Notre Dame and What Was Lost

Notre Dame and What Was Lost

04/16/2019Jeff Deist

Yesterday's terrible fire at the Notre-Dame Cathedral reminds us how quickly centuries of accumulated "cultural capital" can be destroyed. Oak timbers dating from the 1200s in the roof and spire were lost forever; some priceless stained glass windows appear to have suffered damage. As the saying goes, France is the heart of the West, Paris is the heart of France, and Notre Dame is the heart of Paris—and as such the sight of the iconic church ablaze makes an uneasy if simplistic metaphor for the decline of the West.  

"Cultural capital" here of course means something far broader than economic definitions of capital as financial wealth or factors of production. Even the broader Austrian view of capital as heterogeneous production goods, what Rothbard termed an "intricate, delicate, interweaving structure of capital goods," can't capture the sum of wealth in a society. Capital ultimately is measurable, reducible to units, while the value of Notre Dame to Catholics around the world cannot be measured. We cannot quantify the cost of its damage or destruction in purely economic terms. But we can recognize a loss. Hundreds of years of wealth bound up in the beauty of Notre Dame's roof and spire are now lost to us forever.

The blogger Bionic Mosquito reminds us that civilizational wealth compounds over time, and thus wealth can be material, cultural, spiritual, even civilizational: 

...Think of wealth not just on a balance sheet, but wealth in terms of culture, accumulated wisdom and knowledge, the captured savings of time.  

Accumulation and time are key. Healthy societies build and preserve wealth, which is to say they are made up of individuals who strive to create more than they consume. The people who built Notre Dame over two centuries, using rudimentary pulleys and scaffolding, certainly did not expect to see the end results of their work. In fact no single Pope, architect, financier, mason, artist, laborer, or French monarch saw the project through from start to completion. But they built something lasting, something of incalculable benefit to future generations. They created wealth lasting far beyond their lifetimes.

All healthy societies do this. The notion of being concerned with things beyond one’s lifetime is innately human. Humans are hardwired to build societies, and the most ambitious humans have always sought to build lasting monuments and modes of living. That’s not possible unless people work toward a future they will not enjoy themselves.

This was especially true for our ancient primitive ancestors, who lived very short and difficult lives. We can imagine how much they wanted to have lasting forms of sustenance: food, water, clothing, shelter — instead of having to produce that sustenance day after day.

In fact, this trait perhaps more than any other is the hallmark of civilization. We can call it many things, but we might just say healthy societies create capital. They consume less than they produce. This capital accumulation creates an upward spiral that increases investment and productivity, making the future richer and brighter. Capital accumulation made it possible for human populations to develop beyond subsistence misery. It made the agricultural, industrial, and digital revolutions possible.

Technical know-how, artistry, and craftsmanship also represent forms of wealth which can be lost over time, and apparently have been. This article questions whether Notre Dame really can be rebuilt in quite the same way:

While architects have enough detailed information about the cathedral to pull off a technically very precise reconstruction, the craftsmanship is unlikely to be the same. Today, the stone that makes up the cathedral would be cut using machinery, not by hand by small armies of stonemasons as in the 12th century. "Nineteenth-century and 20th-century Gothic buildings always look a little dead, because the stone doesn't bear the same marks of the mason's hand," Murray told Ars Technica.

Civilization is far more than just economics, but it needs economics. Mises cautions us that it "will and must perish if the nations continue to pursue the course which they entered upon under the spell of doctrines rejecting economic thinking." So when we consider the sad spectacle of Notre Dame burning, we should ask ourselves whether the politics and economics of our age encourage or discourage building wealth for future generations. Even if one reduces the inheritance of western countries today to material well-being, the threat of losing what makes us rich certainly concerns us all. Short-term political thinking, coupled with demand-driven mania in fiscal and monetary policy, can consume our future just as fire consumed the roof of Notre Dame.

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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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Will Senate Republicans Endorse Biden-Powell Inflation?

