Tuesday, January 31, 2012

Government Of The Democracy In America - Alexis de Tocqueville

 Government Of The Democracy In America - Alexis de Tocqueville

In the United States the people is not disposed to hate the superior classes of society; but it is not very favorably inclined towards them, and it carefully excludes them from the exercise of authority. It does not entertain any dread of distinguished talents, but it is rarely captivated by them; and it awards its approbation very sparingly to such as have risen without the popular support.
Whilst the natural propensities of democracy induce the people to reject the most distinguished citizens as its rulers, these individuals are no less apt to retire from a political career in which it is almost impossible to retain their independence, or to advance without degrading themselves. This opinion has been very candidly set forth by Chancellor Kent, who says, in speaking with great eulogiums of that part of the Constitution which empowers the Executive to nominate the judges: "It is indeed probable that the men who are best fitted to discharge the duties of this high office would have too much reserve in their manners, and too much austerity in their principles, for them to be returned by the majority at an election where universal suffrage is adopted." Such were the opinions which were printed without contradiction in America in the year 1830!
I hold it to be sufficiently demonstrated that universal suffrage is by no means a guarantee of the wisdom of the popular choice, and that, whatever its advantages may be, this is not one of them.
Causes Which May Partly Correct These Tendencies Of The Democracy Contrary effects produced on peoples as well as on individuals by great dangers—Why so many distinguished men stood at the head of affairs in America fifty years ago—Influence which the intelligence and the manners of the people exercise upon its choice—Example of New England—States of the Southwest—Influence of certain laws upon the choice of the people—Election by an elected body—Its effects upon the composition of the Senate.
When a State is threatened by serious dangers, the people frequently succeeds in selecting the citizens who are the most able to save it. It has been observed that man rarely retains his customary level in presence of very critical circumstances; he rises above or he sinks below his usual condition, and the same thing occurs in nations at large. Extreme perils sometimes quench the energy of a people instead of stimulating it; they excite without directing its passions, and instead of clearing they confuse its powers of perception. The Jews deluged the smoking ruins of their temple with the carnage of the remnant of their host. But it is more common, both in the case of nations and in that of individuals, to find extraordinary virtues arising from the very imminence of the danger. Great characters are then thrown into relief, as edifices which are concealed by the gloom of night are illuminated by the glare of a conflagration. At those dangerous times genius no longer abstains from presenting itself in the arena; and the people, alarmed by the perils of its situation, buries its envious passions in a short oblivion. Great names may then be drawn from the balloting-box.
I have already observed that the American statesmen of the present day are very inferior to those who stood at the head of affairs fifty years ago. This is as much a consequence of the circumstances as of the laws of the country. When America was struggling in the high cause of independence to throw off the yoke of another country, and when it was about to usher a new nation into the world, the spirits of its inhabitants were roused to the height which their great efforts required. In this general excitement the most distinguished men were ready to forestall the wants of the community, and the people clung to them for support, and placed them at its head. But events of this magnitude are rare, and it is from an inspection of the ordinary course of affairs that our judgment must be formed.
If passing occurrences sometimes act as checks upon the passions of democracy, the intelligence and the manners of the community exercise an influence which is not less powerful and far more permanent. This is extremely perceptible in the United States.
In New England the education and the liberties of the communities were engendered by the moral and religious principles of their founders. Where society has acquired a sufficient degree of stability to enable it to hold certain maxims and to retain fixed habits, the lower orders are accustomed to respect intellectual superiority and to submit to it without complaint, although they set at naught all those privileges which wealth and birth have introduced among mankind. The democracy in New England consequently makes a more judicious choice than it does elsewhere.

Monday, January 30, 2012

Milton Friedman on Libertarianism

Milton Friedman on Libertarianism

What are the elements of the libertarian movement and how does one of its most illustrious proponents, Milton Friedman, apply its tenets to issues facing the United States today? Milton Friedman, recipient of the 1976 Nobel Memorial Prize for economic science, was a senior research fellow at the Hoover Institution from 1977 to 2006, discusses, on February 10, 1999, how he balances the libertarians' desire for a small, less intrusive government with environmental, public safety, food and drug administration, and other issues.

To go to segments within a video, click the links below:
  • start video from beginning What is a libertarian? Milton Friedman responds in this Uncommon Knowledgeclassic.
  • start segment 2 at 5:36 What produced the dark and dirty London of Charles Dickens? Was it laissez-faire economics like some argue? Milton Friedman sheds light on the issue.
  • start segment 3 at 12:22 Are regulators like the FDA necessary to safeguard consumers? Milton Friedman says no.
  • start segment 4 at 16:05 Should the government mandate that nutritional labels be placed on food packaging? No, argues Milton Friedman.
  • start segment 5 at 20:35 Of 14 cabinet departments, Milton Friedman says he would only keep a handful.


The Greatest Dangers Of The American Republics Proceed From The Unlimited Power Of The Majority - Alexis de Tocqueville

The Greatest Dangers Of The American Republics Proceed From The Unlimited Power Of The Majority
- Alexis de Tocqueville

Democratic republics liable to perish from a misuse of their power, and not by impotence—The Governments of the American republics are more centralized and more energetic than those of the monarchies of Europe—Dangers resulting from this—Opinions of Hamilton and Jefferson upon this point.
Governments usually fall a sacrifice to impotence or to tyranny. In the former case their power escapes from them; it is wrested from their grasp in the latter. Many observers, who have witnessed the anarchy of democratic States, have imagined that the government of those States was naturally weak and impotent. The truth is, that when once hostilities are begun between parties, the government loses its control over society. But I do not think that a democratic power is naturally without force or without resources: say, rather, that it is almost always by the abuse of its force and the misemployment of its resources that a democratic government fails. Anarchy is almost always produced by its tyranny or its mistakes, but not by its want of strength.
It is important not to confound stability with force, or the greatness of a thing with its duration. In democratic republics, the power which directs *e society is not stable; for it often changes hands and assumes a new direction. But whichever way it turns, its force is almost irresistible. The Governments of the American republics appear to me to be as much centralized as those of the absolute monarchies of Europe, and more energetic than they are. I do not, therefore, imagine that they will perish from weakness. *f
[ This power may be centred in an assembly, in which case it will be strong without being stable; or it may be centred in an individual, in which case it will be less strong, but more stable.]
[ I presume that it is scarcely necessary to remind the reader here, as well as throughout the remainder of this chapter, that I am speaking, not of the Federal Government, but of the several governments of each State, which the majority controls at its pleasure.]
If ever the free institutions of America are destroyed, that event may be attributed to the unlimited authority of the majority, which may at some future time urge the minorities to desperation, and oblige them to have recourse to physical force. Anarchy will then be the result, but it will have been brought about by despotism.
Mr. Hamilton expresses the same opinion in the "Federalist," No. 51. "It is of great importance in a republic not only to guard the society against the oppression of its rulers, but to guard one part of the society against the injustice of the other part. Justice is the end of government. It is the end of civil society. It ever has been, and ever will be, pursued until it be obtained, or until liberty be lost in the pursuit. In a society, under the forms of which the stronger faction can readily unite and oppress the weaker, anarchy may as truly be said to reign as in a state of nature, where the weaker individual is not secured against the violence of the stronger: and as in the latter state even the stronger individuals are prompted by the uncertainty of their condition to submit to a government which may protect the weak as well as themselves, so in the former state will the more powerful factions be gradually induced by a like motive to wish for a government which will protect all parties, the weaker as well as the more powerful. It can be little doubted that, if the State of Rhode Island was separated from the Confederacy and left to itself, the insecurity of right under the popular form of government within such narrow limits would be displayed by such reiterated oppressions of the factious majorities, that some power altogether independent of the people would soon be called for by the voice of the very factions whose misrule had proved the necessity of it."
Jefferson has also thus expressed himself in a letter to Madison: *g "The executive power in our Government is not the only, perhaps not even the principal, object of my solicitude. The tyranny of the Legislature is really the danger most to be feared, and will continue to be so for many years to come. The tyranny of the executive power will come in its turn, but at a more distant period." I am glad to cite the opinion of Jefferson upon this subject rather than that of another, because I consider him to be the most powerful advocate democracy has ever sent forth.

