Wednesday, April 22, 2009

The Works of Murray N. Rothbard, Part II


Before I begin, I need to pass along to you some wonderful news from the Ludwig von Mises Institute. Most of the books and seminars offered by the Institute are now available online for your education and enjoyment free of charge. Please see

Last year's (2008) essay left off with Man, Economy and State, so this year I will begin with its sequel, Power and Market.

In Man, Economy and State, Dr. Rothbard said a few things about interest rates. I believe what he said was key. Since my essay was posted, we did indeed enter a major recession. You have seen some major spectacles on TV. People are out of work. People are losing their homes. We are in a terrible way now, in late November, 2008, as I begin writing this (and still are in spring, 2009. Ed).

All kinds of reasons are being given for the problems. Ron Paul is the only one who is making sense, but nobody is listening to him (1). All the talking heads are discussing is “corporate greed.”

The government is throwing out money by the bushel basket, mostly in the direction of the bankers and big corporations, the same people who are being raked over the coals for being greedy and messing up the entire economy.

My own opinion is that artificially low interest rates set by the Federal Reserve are the main culprit. When interest rates are lowered, the money supply is increased, or inflated, resulting in higher prices. Lower interest rates also encourage borrowing. The Clinton administration imposed regulations that forced banks to lend to people who might not really have been qualified to borrow. According to some news reports, on average today people are thousands of dollars in debt. People embarked on projects the consuming public did not really want. That is, people were embarking on business ventures that the bad market signals had indicated were wanted by the consuming public, but actually were not wanted. Businesspeople were getting wrong signals. Now their chickens have come home to roost and businesses are having to close their doors, throwing people out of work. You see TV news stories about plants closing and you see the suffering of laid-off employees who find themselves looking for jobs that simply are not there.

Everybody feels their pain and wants to help. People are generous but people who need help themselves cannot help others.

Since I can, I am determined to take food to the food banks and increase my donations to the church which is reaching out to feed, clothe, and shelter the homeless, the numbers of whom are increasing. I hope you can give too, since this government of ours seems determined to make things worse.

Actually, this is really what the establishment has been waiting for. More centralization of wealth and power leading to world government is the New World Order they have dreamed of. Another benefit to the powers-that-be is that, as the economy gets worse, recruitment to the armed forces might grow.

President Obama seems determined to out-Bush Bush, even to be freedom-enemy FDR all over again.

Ron Paul is ballistic, as is everyone who understands economics. The wise are stocking up on non-perishable food, guns, ammunition, and gold.

So, once I finish Power and Market (this is really to finish the work I started last winter), I will turn to some of Murray Rothbard's works on monetary economics and the Great Depression, which seems about to be re-run.

(1), Paul, Dr. Ron, “Mises and Austrian Economics: A Personal View” and other works.

Power and Market

Man, Economy and State
(The Scholar’s Edition, 2004)
by Murray N. Rothbard

Right away, Chapter 1 is titled “Defense Services on the Free Market,” in which I thought – goody gumdrops – Dr. Rothbard would again disprove gun control notions. But, rather, he discussed how police protection and courts have to be provided by private companies rather than a government if we are truly going to have a free society.

It is hard to swallow, even for a libertarian, but let’s face it, one cannot, at least I cannot, refute him.

The thing is, the main function of government is to protect the property rights of individuals (which include “human” rights), but, in order to function, government must take from these same individuals in order to pay its employees to do the protecting. It is hard to protect rights by infringing on them. It makes no sense. You cannot have your cake and eat it too, so one has to choose: Does one believe in rights or does one believe in government?

Government is not necessary for the definition of rights. All one needs is reason; Rothbard and others, such as Mises and Hoppe, have shown that rights are a priori. Without them, life cannot go on. This was elaborated on in Man, Economy and State in the Crusoe illustrations.

And Rothbard goes on to point out that people who are under different governments with very different laws in some cases can get along fine. Then, why is government necessary at all to make people get along in peace? (1)

So, back to a free market defense system, what would we have? That the individual has the right to self-defense is a given. Otherwise, what else can be done? We cannot know any details of how any free-market defense would work, any more than we could have known how the television industry would work fifty years before television (2). But we do know some generalities. Dr. Rothbard thinks that chances are security companies would sell subscriptions or memberships and charge regular premiums in much the same manner that insurance companies do. In fact, insurance companies might take on this work (3). In an unfettered free market, with free entry, there would be genuine competition, eliminating a lot of the present problems with insurance companies.

