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Wednesday, February 29, 2012

I, Pencil

I, Pencil

LEONARD READ
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LI-PAPER. The lesson that I give is this: Allow all creative abilities to flow freely.Have faith in free men and women.
Even if I, Pencil, were the only thing to collect the evidence, could testify, what men and women can achieve anything if they can try it in freedom, then it would be for people with little confidence in a fair matter. However, there is evidence in vast quantities, it affects us all and is available to all.
Leonard Read in 1958 published his first essay "I, Pencil," which developed within a very short time become a classic liberal literature. In this entertaining story about a pencil's origin and history - and conveys the way, what incredible power accomplishes the free market by combining the creativity and ability of many people and coordinated. Each of these would be "parents" of the pencil is not in a position to describe its manufacturing process to even, and yet they all work together peacefully to create an amazingly complex product - and thus prosperity for all involved. With "I, Pencil" Read's essay is now available in German.
Download LI-paper (7 pages, PDF)

Tuesday, February 28, 2012

Has Capitalism Failed? - Ron Paul


Has Capitalism Failed?
Congressional Record—U.S. House of Representatives July 9, 2002


To condemn free-market capitalism because of anything going on today makes no sense. There is no evidence that capitalism exists today. We are deeply involved in an interventionist-planned economy that allows major benefits to accrue to the politically connected of both political spectrums. One may condemn the fraud and the current system, but it must be called by its proper names— Keynesian inflationism, interventionism, and corporatism.
What is not discussed is that the current crop of bankruptcies reveals that the blatant distortions and lies emanating from years of speculative orgy were predictable.
First, Congress should be investigating the federal govern- ment’s fraud and deception in accounting, especially in reporting future obligations such as Social Security, and how the monetary system destroys wealth. Those problems are bigger than anything in the corporate world and are the responsibility of Congress. Besides, it’s the standard set by the government and the monetary system it operates that are major contributing causes to all that’s wrong on Wall Street today. Where fraud does exist, it’s a state rather than a federal matter, and state authorities can enforce these laws without any help from Congress.
Second, we do know why financial bubbles occur, and we know from history that they are routinely associated with speculation, excessive debt, wild promises, greed, lying, and cheating. These problems were described by quite a few observers as the problems were developing throughout the ‘90s, but the warnings were ignored for one reason. Everybody was making a killing and no one cared, and those who were reminded of history were reas- sured by the Fed Chairman that “this time” a new economic era had arrived and not to worry. Productivity increases, it was said, could explain it all.
But now we know that’s just not so. Speculative bubbles and all that we’ve been witnessing are a consequence of huge amounts of easy credit, created out of thin air by the Federal Reserve. We’ve had essentially no savings, which is one of the most significant driving forces in capitalism. The illusion created by low interest rates perpetuates the bubble and all the bad stuff that goes along with it. And that’s not a fault of capitalism. We are dealing with a system of inflationism and interventionism that always produces a bubble economy that must end badly.
So far the assessment made by the administration, Congress, and the Fed bodes badly for our economic future. All they offer is more of the same, which can’t possibly help. All it will do is drive us closer to national bankruptcy, a sharply lower dollar, and a lower standard of living for most Americans, as well as less free- dom for everyone.
This is a bad scenario that need not happen. But preserving our system is impossible if the critics are allowed to blame capitalism and sound monetary policy is rejected. More spending, more debt, more easy credit, more distortion of interest rates, more regulations on everything, and more foreign meddling will soon force us into the very uncomfortable position of deciding the fate of our entire political system.
If we were to choose freedom and capitalism, we would restore our dollar to a commodity or a gold standard. Federal spending would be reduced, income taxes would be lowered, and no taxes would be levied upon savings, dividends, and capital gains. Regulations would be reduced, special-interest subsidies would be stopped, and no protectionist measures would be permitted. Our foreign policy would change, and we would bring our troops home.
We cannot depend on government to restore trust to the mar- kets; only trustworthy people can do that. Actually, the lack of trust in Wall Street executives is healthy because it’s deserved and prompts caution. The same lack of trust in politicians, the budgetary process, and the monetary system would serve as a healthy incentive for the reform in government we need.
Markets regulate better than governments can. Depending on government regulations to protect us significantly contributes to the bubble mentality.
These moves would produce the climate for releasing the creative energy necessary to simply serve consumers, which is what capitalism is all about. The system that inevitably breeds the corporate-government cronyism that created our current ongoing dis- aster would end.
Capitalism didn’t give us this crisis of confidence now existing in the corporate world. The lack of free markets and sound money did. Congress does have a role to play, but it’s not proactive. Congress’s job is to get out of the way.







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Monday, February 27, 2012

Has Capitalism Failed? - Ron Paul


Has Capitalism Failed?
Congressional Record—U.S. House of Representatives July 9, 2002

