but one small element in that government dictates what business may pay for certain services, the services of its chief executive being merely the most visible and public of the services it purchases. The Wall Street Journal reported on Friday, October 16, 2009 that “Mr. Feinberg is reviewing pay for the 175 most highly compensated employees at the firms under his purview, and he has been wielding his power extensively. He recently persuaded Citigroup to unload its energy-trading unit to defuse a potential showdown over a $100 million pay package slated for a star trader.” So, first government tackles CEO compensation and then brow beats business to renege on its promise to give star employees the incentive pay that they had been promised. Apparently contracts, even if only implied contracts, have no standing when a government bureaucrat makes a decision.

Earlier in the article the Journal reported that Mr. Feinberg’s duties were making him highly unpopular: “Government officials have acknowledged privately and publicly that the pay czar is likely to upset both those who think his actions are too intrusive and those who think he hasn't done enough. Mr. Feinberg himself has said he'll need to move to Pluto when his job is over.” Is it not ever so when property rights have been violated? Those who fear the implications of the loss of the rule of law are matched in number by those who desire a complete breakdown in the rule of law and despise the half measures taken by those whom they perceive to be weak in the execution of their extraordinary powers. No one is happy and rightly so.

There is no logical stopping point once the process of economic control by government has begun. Ethically there is no more reason to refrain from setting the compensation package of the lowest position in a business than from refraining to rule upon the same thing for its CEO. Practicality reinforces this tendency. If the CEO’s compensation can come under government review, why not the compensation of his immediate subordinates, the senior vice presidents? And if the government reviews the compensation of the senior vice presidents, why not the vice presidents, as so forth on down the chain of command to the lowest position in the company?

Furthermore, the whole idea of a “pay czar” or any other kind of czar to rule over an important element of our economy suffers from a profound error in understanding how an economy operates. The genius of the free market is that it coordinates massive amounts of diffuse knowledge that no single person or committee could possibly comprehend even with the most sophisticated computers. And it does this coordination of diffusely held knowledge effortlessly, timely, and without coercion of any kind. This is why almost any conceivable good or service is readily available in a free market and why command economies suffer from shortages even of essentials. Command economies lack the coordination of diffuse knowledge that exists in a free market. It is important to note that it is the price system itself that is the medium by which local knowledge is diffused throughout the entire economy. And it is the price system which government action interrupts and perverts. It is as if our body could not differentiate between a hot surface and a cold one. We would not know that we had placed our hand on a hot burner until blisters appeared and the damage was done. The longer we hold our hand on the hot burner, the worse damage we do to our bodies. Likewise, the longer and more pervasive are government’s perversion of the price system, whether perverting the prices business pays its employees or some other price fixing intervention such as farm price supports, the more damage government does to the capital structure of the nation, reducing its ability to meet the real needs of its citizens.

Mr. Feinberg is right to be concerned about whether anyone will be satisfied with his pay reviews, for I saw something similar occur almost forty years ago in Britain, where I served in Uncle Sam’s armed forces during the Cold War. Britain had nationalized shipbuilding at the end of World War II. A number of separate and highly militant trade unions worked in the shipyards. One or more of these unions were constantly on strike, paralyzing shipbuilding because no union member from the other unions would cross another’s picket line. The reason for almost all the strikes was pay, of course. No one ever thought that his pay was just, especially in comparison with the pay of some other union worker in the shipyards. But instead of learning a new trade that was more highly regarded in the marketplace, the union members learned that they could get higher pay simply by going on strike. So union A would strike for higher wages and, since the government owned the shipyards and work would stop in all of the nation’s yards, they eventually would get it. But, this set off a series of similar strikes by the other unions to regain their “differentials”, meaning the pay difference that union A had established, either higher or lower, with all the other unions. So if union A got paid another fifty pence per hour, all the other unions would strike for the same or slightly greater increase. Then if the government eventually granted all the unions their increases as desired, union A would be dissatisfied because others had shared its sacrifices. So…you guessed it…union A would walk off the job again, and the vicious cycle would start all over again. Needless to say, Britain today is not the shipbuilding powerhouse that it once was.

The same dynamic will plague Mr. Feinberg and his staff. It may take a few years, but once labor learns how to play the game, it will constantly seek advantages through political power rather than through self-help, market oriented efforts. One group of workers will demand greater pay, setting off a cycle of work stoppages while all the other groups scramble to regain their relative position in the compensation hierarchy.

This slippery slope to total economic control is described so chillingly by German businessman Gunter Reimann in his 1939 book The Vampire Economy: Doing Business Under Fascism. Mind you, this book was written BEFORE the war, and yet Herr Reimann chillingly describes the chaos of Nazi control over prices and production a mere half-decade after the first Nazi price decrees. Corruption was rampant, because that was the only way business could obtain raw materials; petty (and not so petty) Nazi bureaucrats learned how to exploit their tremendously powerful positions in the ever more centrally controlled economy. Naturally, the Nazi government proscribed suitable punishments for those who did not abide by its price dictates and who engaged in bribery of public officials. Nevertheless, corruption increased because, as Herr Reimann explains, economic laws still existed and corruption was the only outlet left before bankruptcy. Thus, the citizen’s view of the government changed radically. Now anyone could become a criminal, from a top industrialist to a small shopkeeper, just because he did what was necessary to stay in business.