Sunday, January 29, 2012

Effects Of The Tyranny Of The Majority Upon The National Character Of The Americans - Alexis de Tocqueville

Effects Of The Tyranny Of The Majority Upon The National Character Of The Americans
Alexis de Tocqueville

Effects of the tyranny of the majority more sensibly felt hitherto in the manners than in the conduct of society—They check the development of leading characters—Democratic republics organized like the United States bring the practice of courting favor within the reach of the many—Proofs of this spirit in the United States—Why there is more patriotism in the people than in those who govern in its name.
The tendencies which I have just alluded to are as yet very slightly perceptible in political society, but they already begin to exercise an unfavorable influence upon the national character of the Americans. I am inclined to attribute the singular paucity of distinguished political characters to the ever-increasing activity of the despotism of the majority in the United States. When the American Revolution broke out they arose in great numbers, for public opinion then served, not to tyrannize over, but to direct the exertions of individuals. Those celebrated men took a full part in the general agitation of mind common at that period, and they attained a high degree of personal fame, which was reflected back upon the nation, but which was by no means borrowed from it.
In absolute governments the great nobles who are nearest to the throne flatter the passions of the sovereign, and voluntarily truckle to his caprices. But the mass of the nation does not degrade itself by servitude: it often submits from weakness, from habit, or from ignorance, and sometimes from loyalty. Some nations have been known to sacrifice their own desires to those of the sovereign with pleasure and with pride, thus exhibiting a sort of independence in the very act of submission. These peoples are miserable, but they are not degraded. There is a great difference between doing what one does not approve and feigning to approve what one does; the one is the necessary case of a weak person, the other befits the temper of a lackey.
In free countries, where everyone is more or less called upon to give his opinion in the affairs of state; in democratic republics, where public life is incessantly commingled with domestic affairs, where the sovereign authority is accessible on every side, and where its attention can almost always be attracted by vociferation, more persons are to be met with who speculate upon its foibles and live at the cost of its passions than in absolute monarchies. Not because men are naturally worse in these States than elsewhere, but the temptation is stronger, and of easier access at the same time. The result is a far more extensive debasement of the characters of citizens.
Democratic republics extend the practice of currying favor with the many, and they introduce it into a greater number of classes at once: this is one of the most serious reproaches that can be addressed to them. In democratic States organized on the principles of the American republics, this is more especially the case, where the authority of the majority is so absolute and so irresistible that a man must give up his rights as a citizen, and almost abjure his quality as a human being, if te intends to stray from the track which it lays down.
In that immense crowd which throngs the avenues to power in the United States I found very few men who displayed any of that manly candor and that masculine independence of opinion which frequently distinguished the Americans in former times, and which constitutes the leading feature in distinguished characters, wheresoever they may be found. It seems, at first sight, as if all the minds of the Americans were formed upon one model, so accurately do they correspond in their manner of judging. A stranger does, indeed, sometimes meet with Americans who dissent from these rigorous formularies; with men who deplore the defects of the laws, the mutability and the ignorance of democracy; who even go so far as to observe the evil tendencies which impair the national character, and to point out such remedies as it might be possible to apply; but no one is there to hear these things besides yourself, and you, to whom these secret reflections are confided, are a stranger and a bird of passage. They are very ready to communicate truths which are useless to you, but they continue to hold a different language in public.
If ever these lines are read in America, I am well assured of two things: in the first place, that all who peruse them will raise their voices to condemn me; and in the second place, that very many of them will acquit me at the bottom of their conscience.
I have heard of patriotism in the United States, and it is a virtue which may be found among the people, but never among the leaders of the people. This may be explained by analogy; despotism debases the oppressed much more than the oppressor: in absolute monarchies the king has often great virtues, but the courtiers are invariably servile. It is true that the American courtiers do not say "Sire," or "Your Majesty"—a distinction without a difference. They are forever talking of the natural intelligence of the populace they serve; they do not debate the question as to which of the virtues of their master is pre-eminently worthy of admiration, for they assure him that he possesses all the virtues under heaven without having acquired them, or without caring to acquire them; they do not give him their daughters and their wives to be raised at his pleasure to the rank of his concubines, but, by sacrificing their opinions, they prostitute themselves. Moralists and philosophers in America are not obliged to conceal their opinions under the veil of allegory; but, before they venture upon a harsh truth, they say, "We are aware that the people which we are addressing is too superior to all the weaknesses of human nature to lose the command of its temper for an instant; and we should not hold this language if we were not speaking to men whom their virtues and their intelligence render more worthy of freedom than all the rest of the world." It would have been impossible for the sycophants of Louis XIV to flatter more dexterously. For my part, I am persuaded that in all governments, whatever their nature may be, servility will cower to force, and adulation will cling to power. The only means of preventing men from degrading themselves is to invest no one with that unlimited authority which is the surest method of debasing them.

Saturday, January 28, 2012

Tyranny Of The Majority II - Alexis de Tocqueville

Tyranny Of The Majority -  Alexis de Tocqueville

Power Exercised By The Majority In America Upon Opinion

In America, when the majority has once irrevocably decided a question, all discussion ceases—Reason of this—Moral power exercised by the majority upon opinion—Democratic republics have deprived despotism of its physical instruments—Their despotism sways the minds of men.
It is in the examination of the display of public opinion in the United States that we clearly perceive how far the power of the majority surpasses all the powers with which we are acquainted in Europe. Intellectual principles exercise an influence which is so invisible, and often so inappreciable, that they baffle the toils of oppression. At the present time the most absolute monarchs in Europe are unable to prevent certain notions, which are opposed to their authority, from circulating in secret throughout their dominions, and even in their courts. Such is not the case in America; as long as the majority is still undecided, discussion is carried on; but as soon as its decision is irrevocably pronounced, a submissive silence is observed, and the friends, as well as the opponents, of the measure unite in assenting to its propriety. The reason of this is perfectly clear: no monarch is so absolute as to combine all the powers of society in his own hands, and to conquer all opposition with the energy of a majority which is invested with the right of making and of executing the laws.
The authority of a king is purely physical, and it controls the actions of the subject without subduing his private will; but the majority possesses a power which is physical and moral at the same time; it acts upon the will as well as upon the actions of men, and it represses not only all contest, but all controversy. I know no country in which there is so little true independence of mind and freedom of discussion as in America. In any constitutional state in Europe every sort of religious and political theory may be advocated and propagated abroad; for there is no country in Europe so subdued by any single authority as not to contain citizens who are ready to protect the man who raises his voice in the cause of truth from the consequences of his hardihood. If he is unfortunate enough to live under an absolute government, the people is upon his side; if he inhabits a free country, he may find a shelter behind the authority of the throne, if he require one. The aristocratic part of society supports him in some countries, and the democracy in others. But in a nation where democratic institutions exist, organized like those of the United States, there is but one sole authority, one single element of strength and of success, with nothing beyond it.
In America the majority raises very formidable barriers to the liberty of opinion: within these barriers an author may write whatever he pleases, but he will repent it if he ever step beyond them. Not that he is exposed to the terrors of an auto-da-fe, but he is tormented by the slights and persecutions of daily obloquy. His political career is closed forever, since he has offended the only authority which is able to promote his success. Every sort of compensation, even that of celebrity, is refused to him. Before he published his opinions he imagined that he held them in common with many others; but no sooner has he declared them openly than he is loudly censured by his overbearing opponents, whilst those who think without having the courage to speak, like him, abandon him in silence. He yields at length, oppressed by the daily efforts he has been making, and he subsides into silence, as if he was tormented by remorse for having spoken the truth.
Fetters and headsmen were the coarse instruments which tyranny formerly employed; but the civilization of our age has refined the arts of despotism which seemed, however, to have been sufficiently perfected before. The excesses of monarchical power had devised a variety of physical means of oppression: the democratic republics of the present day have rendered it as entirely an affair of the mind as that will which it is intended to coerce. Under the absolute sway of an individual despot the body was attacked in order to subdue the soul, and the soul escaped the blows which were directed against it and rose superior to the attempt; but such is not the course adopted by tyranny in democratic republics; there the body is left free, and the soul is enslaved. The sovereign can no longer say, "You shall think as I do on pain of death;" but he says, "You are free to think differently from me, and to retain your life, your property, and all that you possess; but if such be your determination, you are henceforth an alien among your people. You may retain your civil rights, but they will be useless to you, for you will never be chosen by your fellow-citizens if you solicit their suffrages, and they will affect to scorn you if you solicit their esteem. You will remain among men, but you will be deprived of the rights of mankind. Your fellow-creatures will shun you like an impure being, and those who are most persuaded of your innocence will abandon you too, lest they should be shunned in their turn. Go in peace! I have given you your life, but it is an existence in comparably worse than death."