It is now commonplace and politically correct to blame what is referred to as the excesses of capitalism for the economic problems we face, and especially for the Wall Street fraud that dominates the business news. Politicians are having a field day with demagoguing the issue while, of course, failing to address the fraud and deceit found in the budgetary shenanigans of the federal government— for which they are directly responsible. Instead, it gives the Key- nesian crowd that runs the show a chance to attack free markets and ignore the issue of sound money.
So once again we hear the chant: “Capitalism has failed; we need more government controls over the entire financial market.” No one asks why the billions that have been spent and thousands of pages of regulations that have been written since the last major attack on capitalism in the 1930s didn’t prevent the fraud and deception of Enron, WorldCom, and Global Crossings. That failure surely couldn’t have come from a dearth of regulations.
What is distinctively absent is any mention that all financial bubbles are saturated with excesses in hype, speculation, debt, greed, fraud, gross errors in investment judgment, carelessness on the part of analysts and investors, huge paper profits, conviction that a new era economy has arrived and, above all else, pie-in-the- sky expectations.
When the bubble is inflating, there are no complaints. When it bursts, the blame game begins. This is especially true in the age of victimization, and is done on a grand scale. It quickly becomes a philosophic, partisan, class, generational, and even a racial issue. While avoiding the real cause, all the finger pointing makes it dif- ficult to resolve the crisis and further undermines the principles upon which freedom and prosperity rest.
Nixon was right—once—when he declared “We’re all Keynes- ians now.” All of Washington is in sync in declaring that too much capitalism has brought us to where we are today. The only deci- sion now before the central planners in Washington is whose spe- cial interests will continue to benefit from the coming pretense at reform. The various special interests will be lobbying heavily like the Wall Street investors, the corporations, the military-industrial complex, the banks, the workers, the unions, the farmers, the politicians, and everybody else.
But what is not discussed is the actual cause and perpetration of the excesses now unraveling at a frantic pace. This same response occurred in the 1930s in the United States as our policy- makers responded to the very similar excesses that developed and collapsed in 1929. Because of the failure to understand the problem then, the depression was prolonged. These mistakes allowed our current problems to develop to a much greater degree. Consider the failure to come to grips with the cause of the 1980s bubble, as Japan’s economy continues to linger at no-growth and recession level, with their stock market at approximately one-fourth of its peak 13 years ago. If we’re not careful—and so far we’ve not been—we will make the same errors that will prevent the correc- tion needed before economic growth can be resumed.
In the 1930s, it was quite popular to condemn the greed of cap- italism, the gold standard, lack of regulation, and a lack govern- ment insurance on bank deposits for the disaster. Businessmen became the scapegoat. Changes were made as a result, and the welfare/warfare state was institutionalized. Easy credit became the holy grail of monetary policy, especially under Alan Greenspan, “the ultimate Maestro.” Today, despite the presumed protection from these government programs built into the system, we find ourselves in a bigger mess than ever before. The bubble is bigger, the boom lasted longer, and the gold price has been delib- erately undermined as an economic signal. Monetary inflation continues at a rate never seen before in a frantic effort to prop up stock prices and continue the housing bubble, while avoiding the consequences that inevitably come from easy credit. This is all done because we are unwilling to acknowledge that current policy is only setting the stage for a huge drop in the value of the dollar. Everyone fears it, but no one wants to deal with it.
Ignorance, as well as disapproval for the natural restraints placed on market excesses that capitalism and sound markets impose, cause our present leaders to reject capitalism and blame it for all the problems we face. If this fallacy is not corrected and cap- italism is even further undermined, the prosperity that the free market generates will be destroyed.
Corruption and fraud in the accounting practices of many com- panies are coming to light. There are those who would have us believe this is an integral part of free-market capitalism. If we did have free-market capitalism, there would be no guarantees that some fraud wouldn’t occur. When it did, it would then be dealt with by local law-enforcement authority and not by the politicians in Congress, who had their chance to “prevent” such problems but chose instead to politicize the issue, while using the opportunity to promote more Keynesian useless regulations.
Capitalism should not be condemned, since we haven’t had capitalism. A system of capitalism presumes sound money, not fiat money manipulated by a central bank. Capitalism cherishes vol- untary contracts and interest rates that are determined by savings, not credit creation by a central bank. It’s not capitalism when the system is plagued with incomprehensible rules regarding mergers, acquisitions, and stock sales, along with wage controls, price con- trols, protectionism, corporate subsidies, international manage- ment of trade, complex and punishing corporate taxes, privileged government contracts to the military-industrial complex, and a foreign policy controlled by corporate interests and overseas investments. Add to this centralized federal mismanagement of farming, education, medicine, insurance, banking and welfare. This is not capitalism!