11/22/2021Tho Bishop

For months the battle over the Federal Reserve has been playing out within the financial press. On one side, the Warren wing of the Democrat Party trying to make institutional gains within the central bank. On the other, allies of Janet Yellen have promoted Jerome Powell as a fellow traveler. Today, Joe Biden was finally provided with a script naming Powell as the victor.

The real question is whether the battle will end there. 

As we have already seen, what Joe Biden’s handlers want is not always what Joe Biden’s handlers get. High-profile nominees like would-be OBM director Neera Tanden and would-be ATF director David Chipman have already been defeated. An obvious calculation in the renomination of Jay Powell is the belief that Republicans will cross over and make up for predictable defections from the more progressive Democrats in the Senate.

The question now is how many Republicans are willing to own the Powell Fed?

As the Mises Wire noted during his original nomination, Powell’s selection by Donald Trump reflected one of the most significant areas where the Swamp won over the rhetoric of Trump’s campaign. While Powell was quick to become a target of Trump’s wrath, the resulting monetary policy was predictable. The current pandemic of inflation doesn’t reflect some radical break from mainstream monetary policy, but rather is a direct product of the technocratic status quo.

Since 2010, however, the failings of the status quo have required a more advanced lens to appreciation. Corporate consolidation, Cantillon effects, the regressive nature of financialization—all have resulted from the monetary hedonism of the radical nature of post-2008 central banking, but none of these is as apparent as a more expensive Thanksgiving dinner. Or rising gas prices.

While the Republican Senate Caucus is the institution where Bush-era conservatives continue to have the most power, the question is how many senators are willing to go on record in support of the current state of the dollar. Additionally, will rising populist outlets make them pay for doing so?

Tucker Carlson, for example, has established himself as one of the greatest threats to Republican politicians. While your average Republican may be able to fundraise off a nasty article from the New York Times or being made a punchline from Stephen Colbert, a monologue from Tucker can ruin a career. Will the populist Right recognize the importance of Murray Rothbard asking, “What has government done to our money?

With enough pushback, Republicans in the Senate would be right to join with Warren/Sanders-style Democrats in rejecting Jerome Powell. This would not, however, require them to embrace the more partisan Lael Brainard or the radicalism of modern monetary theory. While it is not likely to see the Biden administration ever nominate a serious thinker to head America’s central bank, Republicans could succeed in taking a scalp against those who are the face of the monetary malpractice the Fed is guilty of. Substituting Powell for, say, a Raphael Bostic, would do nothing to improve the Federal Reserve System—but it would provide some small symbolic demonstration of accountability.

Rejecting a Federal Reserve nomination would be a historically significant vote of no confidence.

Does the Senate GOP have the courage to act?

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Powell or Brainard?

11/21/2021Robert Aro

Any day now President Biden will nominate his choice candidate for the role of Chair of the Federal Reserve. If Jerome Powell doesn’t get reappointed then Biden will likely go with progressive Democrat Lael Brainard. Everyone has a take, some more opinionated than others.

The editorial board of the Wall Street Journal made no attempt to soften their thoughts on Powell in the onion piece entitled Tweedledum and Tweedledee at the Fed, calling Powell’s tenure “historic failure:”

Mr. Powell’s credibility has been damaged with his persistent refrain, until recently, that inflation is “transitory.” His new monetary policy framework of average-inflation targeting, unveiled in August 2020, has been a bust.

They conclude that given the choice between two, there isn’t much of a difference and that he’ll have to “own inflation even more than he already does.”

CNBC provided an array of opinions last week, including a chief strategist from State Street who also didn’t have much faith in a Powell re-nomination:

The odds and probabilities seem to be falling. The higher-than-expected inflation readings hurt, the trading scandals hurt, and the fact he’s a Trump appointee makes him an easy scapegoat for the administration.

A chief economist at Grant Thornton made an attempt to compare the two, CNBC quoting:

The biggest difference between her and Powell is she might be faster on climate change, though Powell was pretty quick on the uptake. The other issue is she’s much more open to cryptocurrency for the Fed, and that’s the biggest difference I know between them.

