Rothbard on Free Banking in Scotland

Rothbard on Free Banking in Scotland

Joakim Book has recently published an essay at AIER arguing that Rothbard was wrong to change his mind about free banking in Scotland. Rothbard had originally praised the episode of Scottish free banking in his 1983 book The Mystery of Banking, but then changed his mind in a 1988 essay on The Myth of Free Banking in Scotland. While the topic has been debated extensively throughout the 90s and 00s between free bankers and full-reserve advocates, it is worth responding to this latest argument against the Rothbardian position.

Setting the stage

Before moving on to answering Mr. Book’s specific charges against Rothbard, it is perhaps useful to briefly recount the background to the dispute over free banking. Is it possible to have stable fractional reserve banking in a free market, so-called free banking, where banks issue more bank notes and demand deposits than they have cash on hand to redeem? Or is such a system based on special privileges granted to banks, and will it inevitably result in bank panics and business cycles? Rothbard’s position was the second, while Lawrence White in the early 1980s, first in articles and then in his 1984 book Free Banking in Britain, advanced arguments for the feasibility of free banking on theoretical grounds while using the example of the Scottish experience with free banking 1716-1844 to show that it had also worked in practice. Rothbard’s initial praise for the Scottish experience was based on White’s first paper detailing the episode of free banking, but reading White’s 1984 book and reviewing the histories of Scottish banking himself made Rothbard change his mind and criticize the Scottish system, and White’s portrayal of it, harshly.

The present argument

The charges against Rothbard are three in number:

  1. Rothbard interprets the low failure-rate of Scottish banks as proof of government protection, whereas White and others see it as proof of the stability of the system.
  2. The Bank Restriction during the Napoleonic Wars apparently also applied to Scotland, meaning that the Scottish banks were rendered immune from the legal claims of their clients. This is “completely false” according to Mr. Book, as the only reason the Scottish bank customers did not demand specie was that they preferred bills of exchange and bank notes.
  3. Rothbard claims that the Bank of England was a lender of last resort to the Scottish banking system – which according to Book is a wrong-headed interpretation of the evidence.

As argument number 2 appears to me to get at the heart of the issue, I will deal with arguments 1 and 3 summarily before moving on.

Ad 1): Here I think we must return a Scots verdict – while it is true that we would regularly see firms go out of business in a free market, as more successful entrepreneurs displace the less competent, it seems to me that the banking sector is a special case. Presumably, the clients of the bank would not hold bank notes if they feared there was a risk of the bank going out of business, so people would only patronize very sound banks, meaning that the banking sector would be more stable than the surrounding economy. That’s just speculation, however. Since we don’t have any similar systems to compare the Scottish experience to (the English banks that White compares the Scottish to were artificially weakened due to government regulations meant to protect the Bank of England), we can’t say one way or the other what the low number of bankruptcies indicates.

Ad 3): It is hard to understand how Mr. Book can sustain this charge, let alone describe Rothbard’s position as a “strange historical twist”. It is true, as Mr. Book relates, that in the crisis of 1793 the British government, not the Bank of England, was the source of help for the Scottish banks (a fact that does little to sustain the notion of “free” banking in Scotland), but this is not news to Rothbard, who relates the exact same incident. Nor does it disprove Rothbard’s point about the importance of London for the Scottish banks, for while he does not say that the Bank of England was the lender of last resort to Scottish banks, he does cite the historians Frank W. Fetter and Sydney Checkland to the effect that “(r)edemption in London drafts was the usual form of paying note holders” and “the principal and ultimate source of liquidity [of the Scottish banks] lay in London, and, in particular, in the Bank of England.” That expert historians say something is obviously no guarantee that it’s true, but I think it behooves Mr. Book to realize that his argument is with these gentlemen, instead of making it seem like Rothbard invented the central role of the Bank of England to the Scottish system.

Getting gold in Scotland

Did Scottish banks at any point suspend convertibility, contrary to their legal obligations and the act of 1765 that governed Scottish banking? It is true, as Mr. Book alleges, that the Bank Restriction Act of 1797 only referred to the Bank of England and the Bank of Ireland – but that does not mean that Scottish bankers redeemed their bank notes in gold. As a leading authority on Scottish free banking notes, as soon as the leading bankers in Edinburgh got news of the suspension from the Bank of England, they met together and decided to follow suit.1 In clear violation of the law, the Scottish bankers en masse suspended redemption of their notes for the duration of the suspension in England. The result, as hard money advocates would predict, was a massive inflation in Scotland and erosion of the reserves of the Scottish banks. They went from having reserves of gold covering 10-20% of their outstanding issue of bank notes to only 0.5-3.2%.

While this development hardly speaks to the purported stability of so-called free banking, it does not contradict Mr. Book’s charge that specie redemption was still possible in Scotland. After all, since the action of the Scottish banks in refusing to redeem their notes was clearly illegal, presumably a disgruntled client desirous of gold could take his bank to court. Why didn’t anybody do this? Surprisingly, we need only read the article on the bank restriction by George Selgin that Mr. Book himself links to in support of his claims to realize why. For the Bank Restriction Act did affect Scottish banks: while it did not make Bank of England notes legal tender, if anyone insisted on using such notes in payment of debts, “he was to be protected from arrest for debt” (Selgin quoting Frank W. Fetter). In other words, the legal remedies available to persons insisting on payment in gold were severely curtailed – in Scotland particularly so, as the Act deprived bank creditors of the right to summary diligence, a special procedure under Scots law for the enforcement of debts.

As is to be expected, the suspension of convertibility in Scotland lead to the complete disappearance of silver and gold coins from circulation2, per the working of Gresham’s Law, and bank notes proliferated, leading to the above-mentioned outcome that bank reserves dwindled to a fraction of what they were before the suspension.

