Business ethics is all the rage. This is the first look—well, the second: the first, as the author points out, was 700 years ago by a French Bishop—at the ethics of the business of making money. Not earning money, but producing money. This was near the last in a series of books I have been reading in a self-designed study unit on money and banking issues: The Case Against the Fed, The Mystery of Banking, Money, Bank Credit, and Economic Cycles and a series of articles on both sides of the fractional reserve vs. 100% reserve debate.
The Ethics of Money Production has several unique things to offer.
While simply stated, it covers a tremendous breadth, touching on all the key issues in clear form. It also squarely addresses the issues from both ethical and utilitarian angles and clearly distinguishes both. It gives priority to the ethical—if something is just plain wrong, there is no basis for excusing it on some set of utilitarian grounds. Yet as a highly trained economist, the author is in thorough possession of the utilitarian arguments in favor of various forms of what he identifies as unethical money production and he examines each one finding them to be flawed or self-contradictory on purely economic grounds.
He finds that there has been basically no attempt whatsoever to defend unethical monetary practices such as fractional reserve banking and monopolization of note issue on ethical grounds, and indeed, he can find no ethical grounds to support such practices. Moreover, there is substantial reason to condemn them as fraudulent and socially destructive on many levels, from both ethical and purely economic standpoints.
He summarizes the forms that this destruction takes: the continuous loss of value of everyone's money discourages saving, responsibility, and long-term planning and as a result even assists in the break-down of family bonds and other institutions of civil society. The sole beneficiary is the state itself and its closest friends, the banks that help finance its activities beyond what the citizens are willing to pay.
Inflationary financing is essential to state power, to its wars, to its expansion, to the consolidation of its domination of its subjects.
The conclusion of my study unit: money is a central, if not the central, strategic issue in the strength of the state vis-a-vis its ability to dominate its subjects by having for itself a virtually limitless means of financing itself at the expense of its subjects in a way that is hidden from, and quite mysterious to, most of them.
What is new in The Ethics of Money Production?
The author goes even further than his predecessors in imagining the conditions of free market money production. A key weakness in previous formulations was a presumption that only one type of metal would form a circulating monetary unit. It is entirely possible that more than one could function in parallel for different purposes, and there is no need to have an arbitrary "bimetalist" exchange rate established between them. For example, gold for the high-end, silver in the middle, and copper at the low end of types of transactions. He mentions historical precedent for such arrangements where, for brief periods, the state has not banned them. The metal rates would obviously have to float, as all bimetalist disasters and Gresham's Law-generated deflations in history have clearly demonstrated.
Multiple, freely floating monetary metal currencies are also defensive for the monetary order: if one begins to become corrupted or weakened for any reason, it is easy for consumers to switch to another at the margin, preserving monetary stability, tending to mitigate and rebalance speculative value shifts, and preserving for consumers the ability to shift away from problem areas. This is the very consumer power that the state has always sought to take away in order to protect its sad parade of funny money schemes. The essential point is to have total monetary freedom, which means that people are never forced to accept money they do not wish to, and are free to use any money they do wish to.
An important technical point that was new to me was a subtle error in previous monetary standard formulations. Saying that "an ounce of silver" of a certain quantity is the monetary unit is still not clear enough and leads to problems. The unit must be a specified type of coin that contains this amount of metal. It is costly to mint coins. If the unit is not specified as a coin, a debt of 100 ounces could be paid, for example, with 100 oz bar instead of 100 coins, but the former is actually less valuable than the latter because of liquidity differences and minting costs from bullion. The market solution would likely be to make a specified type of coin itself the contractual unit. If someone wanted to pay in bullion, it would have to be discounted so that the value of the 100 oz. bar, for example, would be lower than the value of 100 of the minted coin units, and the balance, essentially a minting discount plus, would be due in addition to the bar.
As I describe this, I realize that it means that the bar is not the money; it is another commodity. Money is an economic rather than a physical concept. The coin, in this example, would be the money, the bar still another commodity in a technical sense.