Friday, January 27, 2012

Tyranny Of The Majority - Alexis de Tocqueville

Tyranny Of The Majority -  Alexis de Tocqueville

How the principle of the sovereignty of the people is to be understood—Impossibility of conceiving a mixed government—The sovereign power must centre somewhere—Precautions to be taken to control its action—These precautions have not been taken in the United States—Consequences.
I hold it to be an impious and an execrable maxim that, politically speaking, a people has a right to do whatsoever it pleases, and yet I have asserted that all authority originates in the will of the majority. Am I then, in contradiction with myself?
A general law—which bears the name of Justice—has been made and sanctioned, not only by a majority of this or that people, but by a majority of mankind. The rights of every people are consequently confined within the limits of what is just. A nation may be considered in the light of a jury which is empowered to represent society at large, and to apply the great and general law of justice. Ought such a jury, which represents society, to have more power than the society in which the laws it applies originate?
When I refuse to obey an unjust law, I do not contest the right which the majority has of commanding, but I simply appeal from the sovereignty of the people to the sovereignty of mankind. It has been asserted that a people can never entirely outstep the boundaries of justice and of reason in those affairs which are more peculiarly its own, and that consequently, full power may fearlessly be given to the majority by which it is represented. But this language is that of a slave.
A majority taken collectively may be regarded as a being whose opinions, and most frequently whose interests, are opposed to those of another being, which is styled a minority. If it be admitted that a man, possessing absolute power, may misuse that power by wronging his adversaries, why should a majority not be liable to the same reproach? Men are not apt to change their characters by agglomeration; nor does their patience in the presence of obstacles increase with the consciousness of their strength. *c And for these reasons I can never willingly invest any number of my fellow-creatures with that unlimited authority which I should refuse to any one of them.
[ No one will assert that a people cannot forcibly wrong another people; but parties may be looked upon as lesser nations within a greater one, and they are aliens to each other: if, therefore, it be admitted that a nation can act tyrannically towards another nation, it cannot be denied that a party may do the same towards another party.]
I do not think that it is possible to combine several principles in the same government, so as at the same time to maintain freedom, and really to oppose them to one another. The form of government which is usually termed mixed has always appeared to me to be a mere chimera. Accurately speaking there is no such thing as a mixed government (with the meaning usually given to that word), because in all communities some one principle of action may be discovered which preponderates over the others. England in the last century, which has been more especially cited as an example of this form of Government, was in point of fact an essentially aristocratic State, although it comprised very powerful elements of democracy; for the laws and customs of the country were such that the aristocracy could not but preponderate in the end, and subject the direction of public affairs to its own will. The error arose from too much attention being paid to the actual struggle which was going on between the nobles and the people, without considering the probable issue of the contest, which was in reality the important point. When a community really has a mixed government, that is to say, when it is equally divided between two adverse principles, it must either pass through a revolution or fall into complete dissolution.
I am therefore of opinion that some one social power must always be made to predominate over the others; but I think that liberty is endangered when this power is checked by no obstacles which may retard its course, and force it to moderate its own vehemence.
Unlimited power is in itself a bad and dangerous thing; human beings are not competent to exercise it with discretion, and God alone can be omnipotent, because His wisdom and His justice are always equal to His power. But no power upon earth is so worthy of honor for itself, or of reverential obedience to the rights which it represents, that I would consent to admit its uncontrolled and all-predominant authority. When I see that the right and the means of absolute command are conferred on a people or upon a king, upon an aristocracy or a democracy, a monarchy or a republic, I recognize the germ of tyranny, and I journey onward to a land of more hopeful institutions.
In my opinion the main evil of the present democratic institutions of the United States does not arise, as is often asserted in Europe, from their weakness, but from their overpowering strength; and I am not so much alarmed at the excessive liberty which reigns in that country as at the very inadequate securities which exist against tyranny.
When an individual or a party is wronged in the United States, to whom can he apply for redress? If to public opinion, public opinion constitutes the majority; if to the legislature, it represents the majority, and implicitly obeys its injunctions; if to the executive power, it is appointed by the majority, and remains a passive tool in its hands; the public troops consist of the majority under arms; the jury is the majority invested with the right of hearing judicial cases; and in certain States even the judges are elected by the majority. However iniquitous or absurd the evil of which you complain may be, you must submit to it as well as you can.

Money and Freedom

 Money and Freedom
Mises Daily: Wednesday, January 25, 2012 by Joseph T. Salern

The historical embodiment of monetary freedom is the gold standard. The era of its greatest flourishing was not coincidentally the 19th century, the century in which classical liberal ideology reigned, a century of unprecedented material progress and peaceful relations between nations. Unfortunately, the monetary freedom represented by the gold standard, along with many other freedoms of the classical liberal era, was brought to a calamitous end by World War I.

Also, and not so coincidentally, this was the "War to Make the World Safe for Mass Democracy," a political system which we have all learned by now is the great enemy of freedom in all its social and economic manifestations.

Now, it is true that the gold standard did not disappear overnight, but limped along in weakened form into the early 1930s. But this was not the pre-1914 classical gold standard, in which the actions of private citizens operating on free markets ultimately controlled the supply and value of money and governments had very little influence.

Under this monetary system, if people in one nation demanded more money to carry out more transactions or because they were more uncertain of the future, they would export more goods and financial assets to the rest of the world, while importing less. As a result, additional gold would flow in through a surplus in the balance of payments increasing the nation's money supply.

Sometimes, private banks tried to inflate the money supply by issuing additional bank notes and deposits, called "fiduciary media," promising to pay gold but unbacked by gold reserves. They lent these notes and deposits to either businesses or the government. However, as soon as the borrowers spent these additional fractional-reserve notes and deposits, domestic incomes and prices would begin to rise.

As a result, foreigners would reduce their purchases of the nation's exports, and domestic residents would increase their spending on the relatively cheap foreign imports. Gold would flow out of the coffers of the nation's banks to finance the resulting trade deficit, as the excess paper notes and checks were returned to their issuers for redemption in gold.

To check this outflow of gold reserves, which made their depositors very nervous, the banks would contract the supply of fiduciary media bringing about a monetary deflation and an ensuing depression.

Temporarily chastened by the experience, banks would refrain from again expanding credit for a while. If the Treasury tried to issue convertible notes only partially backed by gold, as it occasionally did, it too would face these consequences and be forced to restrain its note issue within narrow bounds.

Thus, governments and commercial banks under the gold standard did not have much influence over the money supply in the long run. The only sizable inflations that occurred during the 19th century did so during wartime when almost all belligerent nations would "go off the gold standard." They did so in order to conceal the staggering costs of war from their citizens by printing money rather than raising taxes to pay for it.

For example, Great Britain experienced a substantial inflation at the beginning of the 19th century during the period of the Napoleonic Wars, when it had suspended the convertibility of the British pound into gold. Likewise, the United States and the Confederate States of America both suffered a devastating hyperinflation during the War for Southern Independence, because both sides issued inconvertible Treasury notes to finance budget deficits. It is because politicians and their privileged banks were unable to tamper with and inflate a gold money that prices in the United States and in Great Britain at the close of the 19th century were roughly the same as they were at the beginning of the century.

Within weeks of the outbreak of World War I, all belligerent nations departed from the gold standard. Needless to say by the war's end the paper fiat currencies of all these nations were in the throes of inflations of varying degrees of severity, with the German hyperinflation that culminated in 1923 being the worst. To put their currencies back in order and to restore the public's confidence in them, one country after another reinstituted the gold standard during the 1920s.