Herr Reimann makes the following revelation, which is not something that we in the Allied camp ever considered about the Nazi regime: “This has the effect of lowering the authority of the State; on the other hand, it also makes the State authorities more feared, for no businessman knows when he may be severely penalized.”

Increased fear and lowered authority—does this not describe the current state of government in America? On the one hand we fear the long arm of government at all levels. On the other hand, our regard for the state—what Reimann calls its authority—ever diminishes. This is the fertile ground for radicalism, something that we have never experienced in America to any great extent. But when its own overreaching causes economic chaos, government’s authority diminishes among all economic classes and radicalism becomes a possibility. This is not something we would wish to live through. Our Founding Fathers fought for the only radical change that we should ever desire. And they provided a system of republican government for the GRADUAL changes that the citizens may deem necessary over the years, decades, and centuries to come. But a weakening of the state’s authority, despite the increased fear that it engenders, increases the possibility of radicalism. Seldom in the history of the world has a more benign and liberal (in the classical sense) government emerged following radical change.

The Real Cause of the Current Economic Crisis and Its Cure

The current economic crisis was caused by government intervention in the economy that thwarted the market process and prevented freely acting and cooperating individuals from assessing reality and taking appropriate action to improve their own well being. The main intervention was by the Federal Reserve Bank’s expansion of bank reserves, which led to an artificial lowering of the interest rate, which spurred massive malinvestment in longer-term production processes. These production processes eventually were abandoned because there were insufficient real resources available for their successful and profitable completion. The artificial lowering of the interest rate did not reflect the reality that real savings had not increased--the government had simply printed more fiat money. In fact, real savings decreased, because the lower interest rate reduced the incentive to save below that which would have existed in the absence of the intervention. Eventually this dichotomy between increased investment not funded by real savings revealed itself in business losses in these longer term investments.

The government guided much of the malinvestment into the housing sector through its purchase of subprime loans by it several housing finance banks—the FHA, Fannie Mae, and Freddie Mac—and other interventions such as the Community Reinvestment Act, although other sectors of the economy also expanded longer term production that was not supported by real resources.

The spectacle of lower credit standards for home loans, which now seem beyond the minimal level of prudence, are but consequences of excessive credit expansion made possible and encouraged by the Federal Reserve Bank and the promise of government finance banks to buy these loans from the originating institutions. The excess fiat money could not be prevented from entering the economy somewhere and touching off the Boom-Bust Business Cycle. The artificial Boom distorted the structure of capital and production so that the real desires of people are not being met. This malinvestment must be redeployed, where possible, and liquidated if it cannot be redeployed. The longer this necessary adjustment process is delayed—for example, by government’s current actions to reflate the Boom—the longer the readjustment process will take and more non-specific capital will be lost that could have been redeployed.

The cure for the Boom-Bust Business Cycle is 100% gold-backed money, a legal prohibition on fractional reserve banking, an end to central banking, and an end to legal tender laws. These actions will prevent future expansions of credit not funded by real savings. Such a monetary system is the only one compatible with our Constitution. The Constitution of the United States clearly charges the federal government with establishing a standard for the dollar and prosecuting counterfeiters (Article I, Section 8). The United States had a relatively free banking system from the demise of the Second Bank of the United States in 1837 until the formation of the Federal Reserve Bank in 1913. During this period it enjoyed the greatest increase in wealth and production in the history of the world despite the death and destruction of the Civil War from 1861 to 1865. The Boom-Bust Business Cycles that occurred during this time were caused by the expansion of credit via fractional reserve banking; that is, the issuance of money substitutes not backed by gold. In other words, banks counterfeited their own money for their own profit, but eventually their fraud was revealed in the marketplace and banking customers scrambled for specie (gold). This is the origin of the “bank run”. Had the federal government prosecuted fractional reserve banking as the fraud that it is, these Boom-Bust Cycles would not have occurred. Likewise, sound money and an end to fractional reserve banking will end Boom-Bust Business Cycles today.

The government’s attempt to solve and/or ameliorate the current crisis will only make matters worse, because it is attempting to solve the crisis with the very same policies that caused the crisis--namely, excess fiat money credit expansion. The government is compounding its errors by spending so-called stimulus money. This spending of even more money created out of thin air will lead to higher prices and possibly hyperinflation, if not rescinded. Since the government can spend only what it takes from the people, its increased spending will drive the people to poverty even if the spending is on what many might consider worthy infrastructure projects. Government must refrain from spending, just as individuals must, in order to pay down debt and allow the economy to recover on its own. Over two hundred years ago, Jean Baptiste Say explained that the unhampered market economy always tends toward equilibrium and becomes more stable, not less stable, over time.