Still somewhat of a difference, if Brainard is “more open” to cryptocurrency, that certainly wouldn’t be a bad thing for the country. While being “faster on climate change” sounds more contentious as the effectiveness of inflating the money supply or suppressing interest rates could have little effect on making the world a greener place.

Perhaps it was an investment manager at Morgan Stanley who said it best:

It’s not like either one would be dramatically different from the other… It’s not like you’re going from a hawk to a dove. You’re changing leadership, not changing philosophy.

Isn’t that the truth?

For all that can be said, the difference between Brainard and Powell is more superficial than skin-deep. Certainly, every Fed Chair brings their own experience, outlook and maybe even leadership qualities. But their ethos, whether it’s the dual mandate or the desire to use the central bank’s powers to intervene in the free market, still stands.

Any notion of freedom, liberty or understanding the dangers of increasing the money supply will likely continue to go unnoticed. Whether Powell or Brainard, however the next four years goes, unless a dramatic change sweeps the country or the Federal Reserve, which demands an end to this pseudo-mainstream/make-it-up-as-you-go economics, there really isn’t much to look forward to regarding who will helm America’s central bank.

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The Dangers of State-Owned Lithium in Mexico

By 1982, Mexico had nationalized 85 percent of its economy. The eighties did not treat Mexico kindly and supposed attempts at neoliberalization took over Mexico in the late eighties and nineties. But as the stupidity of government ventures fades from our collective memory, old methods get reintroduced. Despite a history of failure, the Mexican government, led by President Andrés Manuel López Obrador, seems fixated on repeating such failures.

Case in point, as a part of his attempt to “organize” the energy sector, Mexico will create a new state-owned company to be in charge of the nation’s lithium. As El Financiero noted, “The head of the Ministry of Energy, Rocío Nahle, confirmed that the exploration and exploitation of the mineral will require the creation of a State company.” When asked about this move, Nahle harkened back to Mexico’s expropriation of the oil companies in 1938, a move Nahle praised, saying, “[F]or eight decades, [the oil expropriation] gave us wealth, schools, hospitals, roads…. Lithium will be the same, without a doubt, and I think it will be faster, such a strategic mineral that today is a raw material for the manufacture of batteries.”

This appeal to PEMEX, the state-owned oil company that was the result of the 1938 expropriation, is, quite frankly, hilarious. Indeed, on the same day that El Financiero ran the article, they also ran an article stating that the Mexican government is going to cover PEMEX’s debts (which total roughly $36 billion) that expire in 2024. A state-owned company run so well that the cronyist veil must be dropped so that the state can save its corporatist child is the proposed model for this new lithium company! How grand.

As previously explained, Ludwig von Mises and Murray N. Rothbard made it abundantly clear that there is nothing the Mexican government can do that will benefit the Mexican people. It is apodictically impossible for state action to be in pursuance of the common good. This power grab by the elites in Mexico City will only benefit them and those connected to them. It seems too obvious to even write, but monopolizing lithium production cannot make Mexicans richer. It did not work with oil, it did not work with banks, and it will not work with lithium. Even if this new company were able to bring the price of batteries and other lithium products below the current market price, it would be infantile to claim victory. If the Mexican government decided to spend the entire nation’s GDP on creating the most powerful computer known to man, I do not doubt a powerful computer would be created. But what would the cost be? Starvation for the entire country. The same applies here. Even if the state successfully reduces the price of lithium, this will not create wealth; it will only cause a redistribution of resources. This redistribution would lead resources away from the desires and needs of the people, impoverishing the society. What good are cheaper batteries if food prices go up? It cannot be reiterated enough—the state cannot create. The state only steals and redistributes. It only disrupts. It cannot benefit society in any way, even if it takes control of lithium. Only saving and investment, fueled by a respect for markets, will make Mexicans richer. State interference will only get in the way.