As the author shows, all such problems arise from the state arrogating to itself the right to set arbitrary "standards," which inevitably have some flaw in them that leads to problems that markets could easily have solved and would not have generated.
But the state does this for a reason: it profits. That it profits at the expense of its population, at the expense of everyone else, should be the first point taught in any exposition of monetary theory. In state-run educational institutions, how much prominence do you think this point is given? It is hidden as well as it can be hidden. The author shines the light on it for all to see and shows a way forward that is more ethical, more economically sound, and truer.
Showing posts with label state/business partnership. Show all posts
Showing posts with label state/business partnership. Show all posts
Friday, July 3, 2009
Thursday, November 20, 2008
The perfect crime is the one not detected
Orson Scott Card, in his open letter Would the Last Honest Reporter Please Turn On the Lights? argues that the Community Reinvestment Act and Fannie and Freddie's antics were responsible for the financial crisis due to Democratic party policies.
Card is correct that the deleterious effects of forced and subsidized lending practices helped set up the sub-prime bubble. Unfortunately, the fundamental problem is much broader, much worse, and lies elsewhere. Indeed, it lies well beyond any issues about which Republicans and Democrats differ. The Big Government parties (available in an exciting selection of Blue and Red colors) are united on being unwilling or unable to say a single word about this larger issue.
To place the effect of the CRA in this larger perspective, it may be helpful to imagine the process of overinflating a balloon. The CRA created a weakness at a particular spot on the latex surface of the balloon. When the balloon popped, it naturally popped starting at the weakest point, after which the air proceeded to rush out altogether, deforming the entire balloon.
However, we would not expect the balloon, in the process of being overinflated, to have not popped if only the weakest point on its latex surface had happened to be somewhere else. We would expect it to pop perhaps half a second later, starting in a different place. This is not to advocate or excuse the unending list of nonsensical policies, such as the CRA, that weaken the surface of the balloon, it is rather to argue that the overinflation of the balloon is arguably worse than each and all of these lesser destructive policies.
What few but the Austrian school economists and the Ron Paul movement are currently addressing is the fact that the balloon is quite unlikely to pop at all unless it is being overinflated.
The air pump in this case consists of the fractional reserve banking system pyramiding on top of ever-expanding fiat currency and electronic "deposits" (of nothing) created on central bank computers. The underlying process has, in one form or another, been going on for centuries, becoming ever more refined, effortless, massive, and destructive up to the present day. It exists and persists for a very simple reason. It is the usual reason: the use of state power to channel money. But how does it work and in what direction does the money flow?
The government provides special exemptions to the ordinary rule of law for banks. This allows banks to simultaneously lend out the exact same money that they are supposed to be "safekeeping" on deposit, a form of fraud. Indeed, most of that "money in the bank" that people are lulled into feeling that they have, is not actually in the bank. In return for this special legal treatment of banks, the government, its best friends, and the banks themselves are the first beneficiaries of the new money and loans thus generated fraudulently out of thin air.
The classic question to ask about a policy system such as this is who benefits? Most of the early forms of such fraudulent loans of other people's money went straight from banks to the king for his wars, or to the city for its expanding budget. Of course, the system has come a long way since then.
Today, this process operates as a massive hidden tax that extracts wealth from all the people to whom this money and its effects "trickle down" only late in the process, after the general price level has already been lifted.
In understanding this racket, it is important to realize that creating money out of thin air lifts the price level artificially, but this is a process that takes time, extending out over several months or years. During this period, those who get the money first can spend it before the general price level has been lifted—in other words, when the money still buys more goods and services. Those who get the money later, can only spend it after the general price level has already been lifted—by which time it doesn't buy as much. This is a massive scheme to transfer wealth:
Indeed, a more perfect criminal scheme has never been devised. It is insanely profitable, its victims are unaware of the source of their losses, and the state not only calls it all legal, but is itself at the top of the pyramid, the biggest player in the game.
It makes for fascinating reading, and once you know about it, perhaps also a certain degree of responsibility to learn more and spread the word. The first step is to find out more.
