The Fed Fears Rising Market Interest Rates

The Fed Fears Rising Market Interest Rates

Donald Trump has not had an easy, straight-forward relation with the Federal Reserve. He has both claimed to be a low-interest rate person and accused the Fed of keeping interest rates too low for political reasons. He has also expressed regret at appointing Jerome Powell and the White House has even explored the possibility of firing or demoting the Fed chairman . Apparently, President Trump’s intention was that Powell was to keep interest rates low, and he is not at all happy with the Fed’s policy of allowing them to increase. But why, since the Fed is not immune to political pressure , has the central bank allowed rates to rise in the face of presidential opposition?

In fact, it is likely that the market rate of interest is rising — for whatever reason — and the Fed has to respond in ways that keep a lid on credit creation so as to avoid bubbles. That is, in response to rising market rates, the Fed must raise rates on reserves lest its member banks flood the economy with new loans — and with money.

This is now a possibility because it looks like there is now an increased demand for loans. After the long years of the Great Recession, private companies are finally beginning to expand business again and demand more loans from the banks. What has caused this change is not an easy question to answer. It might be that there is now less regime uncertainty. The financial crisis of 2008 ushered in an era of increased interventionism on all fronts, which is hardly conducive to a good investment climate. Now, the current administration is perceived – rightly or wrongly – to be more friendly to free markets. Investors therefore feel more confident in expanding business. Furthermore, the many government interventions following the financial crisis kept alive businesses and maintained malinvestments that should have been liquidated at the outset of the Great Recession. So, instead of a short, sharp depression it took several years before capital goods were rearranged and markets adjusted to more realistic expectations of consumer demand. One of the main causes of uncertainty was the Fed’s many interventions in the economy, and it’s decision to normalize policy in 2014 — in spite of the fact this policy is only be carried out at extremely slow speed — is one of the main reasons the market is waking up again.

But whatever the causes may be, there is now more optimism in the market and an increased demand for loans. And since the money supply is so far not expanding at a particularly fast rate (see here for the Rothbard-Salerno money supply measure), and there is no increase in the savings rate to offset the increased demand for loans, private businesses are bidding up the price of credit.

Money-supply growth is relatively low:


U.S. personal saving rate 2008-2019:


The Fed Follows Along

In this environment, the Fed simply has to follow the developments in the market and raise its own rates unless it wants to start a new credit expansion.

Hayek described this mechanism in 1929 (p. 167ff): with a greater demand for loans on the part of business, the banks, operating on the fractional reserve principle, would have a choice: raise the interest rate to equilibrate the investment demand with the supply of savings, or issue new fiduciary media at the old rates — or at any rate, at interest rates lower than they would have been had they only been set by the demand for and supply of savings. So far, the banks have refrained from issuing fiduciary media, in large part because it is still a good deal to keep reserves at the Fed (and they are in any case not yet in a position to create new fiduciary media – see below).

The following chart illustrates the point: for the longest time both the market interest rate, illustrated by the 3-month LIBOR, and policy rates were virtually flat. Then in late 2015, LIBOR started rising ahead of the federal funds rate.

Market rate of interest versus policy rates:


There is a complicating factor: the amount of excess reserves has been steadily declining for two years now. Does this not mean that the Fed has failed in its attempt to neutralize the effects of its unconventional policies and that we’re in the midst of a huge credit expansion? After all, the amount of bank reserves with the federal reserve system has fallen from a high of nearly $2.7 trillion in August 2014 to about $1.5 trillion in May 2019. However, all demand deposits are still fully backed by reserves, if only barely so, and the reduction in excess reserves has therefore not caused a credit expansion. Rather, it should be seen in the same way as a private individual who has hitherto kept a large proportion of his wealth in the form of cash but then decides to invest it. Such behavior is precisely what we should expect when the economic environment is improving and business is picking up: During financial crises and depressions, people and businesses will pile up money balances because they are increasingly uncertain about the future. And when conditions improve again, and people begin to feel more certain, they will draw down their accumulated cash balances, and either consume more or invest their funds in the economy. . (For more on this, see Hoppe’s article "The Yield from Money Held.")

The banks function in precisely the same way, with excess reserves being the analogue of increased cash balances. So long as the banks operate at or above 100% coverage of demand deposits, their lending out excess reserves can no more be seen as credit expansion than can the decision of an individual to invest his accumulated cash balance.

Reserve balances (blue) and demand deposits (red):


Prospects for the Future

This does not mean that all is well. For example, a lot of businesses (e.g., Netflix) have been financed and refinanced when the interest rate was extremely low. Will they be able to transition to an environment where debt isn’t that cheap? And just how many zombie companies have been kept alive by artificially low interest rates?

More importantly, the market rate of interest has reversed its upward trend and is now falling again, which indicates that the budding boom of the last few years is already over. While the Fed appears to be oblivious to the possibility of an economic downturn, others are not so sanguine. The American trucking industry is in dire straits as demand for trucking has evaporated, suggesting in turn that there is significantly less business activity now than one year ago. Significantly, the Fed may inadvertently strengthen the downward trend, as the spread between the market rate of interest and the Fed’s policy rates has narrowed, while the Fed has chosen to maintain current rates . This means that it is now a better investment for banks to increase their balances at federal reserve banks than to loan out money, and the data seem to indicate that they have done so, as reserve balances have increased by about $125 billion from May 1 to June 12.

Far from being upset with his central bank, then, President Trump should recognize that the Fed's lack of dovishness has allowed more market freedom in setting the interest rate in a long time. This does not mean that God’s in his heaven and all’s right with the world. If the market interest rate continues to fall without any action by the Fed, we can expect liquidity to drain fast from the market, as the Fed rewards the banks for just sitting on their cash.

To pursue a more sustainable policy, the practice of paying interest on excess reserves must be ended. To do this without causing credit expansion, it is necessary to neutralize the reserves. This can perhaps be done by open market operations, as possible Fed nominee Judy Shelton has suggested, but a different approach is preferable: now is an excellent time to enforce a 100% reserve requirement on the banks and thereby prevent future credit expansion. While this may cause some disruption to the banking sector, the negative impact can be lessened by, for instance, at the same time liberalizing the financial sector, thereby significantly reducing compliance costs and increasing the possibilities for productive investment, or by shelving all talk of trade wars and tariff increases. Once that is done, there will be no reason to keep the Federal Reserve around and it will be a comparatively easy task to eliminate the central bank and finally remove the state entirely from the business of producing money.

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Goodbye Transitory Inflation, Hello Omicron!

12/03/2021Robert Aro

All great narratives must come to an end. No one can predict whether the transitory inflation narrative will ever return. But for now, the Federal Reserve and Treasury have officially retired its banner slogan.

Yesterday The New York Times reported Treasury Secretary Janet Yellen saying:

I am ready to retire the word transitory… I can agree that that hasn’t been an apt description of what we are dealing with.