Of course, there is the real possibility that any given protection or security company might become rogue, or start to behave like a criminal gang. This would be difficult in a free market because rival companies would step up to the plate and put a stop to it. Why? The paying customers of the rogue company and also the honest companies say so, that’s why. Customers can always take their money elsewhere.

In contrast, government agencies can do as they please. If you own a gun store and have a brush with the BATFE, you know this very well. Also, if you run a medical marijuana dispensary, you know how much control consumers have over the DEA. You cannot stop your payments to these agencies; the IRS will see to that. Under government, the breaking of heads and the taking of property is legal or else laws against it are ignored. In the free market it is illegal and the law is justly enforced.

We move on from that brief chapter to Chapter 2, “Fundamentals of Interventionism.”

The most fundamental fact here is that to satisfy one’s wants, one must either work to produce what he wants by making it himself or exchanging for it, or he must take it from somebody by force. It is either/or (4). One who uses the latter means can be called an intervener. This person intervenes into the order of the free market. There are three basic kinds of intervention, all hegemonic, and I will cite my own examples of each in hopes that you can relate.

First, there is autistic intervention (5) whereby the intervener dictates to an individual as to how the individual conducts his life or uses her property. An example of this would be mandatory seat belt and motorcycle helmet use. Such autistic intervention as exemplified by these laws has become more draconian by the year, and proves beyond a shadow of a doubt that the government is interested only in becoming more powerful as the God-given rights of individuals are usurped.

The system is such these days that those who advocate such laws that “protect” the individual from his own “foolishness” will often say the health care system will have to pay a great deal more money to restore someone to health who was injured in an accident only because he was not wearing a seat belt, and had he been wearing one, such injuries would not have occurred. What this actually shows is that the government should not be involved with health care in the first place, but that individuals should be required to be responsible for their own health and safety. This gets us into the affordability of health care which again shows the system is a quagmire of economic and collectivist fallacies, for one thing the level of taxation is the first most important reason health care is unaffordable. Dr. Rothbard treats these fallacies in many places in his works, so right now all I can do is say what I say more than anything else (except maybe that individuals need to have guns) and that is people need to know their economics.

The second kind of intervention is binary intervention (6). In this instance, the intervener forces the individual to turn some property over to the intervener. Taxes are the example coming to mind right away. You work hard all year in hopes of being paid enough to make all the time and effort put into your job worthwhile. From the time you leave home until the time you return you are working for that paycheck. When you receive that check, have a look at the stub and see what has been withheld for income tax. It is outrageous. Regardless of what you think of wars and other government endeavors ... you might even favor them (please tell me why) ... you must admit that you and your employer have zero to say about these deductions.

Governments take and take and take. There are so many ways they do it, including inflation as Rothbard explains. If inflation is 5 percent per year, then the dollar you have today will be worth 95 cents a year from now. So, the government has taken away from you a nickel for every dollar you have. This is a 5 percent tax. What can you do? Zero! If you are going to be smart and save, they will tax your smartness this way.

The last type of interventionism is triangular (7). In this case, a deal between two individuals is interfered with. Say a family is having dinner at home and shares a bottle of wine. The youngest child, a 20-year-old adult, partakes of the wine. By no stretch of the imagination is this going to disrupt civil order in any way. But in the eyes of the government, the serving of alcohol, even by the parents, to a neonate of a mere 20 years of age is enough to bring the sky crashing down on a ruined civilization. Of course that is not literal, but the battering ram and ten police cars outside are very literal if the wrong people get wind of the fact that this child is all of three days before the magical age of 21.

Now, it is pretty easy to flout ridiculous laws of that sort in the privacy of your home. Sometimes. This private home had better be isolated if this family would like to pass a joint along with the wine.

But some equally intrusive and unjust interventions usually cannot be avoided. Try to get a job without a Social Security number, or if you are the wrong age and cannot live at home. You probably do not want to work at what few jobs are available to you.