In addition to the end of government-controlled fiat money production and the rescinding of profligate government spending, the government should refrain from regulating more of the economy. In fact, it should eliminate most of the regulations currently on the books and devote itself to its primary job of protecting life, liberty, and property. Freely acting and cooperating individuals are the best regulators of the market process. No new banking rules enforced by an army of new regulators can prevent the inevitable malinvestment from the expansion of fiat money credit just as all the regulators in the past were unable to recognize the consequences of the Boom-Bust Business Cycles of the past. Thusly, it is imperative that the Fed remove its almost one trillion dollars in excess bank reserves before these reserves can be converted into many multiples of new money via the lending process. It should do this by selling its assets at whatever low price (high interest rate) necessary to accomplish the task. Furthermore, the government should cease all attempts to bail out failed firms, especially large firms, for these actions merely destroy even more of the nation’s capital by funneling what resources remain available to profitable firms to those firms that have proven incapable of producing a profit. The still substantial assets of these failed firms will be sold to entrepreneurs who are more capable of placing them into profitable and productive use.

There is nothing that government can do to speed up or ameliorate the necessary corrections to the economy. It can merely prevent them from happening at a cost of an even greater correction in the future. It is crucial that such correction be allowed to take place before the economy is completely destroyed, as occurred in Germany under the Weimar Republic in 1923 and as happening now in several African nations, such as Zimbabwe, today. The Soviet Union collapsed, because its once formidable economy was denuded of capital via the same policies touted by our government as a cure for the crisis today.

A free market economy—the only economy capable of providing peace and prosperity for all—is not compatible with command-style money manipulated by government for political purposes. It is this dichotomy that will destroy our economy. The economy will either become entirely free or entirely unfree. At the present time we are rushing headlong into a complete loss of freedom, both in economic and political affairs, for the two cannot be separated.

My Trip to the European Parliament

I recently made my second trip to speak at the European Parliament. Last year I spoke in Brussels to a committee on international development about the benefits of sound money for developing countries. This year I spoke in Strasbourg, France as part of a panel of three Austrian School economists, representing the Right Approach Group, which seeks market solutions to current economic problems. Now, just consider these first two lines. Yes, the European Parliament, which is just one branch of the many-tentacled European Government, has two offices—one in Brussels and one in Strasbourg. This fact alone illustrates why the organization is unpopular with the European taxpayer—it spends too much money on itself.

Last year I was wowed by the size and beauty of the Parliament’s offices in Brussels. It is a modern masterpiece of architecture—lots of glass, huge open areas, vast meeting halls, multiple cafeterias and coffee shops, not to mention the hundreds, perhaps thousands, of offices for the members, their staffs, and the unionized civil service. The office complex in Strasbourg is the same—vast, beautiful, and busy. But busy doing what? Well, for one thing, moving. Each month the entire European government moves from its main offices in Brussels to Strasbourg for one week. The cost of this move is enormous. Twice each month the members and their staffs must pack and ship files and other official documents, then travel and reside at significant expense in another city. Strasbourg is much smaller than Brussels, so the prices of hotels rise to reflect the increased demand. And we have not even touched the cost of lost productivity—which assumes, of course, that one believes that something beneficial to Europe really comes out of its alleged continental government. This is the elephant in the living room--does Europe really need a continental government?

The history of the European project is, as are more things than we like to admit, an outgrowth of the two world wars of the twentieth century. After the Second World War, there was real concern that Germany could threaten the peace a third time. Today we may view this concern with incomprehension, but one must look at the facts and the temper of the times. Few statesmen after World War One—called the Great War and the War to End All Wars--believed that Germany intended to restart hostilities or was capable of doing so. Did not the French, for one thing, have the finest army in Europe? France’s great wartime leader, Georges Clemenceau, was one of the few who saw the danger, but his warnings were ignored in favor of worthless arms reduction treaties.

The first step on the road to creating a European government was the formation of the European Coal and Steel Community. Its organizers were very clear that they believed that Germany must not be allowed to become self-sufficient in these two key industrial sectors. It was Germany’s attempt at autarky, meaning self-sufficiency in key economic areas, which made it believe that it could wage “Blitzkrieg War” before its key supplies were embargoed. The allies were determined to prevent this from happening. So Germany’s industrial capacity was made dependent upon foreign-controlled resources.

Over the decades a new agenda--or, rather, multiple agendas--appeared. On the one hand, there emerged a liberal (in the good, classical sense of the word) agenda to erect a large, free trade zone among European countries. The obvious example was that of the United States. Its states exercised no control over interstate commerce. Goods and people could travel freely across state borders. This had given the United States a tremendous advantage in costs and efficiencies. The people of the United States were much more willing to move to a new state to secure a better life, rather than stoically acquiesce in the decline of regional industries. Our common heritage, language, culture, and money made starting a new life in another state less costly and less fearful. Not so in Europe. Just imagine if Pennsylvania and New York were separate countries, whose citizens spoke different languages, required passports for people to travel between them, and charged duties on trade goods. This was the case in Europe. It is a triumph of liberalism that there now are no physical barriers of any kind within the EU. Only a few lonely and abandoned guard shacks remain on some intra-European borders.