This sounds like a light admission of a mistake done by the central planning authority, who, for several months, told us this inflation was believed to be transient in nature. Errors like these illustrate the problem with planning since there is no negative outcome or cost the planner incurs for making such errors.

Yellen’s response was a follow up to Federal Reserve Chair Jerome Powell, who earlier in the week testified before Congress, quoted by CNBC:

…it’s probably a good time to retire that word (transitory) and try to explain more clearly what we mean.

Thus, Powell and Yellen have both explicitly laid the transitory inflation to rest. But as any storyteller knows, the close of one narrative allows for the opening of another. According to Yellen, the spread of new variants has “changed that calculus,” going on to say:

Now the new variant, the Omicron variant — the pandemic could be with us for quite some time and hopefully not completely stifling economic activity, but affecting our behavior in ways that contribute to inflation.

Paying no attention to the Fed’s $8.7 trillion balance sheet or the $21 trillion M2 money supply, the focus is centred on a still little understood virus.

And the more we read the better (or worse) it gets. The New York Times goes on to explain Yellen’s position and how Omicron could spell trouble in the future:

It could further snarl supply chains and fuel inflation, she noted, but if it dampened economic growth it could blunt price increases. She warned, however, that it could cause “significant problems.”

Strangely enough, Congress never asked Powell about the new variants. But New York Fed President John Williams spoke about them, noting they could:

…slow economic activity and exacerbate inflationary pressures.

With the end of the transitory inflation narrative and the start of the new variants narrative, it’s been quite the week for our economic planners. An exhaustive list of what can be learned from this becomes too onerous to compile. But what becomes clear is that there will always be something which threatens the stability of the economy. There will always be a new problem which attacks the vulnerable, the weak, and the poor. There will always be that external force which can destabilize America, its working class, and its working poor. If it’s not clear by now, that exogenous economic problem is called the Federal Reserve. And, the crisis will never resolve so long as they continue to cause economic booms with one hand and economic busts with the other.

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How Lincoln Dealt with "Draft Dodgers" and Other Dissenters

11/30/2021Ryan McMaken reader Brad Cole writes:

A great-great-grandfather Montgomery Cole, got imprisoned during the Civil War because of speaking out against the draft policies. His arrest, along with others, resulted from President Lincoln's invoking his Proclamation 94 in September of 1862. 

As for a bit of background, Montgomery Cole was 39 years old when arrested. He was married with six children (my great-grandfather came along two years after the Civil War) and nearly 100 acres of fields and livestock to work. He had registered correctly for the draft and was legally excused by furnishing a substitute. Scanned copies of his draft documents are below.

President Lincoln's Proclamation enabled Montgomery Cole's arrest by suspending the writ of habeas corpus during the War—no charges necessary for an arrest. In short, Grandfather Cole and other Democrats in the rural part of the northeastern Pennsylvania (Columbia County) area believed that the prolonged War, particularly the draft, caused disproportionate hardships on northern Columbia County, Pennsylvania's people, and their families. The men were undoubtedly not Confederate sympathizers. However, he and the others arrested got accused by Republicans of discouraging volunteer enlistments and criticizing the draft policies.

Many of today's citizens don't know—or care—that in 1864 Lincoln was not necessarily the favored candidate for all. In Columbia County, that was certainly the case. Democrat rival, General George McClellan, carried every district in the County except for the Town of Bloomsburg, Catawissa, and Berwick. The farming communities voted overwhelmingly for McClellan. The vote tally in the County was 3,367 for McClellan and 1,914 for Lincoln. 

The horrible injustice of military arrest without charges and imprisonment of Cole and his fellow Democrats got named the "Fishing Creek Confederacy"—catchy name but a misnomer. To boil down a complicated story to its essence, it was the wrongful treatment of men who were otherwise upstanding community members.

Montgomery Cole's release and the Oath of Allegiance he signed are also in my possession (attached with draft documents). It is moving to hold the papers in my hand and imagine what being arrested and imprisoned without charges was like for him and the other Columbia County men. Shortly after the War's end, Cole was elected a County Commissioner and served from 1866 to 1869. He died of Tuberculosis, known then as consumption, at the young age of 51 in 1877.

As an aside, I turned 18 two years before the draft during the Vietnam War got abolished. Thankfully, I did not have to face getting drafted to head off to an unpopular war by then.


Sep. 24, 1862 proclamation by President Abraham Lincoln:

A Proclamation

Whereas, it has become necessary to call into service not only volunteers but also portions of the militia of the States by draft in order to suppress the insurrection existing in the United States, and disloyal persons are not adequately restrained by the ordinary processes of law from hindering this measure and from giving aid and comfort in various ways to the insurrection;

Now, therefore, be it ordered, first, that during the existing insurrection and as a necessary measure for suppressing the same, all Rebels and Insurgents, their aiders and abettors within the United States, and all persons discouraging volunteer enlistments, resisting militia drafts, or guilty of any disloyal practice, affording aid and comfort to Rebels against the authority of United States, shall be subject to martial law and liable to trial and punishment by Courts Martial or Military Commission:

Second. That the Writ of Habeas Corpus is suspended in respect to all persons arrested, or who are now, or hereafter during the rebellion shall be, imprisoned in any fort, camp, arsenal, military prison, or other place of confinement by any military authority of by the sentence of any Court Martial or Military Commission.

In witness whereof, I have hereunto set my hand, and caused the seal of the United States to be affixed.

Done at the City of Washington this twenty fourth day of September, in the year of our Lord one thousand eight hundred and sixty-two, and of the Independence of the United States the 87th.

Abraham Lincoln



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How Student Loans Drove Up Tuition Costs

11/30/2021Grace Walter

The American federal government from its inception has expressed powers that they do not have the right to express. One of these powers they respectively gave themselves is the power to give out student loans to practically anyone who plans to go to college and needs a loan. Currently, as of November 2021, 44.7 million Americans have student loan debt; 42.3 million of those individuals are in debt to the federal government. The Biden administration has graciously forgiven, so far, $11.5 billion in student loan debt for over 580,000 borrowers. Many would say this is a victory for these individuals. Truthfully this is not the case. Three major consequences arise from the government loaning money to Americans and canceling or forgiving the debt that occurs from the loaning of money.