All this leads us back to Rothbard. Rothbard claimed both less and more than Mr. Book attributes to him. He didn’t claim that the Act of 1797 applied to Scottish banks, merely that they used the opportunity to suspend convertibility – and this not on his own authority, but on that of Professors White and Checkland. However, Rothbard also claimed much more than simply a temporary suspension in Scotland during the early 1800s. It is worth quoting him at length since this claim seems to have escaped Mr. Book’s attention:

Now I come to the nub: that, as a general rule, and not just during the official suspension period, the Scottish banks redeemed in specie in name only; that, in substance, depositors and note holders generally could not redeem the banks' liabilities in specie. The reason that the Scottish banks could afford to be outrageously inflationary, i.e. keep their specie reserves at a minimum, is that, in practice, they did not really have to pay.

[Quoting Professor Checkland] The Scottish system was one of continuous partial suspension of specie payments. No one really expected to be able to enter a Scots bank … with a large holding of notes and receive the equivalent immediately in gold or silver. They expected, rather, an argument, or even a rebuff. At best they would get a little specie and perhaps bills on London. If they made serious trouble, the matter would be noted and they would find the obtaining of credit more difficult in future.

Rothbard goes on to describe a legal battle in the 1750s over the redemption of bank notes that ended up with a nominal victory for the cause of redemption, but in reality the courts refused to force the banks to pay up. The clear conclusion must be that convertibility of Scottish bank notes were only sporadically enforced throughout the existence of the much-vaunted system of free banking in Scotland.

This result should not surprise us, as the system was inherently unstable. While Mr. Book focuses on the issue of bankruptcy rates, this is not Rothbard’s main reason to deem the system unstable. Instead, he focuses on the fact (again using Checkland as his source) that throughout the existence of an independent Scottish banking system, the Scottish banks expanded and contracted credit in a long series of business cycles, as also Huerta de Soto has pointed out. What the Scottish bankers did was secure legal privileges in order to be able to engage in fraudulent credit expansion, and it is only after reading deeper in the history of Scottish banking that Rothbard realized this and subsequently changed his mind on the issue. Far from criticizing Rothbard, Mr. Book, who himself writes often and persuasively about the role of financial history, should recognize him as a kindred spirit – and accept the Rothbardian strictures on free banking in Scotland, based as they are on sound theory and historical inquiry.

Conclusion

The goal of this essay has been to show that, contrary to Mr. Book’s criticism, Rothbard’s change of mind on the issue of free banking in Scotland was based on a better understanding of the episode and was not, as Mr. Book alleges, “the imposition of perfectionist normative judgments” on the historical record. More generally, we have again shown that the claim that Scottish experience validates free banking theory is not supported by the evidence. On the contrary, the attempts by Mr. Book and other free bankers to explain away or ignore the myriad examples of government privilege and intervention in the Scottish case is starting to sound like a no true Scotsman fallacy – they are either ignored, or explained away as not really affecting the financial system.

Free banking has not passed the free market test, at least not in any of the cases that have been brought forward by the free bankers to support their claims. True free banking would indeed be a very stable system – but one with very high reserves. As Mises said:

Suspension of the bank-notes’ convertibility and legal-tender provisions had transformed the ‘hard’ currencies of many countries into questionable paper money. The logical conclusion to be drawn from these facts would have been to do away with privileged banks altogether and to subject all banks to the rule of common law and the commercial codes that oblige everybody to perform contracts in full faithfulness to the pledged word. Free banking would have spared the world many crises and catastrophes.

And:

It is a mistake to associate with the notion of free banking the image of a state of affairs under which everybody is free to issue bank notes and to cheat the public ad libitum. People often refer to the dictum of an anonymous American quoted by Tooke: "Free trade in banking is free trade in swindling." However, freedom in the issuance of bank notes would have narrowed down the use of bank notes considerably if it had not entirely suppressed it. It was this idea which Cernuschi advanced in the hearings of the French Banking Inquiry of October 24, 1865: "I believe that what is called freedom of banking would result in a total suppression of bank notes in France. I want to give everybody the right to issue bank notes so that nobody should take any bank notes any longer."

  • 1. Lawrence White, Free Banking in Britain: Theory, Experience and Debate, 1800-1845, (Cambridge: Cambridge University Press, 1984), p. 46
  • 2. Ibid., 46-7
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It Beats the Alternative? Let's Think about That!

As people get older, we sometimes hear them joke that it beats the alternative, which is usually left unsaid.

There’s another sense in which the alternative is assumed to be far worse than one’s present condition: The type of government almost all people live under, which is the state, here used in the Max Weber sense of an entity successfully claiming a "monopoly of the legitimate use of physical force within a given territory.” As bad as states might be — the argument goes — it certainly beats the alternative, anarchy.

Really?

Is it possible states create the conditions normally associated with anarchy, thought to be a condition of widespread chaos and lawlessness? If we look at history, we find evil in government. It violates every notion of human decency and justice, though there are degrees of difference. A few examples may serve to freshen our memory. 

The current war in Ukraine brings to mind Stalin’s imposition of starvation on the Ukrainian people in 1932-1933, as part of his collectivization of farming, which according to this study resulted in an estimated 4.9 million total deaths. Stalin seized Ukrainian crops and grains as punishment for failing to meet quotas and for resisting collectivization. Also known as the “Great Famine, or Holodomor (extermination by hunger), Ukrainians suffered unspeakable horrors at the hands of Stalin’s “collectors.” 

Peasants accused of being food hoarders typically were sent off to prison, though sometimes the collectors didn’t wait to inflict punishment. Two boys who were caught hiding fish and frogs they’d caught, for example, were taken to the village soviet, where they were beaten, and then dragged into a field with their hands tied and mouths and noses gagged, where they were left to suffocate.

Stalin’s wife, Nadezhda Alliluyeva, committed suicide in late 1932, which according to playwright Mikhail Shatrov stemmed from her violent disagreement with Stalin over his murderous policies. 

Anarchy would have been a blessed option for Ukrainians had they been able to free themselves from Stalin’s grip. Given the power of today’s left-dominated governments and the global push for a Great Reset, humanity’s ultimate horror may still lie ahead.

Is democracy the answer to state growth?

One could argue that democracy — people power — prevents the rise of totalitarian regimes. A researched analysis of the fraudulent covid pandemic, however, where Western governments turned authoritarian overnight and most people obeyed, scraps that idea.

