Money, health, love

Money is like health and love: an energy source that can help create an easier and more pleasant life.

You may have lots of money because you worked hard for it. You may also be in excellent shape because you work out. You might be well-loved because you worked sacrificially on behalf of others.

Then again, you may have lots of money because it was given to you. You may be in excellent shape because of good genes. You may be well-loved because of your charismatic personality without having done anything virtuous or admirable.

And, it's very possible that hard work won't lead to more money, or a better body, or the love of others.

You might deserve what you want, but not get it. Others may have what you want, without ever "earning" it.

You can resent them, or be happy for their good fortune.

What's the benefit of resentment? 

Marshmellows and the Fed

Check out my latest at The Downsize DC Foundation.

Nations Don't Have Economies

Check out my latest at the Downsize DC Foundation. Excerpt:

Why are economic arguments based on what best increases national output? If people say, "This policy won't work," what they mean is that they think it won't increase the nation's GDP.

They object to...

• policies that might lead to lower tax revenue.
• free markets if freedom might lead to Americans losing their jobs to foreigners -- as if foreigners don't matter or are "less equal" than Americans.

The Separation of Money and State

Check out my latest at the Downsize DC Foundation. Excerpt:

Interestingly, Hayek was skeptical that gold would prevail as the standard form of money in a free-market system. Until the 20th century, gold was the preferred form of money of rulers, and brilliant free-market economists such as Hayek's mentor Ludwig von Mises assumed a gold standard as a matter of course.

But is what the rulers want necessarily what the public would prefer?

Podcast Interview on Money

Michael Ostrolenk of AAPS and the Liberty Coalition invited me to his podcast to talk about free currency. You can learn more and listen here.

Trust

Check out my latest at The Partial Observer. Excerpt:

Where the circle of trust is small -- when no one trusts others beyond their family and best friends – it doesn't matter what kind of money circulates in the economy. If one believes others are on the take, it's easy to justify joining them.

But this means people will stop exchanging with each other. People will assume the money that others would give them is counterfeit. A nation could have lots of gold, but still be poor because the people refuse to engage in voluntary exchanges with each other.

Just as gold money won't make a nation rich, so it is true that rich nations don't require gold money. The form of money doesn't matter.

Rich nations get rich on trust.

How Newspapers Can Save Themselves

Check out my latest at The Partial Observer. Teaser, "Two solutions: serialize novels, and create their own currency."

Generosity

Check out my latest at The Partial Observer. Excerpt:

The universe is already generous to us, giving us life and energy without receiving anything in return. But since we are part of this universe, it only makes sense to emulate and reflect what Nature and Nature's God have given us. Generosity may be the one virtue that can save the world from collapse.

Roads and Money

My latest at The Partial Observer: Roads and Money - Why government control isn't necessary.

Excerpt:

I live in the country. There are half-a-dozen routes to the town where I do most of my business. Anyone willing to cut down some trees, pave over a little cropland, and build a small bridge over a narrow river could produce any number of even more direct routes.

St. Louis and Atlanta are roughly 550 miles from each other. David D. Friedman writes in The Machinery of Freedom that in the late 19th Century, there were 20 different railroad routes between St. Louis and Atlanta. This undermines the idea that roads or railroads form some kind of natural monopoly.

Better Than Money

Check out my latest at The Partial Observer. Excerpt:

As I've previously written recently (1, 2) I fully support free competition in currency. This is normally interpreted as a longing for a national gold standard. But let's focus on the benefit to your neighborhood.

The E.F. Schumacher Society promotes local currencies. On this week's Invisible Hand podcast, Tracy Twyman directs us to one such experiment, the Cascadia Hour Exchange, inspired in part by the Ithaca Hours.

These experiments prompted me to suggest something similar . . .

Liberty and Equality

Check out my latest at the Partial Observer. It's about Rand Paul and Civil Rights.

What motivates regulators and prohibitionists?