Books:
1. (Shorter, introductory): The Mystery of Banking (pdf), 2nd ed. by Murray N. Rothbard
Or order a physical copy.
2. (Longer, more detailed): Money, Bank Credit, and Economic Cycles (pdf) by Jesus Huerta de Soto
Or order a physical copy.
Card is correct that the deleterious effects of forced and subsidized lending practices helped set up the sub-prime bubble. Unfortunately, the fundamental problem is much broader, much worse, and lies elsewhere. Indeed, it lies well beyond any issues about which Republicans and Democrats differ. The Big Government parties (available in an exciting selection of Blue and Red colors) are united on being unwilling or unable to say a single word about this larger issue.
To place the effect of the CRA in this larger perspective, it may be helpful to imagine the process of overinflating a balloon. The CRA created a weakness at a particular spot on the latex surface of the balloon. When the balloon popped, it naturally popped starting at the weakest point, after which the air proceeded to rush out altogether, deforming the entire balloon.
However, we would not expect the balloon, in the process of being overinflated, to have not popped if only the weakest point on its latex surface had happened to be somewhere else. We would expect it to pop perhaps half a second later, starting in a different place. This is not to advocate or excuse the unending list of nonsensical policies, such as the CRA, that weaken the surface of the balloon, it is rather to argue that the overinflation of the balloon is arguably worse than each and all of these lesser destructive policies.
What few but the Austrian school economists and the Ron Paul movement are currently addressing is the fact that the balloon is quite unlikely to pop at all unless it is being overinflated.
The air pump in this case consists of the fractional reserve banking system pyramiding on top of ever-expanding fiat currency and electronic "deposits" (of nothing) created on central bank computers. The underlying process has, in one form or another, been going on for centuries, becoming ever more refined, effortless, massive, and destructive up to the present day. It exists and persists for a very simple reason. It is the usual reason: the use of state power to channel money. But how does it work and in what direction does the money flow?
The government provides special exemptions to the ordinary rule of law for banks. This allows banks to simultaneously lend out the exact same money that they are supposed to be "safekeeping" on deposit, a form of fraud. Indeed, most of that "money in the bank" that people are lulled into feeling that they have, is not actually in the bank. In return for this special legal treatment of banks, the government, its best friends, and the banks themselves are the first beneficiaries of the new money and loans thus generated fraudulently out of thin air.
The classic question to ask about a policy system such as this is who benefits? Most of the early forms of such fraudulent loans of other people's money went straight from banks to the king for his wars, or to the city for its expanding budget. Of course, the system has come a long way since then.
Today, this process operates as a massive hidden tax that extracts wealth from all the people to whom this money and its effects "trickle down" only late in the process, after the general price level has already been lifted.
In understanding this racket, it is important to realize that creating money out of thin air lifts the price level artificially, but this is a process that takes time, extending out over several months or years. During this period, those who get the money first can spend it before the general price level has been lifted—in other words, when the money still buys more goods and services. Those who get the money later, can only spend it after the general price level has already been lifted—by which time it doesn't buy as much. This is a massive scheme to transfer wealth:
- From the poor, the retired and others on fixed incomes, savers, and those who work in industries farthest removed from government expenditures.
- To bankers, government employees, debtors, government contractors of all kinds, and any other industries and operations (don't forget universities) that are relatively close to the sources of government expenditures and new money creation.
Indeed, a more perfect criminal scheme has never been devised. It is insanely profitable, its victims are unaware of the source of their losses, and the state not only calls it all legal, but is itself at the top of the pyramid, the biggest player in the game.
It makes for fascinating reading, and once you know about it, perhaps also a certain degree of responsibility to learn more and spread the word. The first step is to find out more.
Books:
1. (Shorter, introductory): The Mystery of Banking (pdf), 2nd ed. by Murray N. Rothbard
Or order a physical copy.
2. (Longer, more detailed): Money, Bank Credit, and Economic Cycles (pdf) by Jesus Huerta de Soto
Or order a physical copy.
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