The state, as sovereign, de facto outlaws genuine democracy. 

Doubt it? How about a vote on the income tax or the state’s official counterfeiter, the Federal Reserve? Not a chance. Our bipartisan overseers won’t allow it. Even worse, thanks to government schools and the state’s official propaganda ministry, most people are at peace with government theft as long as standard euphemisms are applied, such as Treasury’s “taxes” and the Fed’s “accommodation.”

By the way, have you, a non-government citizen, been consulted about the tactical advantages of limited nuclear war? No? How do you like that arrangement?

According to most dictionaries, synonyms for anarchy include lawlessness, disruption, turmoil, disorganization, and disintegration. This is a fair description of conditions in the US and other countries during the so-called pandemic. Such terms also describe countries being bombed back to the stone age, such as Iraq and Afghanistan, where “righteous” states have intervened to eradicate evil or “defend the freedom” of their clueless citizens thousands of miles back home.

Turmoil also depicts the current state of Venezuela, where “dangerously softhearted” World Vision says that

One out of every three Venezuelans is food-insecure and in need of urgent food supplies, according to the World Food Programme (WFP). Once-eradicated diseases like cholera and malaria have returned, and children are increasingly dying of causes related to hunger and malnutrition. . . .

Venezuelan migrants who returned to the country after losing their jobs abroad in the wake of the pandemic have been unable to earn wages back home. Shortages of fuel, electricity, and clean water have sparked riots and left many migrants with no choice but to flee again.

Even Zimbabwe, once the poster child for hyperinflation, is at it again as the Zimbabwean dollar “has been devalued by over 40% since the beginning of the year.” To avoid another currency collapse, central bank governor John Mangudya has inaugurated a program allowing Zimbabweans to exchange their dollars for gold coins. 

Gold, the hallmark of a fully free market, meaning a society that enforces property rights, is coming to the rescue of Zimbabweans. Apparently, when corruption runs its course, some states will try anything, even a temporary return to honest money.

Given what the US state and its coalition partners have done to small countries, to American military personnel, to the cultural climate of peace and liberty that makes civilization possible, it’s hard to imagine a stateless America would be even worse. 

What makes our leaders “great”?

Lincoln, Wilson, and FDR are not renowned for their anarchist views. Through the state they had the means to go to war while forcing others to do the killing and dying. Through the state they had the propaganda tools and the arms to keep most of the public compliant. Through the state they had the means to steal wealth from their citizens to pay for it. Even today, with their crimes detailed online, they remain among the “great” in American history because of a pliant public and a state-controlled media and educational system.

It wasn’t anarchy that produced the massive death and devastation of the two world wars. It wasn’t anarchists who built atomic bombs. It wasn’t anarchists who dropped them on civilian populations.

And it’s not anarchists who've created the conditions for nuclear Armageddon today.

It beats the alternative?

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The Kultusgemeinde and Its Relevance to American Anarchism

11/23/2022Kyle Stephens

Among the many practical issues facing anarchism there is one that attracts the biggest amount of criticism from minarchists: the size of a community. They point out that we do not live in a Hutterite or Anglo-Saxon but urban and global society. As such, size matters. As a settlement grows larger, libertarianism becomes harder to enforce as a covenant. Small communities are easily formed outside the urban matrix, they are not easily sustained on an economic level.

For example, a libertarian community might have a population of 150 people. If a reasonable small business employs a minimum of 25 people, there could only be a total of 6 businesses in that town. To attract additional labor implies if not settlement, nearby arrangements (i.e., company towns and hamlets). If this is the bulk of all its employment, it wouldn't matter. There are only 150 customers to attract, thus little profit to encourage such a business expansion in that community to begin with.

Certainty reigns, so does opportunity cost. Though amassing great company encampments outside the covenant community could become profitable, there is a big metropolis a few miles away that is inhabited by millions of people. Where is the entrepreneur going to go?

Worse, these encampments or company towns amount to enlarging your covenant community. Most bigger cities are actually smaller quarters, separated by wealth or racial characteristics and enjoined as one later on. Suburbs formed from a massive migration of workers to the rust belt. Over time, suburbs became metropolitan areas in tandem with an independent city that is controlled by singular municipal statesmen.

None of this is mitigated with automation or technology either. Companies could invest in it with cloud computing and the like, that would eliminate the issue of opportunity cost previously discussed. However, lacking production means the need to import most goods.

Now, trade makes that easy but that is flawed in a covenant community. Importation implies transportation. If there are top few customers in this small covenant and a large metropolis boasts many, the cost to transport this product is likely greater than what minimal revenue comes from sale. Thus, opportunity cost remains a burden as not only production but importation crash.

The Owenite communes died out for one big reason: people lacked opportunity and sought it elsewhere. It is easy to suggest that this fate was a consequence of its economic model and for sure, communal living does fail. However, it is naive to assume we are in the clear with size in mind.

Though economics are technically secondary to libertarian theory, a community whose population all emigrates makes attempting it fairly futile. Economics in that sense does matter to our success. How could this problem be addressed? Easy.

Within any larger city, there are separate neighborhoods and boroughs with similar characteristics uniting them each. If these became covenant districts, the city itself is only a geographical assembly of covenants. However, labor and capital flows more practically between them. As such, it is sustainable and requires no modification to the broader covenant approach.

This might appear an only minor addendum, but I find the examples most intriguing for it. In areas such as Vienna, Orthodox Jewry tends to live together but differently than he might in Poland with his shtetl. While any gated community is plumbline covenant, these operate with mutual aid in mind (as an extension of religious identity).

Its pricing is not a donation, but mandatory like a tax. This keeps it relatively homogeneous, not only in culture but class too. It is too easy to ridicule that word, "tax" until you realize it is no more an obligation than the bylaw your covenant binds you to. In fact, the covenant most typically proposed by anarchists on the right - though devoid of taxation mention looks more like a social "contract" than a voluntary community (3). Voluntary, it is insofar as you do not need to live there. That is already the way by which a social contract operates, this only excepting its positive law component.