See my latest at The Partial Observer. Excerpt:

People in other countries don't really matter to Americans. Yes, we may care about them in the abstract, but they have no real bearing on our lives. There are so many people in the world dying tragically or being punished unjustly every second, it's impossible to name them all, let alone grieve about them.

There is one reason why we care so much for our fellow Americans and our country. There is one reason, for instance, why a Northeasterner gets upset about school curriculum in a Midwestern state, or a Southerner is upset about the marriage laws in the Northeast, or that everyone's concerned about the number of people without health insurance.

The reason we care is based on a law.

It's a stupid, harmful law, but it seems every country has it. Otherwise, it wouldn't be a country.

Is it fraud if there is more paper money than real wealth?

Lew Rockwell links to a post by Tony Baxendale of England's Cobden Centre against fractional reserve banking. The argument seems that it goes against all the principles of contract law.

I love Lew and the Mises Institute, and Richard Cobden is one of the great heroes of civilization. Nevertheless,I find this argument confusing. It's true that I abhor the idea of money backed by nothing. That's why we need a free market in money. At the same time, seems to me that the 100% Reserve people kind of miss the boat. A while ago I suggested a conceptual difference between certificates of ownership of an amount of precious metal, on the one hand, and bank notes, on the other. Either one could circulate as money; the certificate redeemable in gold (or silver, or whatever the certificate says); whereas the bank note would be a claim to some of that bank's assets,which may or may not include gold or silver, and may include many different things.

If banks lend out more bank notes of value greater than their assets, and these notes circulate as currency, the market itself will judge their value. If that bank's depositors know this is the case, and there are no legal tender laws requiring these bank notes to be accepted as money, I see no ethical problem. I don't understand how any Austrian economist or libertarian would object.

Imagine this principle without a bank. Let's say I'm the owner of a chain of department stores, theoretically called Wilshop. My stores dominate the industry, and are the primary gathering place and economic center of many small towns.

Let's say I come up with an idea: create my own money. These would be paper gift certificates/coupons that would be good for purchases in any of my stores. Anyone could come in and, for $19, receive $20 worth of Wilshop certificates. The more you pay, the better the deal; e.g., $90 will get you $100 in certificates; $850 will get you $1000 in certificates. When you shop at Wilshop, everything you buy, even things on sale, would be discounted all the more if you pay with the Wilshop certficates (certs for short).

Now imagine that the Wilshop store is the only game in town - the only grocery store, the only furniture store, the only clothing store. Other businesses would likely accept Wilshop certs as currency, since everyone shops at Wilshop. Soon, people start buying up Wilshop certs in bulk. Soon, more people hold Wilshop certs that exceed the value of the Wilshop merchandise inventory. Yet more and more people purchase the certificates, so that there is twice, 10 times, even 30 times more Wilshop certs than there is Wilshop inventory.

If everyone came to Wilshop at once and tried to spend all their Wilshop certs, only the first 3% would actually get their value back.

But would it be unethical for Wilshop to sell more Wilshop certificates than the equal value of its inventory? Only if Wilshop promised that the inventory was available, and that the certificates could be spent and redeemed, and then failed to follow through. If no promise was made, it's not Wilshop's fault that others decided that the Wilshop cert was a viable means of currency. If the Wilshop cert entitles you to use it in Wilshop stores only as supplies last, but does not claim that you are entitled to a share of the merchandise inventory, then frankly no fraud would exist. If people no longer liked or trusted Wilshop, they would stop accepting Wilshop certs as payment in their own transactions.

There is nothing intrinsically wrong with a store selling more gift certificates at discounted prices that exceed the value of the inventory itself. For that reason, I do not see how, in a completely free market monetary system, it is intrinsically wrong for banks to issue more of their own notes even if they exceed the value of the deposits they hold. Provided the depositors know the risks involved (just as Wilshop customers understand the risk of buying Wilsop certifcates), and that no one would be legally compelled to accept the bank note as currency, I have no idea why any Austrian School economist or libertarian would outlaw such practices.