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Sunday, February 26, 2012

Pillars of Prosperity FREE MARKETS, HONEST MONEY, PRIVATE PROPERTY


Pillars of Prosperity
FREE MARKETS, HONEST MONEY, PRIVATE PROPERTY

The Economics of a Free Society


Solution
What is the solution?
Most importantly, a new attitude about the role of government is necessary if we expect to solve our problems. As long as we, as a nation, accept the notion that government is the ultimate provider and world policeman, implementing the elusive concept of liberty will be impossible. The degree to which governments are permitted to exert force over the people determines the extent to which individuals retain their liberty as well as the chances for peace and prosperity. Historically, governments have always initiated force against the people with disastrous results. America is the best example of what can happen if that force is restrained, thus maximizing individual freedom and prosperity. Yet today, that wonderful experiment is all but abandoned. We must once again clearly reject the idea that government force and threat of force can be carelessly administered.
Voluntary contracts must be permitted. The trend toward government dominance, interference, and altering of voluntary con- tracts is prevalent and a most dangerous sign. Responsibility to care for one’s self is necessary for a free society to function, and trust that individuals will look out for their own self-interest, even if imperfectly, is required and should be achieved through contractual arrangements. Government interference in voluntary agreements between two parties must be strictly prohibited. Enforcement of those contracts in event of a violation invites the government’s participation in settlement of the dispute. This limited involvement of government in voluntary contracts is necessary in a free society.
The strict limitation of government power imposed by the Constitution must be respected. We must accept the principle that government’s function is not to regulate and plan the economy, protect us from ourselves, arbitrarily attempt to make us better people, or police the world by interfering in the internal affairs of other nations. Its proper function in a free society is to protect liberty and provide for a common defense. When that proper role is assumed, our problems will vanish.
To bring about real changes, we first need to recognize that the politician, per se, is a lot less important than he appears. He is basically a puppet of public opinion that reflects the prevailing ideas of the intellectual and thought leaders. John Maynard Keynes, in one of his more lucid moments, said:
Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.
Media opinion is critical in establishing popular views just as that same media may support or destroy certain political careers. Having accepted the philosophy of economic interventionism and political pragmatism, our society grants political knighthood to the highly paid lobbyists who represent the powerful special interests. But we must remember the lobbyists are the result, not the cause, of our problems. The politician is the puppet of the opinion makers.
Political success is the single goal that drives participants in our political system. No invitations to participants are sent to men of principle, upholders of equal rights, and defenders of the Constitution. Determined political aspirations under today’s circumstances are key to achieving a successful political career—the career being an end in itself. We must be aware that this system of politics is not conducive to bringing about changes necessary to solve our problems. The legislative and political intrigues that con- trol the system for the benefit of the special interests must one day come to an end if personal liberty is to be restored.
The resort to power to control people and the economy must be rejected. Also violence to bring changes beneficial to liberty serves no purpose (unless exerted in true defense under reprehensible conditions). The illicit use of power, even with noble intentions,
has created history’s dung heap of human misery. True change will come through persuasive intellectual influence. If the people refuse to listen, mere recording of significant movements in his- tory will be the limited result of the effort. Yet, not making the effort to persuade the thought leaders to accept freedom and total nonviolence of the state, guarantees that the perpetuation of organized force—the tyranny of the state—will flourish and the suffering will continue for all of us.
Ideas do count; all government action is a result of ideas. It’s incorrect to suggest that freedom ideas must be rejected because they are idealistic—the planned economy is also a result of an idea. It’s only a choice between good and bad ideas. The job of the true believer in liberty is to convince the majority of our leaders that free- dom ideas are superior to the ideas of government coercion. Never can we relax by hoping that the good intentions of the big govern- ment proponents will protect us from the evils of government power that intimidate us all. All politicians, from total statists—Marxists and Fascists—to average conservatives and liberals of today’s Congress, devoutly promise that all their actions are based on good intentions. But it doesn’t matter: Bad ideas regarding the nature and role of government breed bad results and suffering occurs nevertheless. Twisted logic, Machiavellian justifications, excuse making, and short-run benefits can never justify the removal of one iota of liberty from any one person if we intend to live in a free society.
Once the role of government is agreed upon, and government initiation of force is rejected as a legitimate function, the consequences will quickly occur—all positive.
Individuals will reclaim their moral and natural right to their lives and liberty as granted to them by the Creator. The state will be put in its proper place as the protector of equal rights, not the usurper. That in itself should be enough reason to institute a sys- tem of limited government, but the benefits go far beyond the moral justification of true liberty. Prosperity will abound and the chance for war will be greatly reduced.
If this is done, the welfare-warfare state is repealed and spending by the federal government reduced by 80 percent. Special interest politicians will not be served and will vanish. Lobbyists will become mere petitioners for liberty. The budget will be immediately balanced and the debt repaid. No more wealth will be transferred to the poor, the rich, the foreigner, the bankers, or arms manufacturers. Military spending will once again be used for defense and not for the domination of an unofficial American empire.
Money will be honest, the unit precisely defined, and its integrity guaranteed by government or by voluntary contracts. Counterfeiting privileges of the Fed will be abolished and rele- gated to notorious underground figures. Honest money will allow credit to be freely created in the market and not by the privileged banking cartel, yet controlled by the integrity of the market and the convertibility of the dollar. The economic benefits of low-long- term fixed interest rates will be welcomed by all, since credit can then fuel true long-term economic growth.
This scenario sounds utopian, yet it’s more practical than the ill effects of the planned society financed by fiat money and debt creation. It’s difficult to understand the persistence in following the impractical ideas of runaway government coercion.
The philosophy of the free market, sound money, private property ownership, and equal rights, offers the only real “compromise” to the impasse existing in Washington where only token attempts are made to cut the deficit. A truly practical approach to this dilemma can be immediately implemented. I suggest six points:
First, instead of debating forever over whether or not the cuts should be made in domestic welfare or military spending, the answer is simple: Cut both, and quit arguing—that is, if anyone is serious about his declared hostility toward massive deficits.
Second, all votes on spending should be tradeoffs. Welfare to the poor versus welfare to the rich; domestic aid versus foreign aid; aid to friends versus aid to Communists; water projects in the United States versus water projects in Africa; subsidized loans for steel plants in the United States versus those in South America. Sure, many projects will still exist inconsistent with a truly free market but these projects would only be financed by dropping expenditures elsewhere.
Third, centralized planning fails everywhere else so we can expect it to fail with centralized control over bank credit. Sound money, and breaking up the credit/bank cartel, will solve the problem of high interest rates and long-term financing.
Fourth, talks with the Soviets need not stop—only be redirected. But all subsidies to all Communists must end. We can discuss ways to enhance free trade and voluntary cultural exchanges. True friendly unsubsidized relations with even the apparent enemy go a long way toward reducing the chances of war. A nonaggressive purely defensive foreign policy which would prompt troop and missile withdrawals from Europe and elsewhere would be actions much stronger than all the political rhetoric heard surrounding disarmament conferences.
Fifth, equal rights must be guaranteed and enforced regardless of circumstances of race, color, or creed. Equal rights cannot, how- ever, be defined vaguely to include demands on another’s life or property. The goal of freedom must surpass our obsession with material wealth and its forced redistribution.
Sixth, prosperity with freedom for the individual is the only humanitarian system ever offered that prevented mass starvation and suffering. Refusal to accept the free market based on a natural rights philosophy is the most impractical thing we can do. A system that provides sound money, low interest rates, the removal of the bankers’ monopoly over credit, and peace and prosperity will restore trust in the politicians, the money, the future, and in ourselves.
More government cannot possibly offer the solution to the problems we face. Big government is the cause; freedom is the answer. 



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Saturday, February 25, 2012

Pillars of Prosperity FREE MARKETS, HONEST MONEY, PRIVATE PROPERTY


Pillars of Prosperity - Dr. Ron Paul
FREE MARKETS, HONEST MONEY, PRIVATE PROPERTY

The Economics of a Free Society

These selections lay out my views of the proper role of government, namely that it should serve only to protect the life and property of its citizens. I respect the Constitution not because of a nostalgic attachment to an anachronistic document, but because the Founders knew the danger in allowing government to overstep its legitimate functions. It is unfortunate that many Americans today don’t understand the Founders’ wisdom in framing our government on the principles of federalism and republicanism—as opposed to “democracy.” A free society can only work when its members agree that there are certain things left to the discretion of individuals—no matter what a temporary majority might think. In practice this means the government must respect private property and the rule of law, or what is also called free market capitalism.