Unfortunately, the new gold standard of the 1920s was fundamentally different from the classical gold standard. For one thing, under this latter version, gold coin was not used in daily transactions. In Great Britain, for example, the Bank of England would only redeem pounds in large and expensive bars of gold bullion. But gold bullion was mainly useful for financing international trade transactions.

Other countries such as Germany and the smaller countries of Central and Eastern Europe used gold-convertible foreign currencies such as the US dollar or the pound sterling as reserves for their own domestic currencies. This was called the gold-exchange standard.

While the US dollar was technically redeemable in honest-to-goodness gold coin, banks no longer held reserves in gold coin but in Federal Reserve notes. All gold reserves were centralized, by law, in the hands of the Fed and banks were encouraged to use Fed notes to cash checks and pay for checking and savings deposit withdrawals. This meant that very little gold coin circulated among the public in the 1920s, and residents of all nations came increasingly to view the paper IOUs of their central banks as the ultimate embodiment of the dollar, franc, pound, etc.

This state of affairs gave governments and their central banks much greater leeway for manipulating their national money supplies. The Bank of England, for example, could expand the amount of paper claims to gold pounds through the banking system without fearing a run on its gold reserves for two reasons.

Foreign countries on the gold exchange standard would be willing to pile up the paper pounds that flowed out of Great Britain through its balance of payments deficit and not demand immediate conversion into gold. In fact by issuing their own currency to tourists and exporters in exchange for the increasing quantities of inflated paper pounds, foreign central banks were in effect inflating their own money supplies in lock-step with the Bank of England. This drove up prices in their own countries to the inflated level attained by British prices and put an end to the British deficits.

In effect, this system enabled countries such as Great Britain and the United States to export monetary inflation abroad and to run "a deficit without tears" — that is, a balance-of-payments deficit that does not involve a loss of gold.

But even if gold reserves were to drain out of the vaults of the Bank of England or the Fed to foreign nations, British and US citizens would be disinclined, either by law or by custom, to put further pressure on their respective central banks to stop inflating by threatening bank runs to rid themselves of their depreciating notes and retrieve their rightful property left with the banks for safekeeping.

Unfortunately, contemporary economists and economic historians do not grasp the fundamental difference between the hard-money classical gold standard of the 19th century and the inflationary phony gold standard of the 1920s.

Thus, many admit, if somewhat grudgingly, that the gold standard worked exceedingly well in the 19th century. However, at the same time, they maintain that the gold standard suddenly broke down in the 1920s and 1930s and that this breakdown triggered the Great Depression. Monetary freedom in their minds is forever discredited by the tragic events of the 1930s. The gold standard, whatever its merits in an earlier era, is seen by them as a quaint and outmoded monetary system that has proved it cannot survive the rigors and stresses of a modern economy.

Those who implicate the gold standard as the main culprit in precipitating the events of the 1930s generally fall into one of two groups. One group argues that it was an inherent flaw in the gold standard itself that led to a collapse of the financial system, which in turn dragged the real economy down into depression. Writers in the second group maintain that governments, for social and political reasons, stopped adhering to the so-called rules of the gold standard, and that this initiated the downward spiral into the abyss of the Great Depression.

From either perspective, however, it is clear that the gold standard can never again be trusted to serve as the basis of the world's monetary system. On the one hand, if it is true that the gold standard is fundamentally flawed, that in itself is a crushing practical argument against the principle of monetary freedom. On the other hand, if the gold standard is in fact a creature of rules contrived by governments, and it is politically impossible for them to follow those rules, then monetary freedom is simply irrelevant from the outset.

The first argument is the Keynesian argument and the second the monetarist argument against the gold standard.

Read More: Money-and-Freedom

Joseph Salerno is academic vice president of the Mises Institute, professor of economics at Pace University, and editor of the Quarterly Journal of Austrian Economics. He has been interviewed in the Austrian Economics Newsletter and on Mises.org. 

Profits Are Socially Responsible

Profits Are Socially Responsible
Mises Daily: Thursday, January 26, 2012 by Doug French

Back in 1997 Gregory Bresiger penned a piece for the Free Market tearing apart the notion of "socially responsible investing" (SRI). Managers focused on social issues instead of profits will perform poorly as resources are diverted to unproductive uses. Bresiger looked to close the argument with this seemingly absurd proposition:

But SRI funds do point the way to solving a myriad of political debates in this country. Whenever a politician suggests a new tax, mandate, or regulation on business, let's first try it out on one of these "Socially Responsible" companies, purely on a voluntary basis. Let it pay higher taxes, insurance premiums, and wages, while adopting ever more rigid quotas and union rules. Then we can watch what happens to its stock price relative to everyone else's. Any takers?
More than a decade later there are takers. The Wall Street Journal reports that in seven states companies can register as benefit corporations, allowing the firms to pursue social and environmental goals without the worry of shareholders suing them for not maximizing shareholder value.

These corporate charters aren't tax exempt or nonprofit. Companies choosing to be benefit corporations pay Uncle Sam like any other for-profit company, but have the prerogative to make profits an afterthought.

Casey Sheahan, chief executive of outdoor-apparel company Patagonia Inc., changed his company's charter right away, believing that his company's shareholder value should take a backseat to the common good.

Jeff Furman, a Ben & Jerry's director since the 1980s and its current chairman, told the WSJ that had the socially conscious ice-cream maker been a benefit corporation back in 2000, they would have never sold out to Unilever PLC.

Ben Cohen and Jerry Greenfield are the stuff of legend for turning an initial $12,000 investment in an ice-cream store, located in a renovated gas station, into an ice-cream juggernaut the two sold 22 years later for over $300 million.

In addition to the cash price, Cohen and Greenfield negotiated to have the Netherlands conglomerate commit 7.5 percent of Ben & Jerry's profits to a foundation, agree not to reduce jobs or alter the way the ice cream is made, and also contribute $5 million to the Ben & Jerry's foundation, along with creating a $5 million fund to help minority-owned businesses and others in poor neighborhoods, and distribute $5 million to employees six months after the merger.

Surely Unilever would have paid an even higher cash price without all the social responsibility stipulations, which Unilever must have factored into its bid. As it is, based on Furman's comments, the Ben & Jerry's folks still harbor seller's remorse.

The law requires benefit corporations to spell out company social and environmental goals each year in a "benefit report" and then measure progress toward those goals. Of course progress toward goals that are impossible to quantify will be impossible to evaluate, providing a convenient cover for underperforming management. Shareholders will have no real basis to judge management, who by choosing this type of charter are saying, "we don't care about financial profits; we want to make the world a better place."

However, while a business owner may make grand pronouncements that the environment or some social issue is more important than profits, what he or she is really saying is that the company believes these issues are more important than customers.

It is customers who are in command of the profit-and-loss system. Producers who don't serve the buying public best suffer losses and are replaced by those who do. Ludwig von Mises explained that it is the urgent demands of customers that dictate the adjustment of production activities. These adjustments relentlessly continue, driven not by the ideology of the entrepreneur or the opinions of management but by the customer. As Mises explains in Profit and Loss,

Profit and loss are ever-present features only on account of the fact that ceaseless change in the economic data makes again and again new discrepancies, and consequently the need for new adjustments originates.
The idea at the root of benefit corporations is that profit should be abolished. But the results of that would be disastrous. Mises points out that if profits were given to the customers (or, in other words, if prices could not exceed costs), this maximum-price decree would paralyze markets and require goods to be rationed.

For the firm's employees to receive profits, no capital could be accumulated to grow the business or innovate production functions. And finally if the state were to tax 100 percent of profits, customers would no longer be supreme and producers "would just be people who have the power to deal with production as it pleases them."

Murray Rothbard explained in Man, Economy, and State, the aim of any action is to make gains that exceed the costs derived from that action, but that profit and loss in this sense are "psychic phenomena and as such not open to measurement and a mode of expression which could convey to other people precise information concerning their intensity."