Against the word "Capitalism"

What if we called capitalism "savingism" instead? Mark Davis asked the question last year, and I strongly recommend his piece.

Davis's point is that capital is really just savings, or surplus. Civilization grows when people work to the point that they have more than they need. They then save the surplus, trade with it, or invest it in order to create even more surpluses with which to trade and consume. Work now, enjoy the fruits later. Davis also argues that what most people call capitalism today is its exact opposite: creditism. Under this system, the economy is supposed to grow by people borrowing and enjoying the fruits now, and working later to pay off the debts.

At the same time, banks lend far more money than they have on deposit (fractional reserve banking), and charge interest. In a true capitalist/savingist economy this would be considered fraud. But it drives the economy of creditism.

I'm tempted to go one step further than Davis. Let's junk the word "capitalism" altogether. "Liberal" once meant an individualist who favored small government; now it means one who favors large government. "Conservative" once meant preservation of traditional social norms; now it means militarism. And "capitalism" once meant producing greater wealth through savings, yet now it means producing and consuming by borrowing.

The words "liberal" and "conservative" are now virtually useless beyond a religious context. "Capitalism," however, is worse than useless. People who debate it often have exactly opposite definitions.

We should have greater clarity if we instead changed the terms of the debate to "savingism vs. creditism."

Creditists believe that forcing the people to pay for government debt, and to incur debts themselves for everything from homes to college to cars, is a dandy way of keeping an economy and a nation humming. Whether it's called progressivism or Wall Street Republicanism, we have seen the results of this ideology.

Savingists, however, prefer freedom from debt over excessive levels of consumption. A result of this, of course, would be less environmental destruction, as savingists are reluctant to consume more than what they need. They won't buy houses or cars they can't pay for. They would rather live in crowded houses and cooperate with neighbors until they have saved enough to better their condition.

If this model, this lifestyle, appeals to those on the left, then they really should learn more about fractional reserve banking and the Federal Reserve. The same institutions that drive consumer debt are the same that drive government debt. And the beneficiaries of government over-spending - Big Government - are definitely not "the people."

The Mint vs. The Fed

Quote of the Day: The government called three accountants to testify. The defense asked each one, "What is the proper way to calculate income for purposes of the Internal Revenue Code if you are paid in a gold coin that has a $50 face value on it?" All three of them responded, "I do not know; I'll have to research that." -- Mike Zigler, reporting on the 2007 case against Robert Kahre that ended in a hung jury.

Subject: How can legal tender be illegal?

Robert Kahre is facing up to 296 years in prison. His crime? He hired workers on mutually-agreed terms, and paid them in gold and silver dollars rather than in Federal Reserve dollars.

First, some background . . .

* The face value of the U.S. Mint's gold and silver coins are legal tender, meaning they must be accepted in payment of debt

* But a Gold Eagle coin that has "$50" printed on it is legal tender only up to $50, while its gold content is worth about $1,000 in Federal Reserve notes

* No law or IRS regulation requires that receivers of Gold Eagles and other U.S. Mint coins must report the market value of the coins instead of the legal tender value

After extensively researching the issue, Kahre . . .

* hired workers as independent contractors, so he would not pay the payroll tax for their labor

* paid them in gold and silver coins, whose face value - that is, legal tender value - was so low that the workers legally didn't have to report it as income to the IRS

For instance, if a worker was annually paid in gold coins with a legal tender face value of $2,000, the market value of the gold content in those coins could be $40,000, but only the legal tender face value of $2,000 would theoretically count as taxable income. That face value of $2,000 is low enough to be non-reportable to the IRS. But . . .

Even though the coins Kahre used were legal tender, the Justice Department alleged that Kahre's system was a fraudulent, tax-evading scam.