  1. Ronald Regan’s former education secretary William Bennett supported the idea that increases in federal aid only help raise the price of tuition for colleges and universities because they become confident that the federal loans and aid will help “cushion” the increase. This assertion is not far from the truth according to data from recent years. In 2016 Grey Gordon and Aaron Hedlund conducted a “quantitative model of higher education” to explain the rise in college tuition from 1987 to 2010. From 1987 to 2010 there was a 106 percent increase in overall tuition and 102 percent of that increase is solely because of changes to the Federal Student Loan Program (FSLP). They concluded that the “Bennett'” theory has validity based on the cumulative data they reviewed. Stephanie Riegg and Claudia Goldin analyzed the difference in tuition between T4 schools, which participate in Title IV of the Higher Education Act of 1965, and NT4 schools, which do not participate. They controlled for the program, county, year-fixed effects, enrollments, program length, etc., and they found a “large and significant” difference between the two kinds of schools’ tuition. T4 schools charge 78 percent more than NT4 schools. This “Bennett” hypothesis has been proven correct through an honest review of tuition prices for decades.
  2. There is a massive moral hazard when it comes to forgiving student loan debt and government loaning money to individuals. For one, forgiving the debt of those who made poor decisions is not the role of the government. It is not ok nor fair for the government to reward a person for making poor financial decisions. Let’s say a certain individual ends up with $150,000 in student loan debt, but because they choose a poor degree they only end up making $60,000 dollars a year. It will take them over a decade to pay that off. Everyone can acknowledge this is not an ideal situation, but the consequences of their choices are theirs to bare, not others. Elizabeth Warren (M-D) and Bernie Sanders (V-I), who are notorious statists, have proposed new taxes on the “rich” to make up for the cost of forgiving debt. They believe that stealing from the rich is somehow justifiable because it helps those drowning in student loan debt. What they don’t seem to get is this forces responsible and smart individuals who either didn’t take out loans or already paid theirs off to pick up the slack of those who made poor decisions consciously and voluntarily. It is not the financial responsibility of any individual to make up the money for a collective group of people who made poor decisions. If the government continues to forgive student loan debt as they are now, and if they soon do it on a more massive scale, it will only signal to the irresponsible public they can get away with these poor financial choices. Young students will continue to borrow as much as they can because the government has practically incentivized them to do so.
  3. All of these decades of loaning and forgiving the government has created a massive dependence where millions of people rely every year on the government to be their guaranteed loan service. This has granted a great amount of power to the federal government while simultaneously destroying the financial condition of millions of people throughout the years. The federal government has also created an outstanding monopoly on student loans. The percentage of all student loans held privately is 7.71 percent. Student loan debt sets up your financial stability for the rest of your life after you get out of college. If you did not make the integral choices in college you will suffer to pay back the debt you owe. This only brings power to the government and its goal to make you forever dependent. The outcome of the government getting involved in student loans and subsidizing postsecondary education progressively more and more has had dramatic effects that have only gotten worse the more government has intervened. Taxing rich Americans and just throwing money at the problem will not fix the initial issues. We need to address the extremely high prices of higher education and why college has been put on a pedestal as the only legitimate option after high school. We also need to instill in our youth the value of financial responsibility, which saves us from potentially taking out deadly loans.

Overall, what truly needs to happen is a mass exodus from the government. They should have never had the power to ever provide loans in the first place. A gradual step back from recent expansions in who, why, and how much you can get would help every American financially and it would help them think harder on what they really want to do with their future. Unfortunately, since the government has raised prices so much, the amount of people who can actually afford to go to these universities will drop sharply. The government needs to assess the issue and see the carnage they have created. The government first needs to stop loaning out more than what they know the individual can pay back. Even better, they should end the Federal Student Loan Program all together, but that’s a much greater step. Another pragmatic solution would be tax cuts for those with crippling student loan debt so they have some financial hope. Something else that should have been done decades ago is to teach individuals not to find out what you want to do after college, but before you go. There are plenty of jobs you don’t need a meaningless degree for. There are options outside of our nation's colleges and universities.

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American Troika

11/29/2021Robert Aro

It’s called the troika. It sounds like communism. It looks like communism. But is it true communism?

Wall Street Journal explains:

The Fed’s vice chair, along with the New York Fed president, is part of the inner circle of advisers—known as the troika—that shape the agenda for monetary-policy deliberations by the Fed’s rate-setting committee.

America’s Federal Reserve System operates with 12 branch locations across the country, employing roughly 20,000 people. Although often thought of as a clandestine organization, rich in both history and lore, at the heart of it, the Fed is nothing more than a bureaucratic organization. Like all bureaucracies, decision making has to be made somehow.

In the case of the Fed, the twelve member Federal Open Market Committee (FOMC) is the ultimate decision maker for monetary policy. But within the FOMC exists a troika, or the three most important central bankers in the country, if not the planet.

Here’s the opportunity to get to know them:

Chair Jerome H. Powell. By many accounts, Powell oversaw (or helped create) one of the worst economic periods in American history marked by high inflation, high unemployment, and government/Fed money creation programs in the trillions. I’ve dedicated countless articles quoting Powell, who often appears to show very little understanding of economics.

Despite a meager salary of $200,000 a year, the head of America’s central bank is estimated to have a net worth of $50 million.

Should congress approve of Biden’s picks, Lael Brainard will become the Fed’s Vice Chair and an extremely influential person in Washington. Last month she was mentioned when I asked whether the Fed needed more progressives on its payroll. Unlike Powell, Brainard is a learned economist, earning her MS and PhD from Harvard.

The third member of the troika, PhD holder from Stanford, is New York Fed President John C. Williams. Last but hardly least, his job title commands a permanent seat in the FOMC. Seldom seen in the media, and despite being unrecognizable to most Americans, the President of the New York Fed is probably more powerful than Powell himself. As explained, the:

New York Fed has several unique responsibilities, including conducting open market operations, intervening in foreign exchange markets, and storing monetary gold for foreign central banks, governments and international agencies. Foremost among its functions is the implementation of monetary policy, one of the three missions of the New York Fed. The other two are supervision and regulation, and international operations.

That explains how monetary policy is set; in a closed-door meeting, decisions such as how much money should be in the system, interest rate setting, and inflation guidance is deliberated. Within the select few stands the three members troika, as noted above, who have the most influence.

Is this communism per se?

One can easily get sidetracked into debates over whether a policy or practice is communism, socialism, fascism or any other kind of -ism. At the sake of getting sidetracked, what can be said is that the central bank is anti-capitalistic, embracing collectivism, not individualism.

If money creation was left to capitalism, where private individuals could own the means of producing money not constrained by banking regulation, currency laws, and deposit insurance, the country would look a lot different than now. There would be no bank bailouts, no government giveaway programs, and far less disparity between the rich and the poor. Who would pay for our wars, our prisons, the police state and vaccinations, our education system and student loan program? We can only guess. Since there is no Federal Reserve in a truly free market, who would be in a position to fund the system?