For instance, environmentally conscious CEOs can try explaining to shareholders that using more expensive materials or processes to create goods is beneficial to the earth and thus more worthy than using less environmentally friendly but less expensive materials and earning a higher profit, but the net benefit is impossible to measure. The CEO and board are merely asking shareholders to subsidize their worldview.

Read More: Profits-Are-Socially-Responsible Mises Institute

About the Author
Douglas French is president of the Mises Institute and author of Early Speculative Bubbles & Increases in the Money Supply and Walk Away: The Rise and Fall of the Home-Ownership Myth. He received his master's degree in economics from the University of Nevada, Las Vegas, under Murray Rothbard with Professor Hans-Hermann Hoppe serving on his thesis committee. French teaches in the Mises Academy.

Thursday, January 26, 2012

Unlimited Power Of Majority, And Its Consequences—Part I - Alexis de Tocqueville

Unlimited Power Of The Majority In The United States, And Its Consequences

The very essence of democratic government consists in the absolute sovereignty of the majority; for there is nothing in democratic States which is capable of resisting it. Most of the American Constitutions have sought to increase this natural strength of the majority by artificial means. *a
[ We observed, in examining the Federal Constitution, that the efforts of the legislators of the Union had been diametrically opposed to the present tendency. The consequence has been that the Federal Government is more independent in its sphere than that of the States. But the Federal Government scarcely ever interferes in any but external affairs; and the governments of the State are in the governments of the States are in reality the authorities which direct society in America.]
The legislature is, of all political institutions, the one which is most easily swayed by the wishes of the majority. The Americans determined that the members of the legislature should be elected by the people immediately, and for a very brief term, in order to subject them, not only to the general convictions, but even to the daily passion, of their constituents. The members of both houses are taken from the same class in society, and are nominated in the same manner; so that the modifications of the legislative bodies are almost as rapid and quite as irresistible as those of a single assembly. It is to a legislature thus constituted that almost all the authority of the government has been entrusted.
But whilst the law increased the strength of those authorities which of themselves were strong, it enfeebled more and more those which were naturally weak. It deprived the representatives of the executive of all stability and independence, and by subjecting them completely to the caprices of the legislature, it robbed them of the slender influence which the nature of a democratic government might have allowed them to retain. In several States the judicial power was also submitted to the elective discretion of the majority, and in all of them its existence was made to depend on the pleasure of the legislative authority, since the representatives were empowered annually to regulate the stipend of the judges.
Custom, however, has done even more than law. A proceeding which will in the end set all the guarantees of representative government at naught is becoming more and more general in the United States; it frequently happens that the electors, who choose a delegate, point out a certain line of conduct to him, and impose upon him a certain number of positive obligations which he is pledged to fulfil. With the exception of the tumult, this comes to the same thing as if the majority of the populace held its deliberations in the market-place.
Several other circumstances concur in rendering the power of the majority in America not only preponderant, but irresistible. The moral authority of the majority is partly based upon the notion that there is more intelligence and more wisdom in a great number of men collected together than in a single individual, and that the quantity of legislators is more important than their quality. The theory of equality is in fact applied to the intellect of man: and human pride is thus assailed in its last retreat by a doctrine which the minority hesitate to admit, and in which they very slowly concur. Like all other powers, and perhaps more than all other powers, the authority of the many requires the sanction of time; at first it enforces obedience by constraint, but its laws are not respected until they have long been maintained.
The right of governing society, which the majority supposes itself to derive from its superior intelligence, was introduced into the United States by the first settlers, and this idea, which would be sufficient of itself to create a free nation, has now been amalgamated with the manners of the people and the minor incidents of social intercourse.
The French, under the old monarchy, held it for a maxim (which is still a fundamental principle of the English Constitution) that the King could do no wrong; and if he did do wrong, the blame was imputed to his advisers. This notion was highly favorable to habits of obedience, and it enabled the subject to complain of the law without ceasing to love and honor the lawgiver. The Americans entertain the same opinion with respect to the majority.
The moral power of the majority is founded upon yet another principle, which is, that the interests of the many are to be preferred to those of the few. It will readily be perceived that the respect here professed for the rights of the majority must naturally increase or diminish according to the state of parties. When a nation is divided into several irreconcilable factions, the privilege of the majority is often overlooked, because it is intolerable to comply with its demands.
If there existed in America a class of citizens whom the legislating majority sought to deprive of exclusive privileges which they had possessed for ages, and to bring down from an elevated station to the level of the ranks of the multitude, it is probable that the minority would be less ready to comply with its laws. But as the United States were colonized by men holding equal rank amongst themselves, there is as yet no natural or permanent source of dissension between the interests of its different inhabitants.
There are certain communities in which the persons who constitute the minority can never hope to draw over the majority to their side, because they must then give up the very point which is at issue between them. Thus, an aristocracy can never become a majority whilst it retains its exclusive privileges, and it cannot cede its privileges without ceasing to be an aristocracy.
In the United States political questions cannot be taken up in so general and absolute a manner, and all parties are willing to recognize the right of the majority, because they all hope to turn those rights to their own advantage at some future time. The majority therefore in that country exercises a prodigious actual authority, and a moral influence which is scarcely less preponderant; no obstacles exist which can impede or so much as retard its progress, or which can induce it to heed the complaints of those whom it crushes upon its path. This state of things is fatal in itself and dangerous for the future.
How The Unlimited Power Of The Majority Increases In America The Instability Of Legislation And Administration Inherent In Democracy The Americans increase the mutability of the laws which is inherent in democracy by changing the legislature every year, and by investing it with unbounded authority—The same effect is produced upon the administration—In America social amelioration is conducted more energetically but less perseveringly than in Europe.
I have already spoken of the natural defects of democratic institutions, and they all of them increase at the exact ratio of the power of the majority. To begin with the most evident of them all; the mutability of the laws is an evil inherent in democratic government, because it is natural to democracies to raise men to power in very rapid succession. But this evil is more or less sensible in proportion to the authority and the means of action which the legislature possesses.
In America the authority exercised by the legislative bodies is supreme; nothing prevents them from accomplishing their wishes with celerity, and with irresistible power, whilst they are supplied by new representatives every year. That is to say, the circumstances which contribute most powerfully to democratic instability, and which admit of the free application of caprice to every object in the State, are here in full operation. In conformity with this principle, America is, at the present day, the country in the world where laws last the shortest time. Almost all the American constitutions have been amended within the course of thirty years: there is therefore not a single American State which has not modified the principles of its legislation in that lapse of time. As for the laws themselves, a single glance upon the archives of the different States of the Union suffices to convince one that in America the activity of the legislator never slackens. Not that the American democracy is naturally less stable than any other, but that it is allowed to follow its capricious propensities in the formation of the laws. *b
[ The legislative acts promulgated by the State of Massachusetts alone, from the year 1780 to the present time, already fill three stout volumes; and it must not be forgotten that the collection to which I allude was published in 1823, when many old laws which had fallen into disuse were omitted. The State of Massachusetts, which is not more populous than a department of France, may be considered as the most stable, the most consistent, and the most sagacious in its undertakings of the whole Union.]
The omnipotence of the majority, and the rapid as well as absolute manner in which its decisions are executed in the United States, has not only the effect of rendering the law unstable, but it exercises the same influence upon the execution of the law and the conduct of the public administration. As the majority is the only power which it is important to court, all its projects are taken up with the greatest ardor, but no sooner is its attention distracted than all this ardor ceases; whilst in the free States of Europe the administration is at once independent and secure, so that the projects of the legislature are put into execution, although its immediate attention may be directed to other objects.
In America certain ameliorations are undertaken with much more zeal and activity than elsewhere; in Europe the same ends are promoted by much less social effort, more continuously applied.
Some years ago several pious individuals undertook to ameliorate the condition of the prisons. The public was excited by the statements which they put forward, and the regeneration of criminals became a very popular undertaking. New prisons were built, and for the first time the idea of reforming as well as of punishing the delinquent formed a part of prison discipline. But this happy alteration, in which the public had taken so hearty an interest, and which the exertions of the citizens had irresistibly accelerated, could not be completed in a moment. Whilst the new penitentiaries were being erected (and it was the pleasure of the majority that they should be terminated with all possible celerity), the old prisons existed, which still contained a great number of offenders. These jails became more unwholesome and more corrupt in proportion as the new establishments were beautified and improved, forming a contrast which may readily be understood. The majority was so eagerly employed in founding the new prisons that those which already existed were forgotten; and as the general attention was diverted to a novel object, the care which had hitherto been bestowed upon the others ceased. The salutary regulations of discipline were first relaxed, and afterwards broken; so that in the immediate neighborhood of a prison which bore witness to the mild and enlightened spirit of our time, dungeons might be met with which reminded the visitor of the barbarity of the Middle Ages.