We agree with Jacob Hornberger who asserts that the federal government's prosecution of Kahre is self-contradictory . . .

* if you owe $100 in taxes and pay with gold coins with face values totalling $100, the IRS will accept the payment as $100; it could then sell the coins on the market for twenty times that amount and keep the difference. The government will accept your payment as "legal tender."

* but if YOU receive gold coins from someone else in a private transaction, the IRS says you must report the market value of the coins, not the face value. That is, YOU CANNOT TREAT THE COINS AS LEGAL TENDER.

The government fears that if more people took the law at its word and behaved like Kahre . . .

* people would demand payment in the Mint's gold and silver coins and have far fewer reportable "dollars" in income, meaning fewer people would pay income taxes

* the market would soon prefer the coins produced by the Treasury Department's Mint that are regulated by law - not the inflated dollars created by order of the independent Federal Reserve Board

* good money (gold and silver) would drive out the bad (paper Federal Reserve Notes and electronic keyboard strokes), whereas the federal government needs inflated, deficit-driven money to pay for its endless wars, failed welfare schemes, and expanding police state

No wonder the government views Kahre as a threat, and is willing to made a mockery of its own legal tender laws to destroy him!

DownsizeDC.org, however, believes Kahre was on to something. That's why we endorse the "Honest Money Act," which would repeal the legal tender law that gives the Federal Reserve a monopoly over the money supply. This bill, along with the "Tax-Free Gold Act" and the "Free Competition in Currency Act," is a plank in our End the Inflation Tax Campaign.

Repealing the legal tender law would foster the creation of HONEST free market money, and protect people from the Federal Reserve's endless onslaught of legalized counterfeiting, which constantly reduces the value of your money.

Tell Congress to pass the bills in our End the Inflation Tax Campaign.

Use your personal comments to mention the hypocrisy involved in the Kahre case. If the feds are going to make it a crime to FOLLOW the legal tender law, then that's just one more argument for repealing it. You can send your message here.

Thank you for being a DC Downsizer.

James Wilson
Assistant to the President
DownsizeDC.org

Monopoly Money

Check out my latest at the Partial Observer. Excerpt:

"[T]he distortions and evils caused by government control and creation of money cannot be attributed to the free market. In a real free market, the government would prosecute murder, not protect and encourage murderers. And in a real free market, money would be defined by the market and valued by the market, not monopolized and depreciated by the government."

The Foundation of a Free Market is a Free Market in Money

Some years ago I suggested the Freedom Paradox: that the less the State does, the stronger it will be. Less government will mean more prosperity and justice in society, which will renew public confidence in their government, making them more likely to loyally submit when the State expands again.

But I left out a key element that would change my premise. What if we abolished legal tender laws?

Federal Reserve Notes - dollars - are legal tender for all debts, public and private. Individuals are compelled to accept them as payment even if they would prefer some other means of payment.

What if individuals weren't forced to accept them as payment for debts? What if they arranged for debt payment to be made in, say, gold, and only in gold? (Or silver, or Euros, or Disney Dollars, or Canadian Tire money, etc.)

This would mean the Federal Reserve system would have competition. We'd have a free market in money.

The Fed exists for two main purposes:

• to bailout out fractional reserve banks (i.e., banks who lend out more money than they actually have in cash reserves for depositors to withdraw);
• to finance the federal government's deficit spending.
  

Because the Fed's notes are legal tender and are (in violation of the Constitution, by the way) the nation's currency, it has little-to-no competition. They enjoy a monopoly privilege. And the dollars are not redeemable in any commodity such as gold or silver. The Fed can print them up at will, and also, in our checkbook and credit/debit card culture, create even more money with computer keystrokes. This is called monetary inflation, and it drives down the value of dollars relative to other goods, which leads to rising prices. This leads to over-investment (or speculation) in over-priced assets which in turn causes the boom-and-bust cycle.