The bad things that happen to you that are no fault of your own are often the result of some intervention, meaning some infringement on your rights, and as often as not this intervention is by government. All three kinds of interventions are bad as they force people to do something other than what they would otherwise do, meaning utility is lost. The consequences of all kinds of interventions go much further than one thinks they will (8). The book deals with these consequences. Dr. Rothbard points out that there is actually no way to effect any real change under the circumstances, as the Libertarians repeatedly said in this last election, which was allegedly about change. I firmly believe that no true change will occur under the Obama administration as intervention will continue. The details might change a little bit, but the system is still involuntary, therefore interventionist.

We have already belabored the method interventionists use to keep people obedient. That is propaganda.

As a result, people have the idea that government agencies can prevent harm to consumers. We saw in Man, Economy and State that they cannot. The left insists that consumers are ignorant of the information they need to make smart choices and that bureaucrats who are distant can make smart choices for them. That is insane; you are right there doing your full-time job of being responsible for you. The politician or bureaucrat does not even know that you are alive, and makes decisions in a one-size-fits-all manner. These decisions are based on wrong data, and have far-reaching consequences (9) that most likely cannot be traced back to government decisions (10).

A good and timely example is touched upon on page 1071. We are having great economic problems right now, just before Christmas, 2008, as thousands are losing their jobs. The lack of consumer spending in holding prices down (which is a good thing in and of itself) and jobs are hard to come by when normally seasonal part-time jobs open up. The establishment is blaming the whole mess on greed, while actually all the problems can be traced back to artificially low interest rates and an increase in the money supply. The propaganda machine will not allow the Ron Pauls of the world to explain what is really happening.

All the incentives are wrong, Dr. Rothbard explains (11), for bureaucrats and politicians to serve the public. Why should they? After all, their pay comes from compulsory taxation rather than voluntarily paying customers. The politician who has to run for re-election will use the propaganda machine against a challenger who is equally unfit and has less name recognition, and possibly third-party candidates who may be fit but get no media coverage at all. The incumbent can also count on cronies whom he favored while in office. Since one voter has very, very little influence over an election, there is very little incentive to look into the records of candidates.

By contrast, in the marketplace the consumer is sovereign.

In the next chapter, “Triangular Intervention,” we begin to examine the far-reaching adverse effects of government intervention. These cases are when the intervener compels two people to exchange in a manner that is different from the way they would have exchanged if left free.

There are two general kinds of triangular intervention: Price control and product control. Price control dictates the terms of an exchange and we have seen this dealt with so many times it is unnecessary to hash it over here. Even the establishment had to give up on this intervention after it saw the inevitable results of freedom-enemy President Nixon’s price-freeze decree (12).

But, Dr. Rothbard goes into more detail on price controls by discussing exchange rates (I have personally experienced that roller coaster since I spend a great deal of time in Canada, so the first thing I do when I get there is to check the exchange rate, even before I check the price of gasoline), bi-metallic standards (when government decrees the ratio of two money metals such as gold and silver), and usury laws (where interest rates are tampered with). These are all under price control.

Product control is then treated by discussing prohibition (again, this has been touched on in other Rothbard works which I have reported on) and rationing (a form of partial prohibition, an example of which would be the limit on how many guns a person may buy within a given period of time), government priorities (some people have better access to a product than others), and maximum-hour laws (when a law forbids one to work more than X hours a week, as women’s earning capacity used to be limited, holding them back).

The grants of compulsory monopoly are also a form of product control. This was discussed in Chapter 10 of Man, Economy and State. Compulsory monopolies are obviously injurious to the consuming public, so in order to keep them, government uses its foremost tool: propaganda. Many laws that enforce monopolies or partial monopolies are not even associated with this by the gullible public, and are only opposed by libertarians on individual rights grounds. Most of the time, the government is claiming to be “protecting” someone. Examples are (13) licensure, child labor laws (with a very high age of majority), minimum wage laws, anti-pushcart laws, Sunday blue laws, and more, which do nothing except to grant special privilege to some businesses and limit consumer choices. These rules create partial monopolies. These and other examples are then elaborated on (14). The bottom line is that consumers always lose out on goods and services they might have enjoyed at lower prices, businesses lose out on production opportunities, workers lose out on preferred jobs they might have done well, and government bureaucrats win as they gain on money and power. This is what Dr. Rothbard is focusing on here, although my main objection to them is the infringement on the rights of individuals.

But it is the politicians and bureaucrats who make the rules, so it should surprise nobody that they are made to benefit them, the politicians and bureaucrats, and the rest of us are just unwilling cash cows.