So far, so good. But another, more grandiose agenda arose—political integration that would weaken each nation’s sovereignty. To some extent this has been achieved. The Euro—the European Union’s standard money—is administered and controlled by the European Central Bank (ECB), a supposedly independent entity. Although it is just as susceptible to political pressure as is our Federal Reserve Bank, no nation in the Euro Zone (not all EU members are in the Euro Zone) has total control of the ECB. Furthermore, the EU has managed to impose many standard economic regulations on its members and it has been partially successful in standardizing taxation throughout the EU. The purpose of tax standardization is to prevent shifts of business headquarters from high tax countries to low tax countries within the EU. Moving headquarters is very easy to do now that there is relatively free movement of people and goods throughout the EU. But the “tax equalization” movement became a cover for closing the door to the few tax havens that remained in Europe. At one of the large worldwide economic summits recently, French President Nicholas Sarkozy called for the world to close down tax havens in places like the Cayman Islands. So the real purpose of tax equalization is to fleece business everywhere on the planet in order to prevent European headquartered companies from escaping Europe’s onerous taxation.

The downside of all this, as the so-called “Euro Skeptics” claim, is that the EU has become a giant protectionist zone which greatly restricts trade outside its borders and engages in massive transfer payments within it borders. Half of the EU budget goes to farm subsidies, and they are a constant source of controversy. My wife and I had a front row seat to one incident. Our hotel in Strasbourg was only a few minutes’ walk from the EU complex, on a broad avenue that led to the beautiful heart of the city, about two miles away. The farm lobby held a demonstration by marching from the downtown area to the Parliament. The demonstrators chanted slogans, carried signs, drove tractors, and even herded a few reluctant cows. That evening the “France 24 English” television station explained that the farmers want their milk subsidies increased, because the price of milk is so low. One member of the Parliament voiced his support. Apparently he had no conception of basic economics; to wit, subsidies encourage production, and more production lowers the market price. Increasing subsidies would encourage even more production and cause the price to go even lower. Ah, well, we Americans cannot take the moral high ground here, with our own outrageous farm subsidies. Furthermore, like America, the EU blocks imports of cheap food from its poorer neighbors. We Americans block cheap sugar cane imports form dirt poor Caribbean nations, while Europe blocks farm products from Africa. Taxpayers on both continents not only get the honor of paying higher prices for food staples, but we also get the honor of propping up tyrannical and corrupt regimes through our foreign aid. Were these countries allowed to trade freely with their richer neighbors, conditions would be established for the creation of a middle class that eventually would demand more representative and more honest governments.

On the TGV from Charles de Gaulle Airport, just outside of Paris, to Strasbourg I met Paul Nuttall, a newly elected member of the European Parliament, and enjoyed a good hour’s conversation with him. Paul is a member of the United Kingdom Independence Party (UKIP), whose members are Euro Skeptics. Actually they are much more than skeptical of the necessity of the EU—they want Britain to resign from the EU. (In the very complex nature of EU structure, Britain is an EU member but it doesn’t use the Euro—it has kept the Pound Sterling, which is administered by the Bank of England.) Paul explained that EU membership meant that Britain could not freely import products from members of the British Commonwealth, such as Canada. The EU may be a free trade zone internally, but it has high tariffs against non-EU countries. The UKIP members see this as a bad deal; that is, cutting centuries’ old free trade ties with Commonwealth countries in order to pay higher prices for EU products. Furthermore, the leading EU nations, such as France, make no secret of their desire to free themselves from American military and diplomatic dominance. This is understandable and even laudable; there is no reason that the EU, whose GDP is roughly twenty-five percent greater than America’s, should be subservient to anyone. But Britain has a time-honored “special relationship” with America that was solidified in the Second World War. Many in Britain would rather be a junior partner whose voice is, nevertheless, taken seriously in Washington than an “Anglo-Saxon” outsider to a Franco-German dominated Europe.

My talk went well. The audience was attentive, as confirmed by the excellent participation in the Q&A session at the end. I was on three-person panel of Austrian School economists. Our twin goals were to educate and form alliances—educate potential allies in Austrian School principles so as to encourage them to use their influence to adopt sound economic policies. We met with mixed success, but better to speak to a skeptical group with some power than to preach to a choir who has none. As enjoyable as are my talks to those already friendly to Austrian School principles, we must face facts that we are outnumbered by the Keynesians in the halls of power. These are the people who must be presented with the likely consequences of their well-intended but disastrous actions. My points were simple—the actions of the past year to debase money, stimulate the economy, re-regulate the economy, and bail out failed industries must be repealed. The window of opportunity to do so is rapidly closing. The excess reserves injected into the banking system have not been leveraged, via the fractional reserve banking system, into massive amounts of new money media…yet. Only a small percentage of the stimulus package has been spent…yet. There is still time to prevent onerous and foolish new regulations on the financial system. And the bailouts must stop. The other two speakers—Professor Jorg Guido Hulsmann of the University of Angers and Dr. Thorsten Polleit of the Frankfurt School of Management—made similar points. Professor Hulsmann explained that Mercantilism was rising under a new name—Keynesianism--but it is the same, old, and discredited theories from before the industrial revolution wrapped in new garb. Dr. Polleit pointed out that proper policies to correct economic problems must be based upon a proper perception of the causes of the current crisis. Unfortunately, the world is under the impression that past government interventions not only did not cause the crisis, but that it was weak government oversight that allowed freely acting individuals to trash the system; therefore, more oversight is required. This is completely backward, and Dr. Polleit explained why.