Repeal the legal tender laws, and the Federal Reserve dollars face competition. In turn, the fractional-reserve banking system itself will face competition. If new gold and silver banks are formed promising to keep 100% of their deposits available for withdraw, the public will be made aware of the nature of fractional-reserve banking. They will finally learn that fractional-reserve banks are, by definition, insolvent;

• they are unable to meet the withdraw demands of all their depositors
• to bail out the bank in the case of a run, the Fed would have to create more dollars of no real value, reducing the value of the dollar

Fractional-reserve banking is itself immoral, especially if depositors are not made aware that they may not be able to withdraw all their money. As Murray Rothbard pointed out in The Case Against the Fed, it is like a grain elevator printing out fake receipts for bushels of grain it didn't receive, to be bought and sold in a commodities exchange.

The public will then more likely choose to bank where 100% reserves are kept and the bank notes represent redeemable values of gold, silver, or some other commodity.

When the Fed faces this competition, it will be more reluctant to further cheapen its dollar by financing the government's deficits. The government will not find anyone to borrow from, and will be forced to downsize.

And in this system, it also won't have the resources to upsize - to increase its size, scope, and power again - without re-imposing legal tender laws. But the people, enjoying low prices and a high standard of living, will reject inflation with its booms and busts.

Some things the State does may be even more morally abhorrent than legal tender laws and protection of the Federal Reserve system: wars, torture, victimless crime laws, etc. But its capacity to borrow money from a limitless inflationary resource is immoral and feeds all that it does. One could say that while gold can be used as money (a presently-existing product of nature to be exchanged for another currently existing product of nature), the Federal Reserve note is pure mammon and the root of all the State's evils.

But if we have a free market in money, the Fed and its member banks will have to compete or die. The State will lose its cushion. No more borrow-and-spend.

Moreover, a self-styled promoter of the free market who does not acknowledge that there can't be a free market without a free market in money, will ultimately lose the debate. The system as it exists now encourages over-production, speculation, mal-investment, environmental degradation, and government debt. These are attributed by critics as "greed" and proof that "unregulated" markets don't work.

On the other hand, critics of our current system who call for tweaking of it through higher taxes and more regulation miss the point. If they don't recognize the immorality of a financial system based on fraud and inflation, none of their fixes are going to work in the long run.

It is the system itself that must be abolished by allowing a free market in currencies and banking. A free market here will actually create more checks and balances in the system than "regulation" of an inherently monopolistic system would.

The problem free-marketers have today is that their arguments are ultimately unconvincing to those who sense that, at its core, our current economic system is inherently unjust. In our current system, arguments against, say, the minimum wage, do not persuade people. After all, the argument goes, "the cost of living keeps getting higher. Shouldn't wages keep pace?"

Unless we have a free market in money, this objection can at best be rebutted with charts and graphs and curves. But it can't be refuted, because the "sense" that something is wrong is valid.

But if free marketers insist on a free market in money first and foremost, the argument that we then abolish the minimum wage and most other business regulations become airtight cases - precisely because the free market in money will impose checks and balances first in money and finance, and ultimately throughout the market.

Without addressing the system of money and banking, libertarian outreach to the following parties will not succeed:

• the tax-and-regulate Left;
• trade protectionists;
  
• those of any stripe who believe "immigrants steal jobs and drive wages down"
  

And it's precisely because we'd fail in getting to the heart of the problem. We must reveal the fundamental injustice and immorality of our money and banking system and promote the solution of a free market in money. If they're not persuaded, then challenge them to defend legal tender laws, fractional-reserve banking, and the Fed.

Instead of libertarians always on defense, we can state the case for a free market in money and when they try to change the subject to suggest we are uncompassionate, libertine, or whatever, we can refuse to take the bait and press them more forcefully: why do you defend the Fed?

Free Banking

Must money be backed by a 100% gold standard?

Apparently, some in the Austrian School believe that any issuance of money not backed by gold warehoused in the bank is a form of fraud.