Out of these examples, Dr. Rothbard mentioned immigration restrictions. Of course in a free market the flow of people from one country to another would be as unrestricted as the flow of goods and services. Dr. Rothbard advocates open borders. Wages tend to equalize the world over, given a free or only somewhat hampered market.

But, what he ignores (at least in this section of the book) is the welfare system, public “education,” and all the various ways people can feed at the public trough at your expense and mine. I cannot agree with open borders unless and until we clean up this welfare system, or at least find a way to prevent foreigners from partaking in our welfare.

I frequent Canada. In Canada I am a foreigner. I am there on a visa and have to live by the terms of that visa. The terms are easy except I cannot work for pay. So, I don’t. If I help someone out, I do not accept any money or in-kind remuneration. When the visa is up, I have already left. How would it be if I were to seek free medical care? That would be wrong. I either purchase a health insurance policy or I pay out of pocket. By the same token, foreigners who are here in the U.S. should not have their expenses paid by the government here. They need to buy insurance or pay out of pocket, and they need to refrain from working if they do not have a green card or whatever it is that permits them to work.

Many changes must be made before I think we can have open borders. Once these changes are made, open ‘em wide! Basically, Dr. Rothbard is right; his theories are sound.

Dr. Rothbard discusses anti-trust laws (15) which are supposed to be pro-competition, anti-monopoly laws. These laws have been on the books longer than most people have been alive, so they are regarded as a fact of life, and not questioned. They are not analyzed by anyone, not even establishment economists. For if they were, they would have to be re-thought. If there is any criticism of these laws it is that they are too weak.

But, as we saw in Man, Economy and State, the only true monopolies are those that have obtained monopoly status from special privilege granted by the state. Therefore, anti-trust law does not prevent monopolies. What it does is to allow the government to harass business by trotting out anti-trust charges whenever it pleases (16). If government really wanted to stop monopolies, it would simply stop monopoly privilege.

Government itself is a monopoly. One thing this particular monopoly called government does, something nobody has the natural right to do, is to forcibly prevent one from selling labor or some other product without special permission. Without the special permission, the selling is illegal. This special permission to engage in a particular line of work or to conduct a business is called a “license.” The false idea behind this is that there is no right to conduct business, but that it is a “privilege” granted by the state. In order to conduct a business, one must be granted a license, for which one must pay a fee, sometimes a large fee.

We have learned that to buy, sell or trade (i.e., carry on business) is a natural right.

Dr. Rothbard discusses the trend toward monopoly inherent in the bribing of public officials. A bribe occurs when someone wants permission from a public official to do something that is illegal. The person pays the public official to look the other way (17).

What is really the difference between selling a license and taking a bribe? Economically, and in Dr. Rothbard’s opinion, none! None at all! Licensure is simply bribery with a cleaned-up name. I have always opposed business licensure and occupational licensure mainly because it infringes upon the right to start a business (nobody has to patronize the business) or to bargain with prospective employers or employees. Compulsory union membership, I may add, is not different. It all keeps prospects out of a field, tending towards a monopoly favoring those already in the field. The solution to both problems (the blow to individual rights and the monopoly trend) is, of course, to repeal the laws that outlaw the activities.

And, we have to remember that government itself is a monopoly! Just try to compete with it! As we have seen in this chapter, government is at the bottom of all monopoly and its attendant problems.

All of this has been triangular intervention, whereby the government prohibits, requires, or regulates an agreement between two other parties, causing a trend toward monopoly.

So, how does government acquire the funds to finance this intervention? We already know from Man, Economy and State that inflation fills establishment (including government) coffers. We also know about taxation, the direct compulsory collection of the people’s hard-earned money.

Now, let me ask you this: Is the difference between inflation and counterfeiting, and the difference between taxation and robbery any more than the difference between licensure and bribery? Is it really? (18) Are government officials better than the rest of us or must they live by the same standards? We need to get real about this! It is going to hit the fan in this country and the sooner we get real and stay real, the less we will suffer.

Now, Dr. Rothbard asks us who is hurt by and who benefits from taxation and expenditures. Obviously, the people who pay the taxes are hurt the most. As I have said at least once before, look at your paycheck stub and see how much has been taken out for taxes. This is money you worked hard for but were not even allowed to look at. Next, look at a sales receipt and notice the sales tax that the business had to absorb and still get you to buy the product (19).

