Sunday, February 28, 2010

Does the Decline of the Democrats mean the Decline of the Republicans?

As the Democrats crash and burn, the biggest challenge facing Republicans is Republicans. It is easy to be opposed to liberal madness,and it certainly has been gratifying to watch a majority of the American people vehemently reject the left's road to socialist serfdom. However, opposing madness does not equate to promoting sanity. Republicans have famously fumbled the ball whenever it has been handed to them - as they are now doing. After all, when the smoke clears from the Democrat's smoldering morass of Big Government impolicy, the logical next question always must be: "what would you do"?

The reason the Republicans continually fail is because they do not have a logically consistent philosophy. To the extent they advocate any fundamental ideology, it is, in fact, entirely consistent with the essential premises embraced by the left, i.e., the morality of altruism or the view that self-sacrifice is moral and self-interest is evil. Their failure to challenge the morality of the left or, even worse, the active adoption of this ethos, renders them unable to defend individualism, limited government, and free markets. Worse yet, many Republicans attempt to defend capitalism on religious or mystical grounds which concedes to their opponents that freedom has no rational justification and implies that science and reason are actually on the side of the busy bodied Central Planner. Because they do not challenge the welfare state morally, Republicans can only slow the drift towards socialism, getting dragged along while kicking and screaming.

In my post, Why Republicans Keep Failing, I wrote:

The Republicans overtly promote "free markets" and pro American foreign policy without understanding why this is morally right. Capitalism is rightly associated with profit making and self-interest. If you attempt to justify self-interest on the grounds of altruism you will be perceived as unconvincing and hypocritical. ...Their acceptance of the morality of altruism also explains why, in reality, when it comes to policy, the Republicans can not actually implement free market programs or execute all out war on our military enemies. It explains why they are unprincipled, because, under altruism, they can not act on principle without acting like Democrats. The Democrats do not suffer from this contradiction. The Democrats support government intervention in the economy which is consistent with the popular notion that business is selfish and evil. ...They are viewed as "idealistic" and "well-intentioned" albeit "impractical" (or simply "flawed" to the extent that they are personally despicable).

America has been drifting towards statism since its founding. The only way to stop the procession is to understand why freedom and capitalism is the moral system and to proudly and unapologetically defend it.
The Republicans will not change overnight. However, given the current political upheaval and in the wake of the nascent Tea Party movement, I believe there is a real chance to begin making over the Republican Party. This is already happening as primary races increasingly pit traditional Republicans against more libertarian leaning Republicans. For example, in the Kentucky primary for U.S. Senate, Ron Paul's son, Rand Paul, a fiscally conservative physician, is running against a traditional Republican pol, Trey Grayson. Paul is currently up more than 15 points in the primary polls. This is a good sign, but it is not enough.

Republicans should not simply mouth grandiose rhetoric without a concrete plan, nor should they myopically bury themselves in the minutia of policy outside of a larger ideological context. If Republicans want to lead rather than just obstruct, they must adopt and articulate concrete action, but they must do so on the basis of a consistent, principled philosophy.

Anyone who follows my blog will understand that I am a radical for individual rights and capitalism, and that this view is predicated fundamentally on the basis of reason and the morality of egoism or rational self-interest. While such a view entails a political agenda strongly consonant with the Founding Fathers vision of a strictly limited government, it also goes further in explicitly prohibiting the abridgement of the freedom of production and trade, i.e., it entails the complete separation of state and economics. An entirely unadulterated program of policies based on this view, while logically consistent with the requirements of happiness and the prosperity and advancement of human life, are politically impractical in the short run.

Therefore, I advance several concrete policy proposals below which I believe could be articulated and defended in the current political environment. They would serve as a counter-offensive to the socialist onslaught of the Obama administration both in principle and in action. The policies themselves would not only be practically sound, they would serve to illustrate the wider principle that individual rights and free markets are practical and moral. In contrast to the recent M.O. of the Republican party, comprised of ad hoc reaction and milquetoast compromise, these policies could be the foundation of a new Republican party that seeks to lead on the basis of fundamental principles. Alternatively, they could be the policies adopted by any party that values human life and well being.


The fundamental role of government is to protect property and person. The Constitution enumerated the specific role of the federal government while delegating all other powers to the states. The federal government has far overstepped its constitutionally enumerated powers. Not only does the federal government intrude on virtually every aspect of our personal and economic life, it's bloated expenditures have wasted the earnings and capital of the most productive burdening both the present and the future with trillions of dollars of debt.

1. We will submit a balanced budget to the President of the United States
2. In order to accomplish this goal, the budget will rely solely on cuts to current government spending, not on tax increases.
The government is not a productive enterprise and it does not create wealth. It can only create the conditions for individuals and businesses to create wealth. So-called "stimulus" spending is worse than a zero-sum game. Robbing Peter to pay Paul is nothing but a transfer of wealth. In fact, it is worse since it siphons capital from productive uses into government waste and pork barrel spending.

3. We will return any unspent funds from the various stimulus bills and oppose any further attempts at expanding the budget deficit in order to engage in so-called stimulus spending.
Businesses should be free to reap the rewards of their success and bear the consequences of their failure. No business is to big to fail. The government is the protector of private property and an arbiter of legal disputes, not a business manager. Any other role is beyond the federal government's legitimate function, distorts capital markets, and entails necessarily arbitrary and unjust intervention on behalf of favored business constituencies.

4. We will immediately seek to divest the federal government of all privately issued securities, such as preferred shares of financial institutions or automobile companies, procured during the recent crisis. (If they are truly a good investment, then private investors should gladly bid for the securities at a reasonable price.)

5. We will seek statutory prohibitions on the future ability of the federal government to take equity stakes in or purchase the debt of privately held companies.

6. This prohibition will extend to the Federal Reserve bank which will be statutorily constrained to purchasing and selling only the debt of the United States Treasury or debt issued by federal agencies. The Federal Reserve system will be subject to a yearly audit to itemize security holdings and to monitor compliance with these statutes.
Addressing the continual rise in health insurance premiums entails understanding the causes of these increases. The increases are being caused by government interference in the health care market in several ways - primarily by creating third party systems for routine payments. In other words, ordinarily, insurance is obtained for the event of a catastrophe, not as a mechanism to pay every expense. When individuals don't pay their own bills - demand goes up, and costs rise. However, tax incentives favor the provision of expensive health insurance to employees since benefits are not taxable. Government restrictions and mandates on these policies result in ever increasing costs being passed on through premiums and one size fits all policies.

7. We will remove incentives for businesses to provide health insurance benefits by treating all payments to employees, whether in the form of cash or benefits, as equal under the tax law. The government will not seek to "socially engineer" or favor any particular type of spending.

8. We will seek to minimize or eliminate mandates and regulations on insurance policies so as to create a competitive and diverse marketplace

9. We will remove restrictions on out-of-state policy offerings

10. We will seek to restore fairness to the legal system by encouraging monetary standards for malpractice settlements and encouraging "loser pays" rules to discourage frivolous lawsuits
In order to not increase the tax burden due to the equal tax treatment of benefit payments, with a view towards a reduction in the burden of overall government and the complexity of the tax code, and to acknowledge and affirm that an individuals earnings are his own

11. The first $5,000 of monthly income will be deemed non-taxable. This means that anyone making $60,000 or less will not pay income tax. The top marginal income tax rate will be capped at 20%

12. This non-taxable income provision will obviate the need for Health Savings Accounts, Flex spending accounts, or 401k plans and the like thus radically simplifying the preparation of tax forms by individuals and employees while expanding the tax benefit
The social security and medicare system has devolved into a capital destroying Ponzi scheme. It expropriates the earnings of individuals which it spends on current benefits rendering any future "guaranteed" payment uncertain while denying the capture of actual market interest. The social security "trust fund" does not contain actual cash or securities but merely IOU's that, ultimately, can only be satisfied through the expropriation of the earnings of future taxpayers. The magnitude of this unfunded liability and the government's accounting treatment would be grounds for criminal prosecution if undertaken by any private business. Although these programs, as a matter of justice, should be abolished, so many individuals have paid into this system and been guaranteed benefits, the reform of the program must be dealt with on a long term basis.