That this too, is basically a social contract, I do not accept as I believe they turn into states with time. Rather, I propose an easy alteration to it. First, let's understand how these orthodox communities factor in interests. As is the deal with any other typical covenant community, misbehavior means expulsion. However, mutual aid in our typical model covenant community is detached from that contract and only intended as a mitigative measure to be encouraged in lieu of welfare.

If mutual aid is basically a given, the Orthodox Jew loses it once he misbehaves. He loses it however, because he got expelled altogether. In my proposal, misbehavior does not necessarily result in your expulsion (this could vary by the heinousness or pettiness). However, the misbehaving party is no longer eligible for mutual aid. Is that all? No. Though he is no longer, ceasing payment does in fact mean expulsion. He pays and does not receive; this payment then goes to the victim party.

That is not all. So, in a Frankpledge, bylaws are per se voluntary too. This sounds insane, but it isn't. In them, those who opt-out of the covenant bylaws are not eligible to go to court and it could even implement social credit to classify him as a parasite. Essentially, he no longer abides by the community conduct but is totally ostracized for it.

Not all people receive aid, but everyone pays in. But the needy paid in over the years, having already explained residents pay an expensive fee to live here. What if someone does not pay in more than once or twice, now he receives?

First, leeching would qualify as a misbehavior in the code. Second, how is this defined? Well, two ways. One, new residents might not be eligible for its receipt but only after they have resided there for a number of years. Two, such aid has a time constraint (e.g., a year's worth). Those who are eligible for aid may at no time receive for longer than one year at a time.

After that year, they must pay it back. They pay it back in a way that is very similar to tax deference. If you do not pay it back, you are expelled. Think there has to be a limit on how frequently you may receive these years’ worth of aid? No. What happens if you, an insured driver gets into an accident? You pay a higher premium, being that you are a risk to the insurance company. Well, every time a resident here eligibly receives aid, the amount of money he is expected to pay back (in addition to the regular fee) is increased more and more.

Not only does this act as a dual vetting process for immigration, but it also then increases the odds that you get expelled for exploitation. Being as it is voluntarily contributed, mutual aid appears to already have its built-in mechanism against exploitation (i.e., people do not enjoy being exploited). However, collective finance means he who contributes does not decide who might receive.

He might, be it operated by its members with transparent books or in that a mismanaged charity alienates its contributors who then move to a competing organization. That risk has not discouraged charities today from doing so, they simply try not to get caught. If that is to happen, so too will a popular demand for its regulation. An anarchist society is only stateless, it cannot outlaw that a state be invented. As such, what in this public choice analysis feels unfashionable makes it no less relevant.

If the social contract does not in stateless form become a state, it remains collective. In his book, Democracy: The God that failed, Hans Hermann Hoppe addresses voluntary individual behavior as pertains the use of his or her own property. He addresses this, not only as pertains use but permission to invite and so forth. However, his covenant is only stateless and not voluntaryist. Autonomy is a voluntary description of inhabitance or association but that is with the use of property, all. Auberon Herbert described it differently, much closer to the Frankpledge that I have previously outlined.

There could be elements of both these visions, especially regarding mutual aid and whether to have it at all or that of immigration already incorporated in the Kultusgemeinde that I example. Nonetheless, options are worth exploring if we are to attract the more hesitant anarchists screaming tyranny at the former.

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Counterfeit Inclusivity

11/22/2022Robert Aro

In a recent speech, one of the lesser-known Fed Governors, Philip N. Jefferson, discussed the importance of having a home:

Beyond location, a home provides both basic needs, such as shelter, and invaluable benefits, such as a sense of personal safety and dignity. It is a refuge in which our minds and bodies can recuperate and regenerate so we are prepared to participate in all aspects of life, including the next day's work. The costs of living in disadvantaged areas or of dealing with financial hardship can be seen in all areas of life. Higher stress, the frequent necessity of working more than one job, the absence of benefits, and the time and money spent commuting—all these exact a financial and psychological toll.

On some level, he must understand that most Americans are under tremendous financial hardship, given the increase to both the cost of living and interest rates.

He asked the question:

What can the Fed learn from research on opportunity and inclusive growth?

Then tried to elaborate further what this meant:

The better we understand the channels that affect the health and function of the overall economy, the better we can calibrate our policy decisions to deliver on our dual mandate.

Continuing:

In pursuing its dual mandate, the Federal Reserve is essentially trying to foster and maintain the conditions in which the economy and all its participants can thrive.

And again:

Pursuing our dual mandate is the best way for the Federal Reserve to promote widely shared prosperity.

For well over a hundred years the Austrians have documented the economic problems a currency monopoly creates. Even beyond the mechanics of money creation lies moral, ethical, and legal considerations. The summary to Bastiat’s The Law, provides a succinct account:

The question that Bastiat deals with: how to tell when a law is unjust or when the law maker has become a source of law breaking? When the law becomes a means of plunder it has lost its character of genuine law. When the law enforcer is permitted to do with others’ lives and property what would be illegal if the citizens did them, the law becomes perverted.

Bastiat, as one of the proto-Austrians, or predecessors to the school, shared countless ideas which have always remained relevant. Hayek built upon this idea, explaining one of the problems with central planning:

The economic planning which was to be the socialist means to economic justice would be impossible unless the state was able to direct people and their possessions to whatever task the exigencies of the moment seemed to require. This, of course, is the very opposite of the Rule of Law.

What the Fed has successfully done over the last century is normalize one of the biggest crimes of the century: Counterfeiting.

Not a day goes by where the Fed is not mentioned on all business channels. Whether it’s CNBC, Bloomberg, on TV, or in print, a significant amount of effort goes into talking about the Fed, what they will do next, and how they may help or hinder the economy. Mainstream economists seem to revere the Fed, with the institution being widely incorporated into their dogmatic beliefs.

But let’s never forget: The Fed is a counterfeiter.

Should one individual try to pass even $100 of fake note as legal tender, they may face grave punishment. And depending on how large the scheme, the individual could face consequences stiffer than murder charges. Yet, when the Fed prints billions to trillions of dollars, not one in a thousand economists think anything of it. If anything, they’ll applaud the inflationary policy.