Current Political Philosophies’ Errors to Result in Political and Economic Crisis
Congressional Record—U.S. House of Representatives September 20, 1984
Mr. Speaker, I have a deep concern for the direction in which our country is going. I have expressed this concern by pointing out the political and economic contradictions that surround us and have suggested that these contradictions merely are manifestations of philosophic errors made by our intellectual leaders.
Although the country currently is more or less in a euphoric mood, I am convinced the errors we are making today will eventually result in a severe political and economic crisis.
I don’t believe anyone precisely knows the future, yet we all make projections as to our expectations. It’s impossible to know exact events and their timing but trends are known to us and certain policies do have specific consequences. Economically definable laws do exist and cannot be repealed. For what it’s worth, I would like to make a few comments about what we can expect if our current beliefs about government’s role are not changed. The odds of a significant change in attitude occurring in Washington in the near future are utterly remote. Repealing the wel- fare-warfare state may be popular with a growing number of frustrated American citizens, but that attitude is not yet reflected in Washington. The constituency for the monolithic state is alive and well in the U.S. Congress. When disagreement exists in areas such as welfare versus warfare, the poor versus the rich, labor versus business, compromise is always reached and both sides receive an increase in funding. This is a policy of utter folly and is tragically locked in place.
Government is literally out of control. Spending, taxes, regulations, monetary inflation, invasion of our privacy, welfarism to both the rich and the poor, military spending, and foreign adventurism around the world will one day precipitate a crisis that will truly test our will to live in a free society. If government were not so much out of control, would not the most conservative President of the last 50 years be able to do something about the runaway deficits? The deficits have tragically only gotten very much worse under Reagan. All the problems we face, high interest rates, inflation, deficits, vicious business cycles with accelerating unemployment are serious problems indeed, but the real threat under the conditions to come will be the potential loss of our personal liberty. Without liberty, prosperity is lost and equality of poverty prevails.
We have a cancer in the land—the malignant growth of big government—and we can ignore it, treating only the symptoms, hoping they are not reliable signs that a horrible disease has struck our nation. But if we do, we are treating our problems as some foolishly deny the early signs of cancer, by taking aspirin and hop- ing the pain to be only that of inconvenience and that the symptoms will go away in the morning. Instead, the pain gets worse requiring more and more narcotics to numb the pain. Magic cures are sought and tried. Although big government is the disease, attempts to solve all the problems by making government even bigger and more intrusive in our lives are continually tried. This will soon end. We cannot forever ignore the root causes. It’s highly unlikely that we’ll reach the 1990s without a convulsion of our economic or political system.
Although nothing goes up or down in a straight line, we can be sure the long term will bring us ever-increasing interest rates— higher with each cycle and over 20 percent before this cycle completes itself in 1986 or 1987. Without the introduction of a commodity money, one with quality—as well as limitation on its quantity—we will never see the return of long-term fixed low interest rates. The reform will come eventually, if we’re to continue to have even a relatively free society. I just hope we don’t wait too long.
Price inflation, although difficult to predict on a month-to- month or even year-to-year basis, will reach unbelievable heights in this decade. Currency destruction, through the insatiable desire to create massive new fiat monetary units, eventually brings higher prices. Wage and price controls will return regardless of whether a Republican or a Democrat occupies the White House. Free market rhetoric will do nothing to protect us from the pressure the admin- istration will receive to “do something,” even if it’s the wrong thing. Nixonian Keynesianism will continue to dominate, and abu- sive people-control in the form of wage, price, currency and credit controls will return, more vicious than ever before.
There will come a day that the world financiers will rush from dollars just as they have recently rushed into dollars, causing even worse chaos in the international financial markets. Without a sta- ble monetary unit, the speculation will continue and worsen. Overreaction is now becoming more commonplace, but this is a predictable consequence of a world gone mad with fiat currencies, debt creation, and overspending.
Massive debt liquidation will come. The early stages have already started. It will occur with old-fashioned defaults, threats of deflation, and further currency destruction through monetary inflation and liquidation of debt with a depreciating dollar. Whether or not the liquidating debt collapse will be dominated by deflation or inflation of the money supply is yet to be determined since that will depend on government actions and many market forces. An inflationary collapse is a more likely scenario—knowing the special interests, the Congress, the administration, and the cen- tral bankers’ unwillingness to face up to the reality of cutting spending, balancing the budget, and curtailing the supply of money. So in spite of all the tough talk, we can expect the Fed to accommodate and reverse any trend toward deflation.
Without a significant change in attitude by the American peo- ple and Congress as to the purpose of government, the choices are horrible; an inflationary collapse or a deflationary one. The form and timing of the collapse is yet to be determined; the event itself is certain. This crisis will come, as others have, because we refuse to face up to reality and live within our means.
The people’s insatiable appetite for the goods of life without providing a commensurate amount of work and effort needed to produce them (while demanding that politicians deliver the loot) guarantees the process will continue. But a penalty will have to be paid. That penalty—a major banking, currency, economic, and political crisis—will hit this nation and the western world, most likely before the 1990s.
The economic hardship, of which we had a taste in 1981 and 1982, will be much worse. That in itself is bad enough news, but historically, when a nation debauches its currency international trade breaks down—today 40 percent of international trade is car- ried out through barter—protectionist sentiments rise—as they have in Congress already—eliciting hostile feelings with our friends. Free trade alliances break down, breeding strong feelings of nationalism—all conditions that traditionally lead to war; a likely scenario for the 1990s, unless our economic policies and atti- tudes regarding government are quickly changed.
Many who concede we are moving in this direction of war, care- lessly believe that the lack of military spending is the problem and insist on new massive military spending as the solution. This only serves the inflationists, the internationalists, the banking elite, and industrialists who benefit from the massive manufacture of military weapons. It ignores the important fact that most military conflicts throughout history have been the consequence of economic events. Economic events, when combined with a foreign policy void of wis- dom and fraught with folly, sets the stage for needless war.
Conservatives are quick to correctly point out that guns don’t cause crime, criminals do, but fail to see that weapons, or the lack of massive weapons, don’t cause war, politicians’ bad policies do. This is a good reason why the current conservative administration should have stopped subsidizing trade and foreign assistance to the Soviet bloc nations and to Red China, which includes nuclear and military technology, instead of increasing it. This is sheer madness.
Massive military spending to stop the spread of communism, which our own taxpayers are also required to finance, contributes to the economic problem of deficits, inflation, and high interest rates. In addition it justifies, in the political world of compromise, increased domestic spending, higher deficits, accelerating inflation and higher interest rates—all compounding the economic prob- lems that started the trouble in the first place.
Depression and war are the needless consequences of politi- cians’ folly. They are prevented by limiting government power, not by expanding it. Today, campaign rhetoric is frequently heard about balanced budgets and reducing the size of the government; witness the success of conservatives in 1980; yet nothing ever hap- pens. The spending, the regulations, the taxing, and the deficits continue. Time is running short, the frustration running high. Hid- ing from reality won’t help; kidding ourselves won’t do. The sooner we admit, “you can’t get blood from a turnip,” the better off we’ll be.