13. The social security and medicare system will be phased out over a period of at least 30 years.

a) Anyone currently under the age of 30 will no longer pay into the system but will not be guaranteed a benefit based on prior payments made.

b) Anyone over the age of 30 can choose either to (i) continue paying into the system which will result in some guaranteed payment based on a to be determined actuarial table or (ii) choose to opt out which means they will not have to pay but will not receive any benefit.

c) The government will seek to operate the wind down of the program according to generally accepted principles of actuarial accounting and under rules mandating the holding of actual capital and make the fund off limits from current spending other than on actual benefit payments to recipients.
The root cause of the boom-bust cycle is the expansion of credit created by the federal government founded upon the erroneous belief that counterfeit money is equal to capital. The mechanism for this process is the Federal Reserve system that purchases government debt on the open market with "reserves" created out of thin air. When these "reserves" are spent, it leads to chronic inflation, and depending on the severity of Fed policy, to artificial booms followed by inevitable busts. The United States should recognize that the Federal Reserve system has been an unmitigated disaster and resolve to end this experiment with fiat currency.

14. We resolve to restore the monetary system to a foundation of actual capital where domestic and international transactions are settled in specie, i.e., gold and silver as mandated by the Constitution

15. As part of that effort, we resolve to statutorily limit the Fed's role in its conduct of open-market operations and its provision of financing to private businesses, conduct yearly audits, and ultimately formulate a plan to wind down its operation

16. We seek to reduce "moral hazard" (encouraging risk by removing the possibility of failure) by replacing the FDIC with private insurance and abolishing Government Sponsored Enterprises or GSE's such as Fannie Mae and Freddie Mac which underwrite mortgage loans

The recent U.S. Supreme Court ruling upholding the First Amendment right of free speech should be celebrated not denigrated. The campaign finance laws' attempt to limit political speech in the name of "preventing special interest" money from entering the electoral process stems from flawed premises. It is government's power to tax, redistribute and regulate which draws inordinate sums of money into the political process. The Supreme Court was right to see these laws as dangerous attempts to stifle political debate. Rather than preventing persons from speaking their mind, we should resolve to limit the size of government's influence by reigning in its massive size and power.

17. The campaign finance laws should be repealed as attempts by the state and incumbent politicians to stifle debate and favor entrenched incumbency

18. Other forms of legislation that seek to prevent the free expression of ideas in the name of political correctness should be opposed. Any attempt to regulate speech on the Internet or other forms of media through so-called "fairness doctrines" will be vigorously opposed
Our nation desperately needs a principled foreign policy which holds American interests as an absolute priority, that overtly and explicitly names individual rights and free markets as a value, and that recognizes that America is a sovereign nation governed by the people of the United States, not the United Nations or any other international body. Furthermore, America must define its current goals in the mid-east and elsewhere and commit to a bold policy to achieve those objectives.

19. Recognize that the America's enemy is the ideology of Islamic totalitarianism not the tactic of "terror", and that Iran is the intellectual, financial, and military center of this movement
20. Refocus our foreign policy on the threat presented by Iran and its allies committing to total war if the threat is deemed clear and present

21. Recognize that a middle of the road foreign policy results in the loss of American lives while emboldening our enemies. The administration needs to clearly define our military and political goal in Iraq and Afghanistan with respect to any imminent or future threat to America or our allies, acknowledging a willingness to commit total war if there is deemed to be an actual threat or immediately withdraw if there is not

The United States government, in its role as the protector of individual rights and arbiter of legal disputes, must seek to orient its policies in such a way as to promote economic prosperity and the advancement of human life. In other words, it must recognize that the concept of "value" derives from a standard based on human life and that policies that favor the "environment" outside the context of human life are meaningless and destructive.

22. Policies which seek to violate property rights or restrict economic growth based not on legally adjudicated findings of demonstrable harm or violations of the rights of individuals, but rather on unfounded scientific speculation or the "rights" of non-humans, will be vigorously opposed .

23. The "Cap and Trade" bill or any derivative legislation that would cripple the American economy by taxing energy based on the unproven, if not disproven, claims of discredited climate scientists operating under the auspices of the United Nations, will be firmly opposed

24. We will seek to reduce and minimize regulations that stifle the creation, production and delivery of various forms of energy that hold us captive to foreign imports of oil and refined gasoline as well as increase our dependence on outdated sources of energy such as coal burning - including repealing regulations that render the construction and operation of nuclear power plants virtually impossible, repealing rules that restrict the construction of new domestic refineries, and repealing regulations that prevent the exploration and development of domestic oil and natural gas

While these policy proposals fall woefully short of any significant restoration of individual liberty, within the current political context, they are dramatic, and certainly should be regarded as a major step in the right direction. Importantly, the policies are all related in that they are predicated on a consistent moral foundation of individual rights and human happiness. They would, for once, establish the party that adopts them as the advocates of practicality and morality.

Wednesday, February 17, 2010

Boom-Bust Index

Below are links to my recent posts.

Part 1 - Today's crisis as an instance of the classic inflation-depression or boom-bust cycle

Part 2 - Positivism, empiricism and the self-induced myopia of the economics profession

Part 3 - Brief review and analysis of 19th century monetary history; gold the hero, government the villain

Part 4 (coming soon)

Monday, February 15, 2010

Boom-Bust, Part 3

In Part 1 and Part 2, I argued that the current economic crisis is an instance of a classic inflation-depression cycle caused primarily by government engineered credit expansion or inflation. Additionally, I argued that modern economists like Chairman Bernanke's inability to grasp the ultimate nature of the crisis derives from the profession's positivist epistemological bent in which principles are eschewed in favor of myopic empiricism and statistical modeling of the latest data points.

The positivist method helps not only explain the antipathy towards fundamental generalizations regarding the crisis, but partially accounts for the general hostility toward private banking and the gold standard. This is due to the creation of what I dubbed the "mythical narrative of the 19th century" in which the positivist observes the occurrence of boom-busts in the 19th century, despite the presence of a gold standard and supposed laissez faire conditions, concluding that gold and private banking must not prevent the boom-bust cycle. In other words, the inability to properly abstract the relevant economic principles, which explain outcomes in varying contexts, renders these intellectuals incapable of reaching a full understanding.

As Murray Rothbard conclusively demonstrates in A History of Money and Banking in the United States, the government has been intimately involved in the monetary system since the inception of the country, leading to one disaster after another. The 19th century saw an almost constant political tug of war between hard money advocates and those advocating inflationary policies - a battle ultimately culminating in the formation of the Federal Reserve. It is certainly not my intention to recount the entire history here. However, I believe there are several major takeaways to help better understand the evolution of our current system.