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The Effects of Pandemics on Trade and Private Property

11/29/2021Lipton Matthews

Trust is a crucial ingredient for economic growth and innovation. Without the engine of trust fueling, the free flow of ideas innovation would come to a scurrying halt. Before people can cooperate in business and research, they must harvest an environment that cultivates trust. Through the cross fertilization of different viewpoints, we reap the fruits of innovation. Silicon Valley, Hollywood, and Wall Street would not exist if creative minds were unwilling to share ideas. Due to the seminal role of trust in stimulating innovation, we ought to be contemplating the propensity of covid-19 to slow the progress of innovation by impeding trust.

A stronger radius of trust enables a wider diffusion of ideas, but as research reveals the intensity of diseases adversely affects the capacity for large-scale trust by limiting social networks. Deciding to only trust family and close friends narrows the scope for innovation. As Mark Granovetter argues in a landmark paper most opportunities are available to us because of the strength of weak ties. Family and friends have access to similar information, whereas strangers offer new insights. However, the broad networks required to sustain innovation diminish in infectious environments.

Usually, the journey to unleashing innovation necessitates traveling, but in the context of a pandemic like covid-19, people are hesitant to travel, even when failure to do so can deprive them of possible opportunities. Of course, meetings are facilitated by technology, but physical interactions create a more fertile ground for intimate connections that could lead to breakthroughs. A compelling piece by Carl Benedikt Frey published in the Sloan Management Review suggests that online meetings cannot replace the dynamism of physical engagement as a catalyst for innovation. Frey writes, “And while it is true that the web, together with technologies like Zoom and Slack, helps to explain the growing geographical distance between coapplicants on patents even before the pandemic, collaborators have to meet somewhere to build a relationship and generate new ideas in the first place…. Studies show that many new ideas and projects are launched by people meeting at conferences.”

Innovation thrives in social environments, however, since the advent of covid-19 the message of social distancing has been penetrating the atmosphere. Although, promoted as a mechanism to avert fatalities, by minimizing social interactions social distancing hampers innovation. Prior to covid-19 engaging strangers in small talk that led to business collaborations was the norm, yet today we are discouraged from socializing. Under the present regime citizens are earnestly encouraged to express greater clannishness by avoiding strangers to forestall the spread of covid-19.

Employing social distancing to reduce transmissions seems like a laudable goal, but it undermines generalized trust. Generalized trust suggests that we approach people impartially as individuals. Though, today unfortunately, the assumption is to treat the people we meet as potential transmitters of covid-19. Covid-19 is depicted as the world’s most serious issue, so in the short-term containing the disease appears to be a suitable strategy, yet in the long-term we will struggle to rebuild generalized trust.

It will be challenging to alter the legacy of asociality embedded by covid-19. History demonstrates that pandemics impose a long-term imprint on culture and institutions. According to the account of researchers in the paper, “COVID-19 and Development: Lesson from Historical Pandemics,” punitive approaches instituted to confront the perils of covid-19 will be achieved at the expense of social capital and by extension impede long-run development. Using the example of the Black Death they submit that pandemics foment mistrust and intensify social conflicts. Quite appropriately they outline actions pursued by governments that foment mistrust. These factors include:

Propaganda: "Propaganda that exaggerates the severity of the pandemic and media censorship that forbids free discussion of the pandemic." According to Democracy under Lockdown by Freedom House, ninety-one countries experienced new or increased media restrictions on their news media as a result of the outbreak.

Seclusion policies: This has enabled domestic agents to suppress free competition by exerting political influence in opposing the building of strong institutions and developed financial markets.

Deterioration of institutions: In relation to institutions, objections have been raised concerning the flagrant abuse of electoral rules and an upsurge in police violence.

Imposition of travel restrictions: In the report of "COVID-19 and Human Rights: We are all in this together," the United Nations acknowledges that restricting freedom of movement is a practical and necessary measure to stop virus transmission, but also cautions that such restriction should be proportionate and nondiscriminatory given that effective testing, tracing, and targeted quarantine measures are available.

Violations of privacy: In some countries, the personal information of individuals who are tested positive for coronavirus is disclosed in public media including surname, nationality, place of work, home address, hospital, location history, close contacts, and the relationships between them. Sometimes, similar information on their immediate family members is also released. This leaves people who fall sick with covid-19 vulnerable to discrimination. 

These findings are consistent with the results of a 2020 paper published in Health Economics articulating how the long-term effects of the Spanish flu negatively affected economic growth and its implications for development. Also insufficiently explored is the impact of the pandemic on civic life. Social groups engage in a wide array of philanthropic and professional pursuits. Many of their engagements entail direct interactions and cannot be conducted online. For instance, it is more effective to mentor students in person, especially when beneficiaries reside in areas with low levels of internet penetration. Invariably, then covid-19 strips the disenfranchised of necessary social capital to achieve upward mobility.

In sum, measures to halt the proliferation of covid-19 may seem plausible in policy circles, however they portend adverse long-term consequences for the development of trust and innovation. But if logic prevails, maybe politicians will appreciate that the costs of anticovid policies outweigh the benefits.

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Thanksgiving Table Talk

11/25/2021Robert Aro

This Thanksgiving, may you never forget the words of the United States of America’s Vice-President Kamala Harris, as reported by Fox News:

Prices have gone up and families and individuals are dealing with the realities of the bread costs more, the gas costs more, and have to understand what that means.

Excusing her grammatical errors, she’s probably right. The cost of living has gone up by countless measures. Also headlined by Fox News:


While CNBC says it plainly:

Inflation is not going away any time soon – and Biden will have to wait it out like the rest of us.

On Thursday, when millions of American break (more expensive) bread this year than years prior, all while the media, central bankers, and government remain dumbfounded as to the cause, there are several things you may want to discuss at the dinner table:

You can start by mentioning how the word inflation always meant the increase in the supply of money and credit. Then sometime in the middle of last century it changed to signify the increase in prices as measured through various inflation calculations.

Serve that up by mentioning the stock market and housing prices across the country, ask why they are making all time highs and whether this is reflective of a healthy economy, or if something else is driving higher prices.

Feel free to include that prices change for countless reasons, such as consumer preferences, government decree (e.g., price controls), technological advancement and a whole host of supply/demand reasons. Therefore, it seems somewhat disingenuous for a central bank to claim that it controls inflation when there are innumerable factors beyond its control.

Not normally discussed in mainstream media, the supply and demand of money also plays an important role in price setting. This has been noted by the Austrian’s for well over a hundred years.

If you’re lucky enough to sit down with loved ones, point out that the US debt is only a few billion short of reaching $29 trillion, and that it’s strange the M2 money supply is only $21 trillion, or far less than the debt owed. With no end in sight to their exponential increases, our nation’s leaders should be concerned if interest rates were to increase ever again.

With families feeling the pinch of rising prices, America’s Vice-President talks about multi-trillion government plans to help society, claiming:

Build Back Better is not going to cost anything.

Remind them that everything has a cost, a cause and effect, and that it’s the expansion of the money supply that causes many of society’s problems. Therefore it’s unlikely that further expansion will be the solution.