Like democracy through the barrel of a gun, or dropping a bomb for freedom, the words and actions of a central planner are usually diametrically opposed to each other. If the Fed was serious about helping the poorest members of society, wanted to ensure more “inclusivity,” and really wanted Americans to know the joy of home ownership and the pursuit of the American dream, then the best thing it could do is to stop everything it is doing today. If they really cared, they’d surrender to the rule of law, and not the law of the central planning authority.

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How Secession Solves Our Problems: On the 'Crisis Magazine' Podcast

11/18/2022Ryan McMaken

I joined Crisis editor Eric Sammon to discuss secession and my new book Breaking Away: The Case of Secession, Radical Decentralization, and Smaller Polities.

 

From the discussion: "Secession should really just be thought of as one form of political decentralization. In America, we’re pretty familiar with the idea of decentralization overall. Most people call it federalism. ... Americans get the idea of decentralization overall, but what of course they forget is that America’s past is founded on the idea of a more radical version of decentralization, which is known as secession. And so secession took place during the American Revolution, which was a attempt for these 13 sovereign states to secede from the larger empire."

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Did Constitutionalists Gain in the Last Election?

11/18/2022James Anthony

What matters in every election is what progress has been made by constitutionalists.

Constitutionalist voters and politicians have formidable difficulty getting constitutionalists past the Republicans’ Progressives. Progressives are helped by state primary processes, party rules and practices, crony media buys, and legacy-media support.

Even so, constitutionalist voters are in the majority. And constitutionalist politicians, who would earn Conservative Review Liberty Scores of at least 80 percent pro-liberty, went into this election making up around 27 percent of elected Republicans.

The slow turnover of senates and the results of the Republican primaries each guaranteed that this election would bring little increase in liberty in the near term. But next steps were taken towards improving elections, increasing the number of constitutionalist voters, and improving the choices in constitutionalist politicians.

Progressive Incumbent Politicians

The unfolding Great Inflation II has been brewing for a long time. Since 2008, the true money supply has increased by an astounding 303 percent. This dwarfs the Great Inflation I 1960-1978 increase of 176 percent, the Financial Crisis 1995-2007 increase of 128 percent, and the Great Depression 1921-1929 increase of 62 percent.

The Great Inflation II lockdowns, and the recent covid portion of its true money supply increase, an unprecedentedly rapid 120 percent, came under much the same Republicans as now, and Trump.

Going into the Republican primaries, the future senate’s swing vote could have at-most improved from Susan Collins, who had been voting 20 percent pro-liberty, to Mitch McConnell, who had been voting 44 percent pro-liberty.

Going into this election, the current house’s Republican leadership promised far-too-little, and could be counted on to deliver even less.

Election Problems

This election brought even-more-glaring disparities between reliable polls and the vote counts recorded by election officials in numerous precincts.

A kind of natural selection is in progress. Republican state politicians are ultimately going to have to either use their constitutional powers to ensure that voting is untainted, or go extinct and get replaced by new politicians who will use their powers.

Newly Independent Voters

Various voters in the past had been Democrats but, in this election, supported Republicans.

These voters were motivated by economic factors and social policies. Even if they identify as Republicans for now, most will really function as independents, since what drives their voting is that they are economic and social refugees.

Most such refugees’ backgrounds are from cultures, whether foreign or domestic, that have long accepted bigger governments. Any economic refugee’s vote for a big-government Republican Progressive will be a temporary setback, until the refugee sees the natural consequences of this action and learns how to stop getting burned. That will happen sooner or later.

And meanwhile, many economic refugees already arrive with intuition that will help them recognize Progressives, and determination to choose constitutionalists. Constitutionalist voting is growing.

Constitutionalist Politicians

Toward the end of Trump’s time in office, Liberty Scores of at least 80 percent pro-liberty had been earned by 8 percent of that house and 6 percent of that senate. At mid-2022, these had increased to 17 percent of that house and 14 percent of that senate. Given the favorable retirements and the probable losses by some of the worst newcomers like Dr. Oz, when the dust from this election settles, we will likely see that the proportions of constitutionalists have increased further.

But keep in mind that to even block a veto override takes 33 percent of one house. To enact legislation requires 50 percent of a house and a senate, plus a willingness to stand up and be counted using constitutional simple-majority voting in a senate, plus a presidential signature, or else requires 67 percent majorities in a house and a senate.

Change toward constitutionalist governance can come much faster under Constitution-following, emotionally intelligent executives. On this score, this election brought the clearest improvement.

This election made the next president less likely Trump and more likely Ron DeSantis, Rand Paul, or Thomas Massie.

More evidence on election integrity, new independent voters, and a better future president—in a single mid-term election, constitutionalists made helpful progress on many fronts.

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Fedcoin: It Starts with a Trial Run

11/17/2022Robert Aro

A cashless society would be the nail in the coffin for liberty and freedom, offering centralization, the likes of which Marx could only dream. The existence of a government backdoor or spyware becomes a real possibility, and given the State’s track record, a real likelihood. Then, of course, the ability to track, freeze, and even set expiry dates on money, will be marketed as “features” to protect the public.

As for the 5.9 million Americans considered “unbanked,” i.e., those who have no checking or savings accounts, (the poor, weak, and vulnerable) they can expect life to get more difficult. This is the price we pay for free market intervention.

Earlier in the week, the Federal Reserve Bank of New York made the announcement:

Members of the U.S. Banking Community Launch Proof of Concept For A Regulated Digital Asset Settlement Platform

The explanation may only make sense for those well versed in crypto technology:

Members of the U.S. banking community today announced the launch of a proof of concept (PoC) project that will explore the feasibility of an interoperable digital money platform known as the regulated liability network (RLN). Using distributed ledger technology, the proposed platform would create innovation opportunities to improve financial settlements and would include participation from central banks, commercial banks of various sizes and regulated non-banks.

Basically, Fedcoin is advancing and is now in the testing stage:

The 12-week PoC will test a version of the RLN design that operates exclusively in U.S. dollars where commercial banks issue simulated digital money or “tokens” – representing the deposits of their own customers – and settle through simulated central bank reserves on a shared multi-entity distributed ledger.