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Swiss National Bank Fights Climate Change

11/18/2021Robert Aro

The latest quarterly filing statement of the Swiss National Bank (SNB) has been issued. Switzerland’s publicly traded central bank had a decrease in the value of its US stock holdings by around $5 billion in Q3 of 2021, ending the quarter with a value of $157 billion. SNB currently has a profit of over $40 billion for the 9 months ended in the year. Perhaps subjective, it looks like a banner year for an entity who turns a profit through currency manipulation.

As for other affairs the central bank has been concerned with since last quarter; how about climate change?

Several weeks ago the question was asked to board member Andrea Maechler, whether the bank should use its money to “influence companies” linked to climate change initiatives. According to Reuters, the board member responded that it wasn’t the SNB’s job:

We don't have the goal to make the world greener. That's not our mandate.

A bold statement, and something one would be hard pressed to hear coming from a central banker on this side of the Atlantic.

But then the following week happened. On November 3 Reuters reports:

The Swiss National Bank reiterated its commitment to tackling climate change on Wednesday, saying it would take environmental factors into consideration in its macroeconomic modeling and monetary policy analysis.

The SNB bought “green bonds and excluded companies that systemically cause severe environmental damage.” Mining companies are also excluded from their purchases, which is ironic since green technology like electric vehicles rely heavily on the mining industry.

Despite Ms. Maechler comment, the SNB is using some of its power to invest in the green economy. To what ends remains anyone’s guess.

She was again in the news last week, reiterating their ongoing currency intervention strategy, also to ends which no one knows:

The reality is, we continue to have a safe-haven currency… It is something that we do continue to monitor, and we will continue to do so.

Ensuring the currency doesn’t become too strong is the stated reason behind SNB’s money creation scheme, one of the outcomes being the buying and selling of US stocks.

There are almost 200 national currencies in the world. If history is any indication of the past, and if one can reasonably predict the future, it's likely there will only be a handful of safe-haven currencies in the world at any given time. Even if all national currencies continue to decline into inflationary oblivion, there will always be the best of the worst currencies. The US dollar, the Japanese yen and Swiss franc are a few of a handful of such winners.

For all the concern over the risk of the franc becoming too strong, they should be concerned with the franc becoming too weak. Undoubtedly, the SNB will never want to lose the franc’s status as a safe-haven currency. So they're looking to find a level where the franc is weaker than some, or all other safe-haven currencies, but strong enough to maintain safe-currency status.

Like central bank investments into the green economy, no measurement, calculation nor logic will suffice to explain just how weak the franc should be. But with just a little more money creation, maybe one day, their objective can be met.

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The Most Radical Comptroller of the Currency in History?

11/17/2021Alex J. Pollock

The Biden administration has certainly made the most misguided nomination for Comptroller of the Currency in history with its nominee, Saule Omarova. Professor Omarova has published proposals displaying deep ideological commitments which make her obviously unacceptable for this key responsibility in the banking system. Even after this has become apparent, the Biden administration has very surprisingly not withdrawn her name and a Senate Banking Committee hearing on the nomination has been scheduled for this week, November 18.

Concerning this hearing, every Democratic senator on the Banking Committee should be asked in public:

  • Do you subscribe to the proposals published by Professor Omarova?
  • Do you support taking all deposits away from private banks?
  • Do you support making the Federal Reserve in charge of "economy-wide credit allocation"? Do you support making the Federal Reserve a deposit monopoly?
  • Do you support having the New York Federal Reserve Bank short investments it [somehow] decides are too expensive and buy to boost the price of investments it [somehow] decides are too cheap?
  • Do you support giving the government seats on privately owned companies' boards of directors, with the government having "disproportionate voting power"?

All these remarkably unwise and naive proposals are explicitly made in her published articles.

Honorable Senators: If you support these proposals, you should stand up and say so out loud, so everybody can hear you. If you don't support them, you should obviously vote No on this nomination.

Originally published at RealClearMarkets.

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