This isn’t a democrat or republican debate. It’s an economics debate. On one side there is a school of thought which bases its ideas on axioms and the importance of economics to describe a real-world economy, which also includes seeking to understand the history and importance of money and its purchasing power. On the other side, are those who don’t bother with such things.

As to what the price of a turkey will be next Thanksgiving, the year after, and in the long run, no one can accurately predict. But without a bout of turkey deflation, it’s safe to say prices will continue to trend upwards, as intended by the world’s leading economists and our central planners. At least on Thanksgiving Day, you can rest assured that they’re not bothered by any of this in the slightest.

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Nuclear Giants and Ethical Infants

11/25/2021Gary Galles

It is commonplace to hear about how much more we know than our ancestors. And many have long taken that to imply that we are more advanced than they were, or that the accumulation of knowledge will continue to improve (progress, if you claim to be a progressive) over time. However, while that is undeniable in some areas, the opposite might be true in others, making it entirely possible we have regressed in more important ways than we have progressed.

Leonard Read made this important but typically overlooked argument in his “Nuclear Giants and Ethical Infants,” in the August, 1964, The Freeman. His insights there about what we know less of, at the same time we know far more of other things, and the implications about America’s educational system, deserve recalling, given how coercive and controversial that system has become today.

[We have] a superfluity of technical know-how relative to general wisdom or understanding…a dangerous and grotesque imbalance.

Our educational emphasis is more on accumulating know-how than on gaining wisdom or understanding…We have know-how galore…But where is the understanding to balance the know-how?

Are we not, as a nation, on the same reckless course that has brought about the fall of one civilization after another? Self-responsibility--amidst an abundance of know-how and a paucity of wisdom, understanding, conscience, ethics, insight--has given way to government responsibility for our security, welfare, and prosperity.

Unwisely, we increase the curbs on individual initiative…The directive of one’s behavior is less and less what conscience dictates as right.

A rapidly expanding know-how, unless balanced by a commensurately expanding wisdom, assuredly spells disaster.

What is the kind of wisdom Read is referring to here? Because we are very different in many ways, the key to a more moral or ethical society is individual integrity, or “fidelity to one’s highest conscience,” subject to our common “moral obligation not to impair the life, livelihood, or liberty of others.” Such wisdom requires that individuals exercise their own decisions about how best to live, rather than having decisions imposed on them by some collective determination.

The first stage of wisdom requires that we understand the virtues and how to live them. Integrity, that is, fidelity to one’s highest conscience, is foremost and basic…[but] note the millions of individuals who actually believe that the rest of us would fare better were we a reflection of themselves.

[Consider] only two individuals, you and me…I know more about myself than anyone else does…you know yourself better than I know you.

You and I are not alike…My aptitudes, faculties, potentialities, likes and dislikes, yearnings, inhibitions, ambitions, capabilities and inabilities to learn about this or that, are not at all like yours. As to our common ground, each of us has a moral obligation not to impair the life, livelihood, or liberty of others. Beyond this…we are at variance in every particularity.

What does this have to do with our schools? It goes to the very heart of seeking wisdom.

Examine my possible educational relationships to you…the proper role is to let you draw on such know-how and understanding as I may possess and as you may determine. Education is a seeking, probing, taking-from process and the initiative must rest with the seeker…your progress depends on your desire to learn…Mine is, at best, only an exemplar’s role: it is to improve myself to the utmost and thus to persuade solely by precept and example.

When you are at liberty to glean from me or any others as you may choose…You will gravitate in due course toward that balance of know-how and wisdom needed for the fulfillment distinctive to your own person.

My second possible role is that of demigod…I shall compel your (or your children’s) classroom attendance, write your curriculum in accord with my notions of your needs and force it upon you and, lastly, I shall coercively extort the financial wherewithal from all and sundry to defray the costs of imposing my own peculiar brand of knowledge upon you.

The approach of the demigod…is antagonistic to the advancement of wisdom.

Coercion…is, by definition, repressive and destructive…Acquiring understanding or wisdom springs from the volitional faculty.

If…the forcible casting of you (or your children) in my image is wrong… government schooling…is precisely the same thing, except on the grand scale.

Someone might well object to such a claim by saying, “surely you can’t mean that you believe our massive public expenditures on education produce nothing of value” (as if that was the relevant standard). But even to that misdirecting question, Read had an interesting response.

A great deal of first-rate education goes on in our government school systems; but…in spite of, not because of, the coercive or governmental aspects. Untold millions of teachers and students, in many of their day-to-day relationships, are on a voluntary, not a coercive basis; to a large extent the students are selecting their teachers. But wherever coercion insinuates itself into schooling…an imbalance of know-how and wisdom will become evident. Wisdom will decrease, not increase.

From that basis, Read argues that government intrusion into education is at the heart of our “imbalance of know-how and wisdom,” based upon a false premise that if someone doesn’t impose an appropriate education on people, they will not be trustworthy to choose for themselves.

Billions of dollars are forcibly collected from all of us--limiting our individual pursuits--and used to pay for government’s know-how pursuits…Compulsion--government intervention in the educational market--accounts, in no small measure, for the imbalance of know-how and wisdom.

We have many private educational institutions…But so-called private institutions in a statist society are not…free market in character…they are licensed and regulated and increasingly financed by their statist “competition”…education is preponderantly statist…so much of the nation’s resources are converted to know-how pursuits.

Inquire how we in the U.S.A. got off on the wrong foot. History reveals the original “reasoning” to have been somewhat as follows: America is to be a haven for free men. To accomplish this, we must have a people’s, not a tyrant’s government. However, such a democratic plan will never work unless the people are educated. But free citizens, left to their own resources, will not accomplish their intellectual upbringing. Therefore, “we” must educate “them”: compulsory attendance in school, government dictated curricula, forcible collection to defray the costs.

Imagine: We will insure freedom to “the people” by denying freedom to them in education, for if their education is entrusted to freedom they will remain uneducated and, thus, will not be able to enjoy the blessings of freedom!

So how can we recover the wisdom that has been lost to coercive education?

How can we ever expect a people brought up on coercion to be free of demigod mentalities? Does a coercive educational system have the intellectual soil and climate where freedom and wisdom may flourish?

[We have] hooked up coercion to the spirit of inquiry…[but] any light coercion produces is not in the form of wisdom.

Once on this coercive trek toward…toward know-how in everything and understanding in and I and others need to recover from our demigod pose…to reject compulsion and to accept liberty in education.

How…can a people be free or wise unless they are brought up in, steeped in, believe in, and understand that growth in wisdom presupposes freedom of the individual to pursue what is wise?

Read followed up “Nuclear Giants and Ethical Infants” with “The Case for the Free Market in Education,” in the following issue of The Freeman. There, he echoed the faith in freedom that logic and history had taught him was justified in so many areas, as applying to education as well.