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Friday, February 24, 2012

The Case for Gold - Ron Paul



The Case For Gold
Dr. Ron Paul & Lewis Lehrman



II. A History of Money and Banking in the United States Before the 20th Century
As an outpost of Great Britain, colonial America of course used British pounds, pence, and shillings as its money. Great Britain was officially on a silver standard, with the shilling defined as equal to 86 pure Troy grains of silver, and with silver as so defined legal tender for all debts (i.e., creditors were compelled to accept silver at that rate). However, Britain also coined gold and maintained a bimetallic standard by fixing the gold guinea, weighing 129.4 grains of gold, as equal in value to a certain weight of silver. In that way, gold became, in effect, legal tender as well. Unfortunately, by establishing bimetallism, Britain became perpetually subject to the evils known as Gresham's Law, which states that when government compulsorily overvalues one money and under- values another, the undervalued money will leave the country or dis- appear into hoards, while the overvalued money will flood into circulation. Hence, the popular catchphrase of Gresham's Law: "Bad money drives out good." But the important point to note is that the triumph of "bad" money is the result, not of perverse free-market competition, but of government using the compulsory legal tender power to privilege one money above another.
In 17th-and 18th-century Britain, the government maintained a mint ratio between gold and silver that consistently overvalued gold and undervalued silver in relation to world market prices, with the resultant disappearance and outflow of full-bodied silver coins, and an influx of gold, and the maintenance in circulation of only eroded and "light- weight" silver coins. Attempts to rectify the fixed bimetallic ratios were always too little and too late.1
In the sparsely settled American colonies, money, as it always does, arose in the market as a useful and scarce commodity and began to serve as a general medium of exchange. Thus, beaver fur and wampum were used as money in the North for exchanges with the Indians, and fish and corn also served as money. Rice was used as money in South Carolina, and the most widespread use of commodity money was tobacco, which served as money in Virginia. The pound-of-tobacco was the currency unit in Virginia, with warehouse receipts in tobacco cir- culating as money backed 100 percent by the tobacco in the warehouse.
While commodity money continued to serve satisfactorily in rural areas, as the colonial economy grew, Americans imported gold and silver coins to serve as monetary media in urban centers and in foreign trade. English coins were imported, but so too were gold and silver coins from other European countries. Among the gold coins circulating in America were the French guinea, the Portuguese "joe," the Spanish doubloon, and Brazilian coins, while silver coins included French crowns and livres.
It is important to realize that gold and silver are international com- modities, and that therefore, when not prohibited by government decree, foreign coins are perfectly capable of serving as standard moneys. There is no need to have a national government monopolize the coinage, and indeed foreign gold and silver coins constituted much of the coinage in the United States until Congress outlawed the use of foreign coins in 1857. Thus, if a free market is allowed to prevail in a country, foreign coins will circulate naturally. Silver and gold coins will tend to be valued in proportion to their respective weights, and the ratio between silver and gold will be set by the market in accordance with their relative supply and demand.
Shilling/Dollar Manipulations
By far the leading specie coin circulating in America was the Spanish silver dollar, defined as consisting of 387 grains of pure silver. The dollar was divided into "pieces of eight," or "bits," each consisting of one-eighth of a dollar. Spanish dollars came into the North American colonies through the lucrative trade with the West Indies. The Spanish silver dollar had been the world's outstanding coin since the early 16th century, and was spread partially by dint of the vast silver output of the Spanish colonies in Latin America. More important, however, was the fact that the Spanish dollar, from the 16th to the 19th century, was relatively the most stable and least debased coin in the Western world.
Since the Spanish silver dollar consisted of 387 grains, and the English shilling consisted of 86 grains of silver, this meant the natural, free- market ratio between the two coins would be 4 shillings 6 pence per dollar.3
Constant complaints, both by contemporaries and by some later historians, arose about an alleged "scarcity of money/' especially of specie, in the colonies, allegedly justifying numerous colonial paper money schemes to remedy that "shortage/7 In reality, there was no such shortage. It is true that England, in a mercantilist attempt to hoard specie, kept minting for its own prerogative and outlawed minting in the colonies; it also prohibited the export of English coin to America. But this did not keep specie from America, for, as we have seen, Americans were able to import Spanish and other foreign coin, includ- ing English, from other countries. Indeed, as we shall see, it was precisely paper money issues that led, by Gresham's Law, to outflows and disappearance of specie from the colonies.