Was anyone convinced? Maybe. I have received some emails from MEPs (Members of the European Parliament) who are interested in learning more. This is a start. Rome wasn’t built in a day and it didn’t collapse in a day. But the response of all industrial nations to our current crisis cannot work and will make things worse. The world needs to know why, and I, for one, will keep explaining why to anyone who will listen.

"CLUNKERS FOR CASH" IS BACKDOOR BAILOUT FOR GM

This past week Congress doubled down on its “clunkers for cash” program, authorizing another two billion dollars after the original one billion appropriation was drained. For a people who supposedly cannot manage our own spending so as to provide for our own healthcare, we certainly understand when we are getting a bargain…in this case up to nine thousand dollars for a worthless car as long as we “trade it in” for a new one. The Keynesians, who apparently have never heard of Henry Hazlitt’s “broken window syndrome”, think the economy will be enhanced by all this new spending on autos.

Now, there is so much wrong with this program that I am loath to burden the reader with all the fallacious economic theories. But something that professor Bill Dunkelberg wrote about the onerous effects of the increase in the minimum wage put me to thinking about this program. Professor Dunkelberg, writing for the Wynnewood Institute (www.Wynnewood.org) said that when General Motors wants to reduce its inventory of unsold cars, it reduces the price. Likewise, when labor remains unsold, meaning unemployed, the price must be reduced in order to employ all those seeking work. But, of course, our government is doing the opposite. It is raising the price of labor in the face of severe unemployment. This will only exacerbate the unemployment problem. Now back to the topic of this essay—the clunkers for cash program.

Our government took over the management of General Motors, promising to return it to profitability. But how can it do this when GM has huge unsold inventories? The only way to reduce inventories is to sell the cars for less, but GM has the highest cost structure of any carmaker in the world. The cars could be sold only for a loss. It would not do to have our government-managed carmaker experience such huge losses. Why, the electorate might lose confidence in the ability of that thirty-one year old political junkie, who has no experience in the automotive business, being able to turn GM around. Ah, that’s where the “clunkers for cash” program comes in. Rather than dump more bailout money directly to GM, the “clunkers for cash” program funnels the money through car dealerships. This allows GM to sell cars at a profit, with the subsidy booked somewhere else.

So, GM gets to sell its cars at a profit. Car dealerships get to make sales in the depths of a recession. People get to buy new cars for much less than they ever expected. Why, even the environmentalists see this as a wondrous thing: the public gets more fuel efficient cars. And the taxpayer gets to pick up the bill. After all, who cares about the taxpayer? They are nothing but rich, greedy people who deserve higher tax bills anyway. And we all know that higher taxes have absolutely no impact upon production, so these rich, greedy enemies-of-the-people will continue to risk their capital and work just as hard as before. What a country!

How to Lose Friends with Monetary Policy

The unforeseen evil consequence of our government’s constant meddling with monetary affairs extends to causing increased animosity with our trading partners. Of course, America is not alone in this regard, for all governments today feel that it is their right and duty to manipulate their nations’ money supply, interest rates, and banking laws for the benefit of the nation. America, however, is in the (temporarily) unique position to force its trading partners bear much of the cost of such manipulation, due to the use of the dollar as a reserve currency. Since international trade settlement, especially for big-ticket items like oil, is conducted in dollars, each nation must hold more dollars than it would otherwise. This situation is a carry-over from the unique position of the United States at the end of the Second World War. At that time America held the most above ground gold reserves in the world and our nation’s infrastructure had escaped the destruction of war. The Bretton Woods agreement of 1944 enshrined the dollar as a reserve currency. America agreed that it would tie the dollar to gold at thirty-five dollars an ounce; all the rest of the world’s currencies would be tied to the dollar at some agreed-upon exchange ratio. Foreign governments could hold dollars instead gold to satisfy the necessary settlements of trade. This arrangement was called the "gold exchange standard".

The gold exchange standard certainly seemed to be a more efficient system than transporting gold from one central bank to another in order to settle accounts, something that the anti-gold clique, headed by John Maynard Keynes, harped about constantly. As long as America kept its dollar-to-gold ratio in tact, every currency would be subject to the discipline of the gold standard without all the fuss of handling the physical commodity itself. And therein lay the problem—America did not keep its dollar-to-gold ratio in tact. Almost before the ink was dry on the agreement America started printing more dollars. Within three decades America was forced to abandon the Bretton Woods Agreement, because we could not honor the redemption claims of foreign governments. Few Americans understood the full impact of this shameful action, but it was not lost on our trading partners. One of the first foreign statesmen to call the world’s attention to America’s dishonorable failure to uphold Bretton Woods was President Charles de Gaulle of France.