Remove the police force--government as boss--and education is restored to the free, competitive market.

Assume that you are no longer compelled to send Johnnie to school; no government committee will prescribe what Johnnie must study; no government tax collector will take a penny of yours or anyone else’s income for schooling. This, it must be emphasized, is the free market assumption.

[Ask people] if they would let their children go uneducated were all governmental compulsions removed… “I would no more let my children go without an education than I would let them go without shoes and stockings.”

Were there to be no more police-force-as-boss in education…Any person who understands the free market knows…there would be more education and better education.

It is a…blindness to the enormous evidence in support of freedom…that accounts for much of the lost faith in educational productiveness were the educational system relieved of restraints and compulsions.

Those who want education…will have education…Remove all police-force-as-boss, and we remove education’s chief obstacle.

Americans are highly dissatisfied with their educational systems, with controversies raging over The 1619 Project, Critical Race Theory, how to remake math to incorporate “social justice” and much more. Few have seen that such problems derive from government’s coercive involvement as Leonard Read, however. If we would replace the perpetually disappointing faith in force, “education’s chief obstacle,” with Read’s faith in freedom, which has been demonstrated over and over and over, we would move to a world with more wisdom and less controversy over what self-identified demi-gods should force others to be taught. That sounds like a win-win situation to me.

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Leonard Read, Thanksgiving, and the Essence of Americanism

11/24/2021Gary Galles

Thanksgiving plays an important role in Americans’ views of ourselves and our heritage. The mere fact that it is time off from work and school cannot by itself explain how many travel to be with those they care about to celebrate. But our understanding does not extend very deep, because the Pilgrims started from a communal or communist system, and only moved to a private property-rights based system that many, even in this woke time, now celebrate, because they were starving.

That change gave us now far more to celebrate now than the pilgrims did then, because private-property based systems prohibit violations of one anothers’ rights, and enable the greatest area for competitive advancements.

In excellent way to review the essential contributors to the bounty Americans’ now celebrate (even in hard times for many) is to consider an excerpt from Leonard Read’s traditional opening address at Foundation for Economic Education seminars, first given 60 years ago.

The American people are becoming more and more afraid of, and are running away from, their own revolution.

Our Pilgrim Fathers at Plymouth Rock…began the practice of…from each according to ability, to each according to need--and by force! [But] these communalistic or communistic practices were discontinued…because the members of the Pilgrim colony were starving and dying.

During the third winter Governor Bradford got together with the remaining members of the colony and said to them, in effect…“We are going to try the idea of ‘to each according to merit,’”…the private property principle…nothing more nor less than each individual having a right to the fruits of his own labor…Governor Bradford records that “Any generall wante or famine hath not been amongst them since to this day.”

This private property principle…[led] to what I refer to as the real American revolution…The real American revolution was a novel concept or idea which broke with the whole political history of the world.

Up until 1776 men had been contesting with each other, killing each other by the millions, over the age-old question of which of the numerous forms of authoritarianism--that is, man-made authority--should preside as sovereign over man. And then, in 1776…the new idea…“that all men are created equal; that they are endowed by their Creator with certain unalienable Rights; that among these are Life, Liberty, and the Pursuit of Happiness”…This is the essence of Americanism. This is the rock upon which the whole “American miracle” was founded.

It…[denied] that the state is the endower of man’s rights, thus declaring that the state is not sovereign.

It is one thing to state such a revolutionary concept as this; it’s quite another thing to implement it--to put it into practice. To accomplish this, our Founding Fathers added two political instruments--the Constitution and the Bill of Rights. These two instruments were essentially a set of prohibitions; prohibitions not against the people but against the thing the people…had learned to fear, namely, over-extended government.

[America] more severely limited government than government had ever before been limited in the history of the world. And there were benefits that flowed from this severe limitation of the state.

There wasn’t a single person who turned to the government for security, welfare, or prosperity because government was so limited that it had nothing on hand to dispense, nor did it then have the power to take from some that it might give to others. To what or to whom do people turn if they cannot turn to government for security, welfare, or prosperity? themselves.

All over the world the American people gained the reputation of being self-reliant.

When government is limited to the inhibition of the destructive actions of men--that is, when it is limited to inhibiting fraud and depredation, violence and misrepresentation, when it is limited to invoking a common justice--then there is no organized force standing against the productive or creative actions of citizens. As a consequence of this limitation on government, there occurred a freeing, a releasing, of creative human energy, on an unprecedented scale.

This was the combination mainly responsible for the “American miracle,” founded on the belief that the Creator, not the state, is the endower of man’s rights.

This manifested itself…as individual freedom of choice. People had freedom of choice as to how they employed themselves. They had freedom of choice as to what they did with the fruits of their own labor.

But something happened to this remarkable idea of ours, this revolutionary concept…the people we placed in government office as our agents…discovered that the force which inheres in government, which the people had delegated to them in order to inhibit the destructive actions of man, this monopoly of force could be used to invade the productive and creative areas in society.

The extent to which government in America has departed from the original design of inhibiting the destructive actions of man and invoking a common justice; the extent to which government has invaded the productive and creative areas; the extent to which the government in this country has assumed the responsibility for the security, welfare, and prosperity of our people is a measure of the extent to which socialism and communism have developed here in this land of ours.

There was a time, about…[1840], when the average citizen had somewhere between 95 and 98 percent freedom of choice with each of his income dollars. That was because the tax take of the government--federal, state, and local--was between 2 and 5 percent of the earned income of the people. But, as the emphasis shifted from this earlier design, as government began to move in to invade the productive and creative areas and to assume the responsibility for the security, welfare, and prosperity of the people, the percentage of the take of the people’s earned income increased. The percentage of the take kept going up and up and up.

Has there ever been an instance, historically, when a country has been on this toboggan and succeeded in reversing itself?...The only significant one took place in England after the Napoleonic Wars.

England’s debt, in relation to her resources, was larger than ours [in 1961]; her taxation was confiscatory; restrictions on the exchanges of goods and services were numerous, and there were strong controls on production and prices. Had it not been for the smugglers, many people would have starved!

There were in England such men as John Bright and Richard Cobden, men who understood the principle of freedom of exchange. Over in France, there was a politician by the name of Chevalier, and an economist named Frederic Bastiat.

Bastiat was feeding his brilliant ideas to Cobden and Bright, and these men were preaching the merits of freedom of exchange. Members of Parliament listened and, as a consequence, there began the greatest reform movement in British history.

Parliament repealed the Corn Laws, which here would be like repealing subsidies to farmers. They repealed the Poor Laws, which here would be like repealing Social Security. And fortunately for them they had a monarch…who relaxed the authority that the English people themselves believed to be implicit in her office. She gave them…a permissive kind of freedom…Englishmen, as a result, roamed all over the world achieving unparalleled prosperity and building an enlightened empire.