Some of the largest financial institutions are involved in this 12-week program:

BNY Mellon, Citi, HSBC, Mastercard, PNC Bank, TD Bank, Truist, U.S. Bank and Wells Fargo.

Plus:

The technology is being provided by SETL with Digital Asset, powered by Amazon Web Services. Swift, the global financial messaging service provider, is also participating in the initiative to support interoperability across the international financial ecosystem.

From Bitcoin to Dogecoin, there seems little long term hope for those who love privacy and autonomy when the largest corporations and fintech firms work with the Federal Reserve to roll out a Central Bank Digital Currency (CBDC).

Would you like to know who else is was working with the Feds? Courtesy Coindesk:

Former FTX CEO Sam Bankman-Fried was, until last week, a major political donor – he gave $5.2 million to U.S. President Joe Biden’s presidential campaign and spent another $40 million supporting mainly Democratic candidates ahead of the November midterm elections – and an influential figure in Washington.

Bankman-Fried regularly met with regulators and lawmakers, weighing in on how the crypto industry should be regulated. He was a vocal supporter of one bill, in particular: the bipartisan Digital Commodities Consumer Protection Act (DCCPA), a still-in-progress bill…

We know for certain CBDCs are coming, as well as more regulation. And given the trajectory of both, a cashless society is too. What is less certain is whether or not Sam Bankman-Fried, for his culpability in what may amount to one of the largest thefts of all time, will ever see jail time. 

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Mises is the Solution to FTX-Scams

11/17/2022Tho Bishop

Check out this clip from Caitlin Long of Custodia Bank at a Bitcoin conference last year, explaining the dangers of highly leveraged crypto exchanges like FTX. Long calls out the practices of Sam Bankman-Fried, while sharing a stage with the disgraced crypto trader.

The Solution to FTX? Read Mises

Why was Caitlin able to see what most of the financial world, including major financial institutions, couldn't? She's read her Ludwig von Mises. As she explains, there is a fundamental difference between "commodity money" and "circulation money," which Mises calls "fiduciary media" in his treatise A Theory of Money and Credit

Written over 100 years ago, the consequences of leveraged fractional reserve banking and the artificial increase in credit remain. Mises's work remains vital in a world of hedonistic central banks and a financial world shaped by the dangerous fallacies of bad economics.

In the case of FTX, we have an exchange without the backing of the state, though one whose CEO attempted to gain regulatory capture with donations to powerful politicians and their pet ideological causes. In classic beltway-style, Bankman-Fried's failings are now being used by power-hungry politicians to promote the very legislation he advocated, at the expense of responsible actors like Long. Ultimately though, the same dangerous economic views underpinning his approach to crypto continue to guide the globe's traditional financial system. 

The only way out is an ideological revolution into how civilization considers the vital topic of money and banking.

As Mises noted in this important work, "No very deep knowledge of economics is usually needed for grasping the immediate effects of a measure; but the task of economics is to foretell the remoter effects, and so to allow us to avoid such acts as an attempt to remedy a present ill by sowing the seeds of a much greater ill for the future."

Get your copy of Theory of Money and Credit today from the Mises Bookstore.

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Recession Coming to the UK

11/15/2022Robert Aro

A house of cards. A sandcastle. Dominoes. Lots of imagery available to describe our global, socialist economic system. Waiting for a crisis is one thing, considering a way out is another. Watching news from other countries provides signs of things to come which helps diagnose the worldwide problem. From CNBC:

The U.K. economy contracted by 0.2% in the third quarter of 2022, signaling what could be the start of a long recession.

Even in other countries, we see the same will they or won’t they statistical revision game being played, as explained:

The contraction does not yet represent a technical recession — characterized by two straight quarters of negative growth — after the second quarter’s 0.1% contraction was revised up to a 0.2% increase.

If it weren’t for the revision of the Q2 data, the UK would be in a technical recession. What does it matter? Recession or no recession, anecdotally, it’s fair to say few are confident about the state of their nation or economy. 

The learning opportunity comes from seeing how life in the UK mirrors life in America, with financial experts and planners offering few solutions (that stem from the 80’s) to monetary problems.

The country faces a historic cost of living crisis, fueled by a squeeze on real incomes from surging energy and tradable goods prices. The central bank recently imposed its largest hike to interest rates since 1989 as policymakers attempt to tame double-digit inflation.

In addition to rate hikes:

U.K. Finance Minister Jeremy Hunt will next week announce a new fiscal policy agenda, which is expected to include substantial tax rises and spending cuts. Prime Minister Rishi Sunak has warned that “difficult decisions” will need to be made in order to stabilize the country’s economy.

One economist was also cited saying:

...the sharp rise in mortgage rates, and the very early signs of house price declines, point to weaker building activity through next year.

In response to rising prices, we’re offered rising rates, rising taxes and spending cuts, with falling home prices as one of the many side effects. It must be mentioned that these economic problems cannot be fixed by a magical combination of the best tax policy coupled with a mythical optimal interest rate.

Those who seem ignorant of the Austrian Business Cycle Theory, like those in the mainstream media, always leave something to be desired, i.e. an explanation for these periods of inexplicable economic booms followed by periods of inexplicable economic bust.

They normally blame price increases on some exogenous shock, as CNBC blames the problem on an increase in “surging energy and tradable goods prices,” yet this lacks depth and honesty. To them, for some unknown reason, all prices just randomly increased.

It compounds, as to solve the mystery, central banks must then raise rates. With little proof of past successes nor assurances of future successes, we’re told that some time, normally around 30 to 40 years ago it worked swimmingly.

There probably is a technical recession in the UK already, as there probably is one in America. That statisticians play these games to avoid giving the title of recession is not surprising. What is surprising is just how long this game has been played. Ultimately, few remedies are available. Either we change the system from within, or remove ourselves from the system entirely; if not by internal change or external flight, eventually we’ll be consumed by it.

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The Midterm Lesson: Unserious People Can't Stop the Left

11/14/2022Tho Bishop
Listen to the Audio Mises Wire version of this article.