Historically, it appears that government intervention in the monetary system takes two general forms. The first form I will call direct intervention where, for example, the government pyramids paper money on top of specie. The second form of intervention represents a default by the government to perform its legitimate and necessary function as a protector of property - which I will call misintervention. I claim that this misintervention took two primary forms. First, during various crises, it failed to uphold banks contractual obligations to redeem in specie. Second, through various legal precedents, it failed to legally define property in such a way as to effectively outlaw the practice known as fractional reserve banking, i.e., legally distinguish between a deposit and a loan contract.

Therefore, it is my contention that government intervention (or misintervention) caused the banking crises and panics of the 19th century, not the gold standard per se. In fact, it was gold that kept any semblance of price stability and which helped lead to phenomenal economic expansion. To observe this latter point graphically, see Peter Bernholz excellent book, Monetary Regimes and Inflation, wherein he charts consumer prices from 1750 to the present in four different countries. The chart reveals that prices remained virtually flat for 150 years (under a gold standard) and then spike exponentially after 1900 after the advent of the Federal Reserve. (Also, see this
chart at Bernholz states that:

All hyperinflations in history occurred after 1914 under discretionary paper money standards except for the French case during the Revolution of 1789-96, when a paper money standard was introduced with the assignats. (I discussed hyperinflation during the French Revolution at length in this post)
In fact, since the creation of the Fed in 1913, the dollar has lost approximately 95% of its purchasing power. So, in fact, even given the various panics which occurred in the 19th century, the monetary environment under gold was a bastion of stability compared to what has occurred under central banking. It's tempting to stop there, however, it's important to understand why even under this form of gold standard, periodic panics and major disruptions rocked the financial system, because these panics and bank runs are always cited as justification for central banking.

Below I propose four major categories of government intervention or misintervention which I hold, in essence, accounts for virtually every panic of the 19th century.

1. Direct creation and pyramiding of paper money on top of specie by the government

2. Private bank pyramiding of paper money on top of specie (fractional reserve banking) legally sanctioned by the government's inability to properly distinguish a deposit from a loan

3. Government suspension of banks contractual obligation to redeem in specie during various panics

4. Statutory decrees setting the the relative value of gold to silver (bimetallism) rather than allowing prevailing free market rates (see my post
Where's Grover Cleveland When You Need Him which discusses how government policy, in this case the Sherman Silver Purchase Act, led to the panic of 1893.)

Of course, the particular details in each instance varied, however, I believe the root causes derive from these categories. A general pattern tended to occur repeatedly throughout the 19th century:

Depositors would exchange gold with a bank for banknotes redeemable in specie. The bank would create more banknotes than it had deposits to make loans - a process known as fractional reserve banking. For example, since not everybody wanted their money at the same time, the bank could create say $100 of paper for every $10 of gold in the bank. Fractional reserve based credit expansion led to temporary booms for the same reasons cited in Part I, and all was well, until everyone wanted their money at the same time - a phenomena known as a bank run. Bank runs were precipitated by banks issuing too much paper money followed by a panic that the bank would not be able to fully redeem their depositor's gold. Then, during the crisis phase, the state and federal governments repeatedly allowed banks to suspend redeemability thus encouraging banks to expand credit over and over again, knowing that they would be bailed out if depositors ever panicked.

Rothbard writes:

The War of 1812-1815 had momentous consequences...The government therefore encouraged the formation of new and recklessly inflationary banks in the Mid-Atlantic, Southern, and Western states, which printed huge quantities of new notes to purchase government bonds. The federal government thereupon used these notes to purchase manufactured goods in New England.
The number of new banks exploded and pyramid ratios (the ratio of bank notes outstanding to actual specie) were close to 20-1 in some states.

The monetary situation meant that the United States government was paying for New England manufactured goods with a mass of inflated bank paper outside the region. Soon, as the New England banks called upon the other banks to redeem their notes in specie, the mass of inflating banks faced imminent insolvency.
Rothbard explains the "fateful decision" then made by the government.

As the banks all faced failure, the governments, in August 1814, permitted all of them to suspend specie payments-that is, to stop all redemption of notes and deposits in gold or silver-and yet to continue in operation. In short, in one of the most flagrant violations of property rights in American history, the banks were permitted to waive their contractual obligations to pay in specie while they themselves could expand their loans and operations and force their own debtors to repay their loans as usual.

This decision had far reaching consequences in terms of so-called moral hazard.

From then on, every time there was a banking crisis brought on by inflationary expansion and demands for redemption in specie, state and federal governments looked the other way and permitted general suspension of specie payments while bank operations continue flourish. It thus became clear to the banks that in a general crisis they would not be required to meet the ordinary obligations of contract law or of respect for property rights, so their inflationary expansion was permanently encouraged by this massive failure of government to fulfill its obligation to enforce contracts and defend the rights of property.

It is obvious that the governments failure to uphold the contractual obligation to redeem in specie encouraged reckless inflationary expansion on the part of many banks. If the government had simply forced the banks unable to redeem to "incur immediate insolvency and liquidation" the problem would likely have been limited in scope. However, suspensions became the norm not the exception. Rothbard writes:

Suspensions of specie payments informally or officially permeated the economy outside of New England during the panic of 1819, occurred everywhere outside of New England in 1837, and in all states south and west of New Jersey in 1839. A general suspension of specie payments occurred throughout the country once again in the panic of 1857.
Again, in this instance we see the pattern discussed above wherein banks would massively inflate leading to price inflation and a temporary boom followed by a bust, a run on banks, and government sanctioned suspension of specie redemption. It was not only private banks that engaged in inflationary operations. The first attempt at a central bank occurred in 1791 when the First Bank of the United States was chartered. It's inflationary policies are discussed in detail in Rothbard. That bank's twenty year charter failed to be renewed in 1811, but that did not stop the formation of the Second Bank of the United States in 1816.

With the nation emerging from the War of 1812 in monetary chaos, and "with banks multiplying and inflating ad lib, checked only by the varying rates of depreciation of their notes" and "with banks freed from redeeming their obligations in specie, the number of incorporated banks" continued to increase. Rothbard writes:

It was apparent that there were two ways out of the problem: one was the hard-money path...The federal and state governments would have sternly compelled the rollicking banks to redeem promptly in specie, and, when most of the banks outside of New England could not, to force them to liquidate. In that way, the mass of depreciated and inflated notes and deposits would have been swiftly liquidated, and specie would have poured back out of hoards...and the inflationary experience would have been over.
Instead, the Second Bank of the United States was established to "support the state banks in their inflationary course rather than crack down on them." The Second Bank struck a sweetheart deal with the state banks in which it agreed to issue mass amounts of credit "before insisting on specie payments from debts due to it from the state banks." In exchange for this "massive inflation" the state banks "graciously" agreed to resume specie payments and "moreover, the Second Bank and the state banks agreed to mutually support each other in any emergency, which of course meant in in practice that the far stronger Bank of the United States was committed to the propping up of the weaker state banks."

It can be seen that from the start, the government formed an intimate and symbiotic relationship with private banks - a relationship that continues today. Rothbard quotes William H. Wells, an opponent of the Second Bank, in saying that the bank was

ostensibly for the purpose of correcting the diseased state of our paper currency by restraining and curtailing the over issue of bank paper, and yet it came prepared to inflict upon us the same evil, being itself nothing more than simply a paper-making machine.
The Second Bank "launched a spectacular inflation of money and credit" which began to come apart in 1818 when "the enormous inflation of money and credit, aggravated by the massive fraud, had put the Bank of the United States in real danger of going under and illegally failing to sustain specie payments." The bank undertook a massive contraction of credit and

The result of the contraction was a massive rash of defaults, bankruptcies of business and manufacturers, and liquidation of unsound investments during the boom. There was a vast drop in real estate values and rents...and public land sales dropped greatly as a result of the contraction..