Charles de Gaulle was perhaps the only statesman of the modern era who understood economics, especially monetary affairs. His long-time economic confidante, Jacques Rueff, was a highly regarded Austrian School economist. De Gaulle was skeptical of the Bretton Woods Agreement. Having witnessed a large percentage of his countrymen collaborate with the enemy during the war, he well knew the weaknesses of men when placed under extreme pressure, either to save their necks or exercise political power. Therefore, he placed more confidence in the discipline of gold than the promises of men. Why hold dollars as surrogates for gold when the real thing was readily available? Nevertheless, this is the so-called system that the world had adopted when he came out of retirement in 1958 to save France from the insurrection of the Algerian officers and re-write France’s constitution to form the Fifth Republic, still the constitutional order of France. (This episode itself bears the hallmark of an adventure story played upon the world stage in which one man, by force of personality alone, saves his country from disaster for the third time. He saved French honor during the war—the Petain government in Vichy was a Fascist puppet and Germany was forced to occupy France as a conquered nation--and from a communist takeover immediately after France’s liberation.)

After de-colonizing French Algeria, de Gaulle turned his attention to France’s economy. In his presidential memoirs, cut short by his death in 1970, de Gaulle gave as clear an explanation as any textbook in explaining how the United States had managed to export inflation to its trading partners by failing to keep the dollar-to-gold ratio at the level agreed upon at Bretton Woods. One must read selected passages in de Gaulle’s own words in order to understand the international political damage that had been done:

"…there was the monumentally over-privileged position that the world had conceded to the American currency since the two world wars had left it standing alone amid the ruins of the others…the world’s entire stock of gold was piling up in the United States. The countries of the West…had no choice but to accept…the ‘gold exchange standard,’ according to which the dollar was automatically regarded as the equivalent of gold. It was so, in fact, as long as the Federal Government limited its issue of banknotes in direct proportion to its gold reserves…But the vast sums lavished by Washington…had drawn America into a process of galloping inflation…Moreover, America carried sufficient political and economic weight for the International Monetary Fund…not to insist that it be maintained….In France itself, the surplus dollars…since this foreign currency was converted into francs on the spot…resulted in an artificial increase in our total money supply."

In 1963 the French government demanded that America redeem eighty percent of what it owed France in gold. Eight years later America reneged on its promise to redeem the dollar for gold. Bretton Woods collapsed, unleashing government profligacy funded by unprecedented currency debasement.

One of our largest trading partners, China, has pegged its currency to the dollar at a fixed exchange rate, meaning that the Bank of China buys dollars with yuan, which American companies then spend in China. Resisting downward pressure on the dollar, which would mean exchanging fewer yuan for each dollar than the market would command, China has imported American inflation just as did France in the years after Bretton Woods. One could insert "yuan" for "franc" in the quote above, for the process is exactly the same. What can China do with its depreciating dollars? It should float the yuan and accept the recession that this would bring to the Chinese economy, an economy that is much too dependent upon exports, as witnessed by the government’s reluctance to end supporting the dollar at its currently high value. Its only other course of action is to exchange dollars for hard assets before the world recognizes what it is doing. It could buy gold internationally, and there is some indication that it is doing this at a slow process so as not to panic the markets, or it could buy American assets…not treasury bills, but real American assets such as land and companies. Repatriating massive amounts of oversees dollars would cause hyperinflation in the U.S., says Professor Jorg Guido Hulsmann of the University of Angers, France. The scenario from such an action is hard to fathom, but the possibility exists for chaos with our country and instability abroad. Who said the study of economics was dull?

Truman's Steel-Mill Seizure

Fifty-seven years ago today, on April 8th, 1952, President Truman ordered his Secretary of Commerce to seize the nation’s steel mills, ostensibly due to a strike that threatened national security. The nation was fighting a "police action" in Korea at the time and the war was not going well. The United Steel Workers went on strike and America’s steel industry came to a halt. This was President Truman’s very vague justification for his seizure. The industry took the president to court and won, but the case was decided on such narrow grounds that no general precedence was established. This is the story that most historians understand.

But a larger story exists. It is the story of unintended adverse consequences that stem from a trail of government interventions that are not found in the Constitution. This is a common theme that reverberates to an even greater extent today, for today we are witnessing an interventionist government that seems to know no legal bounds to its exercise of power for the most specious of reasons.

The real story and the real lesson is that when property rights have once been violated, there is no end to the trouble that ensues and no real satisfactory answer that will end the controversy. When the principle of the sanctity of property has been violated, we are reduced to the pure exercise of power rather than the rule of law to determine right and wrong.

The early twentieth century saw the rise of militant labor unions. Now there is nothing wrong with men organizing to form a union of workers for the purpose of offering their labor en mass to employers. But the law should not require any employer to recognize or negotiate with such a union.

As it says in the famous passage from the Declaration of Independence, which was borrowed form the 17th century philosopher John Locke: "All men are endowed by their Creator with life, liberty, and the pursuit of happiness." An 1850 book by Frederic Bastiat, titled The Law, gives the clearest and simplest explanation of this phrase. Bastiat contends that we own ourselves and the definition of "ourselves" must extend to include our property, for without property we cannot survive and, therefore, will be reduced to slavery.