This year’s midterms came at a time when most Americans are poorer than they were two years ago, violent crime is on the rise, and exit polls seemed to unanimously point to voters prioritizing these basic facts over abortion rights and “democracy.” Everything was primed for a Republican red wave to set the table for a potential sixty-seat Senate majority in 2024.

Instead, Republicans underperformed historical midterm trends. The only “red tsunami” was in Florida, where Governor Ron DeSantis won with the largest margin since 1868.

The aftermath has reopened wounds that were inflicted when Donald Trump mounted his hostile takeover of the Republican Party. Beltway Republicans, who had largely remained disciplined in holding fire on Trump since his victory in 2016, have unleashed their pent-up rage, trying to scapegoat him for all of the Grand Old Party’s electoral woes.

No one is helping their case more than the former president. DeSantis’s dominating victory has further elevated the one political figure who presents a sincere risk to Trump’s position as a de facto political leader. What started as some public jabs against the governor before the midterms have now evolved into a full-on attack calling into question DeSantis’s “class” for refusing to pledge that he won’t run for president in 2024.

Unfortunately for Americans sincerely concerned about the rising threats presented by the modern Left, Trump’s in-character tantrums distract from a much larger problem: the political institutions of the American Right are led by unserious, inadequate individuals. If Republicans cannot recognize and properly respond to this, the Democrat Party will continue to enjoy the privilege of being the political equivalent of the Harlem Globetrotters, again dunking on the Washington Generals.

The greatest blame for the red trickle should be directed at Republican McLeadership: Kevin McCarthy, Mitch McConnell, and Ronna Romney McDaniels of the Republican National Committee (RNC).

McCarthy has spent his time as Republican House leader largely stumbling through inner-party politics, such as propping up the sinister Liz Cheney in House leadership before ousting her for refusing to follow his very stern warnings not to antagonize the party base. His attempt at crafting a vision for what Republicans do with power includes such vapid statements as “A Future Built on Freedom.” As party leader, he prioritized dedicating millions of dollars to attacking Republicans he feared wouldn’t follow his lead, such as Florida’s Anthony Sabatini and Washington’s Joe Kent, in primaries.

McCarthy’s performance can only be defended by contrasting it with McConnell’s. With the ancient turtle of the Senate facing his own budding rivalry with DeSantis’s successor turned senator, Rick Scott, McConnell’s Senate Leadership Fund was responsible for reallocating almost $10 million dollars away from Arizona’s tight senate race and to Alaska, propping up loyal swamp creature Lisa Murkowski against another Republican competing in the state’s jungle election. McConnell also enjoys the distinction of being the single most hated Republican in Washington, with an approval rating over twice as low as Donald Trump’s.

Hating Mitch McConnell is one of the few issues that can unite an increasingly polarized America.

Of course, many Republicans voted for Trump in 2016 in large part to remove the McCarthys, McConnells, and Romneys from power. Instead, Donald Trump let them back in, making Paul Ryan speaker in 2017, bringing McConnell’s wife onto his cabinet, endorsing Mitt Romney for Senate, and making his niece leader of the RNC. Additionally, Trumpworld raised over $100 million this election cycle for the Save America PAC to help finance Trump-style candidates. Less than $15 million was spent.

At a time when so many Americans wanted Donald Trump to lead the Republican Party, he outsourced that responsibility to his enemies that now want him purged.

While Trump’s brand of populist politics was never perfect, his instincts were always better than traditional Washington’s: a folk opposition to “stupid wars,” an emphasis on revitalizing the American economy, spicy rhetoric lambasting the worst of the Beltway’s political class, attacks on the corporate press, and a recognition that the regime security state was a threat to his liberty (and by extension, ours). As a right-wing populist leader, he thus embodied many of the characteristics that drew Murray Rothbard to Pat Buchanan’s 1992 presidential campaign.

Unfortunately, populism is a political strategy, not an end in itself. To his credit, Trump’s disruption of neoconservative hegemony over the GOP has manifested itself in the intriguing National Conservativism project, which could yet still provide the sort of intellectual artifice needed to reverse American decline. That requires, however, leadership capable of wielding power in a way that truly threatens the regime.

The problems America faces currently, however, are issues that politics alone are inadequate to address.

The current inflationary struggles undermining American quality of life result from the bipartisan empowerment of a Federal Reserve that—along with central banks worldwide—has engaged in decades-long monetary hedonism. Policies that have been disastrous for real America have been a boon for financial institutions and large corporations that have been happy to serve as an extension of the federal regime and to finance campaigns in return.

The third rail of American politics, Social Security, Medicare, Medicaid, and various other social welfare programs, suffers from a basic math program. The size of unfunded liabilities continues to grow as America itself becomes older. Young Americans are getting married later and less often, resulting in fewer children and creating new economic stress that many seek to address with increased immigration. The social costs of declining birth rates and changing migration patterns have additional consequences that economics alone can’t analyze.

Additionally, the Democrats’ overperformance in the midterms has identified major cultural concerns. Many voters have demonstrated they are more offended by the idea of a fifteen-week limit on abortion than by tyrannical covid lockdowns. Maybe there is a connection between an election that elevated a mentally damaged man to the Senate and a voter base that refused to punish governors whose policies are responsible for damaging the intellectual development of children.

These issues aren’t solved with elections but with a profound change in America’s economic, spiritual, and cultural realities.

The question now is what comes next.

As I noted after Biden’s inauguration, Trump’s moment has been one of the most exciting political developments in modern American electoral history. This remains true, even if the man responsible for its creation seems increasingly ill-prepared to lead it. Trumpers are still better than Trump.

This is why the brightest spot for Republicans in 2022 appears to be the best hope for American politics: Ron DeSantis. The question now is, Can he hold up in the face of a category 5 Trump storm after so many others have not?

Several points indicate DeSantis may be different. 1) He himself is a product of Trump, as the former president has noted. DeSantis went from afterthought to Republican nominee only after Trump’s endorsement, and his primary campaign was dedicated to reminding people just how dedicated he was to the MAGA brand. 2) He’s an executive with an unparalleled record of covid-era competency, effectively resisting both federal and corporate tyranny, genuinely increasing the quality of life of his population, and 3) now he's an electoral powerhouse reshaping the politics of his state.