In their own mercantilism, the colonial governments early tried to hoard their own specie by debasing their shilling standards in terms of Spanish dollars. Whereas their natural weights dictated a ratio of 4 shillings per 6 pence to the dollar, Massachusetts, in 1642, began a general colonial process of competitive debasement of shillings. Mas- sachusetts arbitrarily decreed that the Spanish dollar be valued at 5 shillings; the idea was to attract an inflow of Spanish silver dollars into that colony, and to subsidize Massachusetts exports by making their prices cheaper in terms of dollars. Soon, Connecticut and other colonies followed suit, each persistently upping the ante of debasement. The result was to increase the supply of nominal units of account by debas- ing the shilling, inflating domestic prices and thereby bringing the temporary export stimulus to a rapid end. Finally, the English govern- ment brought a halt to this futile and inflationary practice in 1707.
But the colonial governments had already found another, and far more inflationary, arrow for their bow: the invention of government fiat paper money.
Government Paper Money
Apart from medieval China, which invented both paper and printing centuries before the West, the world had never seen government paper money until the colonial government of Massachusetts emitted a fiat paper issue in 1690.4-5 Massachusetts was accustomed to launching plunder expeditions against the prosperous French colony in Quebec. Generally, the expeditions were successful, and would return to Bos- ton, sell their booty, and pay off the soldiers with the proceeds. This time, however, the expedition was beaten back decisively, and the soldiers returned to Boston in ill-humor, grumbling for their pay. Dis- contented soldiers are ripe for mutiny, so the Massachusetts govern- ment looked around in concern for a way to pay the soldiers. It tried to borrow 3-4,000 pounds from Boston merchants, but evidently the Massachusetts credit rating was not the best. Finally, Massachusetts decided in December 1690 to print £ 7,000 in paper notes and to use them to pay the soldiers. Suspecting that the public would not accept irredeemable paper, the government made a twofold pledge when it issued the notes: that it would redeem them in gold or silver out of tax revenue in a few years and that absolutely no further paper notes would be issued. Characteristically, however, both parts of the pledge went quickly by the board: The issue limit disappeared in a few months, and all the bills continued unredeemed for nearly 40 years. As early as February 1691, the Massachusetts government proclaimed that its issue had fallen "far short" and so it proceeded to emit £ 40,000 of new money to repay all of its outstanding debt, again pledging falsely that this would be the absolutely final note issue.
But Massachusetts found that the increase in the supply of money, coupled with a fall in the demand for paper because of growing lack of confidence in future redemption in specie, led to a rapid depreciation of new money in relation to specie. Indeed, in a year after the initial issue, the new paper pound had depreciated on the market by 40 percent against specie.
By 1692, the government moved against this market evaluation by use of force, making the paper money compulsory legal tender for all debts at par with specie, and by granting a premium of five percent on all payment of debts to the government made in paper notes. This legal tender law had the unwanted effect of Gresham's Law: the disappear- ance of specie circulation in the colony. In addition, the expanding paper issues drove up prices and hampered exports from the colony. In this way, the specie "shortage" became the creature rather than the cause of the fiat paper issues. Thus, in 1690, before the orgy of paper issues began, £ 200,000 of silver money was available in New England; by 1711 however, with Connecticut and Rhode Island having followed suit in paper money issue, £ 240,000 of paper money had been issued in New England but the silver had almost disappeared from circulation.
Ironically, then, Massachusetts' and her sister colonies' issue of paper created rather than solved any "scarcity of money." The new paper drove out the old specie. The consequent driving up of prices and depreciation of paper scarcely relieved any alleged money scarcity among the public. But since the paper was issued to finance govern- ment expenditures and pay public debts, the government, not the public, benefited from the fiat issue.
After Massachusetts had emitted another huge issue of £ 500,000 in 1711 to pay for another failed expedition against Quebec, not only was the remainder of the silver driven from circulation, but despite the legal tender law, the paper pound depreciated 30 percent against silver. Massachusetts pounds, officially seven shillings to the silver ounce, had now fallen on the market to nine shillings per ounce. Depreciation proceeded in this and other colonies despite fierce governmental attempts to outlaw it, backed by fines, imprisonment, and total confiscation of property for the high crime of not accepting the paper at par.
Faced with a further "shortage of money" due to the money issues, Massachusetts decided to press on; in 1716, it formed a government "land bank" and issued £ 100,000 in notes to be loaned on real estate in the various counties of the province.
Prices rose so dramatically that the tide of opinion in Massachusetts began to turn against paper, as writers pointed out that the result of the issues was a doubling of prices in the past 20 years, depreciation of paper, and the disappearance of Spanish silver through the operation of Gresham's Law. From then on, Massachusetts, pressured by the Crown, tried intermittently to reduce the bills in circulation and return to a specie currency, but was hampered by its assumed obligations to honor the paper notes at par of its sister New England colonies.