Wednesday, January 25, 2012

The Principle Of The Sovereignty Of The People In America - Alexis de Tocqueville

The Principle Of The Sovereignty Of The People In America

At the very time when this consequence of the laws and of the revolution was apparent to every eye, victory was irrevocably pronounced in favor of the democratic cause. All power was, in fact, in its hands, and resistance was no longer possible. The higher orders submitted without a murmur and without a struggle to an evil which was thenceforth inevitable. The ordinary fate of falling powers awaited them; each of their several members followed his own interests; and as it was impossible to wring the power from the hands of a people which they did not detest sufficiently to brave, their only aim was to secure its good-will at any price. The most democratic laws were consequently voted by the very men whose interests they impaired; and thus, although the higher classes did not excite the passions of the people against their order, they accelerated the triumph of the new state of things; so that by a singular change the democratic impulse was found to be most irresistible in the very States where the aristocracy had the firmest hold. The State of Maryland, which had been founded by men of rank, was the first to proclaim universal suffrage, and to introduce the most democratic forms into the conduct of its government.
When a nation modifies the elective qualification, it may easily be foreseen that sooner or later that qualification will be entirely abolished. There is no more invariable rule in the history of society: the further electoral rights are extended, the greater is the need of extending them; for after each concession the strength of the democracy increases, and its demands increase with its strength. The ambition of those who are below the appointed rate is irritated in exact proportion to the great number of those who are above it. The exception at last becomes the rule, concession follows concession, and no stop can be made short of universal suffrage.
At the present day the principle of the sovereignty of the people has acquired, in the United States, all the practical development which the imagination can conceive. It is unencumbered by those fictions which have been thrown over it in other countries, and it appears in every possible form according to the exigency of the occasion. Sometimes the laws are made by the people in a body, as at Athens; and sometimes its representatives, chosen by universal suffrage, transact business in its name, and almost under its immediate control.
In some countries a power exists which, though it is in a degree foreign to the social body, directs it, and forces it to pursue a certain track. In others the ruling force is divided, being partly within and partly without the ranks of the people. But nothing of the kind is to be seen in the United States; there society governs itself for itself. All power centres in its bosom; and scarcely an individual is to be meet with who would venture to conceive, or, still less, to express, the idea of seeking it elsewhere. The nation participates in the making of its laws by the choice of its legislators, and in the execution of them by the choice of the agents of the executive government; it may almost be said to govern itself, so feeble and so restricted is the share left to the administration, so little do the authorities forget their popular origin and the power from which they emanate.

Tuesday, January 24, 2012

The Principle Of The Sovereignty Of The People In America - Alexis de Tocqueville

The Principle Of The Sovereignty Of The People In America

Whenever the political laws of the United States are to be discussed, it is with the doctrine of the sovereignty of the people that we must begin. The principle of the sovereignty of the people, which is to be found, more or less, at the bottom of almost all human institutions, generally remains concealed from view. It is obeyed without being recognized, or if for a moment it be brought to light, it is hastily cast back into the gloom of the sanctuary. "The will of the nation" is one of those expressions which have been most profusely abused by the wily and the despotic of every age. To the eyes of some it has been represented by the venal suffrages of a few of the satellites of power; to others by the votes of a timid or an interested minority; and some have even discovered it in the silence of a people, on the supposition that the fact of submission established the right of command.
In America the principle of the sovereignty of the people is not either barren or concealed, as it is with some other nations; it is recognized by the customs and proclaimed by the laws; it spreads freely, and arrives without impediment at its most remote consequences. If there be a country in the world where the doctrine of the sovereignty of the people can be fairly appreciated, where it can be studied in its application to the affairs of society, and where its dangers and its advantages may be foreseen, that country is assuredly America.
I have already observed that, from their origin, the sovereignty of the people was the fundamental principle of the greater number of British colonies in America. It was far, however, from then exercising as much influence on the government of society as it now does. Two obstacles, the one external, the other internal, checked its invasive progress. It could not ostensibly disclose itself in the laws of colonies which were still constrained to obey the mother-country: it was therefore obliged to spread secretly, and to gain ground in the provincial assemblies, and especially in the townships.
American society was not yet prepared to adopt it with all its consequences. The intelligence of New England, and the wealth of the country to the south of the Hudson (as I have shown in the preceding chapter), long exercised a sort of aristocratic influence, which tended to retain the exercise of social authority in the hands of a few. The public functionaries were not universally elected, and the citizens were not all of them electors. The electoral franchise was everywhere placed within certain limits, and made dependent on a certain qualification, which was exceedingly low in the North and more considerable in the South.
The American revolution broke out, and the doctrine of the sovereignty of the people, which had been nurtured in the townships and municipalities, took possession of the State: every class was enlisted in its cause; battles were fought, and victories obtained for it, until it became the law of laws.
A no less rapid change was effected in the interior of society, where the law of descent completed the abolition of local influences.

Monday, January 23, 2012

Ideas Have Sex, and We’re Better for It - John Stossel

Sunday, January 22, 2012

Soak the Poor

Soak the Poor
Mises Daily: Friday, January 20, 2012 by Frank Chodorov

To be sure, the original Populists, and the aping Democrats and Republicans, to say nothing of the conscious Socialists, little thought that their income-tax gadget would ever be used to "soak the poor." It was an instrument, they thought, that could lend itself to no other purpose than to expropriate the rich in favor of the poor. How the poor would benefit from the expropriation, they did not explain; their intense hatred of the rich conveniently filled this vacuum in their argument. Their passion blinded them to the fact that this "soak the rich" law would enable the government to filch the pay envelope.

The class-war doctrine is most vicious not in that it sets man against man, producer against producer, but in that it diverts the attention of the contestants from their common enemy, the State. Men live by production, but the State lives by appropriation. While the haves and the have-nots struggle over the division of existing wealth, it is the business of the State to improve itself at the expense of both; it picks up the marbles while the boys are fighting. That has been the story of men in organized society since the beginning. That this lesson of history should have escaped the reformers of the 19th century, when the habit of freedom was still strong in America, can be easily understood; what is not easily explained is the acceptance of the doctrine of benevolent government in our day, when all the evidence to the contrary is before our eyes.

However, one good "reason" followed another for making better use of the 16th Amendment. After 1913, the government, which for over a century had managed to get along without income taxation, felt a continuing need for more funds.[1] The income-tax rates kept climbing, and the exemptions kept declining; the mesh of the dragnet was made finer and finer so that more fish could be caught. At first it was the incomes of corporations, then of rich citizens, then of well-provided widows and opulent workers, and finally the wealth of housemaids and the tips of waitresses.

This is all in line with the ability-to-pay doctrine. The poor, simply because there are more of them, have more ability to pay than the rich. The national pay envelope contains more money than the combined treasuries of all the corporations of the country. The government could not for long overlook this rich mine. Political considerations however, made the tapping of the pay envelope difficult. The wage earners have votes, many votes, and in order not to alienate these votes, it was necessary to devise some means for making the taxation of their incomes palatable. They had to be lulled into acceptance of "soak the poor."

The drug that was concocted for this purpose was "social security." The worker was told that he was not paying an income tax when his pay envelope was opened and robbed; he was simply making a "contribution" to "insurance" against the inevitable disabilities of old age. He would get it all back, when he could no longer work, and with a profit.

This is sheer fraud, as can be readily seen when comparison between social security and legitimate insurance is made. When you pay a premium on an insurance policy, the company keeps part of it in reserve. The amount thus set aside is based on actuarial experience; the company knows from long study how much money it must keep on hand to meet probable claims. Most of your premium is invested in productive business, and out of the earnings from such investment the company pays its running expenses and builds up a surplus to meet unexpected strains; or it pays the policy holders a share of this extra income, in dividends. Without going into the intricate details of the insurance business, the guiding principle is that benefits are paid out of the reserve or the company's earnings from investments.