But the Orwellian-named "Progressive Movement" weakened the sanctity of both self-ownership and property ownership. Included in its poisonous philosophy was the idea that labor unions had a right to force workers to become members and to force employers to contract for labor exclusively through the union. The Depression era "National Labor Relations Act" of 1934 (Wagner Act) created a means for sympathetic politicians and courts to defend unions’ forceful occupations of factories with violence to the owners and non-union workers. This law exacerbated union violence and labor unrest during the Great Depression.

The act ignored the fact that labor and capital have harmonies of interest and will tend to resolve differences peacefully as long as property rights are not violated. This means that men may offer their services individually or via a union and that the owners may employ labor either individually, through a union, or through some combination of both. The competitive market place ensures that owners pay the workers according to the value of the skill they bring to the work place. This same market ensures that the owners are not forced to deal with a legally protected and uncompetitive labor force. But the Wagner Act intervened in this basically peaceful and fruitful process.

The Wagner Act had been passed during the Depression by a Democratic Congress and signed into law by a Democratic president-FDR. After the war, a Republican Congress sought an end to labor violence and unrest, but instead of simply repealing the Wagner Act and taking measures to restore the rule of law to its rightful place as protector of property rights—which includes the right NOT to belong to a labor union plus the right NOT to negotiate with one—the Republicans passed the "Labor Management Relations Act" of 1947 (Taft-Hartley) over the veto of another Democratic president-Harry S. Truman. Taft-Hartley gave Congress the power to force workers to continue on the job AFTER their contract had expired. In other words, the union would not be allowed to strike as long as Taft-Hartley had been invoked. Labor rightly saw this as slave labor and called it so.

This is the state of things even today. Whereas the market would tend to resolve labor disputes in a peaceful manner, due to the inherent harmony of interests between labor and capital, conflicting laws perpetuate and aggravate labor strife. It seems to be a law of nature that one bad law generates a second bad law that generates a third bad law…on infinitum. Without first the Wagner Act, that attempted to side with unions, and then Taft-Hartley, that attempted to deal harshly with unions, there would have been less labor strife overall and possibly no labor strife during the Korean War that spurred HST to seize the mills. What is so complicated about protecting life, liberty, and property?

Stealing a Nation

Bloomberg News reported earlier this week that it had calculated the total spending promised by the Obama administration to date as equaling the nation’s gross national product for one entire year—around $13 trillion. The public has grown inured to daily reports of massive spending programs and the administration’s fear mongering that the world will come to an end—or rather the cushy jobs of its friends on Wall Street will come to an end—unless our government spends and inflates on a scale that has never before been attempted. Ah, all the more reason to admire us, their propagandists proclaim, for the boldness of our actions in the face of such a calamity.

Yes, a calamity is approaching. It is the calamity brought about by reckless spending of the nation’s wealth in pursuit of the unattainable. There is no way that the trillions of dollars of malinvestment of the last few years can be pulled back out of the sinkhole. The money is gone. There is no way to get it back. What the Obama administration is doing is trying to make everyone pay for this massive loss when the proper, legal, ethical policy should be to ensure that those involved accept their losses like men (which may include many reading this essay plus the author himself).

It is redundant of me to point out to readers of my essays that none of the Obama administration’s plans would be possible without the ability of the Federal Reserve Bank to inflate the money supply and steal from us via reducing the purchasing power of the dollar. Without a central bank the government would be required to adopt some combination of taxes and borrowing to launch any bailout and stimulus plans. The nation might accept some small measures, but it would never accept measures that would require it to toil for one full year as a slave of the government.

This is the great evil that a central bank makes possible—the theft of a nation’s wealth. Gone forever is the pretense that the central bank is an independent agency that guards our money from the predation of plundering politicians aligned with powerful interest groups. The citizens of the United States should demand an end to the Fed and an end to this administration’s plans to steal our wealth.

Hold no illusions. The administration’s plans to rescue the American economy will not work. Our government cannot turn back the clock and pretend as if millions of homes had not been built at a loss rather than a profit. The damage has been done and now the insane pretensions of megalomaniacs must stop before even more damage is done—damage that even the great American people cannot repair in a generation. Criminals who claim no more right to their actions than that they won an election and/or were appointed to a government job are plundering our nation. They are our servants and not our masters. They certainly are not entitled by any law to rob us of all our wealth and destroy our liberties in the futile attempt to hold back the tide or paper over losses borne by their friends on Wall Street. This plunder, this theft, this illegality must stop!