For the first time, Trump’s attacks on a rival seem to be coming from a place of weakness, not from a place of New York swagger.

DeSantis has also demonstrated qualities unique in modern American politics. For one, he has been able to surround himself with truly talented people, such as his communications general, Christina Pushaw, who successfully pivot a media-created narrative about a “Don’t Say Gay” bill into a conservative war on “groomers.” DeSantis is also, well, intelligent. As Dr. Jay Bhattacharya told Tom Woods last year, he found it “remarkable” that the governor “knew all of the details” when discussing scientific studies on covid that did not fit the regime’s narrative.

He was even able to rebuild a bridge faster than several states count ballots.

America’s issues, however, are bigger than covid. Will DeSantis be able to apply similar distrust of “policy experts” in other areas of deeply ingrained Washington corruption, such as foreign policy, monetary policy, and the national security state? Skepticism of any politician is always warranted.

Ultimately, though, this year’s midterm disappointment for Americans hoping the lunacy of the Left would fundamentally weaken the Democrat Party highlights that the very real problems we face will not fall under their own weight. The antihuman threat of progressivism continues to rise, no matter how visually absurdly it manifests itself.

For those with a sincere interest in protecting themselves, their families, and future generations from the horror, now is the time to start formulating real solutions and strategies to engage it.

We can no longer afford unserious people.

Image source:
TALK MEDIA NEWS | Flickr
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When So-Called Financial Genius Failed—Again

When on Monday FTX CEO Sam Bankman-Fried (hereafter referred to as SBF) took to Twitter to reassure depositors that the third-largest cryptocurrency firm’s liquidity was fine, one could be forgiven for hearing echoes of Bear and Lehman’s c-suiters talking to CNBC to reassure their respective sources of funding, their short-term lenders, that their liquidity was also fine, when in fact their own firms were in their death throes. That sense of foreboding was temporarily eased when on Wednesday it was announced that Binance, the market’s largest crypto firm, would rescue FTX by absorbing it in a takeover reminiscent of the one that saw J.P. Morgan gobble up the smaller Bear Stearns during the onset of the Great Financial Crisis. 

However, after just a few hours of Binance’s due diligence team looking over its rival’s books it was announced Thursday that the deal was off. As a CoinDesk report the week prior had noted uneasily, FTX had put much of its depositors’ money into “hard to sell” positions. These included large equity stakes taken over the summer in troubled crypto-players BlockFi and Voyager, as well as large loans to one of SBF’s other business ventures, the Hong Kong based crypto trading firm Alameda. Facing a $4 billion dollar shortfall, the firm announced Friday FTX and all its related companies were filing for bankruptcy. 

It marks the largest collapse of a crypto player to date and sparked a sell off in crypto markets already badly beaten down by rising interest rates.

The irony that it was Binance that had first dangled salvation before taking it away was not lost on informed observers of the crypto space. Following a series of public spats over SBF’s perceived friendliness toward financial regulators having gone too far, Binance’s announcement that it would begin closing its large position in FTX helped spark the run that eventually killed the firm. 

The problem, apart from Binance’s impending withdrawal, was the signal it sent to the market. Selling its FTT holdings, the digital token underlying the FTX network, worth billions of dollars at the time, would tank the price. If you know a whale is selling, it’s best to be out first, and that logic prompted huge withdrawals. For its part, meeting these calls for customer cash became increasingly difficult for FTX. Even if it had been able to access the FTT it had lent to Alameda, which was being used as collateral to trading counterparties, selling it for cash at distressed prices would have likely blown up both firms. On the one hand, selling so much FTT would have tanked the price, putting FTX in dire financial straits; while on the other, the fall in the asset’s value would have triggered a cascade of margin calls on Alameda’s outstanding positions.

Just like Bear and Lehman, whose houses of mortgage-backed collateral collapsed when a sudden panic over their quality meant the positions were effectively unsaleable and would not be taken as collateral, FTX and its related companies had no assets they could sell quickly to raise cash and no collateral any counterparty wanted to take.

From being worth billions to being bankrupt in less than a week, given the similarities between the implosion of FTX and the financial crises faced by other firms in the past, several recurring lessons seem worth pointing out:

First, hold a diverse balance sheet. Much of the panic that results in the variations between asset classes going to one is caused by firms realizing the instability large un-diversified counterparties pose to the system. From Long Term Capital Management’s short equity volatility position to the investment banks that bet it all on their subprime securitization businesses, a lack of high-grade liquid assets will always leave a firm on knife’s edge. 

Second, when credit conditions begin to tighten firms need to either deleverage or else carefully manage their liquidity. Neither of those things happened. 

Third, when depositing money at an institution, one is in effect making a loan. The interest rate, therefore, should be seen as an indicator of the level of risk a depositor is taking on. In the case of crypto lenders, operating without the Federal Reserve’s safety net, the interest rate offered to attract lenders is generally several times higher than one could get at a legacy deposit taking institution. The reason, as just evidenced, is that these firms are paying buyers for taking on the risk of a complete loss of capital.

Fourth, beware obvious conflicts of interest. Just as it should have been a red flag that the ratings agencies were being paid by the banks for their ratings and had to compete with one another to retain the lucrative business of the big banks, SBF’s role as unencumbered head of both FTX and Alameda deserved much more scrutiny than it got.

Finally, it isn’t just “dumb” retail investors that are on the hook for huge losses. Several large institutional investors face a combined billion dollars in potential write downs. Such “smart” money made all the classic mistakes that have seen banks from UBS and Credit Suisse to Merrill Lynch get themselves into loads of trouble before. Related hedge funds or special investment vehicles that could potentially expose a lender to losses need to be carefully supervised, and by at least two different people. 

Taken in by a story told by a charismatic young entrepreneur, these investors all chased yield at their peril, whether they knew it or not.

One can only hope the inevitable calls for more regulation of the crypto space and an expansion of the powers of the Consumer Protection Bureau will be deterred by cooler heads, who recognize there was nothing so special in the death of FTX at all. 

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