This development continued until just before World War I. Then the same old political disease set in again…It has many popular names…such as socialism, communism, state interventionism, and welfare statism. It has other names such as fascism and Nazism. It has some local names like New Deal, Fair Deal, New Republicanism, New Frontier, and the like.

If you will take a careful look at these so-called “progressive ideologies,” you will discover that each of them has a characteristic common to all the rest. This common characteristic is…a rapidly growing belief in the use of organized force--government--not to carry out its original function of inhibiting the destructive actions of men and invoking a common justice, but to control the productive and creative activity of citizens in society.

As this belief in the use of force as a means of creative accomplishment increases, the belief in free men--that is, men acting freely, competitively, cooperatively, voluntarily--correspondingly diminishes. Increase compulsion and freedom declines. Therefore, the solution to this problem, if there be one, must take a positive form, namely, the restoration of a faith in what free men can accomplish…either you accept the idea of the Creator as the endower of man’s rights, or you submit to the idea that the state is the endower of man’s rights…We have forgotten the real source of our rights…the free market, private property, limited government philosophy with its moral and spiritual antecedents.

The real problem is developing a leadership for this philosophy.

[It] requires that an individual achieve that degree of understanding which makes it utterly impossible for him to have any hand in supporting or giving any encouragement to any socialistic activities…however disguised. People reject socialism in name, but once any socialistic activity has been Americanized, nearly everybody thinks it’s all right.

Read the ten points of the Communist Manifesto and see how close we have come to achieving them right here in America.

The philosophy of freedom is at the very pinnacle of the hierarchy of values; and if you wish to further the cause of freedom, you must use methods that are consonant with your objective. This means relying on the power of attraction.

Freedom is an ore that lies much deeper than most of us realize…A great effort is required to dig up this ore that will save America.

We will find these miners of the freedom ore among those who love this country.

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The Divisia Monetary Indicator and the Money Supply Definition

11/24/2021Frank Shostak

By most commentators, since the early 1980s, correlations between various definitions of money and national income have broken down. The reason for this breakdown, it is held, is financial deregulation that made the demand for money unstable. Because of financial deregulation the nature of financial markets has changed; consequently, past definitions of money no longer hold.

As a result, it is held the usefulness of money as a predictor of economic events has significantly diminished. Note that according to popular thinking the definition of money is not something permanent but of a flexible nature. Sometimes it could be M1 and at another time, it could be M2. What dictates whether M1, M2 or some other M will be labelled as money is the correlation with national income.

Note again that according to popular thinking, the validity of various definitions of money can be ascertained by means of quantitative methods. What determines whether money M1, M2, and the other Ms are valid definitions is how well they correlate with various key economic data such as the gross domestic product.

Some commentators are of the view that a major factor behind the breakdown in the correlation between money supply and national income is not so much financial deregulation but rather an unsound methodology of measuring the monetary aggregates.

On this way of thinking the monetary aggregates presented by the Fed is a sum of its monetary components in which the components are assigned the same weight. For instance, the components of the money supply definition M2 comprises of cash, checking deposits, savings deposits, money market securities, mutual funds, and other time deposits.

It is however argued that such a summation does not weigh components in a way that properly summarizes the services of each monetary component of money. On this way of thinking, conventional money-supply measures do not account for differences in the degree to which various assets actually serve as money.

The Divisia indicator, named after the early 20th-century French economist, Francois Divisia, makes adjustments for differences in the degree to which various components of the monetary aggregate serve as money. This in turn it is held offers a more accurate picture of what is really happening to money supply. 

The primary Divisia monetary data for the US is money M4. It is a broad aggregate, which includes negotiable money-market securities, such as commercial paper, negotiable CDs, and T-bills. By assigning variable rather than equal weights to the money supply components, it is held, that one could remedy the issue of an unstable money demand. By assigning suitable weights by means of quantitative methods, it is held that one is likely to improve the correlation between the weighted monetary gauge and various economic indicators. Consequently, one could employ this monetary measure to ascertain the future course of key economic indicators.1

However, does it all make sense?

Defining What Money Is

No definition can be established by means of a correlation. The purpose of a definition is to present the essence the distinguishing characteristic of the subject we are trying to identify. The definition is expected to tell us what the fundamentals of a particular entity are.

To establish the definition of money we have to ascertain how a money-using economy came about. Money emerged as a result of the fact that barter could not support the market economy. A butcher who wanted to exchange his meat for fruit might have difficulties to find a fruit farmer who wanted his meat, while the fruit farmer who wanted to exchange his fruit for shoes might not been able to find a shoemaker who wanted his fruit. The distinguishing characteristic of money is that it is the general medium of exchange. It has evolved from the most marketable commodity.

On this Mises wrote in The Theory of Money and Credit,

There would be an inevitable tendency for the less marketable of the series of goods used as media of exchange to be one by one rejected until at last only a single commodity remained, which was universally employed as a medium of exchange; in a word, money. 

Observe money is that for which all other goods and services are traded. This fundamental characteristic of money must be contrasted with those of other goods. For instance, food supplies the necessary energy to human beings, while capital goods permit the expansion of infrastructure that in turn permits the production of a larger quantity of goods and services.

Through an ongoing selection process over thousands of years, people have settled on gold as money. Gold served as the standard money. In today’s monetary system, the money supply is no longer gold but coins and notes issued by the government and the central bank. Consequently, coins and notes constitute the standard money, known as cash that is employed in transactions. Goods and services are bought and sold for cash. Note again that the essence of money is that for which all other goods and services are traded. Also, note that the essence of money remains the same irrespective of financial deregulations.

Distinction Between Claim and Credit Transactions

At any point in time, an individual can keep his money in his wallet, at home or deposit the money with a bank. In depositing his money, an individual never relinquishes his ownership over the money. No one else is expected to make use of it.

When Joe deposits his money with a bank, he continues to have an unlimited claim against it and is entitled to take charge of it at any time. Consequently, these deposits, labelled demand deposits, are part of money. At any point in time if in an economy individuals hold $10,000 in cash, we would say that the money supply in this economy is $10,000.

Now, if some individuals have stored $2,000 in demand deposits, the total money supply will still remain $10,000: $8,000 in cash and $2,000 in demand deposits—that is, $2,000 cash is stored in bank demand deposits. Finally, if individuals deposit their entire stock of cash, the total money supply will remain $10,000, all of it in demand deposits.

This must be contrasted with a credit transaction, in which the lender of money relinquishes his claim over the money for the duration of the loan. As a result, in a credit transaction, money is transferred from a lender to a borrower.

Credit transaction does not alter the amount of money. If Bob lends $1,000 to Joe, the money is transferred from Bob’s demand deposit or from Bob’s wallet to the Joe’s possession.