The Jacksonian Meaning of Corruption

It is tempting to men who are entrusted with public responsibility to steal from the public purse. Many do so, but they hide the fact from their colleagues and constituents, for they face jail and shame when discovered. This is one of the inherent evils associated with big government—politicians and bureaucrats control so much money that it becomes almost impossible to keep track of it all and, therefore, men of weak character enrich themselves. When discovered, such men are rightly shamed, drummed out of office, prosecuted, fined, and jailed. This is the modern meaning of corruption. But it is weak and paltry thing next to the meaning of corruption as understood by one of our nation’s early great leaders—President Andrew Jackson. Jackson understood that far greater damage was done by the corruption to the body politic that occurred in the light of day.
Jackson was our first president not born and raised in one of the original thirteen colonies. Although not all of the Founding Fathers were wealthy, they all were part of a tightly knit elite who knew one another intimately. With the presidency of John Quincy Adams--son of our second president, John Adams—it seemed as if this tightly knit group would pass its baton of leadership to family members and other insiders. But the American people had other ideas. Andrew Jackson epitomized what was to become almost a caricature American—one who despised privilege and valued his personal freedom above all else. Jackson saw the threat of centralized power made possible by the stealth funding provided by a central bank.
The Second Bank of the United States—the nation’s second central bank and long ago ancestor of our current Federal Reserve Bank—was the favored tool of the Hamiltonians, who relished a strong, centralized national government. A central bank can be used to abrogate power to those whom it wishes to favor. Chartered by government, it is government itself that benefits most from a central bank, primarily from the central bank’s ability to finance the government’s debt. The Bank of England was the template, granting the British crown financial power that the British people would never grant it willingly. Our modern governments could not have attained a fraction of their current size and power without the central bank’s ability to fund government debt to unimaginable levels.
The Hamiltonians created our nation’s first major political riff by forming the Second Bank of the United States in clear violation of the Constitution’s prohibitions. Nowhere in the Constitution is the federal government granted the power to form a central bank. In fact the Constitution grants the federal government the power to ensure that only sound money—which the Founding Fathers knew to be gold or silver—would circulate within our borders. It even gave the federal government the responsibility to ensure that the states did not create machines of inflation.
Nevertheless, the Hamiltonians succeeded and the Second Bank of the United States was chartered in 1817. Immediately the new bank began to "buy" the government’s debt with money created out of thin air, which sparked an inflationary credit boom that benefited the bank’s insiders and political cronies in government. Andrew Jackson was determined to end this corruption.
Notice that Jackson was not claiming that bank officials were stealing--our weak-kneed modern definition of corruption. Oh, no. But they were using the unchecked powers of the bank to ensure that their crones were the beneficiaries of the credit expansion the bank set in motion. To Jackson this was corruption, and he was determined to end it. He engaged in a titanic struggle over many years, but eventually he was successful in ensuring that the bank’s charter was not renewed in 1837.
Today Jackson would see corruption everywhere and he would understand its source—the nation’s third central bank, the Federal Reserve Bank. Here are just two examples. Last week the Wall Street Journal’s investigative reporters were able to find out who were the beneficiaries of the Bush Bank Bailout in the closing month of his administration. Among others, Goldman Sachs received $6 billion. Why is this corrupt? Two reasons. First of all, the Treasury Department tried to keep the names of the beneficiaries secret. Of course they felt they had good reasons, but no reason is acceptable to a supposedly free nation with a government "of the people, by the people, and for the people". Secondly, Henry Paulson, then Secretary of the Treasury, had been a partner with Goldman Sachs for twenty years! Yes, yes, he sold his shares in the firm, but we must assume that he had boon companions who would lose all if not bailed out with taxpayer dollars. Thusly, then Secretary of the Treasury Paulson was able to rationalize the secret transfer of billions of our dollars to his old buddies on Wall Street.
Here’s another example. Who are the recipients of the Obama "stimulus" funds? (Forget for a moment that the stimulus will not work.) If the Obamiacs really believe that it is necessary for the government to create liquidity for the benefit of the nation, why doesn’t the government send checks to all of us? Even if many of us hoard the cash, surely enough of us will spend it to stimulate the economy as the Obamiacs desire. Even those of us who might hoard the cash will place it in government insured bank accounts, which would accomplish the same thing as giving the money to the banks directly—the banks would have money to lend, thawing the so-called frozen credit markets. So why bail out the banks directly and why spend the money only on projects desired by the government? The government has given us no economic reason to justify targeted expenditures rather than a broad-based one. In fact the government’s Keynesian economists themselves imply that what the economy needs is a broad-based stimulus that would effect all geographical areas of the country and all industries relatively equally. There is nothing in Keynesian theory that suggests that only certain industries are worthy of stimulating. Yet, the auto industry is bailed out. The insurance companies are bailed out. And, of course, the bankers are bailed out. The rest of the stimulus is going to the usual suspects: unionized industries and other liberal voting blocks.
Andrew Jackson would understand this as massive corruption—spending the public’s purse to buy votes and keep friends and cohorts solvent. And Andrew Jackson was right, despite the protestations that it is all for our own good. This is nothing more than rationalizing massive corruption. And just as in the Jacksonian era, America’s central bank is the mechanism through which the government funnels America’s wealth to political insiders. Unfortunately, we have only touched upon the debts of corruption that a central bank sets in motion. In a future essay I will discuss an even more deep-seated evil that emanates from the banking sector. It is nothing less that a corruption of our morals and our civil society. Give Us Liberty! End the Fed!