If the bank issues gold or silver certificates without having the actual gold to exchange them with, that is certainly fraud.

But if it issues its own bank notes to be circulated in the community, I don't see why it has to be backed by a precious metal, so long as it is backed by other assets of equal value belonging to the bank.

Let's say a silver dollar is defined as having one ounce of silver. The Smith Bank could issue its own paper dollars. Their dollar could be defined as having the value of 1 ounce of silver, but doesn't necessarily entitle the possessor of the dollar to exchange it for an ounce of silver; it could be exchanged for other assets belonging to the bank.

Let's say Joe is a teddy bear salesman. He has 1000 teddy bears with a wholesale value of $1 (in silver dollars) each. But he needs $900 right now for some urgent needs. He goes to Smith Bank and asks for $1000. Here is the deal he is offered. He can have $900 in Smith notes. In a year's time, however, he must pay the bank:

• $1000 in Smith notes, or
  
• $1000 in Silver certificates, or
• his Teddy Bear inventory valued at $1000, or
• some combination of the above totaling $1000

Because Joe has assets equal to the amount he will be loaned and pay back with interest, there is no inflation of Smith dollars when Joe receives them and starts to circulate them in the economy with his purchases: they represent assets of equal value that already exist in the economy. The asset that the bank has is its claim on $1000 from Joe, backed by his teddy bear inventory.

It is also possible for a bank to issue loans even without much in the way of current collateral (like Joe's teddy bears) if:

• if the loan is for production of current high-demand necessities such as food and soap;
• the borrower has proof of insurance that will pay back the loan in the event of accident or natural disaster
• the loan is relatively short-term
  

If the public trusts Smith Bank's lending practices and are confident that Smith dollars constitute real wealth, then individuals will use them and merchants will accept them. If Smith issues more dollars than it has in assets, however, then the public will stop using Smith dollars and revert to the Johnson bank.

A free market in money and banking will not necessarily lead to a 100% gold standard, nor would every form of paper money have to be a certificate entitling the owner to trade it for precious metal. Instead, it will see banks issuing their own paper currency, instead of relying on the national Federal Reserve Note monopoly. The banks that make the soundest lending decisions will be the banks with the most highly-sought dollars. But it simply is not the case that these dollars must be backed by gold or some other metal. The important thing is that they are backed by real assets of some sort.

Thanks to work by Antal Fekete and Nelson Hultberg for clarifying this issue for me.

Cake-and-eat-it Carousel

This is my latest at the Partial Observer. Excerpt:

If the title of this piece sounds vaguely familiar, you have probably listened to the Beatles' Abbey Road at some point in your life, or were a regular listener to a quality classic rock station that played more than just their #1 hits.

But I believe it is an apt description of a credit-based, government-run monetary system. You can eat your cake while riding the merry-go-round, and when it swings by the bake-sale table, grab the pole with one hand, and with the other, reach out and grab another piece. You can have all the cake you want - it's reserved for you at the bake sale table - and, therefore, you can eat all the cake you want. "You can have your cake and eat it, too." Don't ask where it came from, just have faith that there will always be more. The Cake-and-eat-it-Carousel.

And what if eating all the cake while riding around in circles makes you barf? There's a solution to make you feel better: more cake! And more rides on the merry-go-round!

Instead of the Bailout

This is my latest at The Partial Observer. Excerpt:

Many people, conservative and progressive alike, have been concerned about environmental degradation, the culture of consumerism, and "atomization," meaning the loss of community. These complaints should be taken with a grain of salt; after all, they are frequently made by people living in comfortable homes and posted from laptop computers. But whether particular complaints are valid, or just a projection of one's own unhappiness onto the outside world, there is indeed a fundamental flaw in our System. And it is for this reason that all thoughtful people, left, right, and middle, should oppose the Big Bailout of Wall Street and allow civil society to transform to a more natural order.