Sound familiar? Fortunately, President Andrew Jackson, a hard money advocate, was able to veto recharter of the Second Bank in 1831 and set about to completely "disestablish" the bank. (It's also interesting, although beyond the scope of this post, that a system known as the Suffolk System emerged from about 1825-1858 and functioned as a free market central bank. In other words, the Suffolk Bank in Massachusetts was willing to redeem or clear the notes of other banks (at par) as it required outside banks to maintain sufficient deposits with Suffolk.)

The Civil War would fundamentally alter the monetary system forever. The dire straights of the federal government during the war led to the issuance of the unbacked "greenback" and ultimately paved the way for the
Legal Tender Cases, the National Bank Act of 1863, and ultimately the formation of the Federal Reserve itself in 1913. In other words, the disasters caused by government intervention and misintervention begot calls for more government intervention followed by more disasters justifying creation of the Federal Reserve, the abolition of gold, fiat currency, unlimited government deficit spending, chronic inflation and an even more dramatic inflation-depression cycle!

In connection to the inflationary policies of both public and private banks, a further question necessarily arises - should it be legal for banks to create more bank notes than for which they have deposits? Should fractional reserve banking be legal in the first place?

In a
previous post, I followed Jesus Huerta de Soto book, Money Bank Credit and Economic Cycles, and Rothbard's, The Mystery of Banking, to offer a brief history and explanation of the essentials of fractional reserve banking including definitions of various terms: bailment, regular and irregular deposit contract, etc. as well as sketch their arguments as to why it should not be upheld by the courts. (Also, Michael Labeit has an excellent synopsis of Jesus Huerta de Soto's argument against fractional reserve banking. Those posts should be read with the following.)

To summarize, when you deposit money in a demand checking account today, the bank obligates itself to give you your money whenever you ask. However, the bank does not literally keep your money laying around. Under fractional reserve banking, the banking system takes the $100 you deposited and can create about $1,000 in loans. In other words, banks only need to keep about 10% of their depositors money in reserve. [Bank A takes $100, holds $10 in reserve and lends $90. Borrower deposits the $90 in Bank B and that bank sets aside $9 in reserves and lends $81, and so on. Ultimately, at the end, the original $100 will have turned into $1,000 of demandable funds even though only $100 actually exists.] Similarly, in the 19th century, one would deposit gold in a bank and receive a banknote redeemable in gold. Through the loan process, the banks would create more banknotes than they held in gold. This is what led to the temporary inflations and bank crises I described above.

How is it possible that the bank could simultaneously obligate itself to make the gold available on demand while loaning it out? Should banks be allowed to engage in this practice?

I believe this issue has its roots in the philosophy of law and, in particular, the proper distinction between a deposit contract and a loan contract. When you enter into a "deposit" contract, one does not transfer title of his property. The counter party provides a safekeeping function. (In the post, I describe the Bank of Amsterdam 150 year run as a 100% deposit bank.) This should be distinguished from the "loan" contract (which gives rise to separate loan banking), in which you transfer legal ownership of something, like money, to another party and allow them to use it in any way they wish (or in a way specified in the contract). In this case, you are transferring title to someone else in exchange for future goods specified in the contract such as the amount of money plus interest. These transactions are based on two very distinct concepts. In one case, you actually pay someone a fee to perform the service of safekeeping property to which you retain title. In the other case, you transfer ownership of property in the present in exchange for future goods, i.e., for payment in the future.

I hold that it is a contradiction for the government to uphold a conflation of these distinct legal concepts. How exactly can a court reconcile a contract in which the parties agree that title to property is and is not transferred at the same time? This would be similar to asking the courts to uphold a contract where a painter is contracted to paint one's house both blue and red at the same time. In other words, prohibition of this practice is not a question of violating the freedom of contract, it is a question of the legal validity and status of a contract based upon a contradictory, and ultimately, fraudulent property claim. [update: by "prohibition", I mean that the courts should refuse to uphold a contradictory contract which would effectively end the practice.]

This issue came to a head in several court cases in the 19th Century. In The Mystery of Banking, Rothbard writes:
Thus, in England, the goldsmiths, and the deposit banks which developed subsequently, boldly printed counterfeit warehouse receipts, confident that the law would not deal harshly with them. Oddly enough, no one tested the matter in the courts during the late seventeenth or eighteenth centuries. The first fateful case was decided in 1811, in Carr v. Carr. The court had to decide whether the term debts mentioned in a will included a cash balance in a bank deposit account. Unfortunately, Master of the Rolls Sir William Grant ruled that it did. Grant maintaned that since the money had been paid generally into the bank, and was not earmarked in sealed bag, it had become a loan rather than a bailment.
In the follow up case of Devaynes v. Noble, Rothbard writes:

one of the counsel argued, correctly, that "a banker is rather a bailee of his customer's funds than his debtor...because the money in...[his] hands is rather a deposit than a debt, and may therefore be instantly demanded and taken up." But the same Judge Grant again insisted-in contrast to what would be happening later in grain warehouse law-that "money paid into a banker's becomes immediately a part of his general assets; and he is merely a debtor for the amount."

The seminal ruling was made by Judge Lord Cottenham in the 1848 case Foley v. Hill. De Soto writes about the case:

At the end of the eighteenth century and throughout the first half of the nineteenth, various lawsuits were filed by which depositors, upon finding they could not secure the repayment of their deposits, sued their bankers for misappropriation and fraud in the exercise of their safekeeping obligations. Unfortunately, however, British case-law judgments fell prey to pressures exerted by bankers, banking customs, and even the government, and it was ruled that the monetary irregular-deposit contract was no different from the loan contract, and therefore that bankers making self-interested use of their depositors' money did not committ misappropriation.

In the decision, Lord Cottenham wrote:

Money, when paid into a bank, ceases altogether to be the money of the customer; it is then the money of the banker, who is bound to return an equivalent by paying a similar sum to that deposited with him when he is asked for it. The money paid into the banker's is money known by the customer to be placed there for the purpose of being under the control of the banker. It is then the banker's money; he is known to deal with it as his own...The money placed in the custody of a banker is to all intents and purposes the money of the banker, to do with it as he pleases. He is guilty of no breach of trust in employing it; he is not answerable to the customer if he puts it into jeopardy, if he engages in a hazardous speculation; he is not bound to keep it or deal with it as the property of the customer, but he is, of course, answerable for the amount, because he has contracted, having received that money, to repay to the customer, is when demanded, a sum equivalent to that paid into his hands.
This ruling would make fractional reserve banking a permanent fixture on the monetary scene. De Soto offers compelling arguments to demonstrate not only the inflationary boom-bust effects that follow from fractional-reserve banking but also to demonstrate that "from a legal point of view, it is impossible to equate these two contracts" (the monetary irregular deposit contract and the loan or mutuum contract). He writes:

We therefore conclude that past attempts to legally justify fractional-reserve banking with respect to demand deposits have failed. This explains the ambiguity constantly present in doctrines on this type of bank contract, the desperate efforts to avoid clairty and openness in its treament, the generalized lack of accountability and ultimately (since fractional-reserve banking cannot possibly survive economically on its own), the fact that it has been provided with the support of a central bank which institutes the regulations and supplies the liquidity necessary at all times to prevent the whole setup from collapsing.