Is that what happens to your "contribution" to social security? Not a bit of it.

Read More:
Mises Institute -Soak-the-Poor


What freedom is not - P. J. O'Rourke

What freedom is not.

Many people attempt to destroy the word freedom, attempt to make thoughts of freedom unthinkable, by making the word meaningless, by applying it to anything and everything.
P. J. O'Rourke dismisses such evasive weasel words:
Freedom is not empowerment. Empowerment is what the Serbs have in Bosnia. Anybody can grab a gun and be empowered.
It's not entitlement. An entitlement is what people on welfare get, and how free are they?
It's not an endlessly expanding list of rights — the "right" to education, the "right" to health care, the "right" to food and housing. That's not freedom, that's dependency. Those aren't rights, those are the rations of slavery — hay and a barn for human cattle. 

How Deflationary Forces Will Be Turned into Inflation

How Deflationary Forces Will Be Turned into Inflation
Mises Daily: Thursday, January 19, 2012 by Thorsten Polleit


The ongoing financial and economic crisis has not only stoked fears that it will end in inflation — as central banks will print up ever-greater amounts of money — but it has also given rise to a diametrically opposed concern: namely, that of deflation.

For instance, in December 2011 Christine Lagarde, head of the International Monetary Fund (IMF), warned that the world might risk sliding into a 1930s-style slump, such as the Great Depression.

This episode was characterized by worldwide defaulting banks, a shrinking of the money supply (or, deflation), which in turn led to falling prices across the board, sharply falling production and drastically rising unemployment.

In today's fiat-money regime — which contrasts with the gold-exchange-standard that was in place in many countries at that time — the possibility of deflation appears fairly small indeed.[1]

This becomes obvious if one takes a look at the workings of today's fiat-money system, a system in which the money supply can actually be increased at any point in time in any amount deemed politically desirable.


Commercial banks need two ingredients to produce additional bank-circulation credit, through which the fiat-money supply is increased, namely, central-bank money and equity capital.

Central-bank money is a "monopoly product," produced by the central bank, typically through loaning to commercial banks.

Equity capital comes from investors who are willing to invest their money in commercial banks, thereby becoming owners of the banks.

Banks need central-bank money for three reasons. First, they have to hold a certain percentage of their liability vis-à-vis nonbanks in central-bank money; these are the so-called minimum reserves.

Second, banks need central-bank money for making payments in the interbank market. And third, banks keep central-bank money for meeting the cash drain, caused by clients demanding a cash payout of their deposits.

If, for instance, the minimum reserve rate for demand deposits is 2 percent, the banking sector as a whole can produce $50 of credit and fiat money with each $1 of central-bank money (that is 1 divided by 0.02).

Government regulation requires commercial banks to back up their "risky assets" (such as loans and securities) by a "minimum" equity capital. If, for instance, the minimum capital requirement is 8 percent, a bank can produce $12.50 of credit and money (that is 1 divided by 0.08) with a given $1 of equity capital.

If the risky weighting of risky assets is, say, 25 percent rather than 100 percent, a bank can produce credit and fiat money in the amount of $50 (that is $12.5 times 1 divided by 0.25). That said, a loss of $1 requires a bank to reduce its credit and money supply by $50.

Against this backdrop we find that the lower the minimum reserve ratio is, the more credit and fiat money the banking sector can produce with a given unit of central-bank money. And further, the lower the capital requirement and the risk weightings are, the higher will be the leverage banks can build up with a given amount of equity capital.


From early 1960 up to the end of 2007, US banks' credit and money multipliers (which denote the amount of credit and money banks can produce with $1 in central-bank money) increased drastically — thanks to a continual rise in central-bank money, ever-lower reserve requirements, and readily available bank-equity capital.

For instance, with a central-bank money supply of $1, banks produced around $211 of bank credit in August 2008. This compares with less than $20 seen in the early 1960s.

In "fighting" the credit crisis, the US Federal Reserve increased US banks' (excess) reserves drastically as from late summer 2008. As banks did not use these funds (in full) to produce additional credit and fiat-money balances, however, the credit and money multipliers really collapsed.

The collapse of the multipliers conveys an important message: commercial banks are no longer willing or in a position to produce additional credit and fiat money in a way they did in the precrisis period.

This finding can be explained by three factors. First, banks' equity capital has become scarce due to losses (such as, for instance, write-offs and creditor defaults) incurred in the crisis.

Second, banks are no longer willing to keep high credit risks on their balance sheets. And third, banks' stock valuations have become fairly depressed, making raising additional equity a costly undertaking for the owners of the banks (in terms of the dilution effect).

For instance, in the euro area, bank stock prices fell by around 76 percent from the beginning of 2007 to the beginning of 2012 — unmistakably signaling investors' lack of confidence in the viability of many banks' business models. In the United States, bank stock price declines amounted to slightly more than 50 percent.

The latest developments suggest that banks are about (at least for now) to start scaling back their risky assets in relation to their prevailing capital base. In other words, banks are adopting a strategy of "deleveraging" and "derisking."

Such a strategy can be put into practice by, for instance, refraining from rolling-over maturing loans granted to, say, corporate, consumers, and public-sector entities — something that will in a fiat-money system result in a decline in the outstanding credit and fiat-money supply.

Alternatively, banks can reduce their risks by selling off assets so far recorded on their balance sheet. This would also reduce the outstanding money supply — as the buyers of bank assets would pay with existing demand deposits, which are thereby literally "destroyed."

Given that investors in bank capital become unwilling to expose their money to credit risks, let alone want to assume new credit risks, the fiat-money system, which has been highly inflationary in the last decades, would turn deflationary.

Read More:
Mises -How-Deflationary-Forces-Will-Be-Turned-into-Inflation

Saturday, January 21, 2012

Why socialism needs killing fields - jamesd@echeque.com

 Why socialism needs killing fields:

Throughout the twentieth century the introduction of socialism has always involved killing fields, facilities for the mass production of murder by specialized labor.
Although this institution has been widely used throughout the twentieth century, we did not create a word for it until close to the end of the twentieth century, when Pol Pot organized approximately 20 000 separate killing fields, a world record, thanks to his firm commitment to decentralized government.
Though the word is new, the system is as old as socialism.
The basic problem of socialism is the relationship between production and consumption. It is likely that the number seven widget collective might want to produce fewer widgets, or a different kind of widget, to that which certain users of widgets desire. Furthermore some users of widgets will want widgets for one purpose, and others for a different purpose, and there probably will not be as many widgets as they all desire, or the varieties that each diverse user of widgets desires.
Now under capitalism, no problem. You want widgets? You pay for widgets. You get the widgets you want or you refuse to buy widgets. And if you do not want to pay, then you probably do not need the widgets as much as the guy who is willing to pay. And if the price is high, then making widgets must be hard, and if it is not hard, you go into business making widgets, and you do not have to ask anyone's permission to do that.
But under socialism, the number seven widget collective is producing widgets for free, or at a “socially desirable price”, which usually might as well be free, since when goods are produced at “socially desirable” prices money rapidly becomes unspendable. So who gets to decide what widgets to produce? Those who produce them, or those who consume them?
Well obviously “the community” must decide.
And then “the community” must impose its decision on the producers and consumers of widgets.
Whereas in capitalism, the community can go jump in the lake. It is nobody's business but that of a willing seller and a willing buyer.
This means that under socialism, issues of production and consumption have to be dealt with in the same way that capitalists deal with issues such as a stolen handbag.
Under capitalism there is a positive incentive to produce, since if you produce something you own it, until you trade if for something you want more, and you cannot consume, except you have produced something that someone else values more than what you consume.
This of course makes it possible in capitalism for one person to wind up owning vastly more than another due to the accidents of luck, opportunity, ability, and ambition.
Under socialism it is necessary to use negative incentives, to punish people for “parasitism” “hoarding”, “black marketeering”, and suchlike “crimes”, “crimes” which are unknown in capitalism, or rather honored as virtues.
A socialist economy must employ negative incentives, the kind of incentives that law abiding people apply only to muggers and the like, in order to get light bulbs in the light sockets and toilet paper in the toilets. Thus the entire socialist country must be run as a prison, and all the citizens are lifers, and the nomenclatura are merely trusties.
Needless to say, when this system is introduced, a great many people misbehave. You cannot send them to prison, they already are in prison.
You have to murder them.
Hence the need for efficient methods for the mass production of murder.