Why Various Popular Definitions of Money Are Questionable

Consider the money M2 definition. This definition includes money market securities, mutual funds and other time deposits. However, investing in a mutual fund is in fact an investment in various money market instruments. The quantity of money is not altered as a result of this investment; only the ownership of money has temporarily changed.

Thus, if Joe invests $1,000 with a mutual fund, the overall amount of money in the economy will not change as a result of this transaction. Money will move from Joe's demand deposit account to the demand deposit account of the mutual fund with a bank. To incorporate the $1,000 invested with the mutual fund into the definition of money would amount to double counting. Again, the investment of $1000 in the mutual fund did not generate additional money that should be included in the money definition.

We suggest that the money of zero maturity (MZM) definition also does not help identifying what money is. The essence of the MZM is that it encompasses financial assets with zero maturity. Assets included in the MZM are redeemable at par on demand. This definition excludes all securities, which are subject to risk of capital loss, and time deposits, which carry penalties for early withdrawal. 

The MZM includes all types of financial instruments that can be easily converted into money without penalty or risk of capital loss.2 Observe that MZM includes assets that can be easily converted into money. This is precisely what is wrong with this definition, since it does not identify money but rather various assets that can be easily converted into money. It does not tell us what money actually is. This is what a definition of money is supposed to do. 

Observe that the Divisia monetary gauge is not of much help either in establishing what money is. Please note that this indicator was designed to strengthen the correlation between monetary aggregates such as M4 and other M’s with an economic activity indicator. In fact, by this logic the change in weights of various components of money as a result of financial innovations can lead to an ongoing change of the definition of what money is. In this sense, the construction of the Divisia gauge is an exercise in curve fitting. 

We suggest that by replacing the equal weights components of the popular money supply definitions with variable weights one does not establish the essence of what money is.

Again, the Divisia M4 or the Divisia of other M’s are employed with the view that it will enable a reliable forecast of some key economic data. The Divisia of various M’s such as the Divisia M4 does not address the double counting of money issue.

Note again that the M4 is a broad aggregate, which includes cash plus negotiable money-market securities, such as commercial paper, negotiable CDs, and T-bills. What we have here is a mixture of claim and credit transactions i.e. a double counting of money. This generates a misleading picture of what money truly is. Applying various weights to the components of money cannot make the definition of money valid if the definition comprises of erroneous components.

The current practice of including various assets into the definition of money because of their liquidity is questionable. In some cases, inventories of retail goods might be as liquid as stocks or bonds. However, no one would consider these inventories as part of the money supply. In fact, they are other goods that sold for money in the market. Observe, that liquid assets like stocks and bonds in similarity to other goods and services are exchanged for money i.e., other goods are not exchanged for these assets.

We hold that once it is established that the definition of money is sound one must stick to it regardless of whether it is well correlated with some other economic data or not. Thus regardless of the correlation we can say that an increase in money supply sets in motion an exchange of nothing for something. This in turn results in the diversion of wealth from wealth generators towards non-wealth generating activities. In the process, this sets in motion the menace of the boom-bust cycle. Hence, by observing the correctly defined money supply an analyst can establish an important economic information.

The introduction of electronic money has supposedly introduced another confusion regarding the definition of what money is. It is held that the electronic money is likely to make the current money i.e. cash redundant. We suggest that the various forms of electronic moneys do not have a “life of their own.” Electronic money can function as money as long as individuals know that they can obtain cash on demand. Various financial innovations do not generate a new form of money, but rather the new ways of employing existing money in transactions. Regardless of these financial innovations, the nature of money does not change. It is that for which all other goods and services are traded for. 

  • 1. Barnett, W. A., 1980. “Economic Monetary Aggregates: An Application of Aggregation and Index Number Theory,” Journal of Econometrics 14, 11-48.
  • 2. John B. Carlson and Benjamin D. Keen  “MZM: a monetary aggregate for the 1990’s?” – Federal Reserve Bank of Cleveland Economic Review, 1996.
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Friedman, Freedom, and The Road to Serfdom

11/23/2021Gary Galles

I just came across and article which reminded me that this November 16 was the 15th anniversary of the death of Milton Friedman, one of the past century’s greatest advocates of freedom. As someone who has followed his writing for most of my adult life, I can barely believe he has been gone that long. On the other hand, the abyss between the freedom he advocated and the world we now inhabit is so vast, I can barely believe he has only been gone that long.

That great gap makes me believe that now would be a good time to think back to some of Friedman’s insightful words. But his prolific output makes it hard to choose (rather than Free to Choose) among them when faced with limited space. How much further we have moved along what Friedrich Hayek called The Road to Serfdom since then, however, suggests one good source—Friedman’s “Introduction” to the University of Chicago Press’s 50th Anniversary edition of the book.

The promotion of collectivism is combined with the profession of individualist values.

Individualism…can be achieved only in a liberal order in which government activity is limited primarily to establishing the framework within which individuals are free to pursue their own objectives.

The free market is the only mechanism that has ever been discovering for achieving participatory democracy.

Unfortunately, the relation between the ends and the means remains widely misunderstood. Many of those who profess the most individualistic objectives support collectivist means without recognizing the contradiction.

To understand why it is that “good” men in positions of power will produce evil, while the ordinary many without power but able to engage in voluntary cooperation with his neighbors will produce good, requires analysis and thought, subordinating the emotions to the rational faculty.

The argument for collectivism is simple, if false; it is an immediate emotional argument. The argument for individualism is subtle and sophisticated; it is an indirect rational argument.

Experience…has strongly confirmed Hayek’s central insight--that coordination of men’s activities through central direction and through voluntary cooperation are roads going in very different directions: the first to serfdom, the second to freedom. That experience has also strongly reinforced a secondary theme--central direction is also a road to poverty for the ordinary man; voluntary cooperation, a road to plenty.

The battle for freedom must be won over and over again. The socialists in all parties to whom Hayek dedicated his book must once again be persuaded or defeated if they and we are to remain free men.

The bulk of the intellectual community almost automatically favors any expansion of government power so long as it is advertised as a way to protect individuals from big bad corporations, relieve poverty, protect the environment, or promote “equality.”

It is only a little overstated to say that we preach individualism and competitive capitalism, and practice socialism.

It is amazing how dead-on both Friedrich Hayek’s The Road to Serfdom and Milton Friedman’s appreciative and insightful “Introduction” remain about Americans’ current situation, unfortunately moving back down the wrong road in many ways. But I find the last two quotations particularly ominous. Many today have moved to the point, in their confused understanding, that they want to not only practice socialism, particularly when they think its selective application will benefit them, but preach it as well. But that “progressive” regression into utopian thinking which actually produces dystopian results also means that the benefits from renewed attention to the lessons for liberty to both Hayek and Friedman are greater, as well. 

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