It should be noted that the primary culprit today is not fractional reserve banking per se. If bank notes are ultimately redeemable in specie, and the government upholds banks obligations to redeem, the practice would necessarily be limited (see the Suffolk Bank mentioned earlier). In other words, fractional reserve banking would have the potential to create a moderate business cycle but it would be nowhere near the magnitude witnessed today. This can be seen empirically in charts of prices throughout the 19th century as compared to price charts in the 20th century under fiat money. This follows from the fact that today, unlike the 19th century, there is no obligation on the part of banks to redeem in specie. The government, through the Federal Reserve system, can print arbitrary amounts of money which it has effectively done. Fractional reserve banking serves only to multiply this ever increasing pile of money created by virtue of government deficit spending.

For example, if the banking system has $100 then fractional reserve banking can multiply it to $1,000. If the government creates another $10,000, then fractional reserve banking can multiply it to $100,000, and so on. However, if the government had not created the extra money, the money stock would have been limited to the $1,000. In other words, it is the arbitrary creation of money out of thin air which is the primary culprit in today's boom bust cycles. That is not to say that fractional reserve banking should be legal. I hold that it should not be upheld by the courts for the reasons I cited. This would simply lead to a 100% reserve gold standard and a separation of deposit and loan banking.

What I have attempted to show is that today's destructive inflation-depression cycle is an instance of a reoccuring pattern that has played out over centuries. The Federal Reserve system, rather than being the solution, has exacerbated the very causal factors which allegedly led to its creation. When analyzed from an integrated historical perspective, the various problems related to the 19th century monetary system can be seen to have stemmed from government intervention and misintervention - problems which could have readily been solved by a full 100% gold reserve private banking system. Instead, the United States has gone in the exact opposite direction leading to the predictably unfortunate and ever worsening circumstances we find ourselves in today.

In Part 4, I will analyze the so-called "tools" that the Federal Reserve claims will allow it to reign in its massive creation of reserves.

Sunday, February 14, 2010

Boom-Bust, Part 2

In part I, I began discussing the Fed's response to the recent economic crisis as detailed in Chairman Ben Bernanke's recent statement to Congress. To better understand the causes of the crisis and evaluate Bernanke's proposed solutions, I used Dr. George Reisman's explanation of the inflation-depression cycle to briefly show that the current crisis is yet another instance of a well known process whereby government inflation of the money supply causes an artificial boom that sets the stage for a spectacular bust as soon as the credit expansion slows or stops. Dr. Reisman's explanation is consistent with what has become known as the theory of the Austrian business cycle.

To better understand the particulars of Bernanke's response and to better grasp the ultimate solution to the economic crisis, it is helpful to understand why it is we even have a central bank in the first place. If it is true, as I asserted, that central banking itself coupled with fractional reserve banking is largely responsible for the current crisis, why do modern economists believe a central bank is even necessary? Why does Bernanke think we need a central bank and what informs his actions as chairman?

Bernanke did his thesis on the Great Depression and is considered an expert on the subject. His formal conclusions from this work led to his nickname, "Helicopter Ben", since he famously claimed to be willing to drop freshly created paper money from helicopters if necessary to ward off a monetary crisis. Anthony Mueller, in a recent article, discussed "Helicopter Ben's" belief that inflation is always the solution to a monetary crisis:

Bernanke is an economist by trade, specializing in the study of the Great Depression. That was a bad omen from the beginning — because he has studied economics and the Great Depression in the framework of a particular, flawed paradigm. His studies make him believe that the central bank could have prevented the great economic decline of the 1930s if only it had more aggressively expanded the money supply. This was the lesson that Bernanke learnt from Milton Friedman. Apparently unfamiliar with alternative explanations, Bernanke has never doubted Friedman's thesis.

What has led Bernanke to this "flawed paradigm", a paradigm asserted to follow from the work of Milton Friedman? In the biggest picture terms, this paradigm follows from a flawed epistemological method and its logical consequence: flawed, or at best, incomplete conclusions.

First, Milton Friedman and Anna Schwartz authored a highly influential book, A Monetary History of the United States: 1867-1960. Bernanke no doubt adopted Friedman's interpretation of the economic history of the Great Depression including the view that the government could have prevented the Great Depression by creating massive amounts of paper money in the aftermath of the 1929 crash. In other words, instead of focusing on how the Federal Reserve's expansion of credit in the 1920's (along with a mountain of statist anti-business policies) set the stage for a bust in the early 1930's and thus caused the Great Depression, Bernanke focuses only on the more narrow question of the Fed's monetary response.

Such an approach derives from what Mueller refers to as Friedman's (and by implication Bernanke's) "positivist" approach to analyzing economic history. Positivism, in essence, is an extreme form of empiricism where one attempts to rely solely on empirical data. It is associated with "scientism" which is the view that the methods of the natural sciences can be applied to every field including economics. As part of this approach, Friedman argued that economics should be free of value judgments or so-called "normative" statements. In the introduction to Murray Rothbard's, A History of Money and Banking in the United States, Joseph T. Salerno contrasts Friedman's positivist approach with Rothbard's Austrian approach (known as praxeology):

Rather, the positivist methodology they [Friedman and Schwartz] espouse constrains them to narrowly focus their historical narrative on the observable outcomes of these actions and never to formally address their motivation. For, according to the positivist philosophy of science, it is only observable and quantifiable phenomena that can be assigned the status of "cause" in a scientific investigation, while human motives are intensive qualities lacking a quantifiable dimension. So, if one is to write a monetary history that is scientific in the strictly positivist sense, the title must be construed quite literally as the chronicling of quantitative variations in a selected monetary aggregate and the measurable effects of these variations on other quantifiable economic variables, such as the price level and the real output.

Salerno points out that such an approach leads Friedman and Schwartz to "forays into human history which are cursory and unilluminating, when not downright misleading." He states:

Friedman and Schwartz thus portray the drive toward a central bank as completely unconnected with the money issue and as only getting under way in reaction to the panic of 1907 and the problem with "inelasticity of the currency" that was then commonly construed as its cause. The result is that they characterize the Federal reserve System as the product of a straightforward, disinterested, bipartisan effort to provide a practical solution to a purely technical problem afflicting the monetary system.

Salerno goes on to show that this empirical approach fails to account for all the causal factors that give rise to a particular result in any given context. For example, he discusses their treatment of the panic of 1907 in which they observe that banks "restricted cash payments to their depositors within weeks after the financial crisis struck, and there ensued no large-scale failure" thus conjecturing that "when a financial crisis strikes, early restrictions on currency payments, work to prevent large scale disruptions of the banking system." They "test this conjecture" by observing that banks did not restrict bank depositors after the stock market crash of 1929 and there occurred a "massive wave of bank failures" from 1930 to 1933. Salerno summarizes the conclusion of Friedman and Schwartz:

The theoretical conjecture, or "counterfactual statement," that a timely restriction of cash payments would have checked the spread of a financial crisis, is therefore empirically validated by this episode because, in the absence of a timely bank restriction, a wave of bank failures did , in fact, occur after 1929.

Of course, unlike a natural science experiment, causal factors in this context can not be strictly "controlled." Salerno states:

Friedman and Schwartz do recognize that these theoretical conjectures cannot be truly tested because "there is no way to repeat the experiment precisely and to test these conjectures in detail." Nonetheless, they maintain that "all analytical history, history that seeks to interpret and not simply record the past, is of this character, which is why history must be continuously rewritten in the light of new evidence as it unfolds."