Friday, January 20, 2012

Customary Law - Bruce Benson

Customary Law

The following is a passage from Bruce Benson's The Enterprise of Law, available from Laissez Faire Books.
Extracted by Mark Sulkowski

Law can imposed from above by some coercive authority, such as a king, a legislature, or a supreme court, or law can develop "from the ground" as customs and practice evolve. Law imposed from the top — authoritarian law — typically requires the support of a powerful minority; law developed from the bottom up — customary law — requires widespread acceptance. Hayek explained that many issues of law are not
whether the parties have abused anybody's will, but whether their actions have conformed to expectations which other parties had reasonably formed because they corresponded to the practices on which the everyday conduct of the members of the group was based. The significance of customs here is that they give rise to expectations that guide people's actions, and what will be regarded as binding will therefore be those practices that everybody counts on being observed and which thereby condition the success of most activities.
Customary law is recognized, not because it is backed by the power of some strong individual or institution, but because each individual recognizes the benefits of behaving in accordance with other individuals' expectations, _given_ that others also behave as he expects. Alternatively, if a minority coercively imposes law from above, then that law will require much more force to maintain social order than is required when law develops from the bottom through mutual recognition and acceptance.
Reciprocities are the basic source both of the recognition of duty to obey law and of law enforcement in a customary law system. That is, individuals must "exchange" recognition of certain behavioral rules for their mutual benefit. Fuller suggested three conditions that make a duty clear and acceptable to those affected:
First, the relationship of reciprocity out of which the duty arises must result from a voluntary agreement between the parties immediately affected; they themselves "create" the duty. Second, the reciprocal performances of the parties must in some sense be equal in value. ... We cannot here speak of an exact identity, for it makes no sense at all to exchange, say, a book or idea in return for exactly the same book or idea. The bond of reciprocity unites men, not simply in spite of their differences but because of their differences. ... Third, the relationships within the society must be sufficiently fluid so that the same duty you owe me today, I may owe you tomorrow — in other words, the relationship of duty must in theory and in practice be reversible.
Because the source of recognition of customary law is reciprocity, private property rights and the rights of individuals are likely to constitute the most important primary rules of conduct in such legal systems. After all, voluntary recognition of laws and participation in their enforcement is likely to arise only when substantial benefits from doing so can be internalized by each individual. Punishment is frequently the threat that induces recognition of law imposed from above, but incentives must be largely positive when customary law prevails. Individuals must expect to gain as much or more than the costs they bear from voluntary involvement in the legal system. Protection of personal property and individual rights is a very attractive benefit.
Under customary law, offenses are treated as torts (private wrongs or injuries) rather than crimes (offenses against the state or the "society"). A potential action by one person has to affect someone else before any question of legality can arise; any action that does not, such as what a person does alone or in voluntary cooperation with someone else but in a manner that clearly harms no one, is not likely to become the subject of a rule of conduct under customary law. Fuller proposed that "customary law" might best be described as a "language of interaction." Facilitating interaction can only be accomplished with recognition of clear (although not necessarily written) codes of conduct enforced through reciprocally acceptable, well established adjudication arrangements accompanied by effective legal sanctions.
James Buchanan asked, if government is dismantled “how do rights re-emerge and come to command respect? How do 'laws' emerge that carry with them general respect for their 'legitimacy'?” He contended that collective action would be necessary to devise a “social contract” or “constitution” to define rights and to establish the institutions to enforce those rights. But collective action can be achieved through individual agreements, with useful rules spreading to other members of a group. Demsetz explained that property rights will be defined when the benefits of doing so cover the costs of defining and enforcing such rights. Such benefits may become evident because a dispute arises, implying that existing rules do not adequately cover some new situation. The parties involved must expect the benefits from resolving the dispute (e.g., avoiding a violent confrontation), and of establishing a new rule, to outweigh the cost of resolving the dispute and enforcing the resulting judgment, or they would not take it to the adjudication system.
Dispute resolution can be a major source of legal change since an adjudicator will often make more precise those rules about which differences of opinion exist, and even supply new rules because no generally recognized rules cover a new situation. If the relevant group accepts the ruling it becomes part of customary law, but not because it is coercively imposed on a group by some authority backing the court. Thus, good rules that facilitate interaction tend to be selected over time, while bad decisions are ignored.
Dispute resolution is not the only source of legal evolution under customary law. Individuals may observe others behaving in a particular way in a new situation and adopt similar behavior themselves, recognizing the benefit of avoiding confrontation. Institutions for enforcement similarly evolve due to recognition of reciprocal benefits.
Consider the development of dispute resolution procedures. No state- like coercive authority exists in a customary system to force disputants into a court. Because rules of customary law are in the nature of torts, the aggrieved party must pursue prosecution. Under such circumstances, individuals have strong reciprocal incentives to form mutual support groups for legal matters. The makeup of such groups may reflect family (as it frequently did in primitive societies), religion (as in some primitive groups), geographic proximity (as in Anglo-Saxon England), functional similarity (as with commercial law), or contractual arrangements (e.g., as in medieval Ireland and in medieval Iceland). The group members are obligated to aid any other member in a valid dispute, given that the member has fulfilled his obligations in the past. Thus, ability to obtain support in a dispute depends on reciprocal loyalty.
Should a dispute arise, reciprocal support groups give individuals a position of strength. This does not necessarily mean, however, that disputes are settled by warfare between groups. Violence is a costly means of solving a dispute: if the accuser and his support group attack the accused, the accused's group is obliged to avenge the attack. Consequently, arrangements and procedures for non-violent dispute resolution should evolve very quickly in customary law systems.
The impetus for accepting adjudication in a customary legal system (as well as in an authoritarian system) is the omnipresent threat of force, but use of such force is certainly not likely to be the norm. Rather, an agreement between the parties must be negotiated. Frequently, a mutually acceptable arbitrator or mediator is chosen to consider the dispute, but this individual (or group) will have no vested authority to impose a solution on disputants. The ruling, therefore, must be acceptable to the groups to which both parties in the dispute belong. The only real power an arbitrator or mediator holds under such a system is that of persuasion.
If the accused offender is found guilty, the "punishment" tends to be economic in nature: restitution in the form of a fine or indemnity to be paid to the plaintiff. Liability, intent, the value of the damages, and the status of the offended person all may be considered in determining the indemnity. Every invasion of person or property is generally valued in terms of property.
A judgment under customary law is typically enforceable because of an effective threat of total ostracism by the community (e.g., the primitive tribe, the merchant community). Reciprocities between the groups, recognizing the high cost of refusal to accept good judgments, takes those who refuse such a judgment outside their support group and they become outcasts or "outlaws." The adjudicated solutions tend to be accepted due to fear of this severe boycott sanction.
Carl Menger proposed that the origin, formation, and ultimate process of all social institutions (including law) is essentially the same as the spontaneous order Adam Smith described for markets. Markets coordinate interactions, as does customary law. Both develop as they do because the actions they are intended to coordinate are performed more effectively under one system or process than another. The more effective institutional arrangement replaces the less effective one.
The evolutionary process is not one of deliberate design. In the case of primitive societies, for example, early kinship or neighborhood groups were effective social arrangements for internalizing reciprocal legal benefits — as well as other benefits arising out of cooperative production, defense, religious practices, and so on — _relative_ to previously existing arrangements. Others saw some of those benefits and either joined existing groups or copied their successful characteristics and formed new groups. Neither the members of the earliest groups nor those who followed had to understand what particular aspect of the contract actually facilitated interactions that led to an improved social order...

The Enterprise of Law: Justice Without the State by Bruce Benson. pp 12-15