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Thursday, February 23, 2012

The Case For Gold - Ron Paul

The Case For Gold
Dr. Ron Paul & Lewis Lehrman



The Present Monetary Crisis
In 1784 in the debate over the money issue, Thomas Jefferson said: "If we determine that a dollar shall be our unit, we must then say with precision what a dollar is." Our Founding Fathers followed that advice and in 1792 the dollar was defined as 371Vi6 grains of silver. From 1792 until August 15, 1971 the dollar was defined as a precise weight of either silver or gold. Since 1971, the dollar has had no definition (officially the definition was not legally rejected until 1976); the advice of Thomas Jefferson has been rejected entirely. For more than 10 years the dollar has been nothing more than a piece of paper with government ink on it.
More and more Americans have come to recognize this, and a loss of confidence in the currency has paralleled this recognition. The monetary authorities say it is unnecessary to have a precise definition of the dollar, claiming: "A dollar is whatever it will buy." This being the case, and the fact that the dollar buys less every day, and approximately one-third of what it bought in 1971, the dollar today is undefinable, and its value is relative. It should be obvious that this loss of definition of what the monetary unit is, is directly related to the financial and economic problems we face today.
If the dollar served as the unit of account for a single South American nation, such as Chile or Brazil, the significance of this change from a precise definition to no definition would be less. However, since World War II the dollar has been the international currency of account, used throughout the world, and held as a reserve currency by most major western nations. Even though this was done unwisely, it worked temporarily up until 1971 when the definition of the dollar was changed.
Until 1971 a dollar was Vss of an ounce of gold, and all nations that held the dollar as a reserve were assured that their dollars could be redeemed for V35 of an ounce of gold—even if American citizens were denied that same right. However, the failure of the U.S. government over many decades (Congress, the Federal Reserve, and the administration) to issue only dollars that could be redeemed led to a massive inflation of the money supply for various political reasons. This forced the United States to default on its convertibility pledge and the dollar became only something the government claimed it was. Residual trust and blind faith have allowed the dollar to serve since 1971 as money, but with ever increasing difficulty. Understanding Jefferson's advice about a precise definition of the dollar, and analyzing the problems of
the last decade, during which time we have had no definition of the dollar, are crucial in our attempt to pave the way for a sound, honest, and reliable monetary system.
From 1792 to 1971 we had an imperfect money and banking system, as will be shown in chapters two and three. But during that time the dollar was always related to gold in one way or another. (It may be argued that the exception was the greenback era during the Civil War, but even then gold circulated and was used to some degree.) Even with its obvious imperfections, the gold dollar worked rather well compared with the past 10 years. Though the Depression of the 1930s was ushered in by government meddling in the economy and irresponsible money management, the gold dollar per se survived, even though debased by 41 percent. Today the dollar is troubled by a general lack of confidence. The market is anticipating that a steady depreciation will continue, thus prompting high interest rates. The purchasing power of the dollar as compared with gold has dramatically decreased over the past decade. By historic analysis, it is clear that 1971 was a significant and unique year in American monetary history.
This being the case, what in particular occurred on August 15, 1971? It was on this day President Nixon ''closed the gold window/' which meant that officially the American government would no longer honor its promise to foreign holders of dollars to redeem those dollars in gold. It became policy what was already known through the world, that the American government had created many more dollars—promises to pay—than it should have and no longer could live up to its monetary commitments by redeeming them in gold. A new agreement, the Smithsonian agreement, which lasted only 14 months, was claimed by President Nixon to be "the most significant monetary agreement in the history of the world/' promising it would create jobs, restore financial stability, help the farmers, stimulate exports, and bring prosperity to all. "Significant" it was, but in an entirely different way, for it was this agreement that ushered in the present period of fiat paper money and monetary chaos. It has brought us the exact opposite of what was intended.
In his statement in 1971 President Nixon, as many uninformed individuals do today, blamed "speculation" for our problems and not the real culprit—government inflation. He further stated on that fateful day "that the effect of this action, in other words, will be to stabilize the dollar." How can we expect those who claimed that rejecting a gold-related dollar would "stabilize the dollar" to advise us now on solving our current financial and monetary crisis? We cannot, because hey are not capable. It is necessary to look elsewhere for the solution. Even though the declaration made in August 1971 was of great significance, overall monetary policy did not change at that particular time. This was essentially an admission of the failure of the Federal Reserve's discretionary monetary policy it had followed in various forms since 1914. Although previous deflations (particularly 1929 and 1932), and the fact we were spared from the physical destruction of World War II, prolonged the life of the dollar, the inevitable failure of
discretionary policy was known by many for a long time. When the record of the past 10 years is examined, it is clear that indicting the monetary arrangements of the past decade is justified. It
is clear that discretionary monetary policy, without any assistance from gold, leads to serious economic instability, lack of capital formation, high interest rates, high price inflation, and intolerably high levels of unemployment. The climax of this policy came in October 1979 when the Federal Reserve was forced to change some of its management techniques. Due to international pressure, weakness of the dollar, gold at $600 an ounce, and silver over $25 an ounce, the Federal Reserve adopted a policy directed toward concentrating more on money supply than on interest rates. Monetarism was to be given a chance at solving the problems of inflation. The record from 1979 to the present offers no real hope and in many ways confirms the contention by many that the only solution will come when we have a redeemable currency.
The money supply since 1971 has been growing at unprecedented rates. Since inflation is an increase in the supply of money and credit, this is of critical importance. It tells us what many economic historians knew even before 1971, that when government is granted an unlimited power to create money out of thin air as the Federal Reserve has, that power is always abused. For various political reasons, excessive money is always created, bringing only trouble to the innocent citizens not receiving the "benefits" of inflation. It is tempting to pursue inflationary policies, since during all stages of inflation special interest groups benefit at the expense of others. History shows this temptation has never been resisted and the record of the money growth of the past decade confirms this to still be the case.


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Wednesday, February 22, 2012

Minimum Understanding


Minimum Understanding

by DON BOUDREAUX on FEBRUARY 13, 2012
Here’s a letter to the Gray Lady:
Noting that “New York is an expensive place to live,” you call upon the legislature there to raise New York’s hourly minimum-wage from $7.25 to $8.50 (“Raise New York’s Minimum Wage,” Feb. 13).
In the same spirit of demanding that government improve people’s economic well-being simply by ordering that people be paid more, allow me to make a similar plea on your behalf.
The newspaper business today is in difficult straits.  So I hereby call upon the legislature in Albany to force you and other newspapers in New York to raise your subscription and advertising rates by 17.2 percent (the same percentage raise that you want to force low-skilled workers to demand from their employers).  Voila!  If your economic theory is correct, your profits will rise.  And the magnitude of these higher profits, we can assume (just as you assume in the case of low-skilled workers), will be greater than any negative consequences that might be unleashed by such legislative interference in your ability to determine the terms on which you sell your services.
You can thank me by giving me my own column, and pay me out of the extra profit that you’ll earn as a result of my petitioning the legislature on your behalf – a petition that, as you say about efforts to raise the minimum-wage, “should not be a controversial measure.”
Sincerely,
Donald J. Boudreaux
Professor of Economics
George Mason University
Fairfax, VA  22030

Jason Lewis Interview of James G. Rickards

Jason Lewis Interview of James G. Rickards, Author of Currency Wars, the Making of the Next Global Crisis

gcnlive.com/podcast/jasonLewis/0109123.mp3




If you are having trouble with the link, go to archives, Jan 9 , 2012 3rd hour.