Salerno summarizes:

In rejecting the historical method of specific understanding, Friedman and Schwartz are led not by reason, but by a narrow positivist prepossession with using history as a laboratory, albeit imperfect, for formulating and testing theories that will allow prediction and control of future phenomena.

To narrowly focus on concrete quantitative data without accounting for potential causal factors applicable to varying degrees in varying contexts is a fundamentally flawed approach. Yet, not surprisingly, this is Bernanke's approach to monetary policy. Rather than being guided by universal principles of economics based on an integrated grasp of theory and history, modern economists like Bernanke are in a state of almost constant intellectual flux, awaiting the latest round of data in order to guide their actions. Quoting Mueller:

It is Bernanke's unwavering creed that central banking can be practiced as a science. If things don't work out as they are supposed to, it must be because of insufficient data and inadequate models. Thus, in his anguish, he decided to create a special "brain trust," a creation called MAQS: the Fed's "Macroeconomic and Quantitative Studies" unit. Bernanke wants this team to sift through as many models, projections, stats, and scenarios as possible.

Blinded by scientism, the chairman obviously is unable to see that no sound conclusion or reliable policy formulation can be reached this way. The more data the studies team collects and sifts, the more confusions and contradictions they will bring to light; the longer they collect and sift, the less relevant the data will become.

Of course, it is not only Bernanke that is mired in this kind of brute empiricism. The entire field of economics, excepting advocates of Austrian economics, consists of glorified statisticians unable or unwilling to offer any principled understanding of economics.

The argument made in Part I, that central banking is the problem, is an argument that has been made countless times for decades. Understanding the epistemological milieu of the economics profession is important in grasping why mainstream economists are so unable to grasp this. Once again, the solution was put forth in essentialized terms by Robert Klein and George Reisman in their recently published Barron's article, Central Problem: the Central Bank :

Lurching from crisis to crisis in boom-bust fashion is unacceptable and unnecessary. The Federal Reserve must stop juicing the economy with massive amounts of newly created money and move to a monetary system free of government-caused booms and busts. The only effective way to do this would be to remove control of our money supply from politicians and their appointees. We need to move to a money that is 100% backed by a commodity, such as gold. Only then can we rid the economy of the devastating effects of the creation of money and credit out of thin air.

I have observed that any criticism of central banking or advocacy of gold is virtually always met by a similar argument. In essence, the argument is made that even under a gold standard, reoccurring panics occurred that followed the same pattern as today's boom-bust cycles. I hold that only the positivist approach to economic history could account for such a complete misunderstanding of the events of the 19th century. In other words, the positivist observes that in the 19th century there was a gold standard and yet, there were boom-busts. Then, he sees no gold standard today but stills observes boom-busts. Ergo, he concludes, gold does not prevent boom bust.

In fact, this kind of thinking has led to a kind of mythical narrative of the 19th century. The narrative goes something like this:

Once upon a time, the United States had laissez faire and a totally free banking system based on a gold standard. This "free market" system led to reoccuring panics, runs on banks, and a volatile business cycle throughout the 19th century. Finally, after the 1907 panic, a group of wise businessmen and government officials got together and created the quasi-public Federal Reserve system to act as lender of last resort and to permanently eliminate reliance on the "barbarous relic" (gold) which stood in the way of economic progress by causing continual liquidity crises. With the banking system and money supply in the hands of wise and prescient central planners (like Ben Bernanke), the United States economy would live happily ever after. The End.

I hold that such a view betrays a complete disregard for cause and effect. To fully understand the monetary history of the United States and grasp the causal factors, economic and political, which led to the unfortunate advent of the Fed, would require a volume. Fortunately, much of that work has already been done by Murray Rothbard in the aforementioned, A History of Money and Banking in the United States. Other excellent volumes have been published that detail the effects of government inflation around the world from antiquity forward such as Money, Bank Credit, and Economic Cycles by Jesus Huerta De Soto, Peter Bernholz, Monetary Regimes and Inflation, and the recent volume, This Time is Different, by Reinhart and Rogoff.

In Part 3, I will attempt to address the specific history and detail my arguments including an explanation of the "tools" that Bernanke is proposing to use to reign in his recently created excess reserves, but the essence of my historical argument is as follows.

The government has been intimately involved in the monetary system since the inception of the country leading to one disaster after another. This involvement takes two general forms. The first form is direct intervention such as the First Bank of the United States (chartered in 1791), which pyramided paper money upon specie in the form of treasury notes and set the stage for destructive inflation-depression in the early 1800's. The second form of intervention represents a default by the government to perform its legitimate and necessary function as a protector of property - call it misintervention. I claim that this default took two primary forms. First, during various crises, it continually failed to uphold banks contractual obligations to redeem in specie. Second, through various court cases, it failed to legally define property in such a way as to effectively outlaw the practice known as fractional reserve banking, i.e., legally distinguish between a deposit and a loan contract.

In Part 3, I will discuss in detail my contention that it is government intervention (or misintervention) that caused the banking crises and panics of the 19th century, not the gold standard per se. In fact, it was gold that kept any semblance of price stability at all and led to phenomenal economic expansion. Ultimately, I will argue that the permanent solution is a 100% reserve specie standard and a complete separation of state and economy.

Thursday, February 11, 2010

Economy Update and The Causes of Boom-Bust, Part 1

Due to the record setting winter storms and freezing temperatures, evidently caused by global warming, Federal Reserve Chairman, Ben Bernanke, was not able to deliver testimony to the Congress in person. However, his statement was published online and it provides an excellent chance to analyze the current state of the economy and analyze some present and historical causes.

Bernanke separates the Fed's response to the crisis into two parts:

First, our financial system during the past 2-1/2 years has experienced periods of intense panic and dysfunction, during which private short-term funding became difficult or impossible to obtain for many borrowers. The pulling back of private liquidity at times threatened the stability of major financial institutions and markets and severely disrupted normal channels of credit.
To the modern intellectual, such an economic state appears to be an unprecedented mystery without cause or explanation (as does every other action in the universe). After all, such panics have been occurring regularly for hundreds of years. They appear to be a random phenomena associated with markets. Wasn't the Federal Reserve system created to deal with just these types of "panics"? Bernanke continues:

In its role as liquidity provider of last resort, the Federal Reserve developed a number of programs to provide well-secured, mostly short-term credit to the financial system. These programs, which imposed no cost on the taxpayer, were a critical part of the government’s efforts to stabilize the financial system and restart the flow of credit. As financial conditions have improved, the Federal Reserve has substantially phased out these lending programs.
Let's put aside Bernanke's contention that these programs "imposed no cost on the taxpayer" and his contention that "conditions have improved" and take a wider perspective. What he is describing is a "credit crunch", a classic economic effect associated with government caused boom-bust cycles.

Government induced credit expansion or inflation, which occurred in dramatic fashion in the years preceding the crisis, causes two primary effects. Quoting
Dr. George Reisman (see Capitalism, p.938-940):

Inflation does two critical things. It superinflates people's revenues and incomes, while making them correspondingly illiquid, and it leads them to pile up substantial debts against those revenues and incomes.
In other words, the rapidly expanding base of money induces illiquidity by incentivizing firms and individuals to hold smaller cash balances. This is because funds are easily available and it becomes extremely profitable to borrow. Reisman continues:

Inflation in the form of credit expansion encourages borrowing by holding down the rate of interest in relation to the rate of profit. It makes borrowing exceptionally profitable; and the more so, the more leverage the borrowing provides. Another important way that inflation encourages debt is simply by leading people to borrow in anticipation of rising prices. Housing purchases are a prime example of this effect of inflation. People go heavily into debt to buy houses at already inflated prices, because they expect housing prices to go on rising. The same thing happens with business spending for plant and equipment and inventories. [emphasis mine, keep in mind, this book was published in 1993]
Why does this ultimately lead to a "credit crunch"? Eventually, once the inflation stops, prices and revenues stop rising, individuals must raise their cash holdings to repay their debts.

As a result, spending and the velocity of circulation fall, with the further result that people's money revenues and incomes fall. The effect of this, in turn, is that they cannot pay their debts. A substantial number of business and personal bankruptcies occur.
This causes a credit death spiral

as the assets and capital of banks which have lent to such borrowers is correspondingly reduced, and many of them also fail.
Reisman's next passage is very important (as it hints at the problem of fractional reserve banking.)

The failure of banks, of course, causes the money supply to actually be reduced, since the banks' outstanding checking deposits are part of the money supply. The reduction in the money supply then leads to a further decline in spending, revenues, and incomes and thus to still more bankruptcies and bank failures.
He points out that this process feeds on itself to the point of potentially destroying all fiduciary media

The reduction in the quantity of money can be avoided only if the government is prepared to create additional fiat standard money to whatever extent may be necessary to guarantee the fiduciary media of the failing banks. But this lays the foundation for a still greater expansion in the supply of fiduciary media in the future.
Note, that this is exactly what Bernanke is describing in his testimony. Another reinforcing factor is that the inflation causes malinvestments, which Reisman defines as:

investments which are only profitable on the basis of inflation itself. When the inflation comes to an end, the unprofitability of the malinvestmets is revealed.

Anyone who bought a home at the peak of housing prices several years ago understands this effect. Inflation leads to depression by reducing the availability of real capital:

This is because the existing capital funds of many enterprises, are made inadequate by the rise in wage rates and material prices caused by the previous injections of credit in the form of new and additional money. The consequence is that firms requiring credit turn out to need more credit than they had planned on, while those firms normally supplying credit turn out to be able to supply less than had been counted on , and may even need credit themselves in order to meet the requirements of their own internal operations at these higher wage rates and prices. Thus, as the need for credit surges and as suppliers of funds become demanders of funds, or at least supply less funds, firms that had counted on borrowing money, or on refinancing their existing borrowings, find that they are unable to do so.
Reisman summarizes "the essence of the inflation-depression process":

The critical factors are: artificial inducements to illiquidity and to a corresponding superinflation of revenues and incomes; the piling up of a mass of debt against these superinflated revenues and incomes; and then a contraction in spending, revenues, and incomes following the end of the inflation. The contractions phase leaves people with no means of paying the mass of debt they have accumulated, and can operate to produce a self-reinforcing downward spiral of deflation of the money supply.

So, is the inflation-depression process a mystery? Evidently not. The governments arbitrary creation of paper money which becomes leveraged or pyramided through the fractional reserve banking system sets the stage for this inflation-depression process. Of course, the particular nature of any given crisis will depend on other factors as well. For example, during the dot-com boom, the inflation found its way into stock prices. In the aftermath of that crash, inflation found its way into the housing market due to government tax and regulatory incentives as well as direct government support through agencies like Fannie Mae and Freddie Mac which underwrite mortgages.

Given these facts, do you think that it would be prudent for the government to understand how its fiat money credit expansion coupled with fractional reserve banking coupled with market distorting tax and regulatory policies leads to boom-bust cycles? Do you think that this understanding could be used not only to solve the current crisis, but to make sure that such a crisis never occurs again?

Bernanke continues:

Second, after reducing short-term interest rates nearly to zero, the Federal Open Market Committee (FOMC) provided additional monetary policy stimulus through large scale purchases of Treasury and agency securities. These asset purchases, which had the additional effect of substantially increasing the reserves that depository institutions hold with the Federal Reserve Banks, have helped lower interest rates and spreads in the mortgage market and other key credit markets, thereby promoting economic growth.
So, the Fed has driven short term rates to zero by creating money out of thin air, in particular, by purchasing over $1 trillion of mortgage backed securities thus helping to prop up the mortgage market which serves to encourage home buying more than otherwise. In other words, it's response to the crisis has been to engage in the very policies which caused the crisis!

[To see this in detail, see the Fed's most recent balance sheet. On the asset side, note that they have purchased $970 Billion of mortgage backed securities and $164 Billion of federal agency debt. They paid for this by creating reserves (printing money). When the Fed creates money, it creates a corresponding liability. In this case, since only a small amount of the funds have gone directly into the banking system, which shows up in the line "Currency in circulation", the funds must show up in the item "Reserve balances with Federal Reserve Banks". Currently, this item is over $1.1 trillion. The money is still on "reserve" at the Fed because the Fed began paying interest on these reserves under a newly created policy - a policy designed for this very purpose, i.e., incentivizing banks to keep their money at the Fed instead of lending it.]

If Bernanke does not realize that the very act of this money creation is a problem, he does realize that the trillion dollars that has been created out of thin air does represent a potential problem.

Although at present the U.S. economy continues to require the support of highly accommodative monetary policies, at some point the Federal Reserve will need to tighten financial conditions by raising short-term interest rates and reducing the quantity of bank reserves outstanding. We have spent considerable effort in developing the tools we will need to remove policy accommodation, and we are fully confident that at the appropriate time we will be able to do so effectively.
In other words, "at some point", he is "fully confident" that the Fed will be able to simply remove the money they have created without any negative repercussions. And just how will he accomplish this?
In subsequent parts, I will discuss the real cure for the economy including a discussion of the Fed's so-called "tools" for tightening monetary policy, how its current policies are exacerbating the problem, and the history and essential problem of fractional reserve banking in causing crises that provided justification of the creation of the Federal Reserve system and the overthrow of the gold standard.

Thursday, February 4, 2010

Republic Saved by 5-4 Vote

In my March 2009 post Trial Balloon of the Century, I discussed the crucial importance of the Citizens United case against the FEC in reaffirming the First Amendment right to free speech in America. The case involved a challenge to the campaign finance laws prohibition on the financing of political speech by corporate entities in a period of time leading up to an election. Among the various trial balloons floated by opponents of free speech, the campaign finance laws represent among the most egregious and potentially lethal violations of free speech since they grant the government the power to directly regulate political speech.

I argued that "if freedom of speech were to be abrogated in the United States, it would be the final straw for advocates of freedom and should lead to an all out revolution. This is because without the freedom to think, all other rights are meaningless." In other words, because reason, reality, and morality are on the side of advocates of freedom and limited government, we still have a chance as long as we are free to speak out. Alternatively, we have no chance if we are not free to speak.

It was therefore extremely gratifying to see the U.S. Supreme Court
strike down this provision in a 5-4 decision. Further, it was amazing that some members of the court appeared to actually take a principled stand on the issue. This NY Times article discusses "expansive remarks" made recently by Justice Thomas regarding the case.

Justice Thomas said the First Amendment’s protections applied regardless of how people chose to assemble to participate in the political process.

“If 10 of you got together and decided to speak, just as a group, you’d say you have First Amendment rights to speak and the First Amendment right of association,” he said. “If you all then formed a partnership to speak, you’d say we still have that First Amendment right to speak and of association.”