Monday, February 20, 2012

Crisis & the Law with Richard Epstein


Crisis & the Law with Richard Epstein

Considered one if the most influential legal thinkers of modern times, Richard Epstein brings his libertarian views to bear on the current financial crisis --government incentives were perverse, so the actions of the private parties were perverse-- and rates the performances of George Bush and Barack Obama in their responses to the crisis. He speaks to the importance of contracts and the constitutionality of the expo facto taxation on AIG executives and the Employee Free Choice Act embraced by President Obama. Finally he speaks of his personal and professional dealings with Barack Obama when they were law school faculty mates at the University of Chicago.
 




Sunday, February 19, 2012

“F” as in Fed


“F” as in Fed.


The Federal Reserve, America’s fatally conceited monetary central planner, is not terribly popular these days—which is cause for hope—and now we have a report card on the entire Fed era that strongly supports the view that we’d be better off without it. At the very least, as the authors suggest, the burden of proof is squarely on those who would retain the central bank.
The report card comes in the form of a working paper from the Cato Institute: “Has the Fed Been a Failure?” by George A. Selgin, William D. Lastrapes, and Lawrence H. White.
The authors state in their abstract:
As the one-hundredth anniversary of the 1913 Federal Reserve Act approaches, we assess whether the nation’s experiment with the Federal Reserve has been a success or a failure. Drawing on a wide range of recent empirical research, we find the following: (1) The Fed’s full history (1914 to present) has been characterized by more rather than fewer symptoms of monetary and macroeconomic instability than the decades leading to the Fed’s establishment. (2) While the Fed’s performance has undoubtedly improved since World War II, even its postwar performance has not clearly surpassed that of its undoubtedly flawed predecessor, the National Banking system, before World War I. (3) Some proposed alternative arrangements might plausibly do better than the Fed as presently constituted. We conclude that the need for a systematic exploration of alternatives to the established monetary system is as pressing today as it was a century ago.
In light of the Fed’s defined mission—monetary support for economic growth, stable prices, maximum employment—the authors use the following criteria to assess its record: “the relative extent of pre- and post-Federal Reserve Act price level changes, pre- and post-Federal Reserve Act output fluctuations and business recessions, and pre- and post-Federal Reserve Act financial crises.” The Fed has done poorly on every count. No one familiar with the Mises-Hayek critique of central planning will be surprised. Central banking is not equivalent to comprehensive planning of the economy, but money is the most pervasive good and monetary engineers suffer the same insurmountable ignorance as any central planner.
I can only hit the paper’s highlights here.

Inflation

Selgin et al. pronounce the Fed a dismal failure in controlling inflation. “[F]ar from achieving long-run price stability, it has allowed the purchasing power of the U.S. dollar, which was hardly different on the eve of the Fed’s creation from what it had been at the time of the dollar’s establishment as the official U.S. monetary unit, to fall dramatically.”
The value of the dollar was essentially stable from the late eighteenth century to the second decade of the twentieth century! “A consumer basket selling for $100 in 1790,” they write, “cost only slightly more, at $108, than its (admittedly very rough) equivalent in 1913.”
And since that time? “[T]hereafter the price soared, reaching $2,422 in 2008. . . . [M]ost of the decline in the dollar’s purchasing power has taken place since 1970, when the gold standard no longer placed any limits on the Fed’s powers of monetary control.”
The dollar has lost 95 percent of its value since the Fed came into existence.

Deflation

The authors say that since the Great Depression the Fed has rid the economy of deflation (defined as falling prices), which was a feature of the late nineteenth-century economic landscape. Economists, including Fed chairman Ben Bernanke, generally deem deflation as something to be avoided at almost all costs, so they would give the Fed kudos in this respect. But Selgin et al. point out (as have others, such as Steven Horwitz, in the January/February 2010 Freeman) that what matters is not deflation per se but the kind of deflation:
Harmful deflation—the sort that goes hand-in-hand with depression—results from a contraction in overall spending or aggregate demand for goods in a world of sticky prices. As people try to rebuild their money balances they spend less of their income on goods. Slack demand gives rise to unsold inventories, discouraging production as it depresses equilibrium prices. Benign deflation, by contrast, is driven by improvements in aggregate supply—that is, by general reductions in unit production costs—which allow more goods to be produced from any given quantity of factor and which are therefore much more likely to be quickly and fully reflected in corresponding adjustments to actual (and not just equilibrium) prices.
Historically, benign deflation has been the far more common type.
During roughly the last quarter of the nineteenth century, prices in the United States declined 37 percent—1.2 percent a year on average. That’s what the Fed has saved us from, thank you very much.

Frequency and Duration of Recessions

Again, the pre-Fed record is better than the Fed’s performance. Drawing on the latest research, the authors conclude:
[A]lthough contractions were indeed somewhat more frequent before the Fed’s establishment than after World War II (though not, it bears noting, more frequent than in the full Federal Reserve sample period), they were also almost three months shorter on average, and no more severe. Recoveries were also faster, with an average time from trough to previous peak of 7.7 months, as compared to 10.6 months. Allowing for the recent, 18-month-long contraction further strengthens these conclusions.
Moreover, the Fed has violated traditional standards by bailing out insolvent banks. Selgin et al. reject the “too big to fail” doctrine, arguing that the fear-mongering about “systemic risk” is unsubstantiated. Bailing out the creditors of insolvent institutions, as the Fed did during the current financial crisis, has increased the future exposure of the public by reinforcing moral hazard—encouraging excessively risky behavior by creating the expectation of government rescue. In the process the Fed has gone from lender of last resort to allocator of capital—an ominous move toward central planning.
The authors do not endorse the pre-Fed system, which was heavily regulated by the national and state governments. Indeed, for most of American history interstate and intrastate branch banking was illegal, producing an industry of uncompetitive and undiversified banks.
Nor do they explore the free-banking alternative, though Selgin and White are well-known advocates of it. Instead they confine their analysis to various rules that would take away the Fed’s discretionary power over the money supply. These would be improvements but a far distant second to free banking.
The authors leave no doubt that “the Fed’s poor record calls for seriously contemplating a genuine change of regime.”