“But what if you put yourself in a corporate form?” Justice Thomas asked, suggesting that the answer must be the same.

Quoting the decision:

Premised on mistrust of governmental power, the First Amendment stands against attempts to disfavor certain subjects or viewpoints or to distinguish among different speakers, which may be means to control content. The government may also commit a constitutional wrong when by law it identifies certain preferred speakers. There is no basis for the proposition that, in the political speech context, the Government may impose restrictions on certain disfavored speakers. Both history and logic, lead to this conclusion.
I am no expert on Constitutional law, and I am sure there remain problematic aspects of this ruling, but this counts as a step in the right direction. It was also not surprising that Obama, in unprecedented fashion, used the state of the union to chastise the court for its ruling. The chilling spectacle of the POTUS and the jeering Democratic members of Congress deriding a ruling, which only affirms and protects our cherished First Amendment, was a moment that no one should ever forget or tolerate. Also, in case there was any doubt, that moment must officially mark the end of any pretense that liberals are defenders of free speech.

Tuesday, February 2, 2010

The Fallacy of "Helping the Environment", Can the Earth be Dirty, and True Human Sustainability

There are several environmentalist claims that are now regarded to be virtual truisms. These particular assertions rest on premises that are never defined, much less challenged, yet function as moral imperatives that urge immediate and continual action. One example concerns the contention that specific actions (or inaction's) are necessarily good if they "help the environment". For example, it is alleged that recycling or throwing a can into a special container (often a different color) so that a special truck will drive to your house, pick it up, and take it to a special place (other than a landfill), while concomitantly leaving a piece of aluminum in the ground in another location, "helps the environment." Such action, it is believed, is unquestionably moral and to take a contrary action would be regarded as tantamount to (if not literally) a criminal offense.

So, what exactly does it mean to "help the environment"? First, what exactly is the environment? Is the environment the totality of all that exists or is it the totality of all that exists EXCEPT man? It seems that environmentalists mean the latter. But why doesn't the environment include my living room, my garage, or my automobile? After all, if I install an air conditioner or a plasma television in my home, haven't I helped my environment? If I cut my lawn, haven't I helped my environment?

The other key concept is that of help. Help is defined as: "the activity of contributing to the fulfillment of a need or furtherance of an effort or purpose." The idea that the environment requires help implies that nature (evidently, the universe sans man) has a kind of preferred state or even a purpose that each person is duty bound to assist in accomplishing. What exactly is this state and why should we strive to reach it? Is this particular state the one nature was in yesterday, last year, last century, or a million years ago? It's not clear.

Of course, it is obvious that nature constantly changes. Climate changes naturally moving from higher temperatures to ice ages and back. Land masses slowly move. Earthquakes, volcanoes, meteors, lightning, hurricanes and other violent, cataclysmic events continually change and reshape the earth. Millions of species of animal and plant have come into and gone out of existence. One day, when the sun burns out, the earth as we know it will be completely destroyed. Naturally, given our short life span, such changes are practically imperceptible, but the point is that the earth constantly changes according to natural law, and no particular state is preferred. Nature, less man, has no purpose - it just is.

To see this more clearly, consider a planet that has no humans, such as Jupiter. Is there any action that would help Jupiter's environment? What would this even mean? For example, should we attempt to maintain the concentrations of hydrogen and helium in its atmosphere as of a certain date? The idea that one can help the environment apart from an evaluation of how that action affects man is utterly meaningless. A particular action can only be evaluated as "helpful" in the context of the fulfillment of man's needs.

Given this, how can one assert that recycling helps the environment? Does aluminum care if it is in a mine, in my refrigerator, or in a landfill? In fact, given that recycling costs money (which is why many cities fine people for not recycling instead of paying for the garbage…), it implies that it takes more effort to recycle than to simply make new things. These costs are comprised of the materials and labor it takes to collect the refuse and reform it into something usable. Since it takes more resources to recycle than to make something new, recycling is actually a profoundly wasteful activity as it relates to man's life. Then why do environmentalists regard recycling as a help to the environment?

Additionally, if someone says we should clean up some land site, it implies that the land is "dirty". In fact, we often hear that some area of the earth is dirty and are admonished to keep the planet "clean". Given that the earth is literally made of dirt, what does "clean" mean in this context? When environmentalists discuss cleaning the earth, often it seems they mean removing man's products from an area and putting them in another area. One good reason might be that a particular material is dangerous to humans. However, dangerous chemicals exist naturally too. A snake's venom is poisonous as is poison ivy as are certain kinds of mushrooms and insects. Water is even dangerous if you drown in it. But, would killing snakes and bugs or digging up poison ivy in a certain area be considered "cleaning the environment"? Would building a home to protect from natural elements be considered a form of "cleaning the environment"? Why not?

Concerns over the byproducts of man's activities or even natural processes causing harm to human life is entirely legitimate. For example, if I dump a dangerous chemical into a stream from which animals drink and then someone eats the animal, perhaps, that person will inadvertently ingest the poison. Clearly, this is a real potential problem which raises legitimate scientific questions and involves issues in property and liability law. Who owns the stream? Was the chemical known to be poisonous? Who owned the animals? Who processed the animal meat and did they test their product for chemicals? Although technology changes, these problems are not new. They are the essence of common law and an objective legal system which upholds property rights is the proper framework to deal with such matters.

Although the above example might count as a subset of what appears to concern environmentalists, is man's health and well being really their concern? When they say we should "help the environment", do they really mean help man's environment? Environmentalists, recognizing some need to ground their concerns in a form that relates to human life, go to fantastic lengths to make this connection and obfuscate their true motives. For example, we are told about the need for biodiversity, sustainability, conservation, and global warming - concepts that allegedly pertain to man's ability to survive.

But do any of these concepts really have anything to do with man's survival? Doesn't man's survival depend on his ability to think and produce? Doesn't it depend on our ability to continually find better ways of reshaping the environment to fulfill our needs? Doesn't it depend on providing an industrial and technological base upon which we can solve even the most complex natural problems, including protecting ourselves from natural change? Doesn't freedom and capitalism allow man the rule of law and property rights to resolve land use, to produce wealth, and to adapt to changing circumstances, i.e., to effect true human sustainability?

Recently, in an area where I lived, environmental groups sued to stop the construction of a major biotechnology park because it was proposed that the park be constructed in an orange grove containing some wetlands. Their lawsuit wasted time, money and impeded the development and scope of the project, ultimately resulting in less research on biotechnology. If they were truly concerned with human life, wouldn't they recognize the benefit of such a park against the development of an orange grove? Does concern for man provide an explanation for such a suit and countless suits and regulations that stop these kinds of developments across the country? Does it explain why they chain themselves to trees rather than allow the tree to be used for lumber or why they admonish us to make do with less material conveniences in order to minimize carbon footprint?

The only possible explanation for their ideology is that they regard the environment as a value apart from man, i.e., they regard the environment (without man) to be intrinsically valuable which is a contradiction in terms. Nothing is valuable without a valuer. Such an ideology requires environmentalists to see man as an enemy since man must reshape the earth to survive. When they say an activity will "help the environment", they mean it. They see natural processes as some kind of preordained sequence of events which must not be tampered with at any cost. They see their efforts at thwarting human progress to be a step towards helping the earth reach its anthropomorphized "goal." And given the extraordinary destruction to human life that their policies entail from development restrictions, to cap and trade taxes, to calls for global governmental environmental police, we better start understanding what they really mean.