Who benefits? Government bureaucrats. They are the people who tell you what to do. They are the police, building inspectors, judges, and school officials; they have a heck of a lot of power. They are the “deciders.” This goes for politicians, of course, but at least politicians face re-election. Bureaucrats get tenure. You are paying them to mess up your life, even to take your property.

This is liable to cause the problem of public support. Therefore, there needs to be more than just government employees on the government payroll. There are those who adhere to the government’s cause, whom Dr. Rothbard calls “adherents” (20). I would say that these are a large part of the “establishment.” The armaments industry is an example, companies that manufacture war materials. I think today one could cite Halliburton and Blackwater as examples. This would include suppliers to these companies. This is one way wealth drifts toward establishment interests.

It also shows how taxes and government expenditures distort the market, and it thus proves that a “fair” tax or “neutral” tax is neither fair nor neutral. Government spends this money in the marketplace, but not in the same way the consumer would. Consumers would spend it on food, clothing, shelter, education, entertainment, medical care, self-defense, and other things people need. The government takes money from these areas of the economy and spends it on war materials, prison cells, chasing down pot-smokers and seat-belt-non-users, and other things that people do not need. Of course, some of the money goes to border security (such as it is), roads, bureaucrat salaries, some medical care, and some things people do need. But, how efficiently? Regardless of how you think about these issues, you must understand that the spending is changed from what it would have been had earners been allowed to keep what they earned. So, the economy is distorted, and it is mainly the little guy with no connections who loses out as resources are taken away from what he wants (21).

This distortion of the economy, I fear, is about to get even worse. This is because of the distortion caused by government taxation and spending level (regardless of kind) proportional to the private sector (22). We have just about finished (it is nearly Christmas 2008) the disastrous Bush administration, the earmarks of which were enough spending to make drunken sailors appear sober and frugal, so a great deal of the distortion we see now is from this cause. But while we can celebrate Bush’s retirement, we have to face the Obama administration which promises to be even worse. They are describing new policies to be like unto FDR to combat the present recession. This is scary for numerous reasons, and for an elaboration on that, please see my 2004 - 2005 winter essay, The Three Worst American Enemies of Freedom (23) for my thoughts on FDR’s sorry record, paying close attention to works cited in the footnotes, which are worthy of reading by anyone who is interested in the subject.

Dr. Rothbard, in his discussion of taxes, talks about income vs. sales taxes (24). Many libertarians, including myself until I took courses in Austrian economics, would like to see a repeal of the income tax and an enactment of a national sales tax to replace it. The rationale is that this would end the dread Internal Revenue Service with its mounds of personal information requirements and it would tax consumption rather than earnings.

While this would be a step forward, Dr. Rothbard shows that it is all wrong.

Most people believe that it is the customer who is paying the sales tax; that the seller is “passing on” this expense to the customer. They tell you that the item you are buying is X dollars and Y cents, “plus tax.” This leads you to believe that you are paying the tax. Actually the price of the item includes all you pay (plus time and expense).

Let’s say that I won’t pay more than $9.00 for a T-shirt as per my example in last year’s essay. That is $9.00, plus time and expense of getting to and from the store. I bundle my errands, so this might be negligible. Of course I know what the sales tax will be and that is considered. If this tax brings the T-shirt over the amount I will pay, I will not buy. I will buy at $8.50, tax or no tax. I will not buy at $9.50, tax or no tax. If the store does not absorb the tax, it loses business.

I remember an example from a few years ago when I was in British Columbia. The government announced an additional sales tax of three cents a liter on gasoline to go into effect on a given day. The demand for gasoline is inelastic (until prices rise to a certain level), so I thought prices would be up by three cents the morning of the tax. Sure enough, they were. I thought that maybe we were not entirely right about this, at least when demand for the product is inelastic, but if we were right, prices would drop back again by competition, forcing producers to absorb the tax. Not many days later, the prices were down again, vindicating the Austrian economists. This could have been the straw that broke the camel’s back in the case of some fuel stations, closing the station and throwing its employees out of work.

Sales taxes, explains Dr. Rothbard, do not get passed forward as a product is sold from one producer to another on its way to completion and the end consumer. Rather, the taxes get passed back to the original producers on their income. They harm everyone by distorting the economy.

Technically, I think the added gasoline tax I just mentioned is an excise tax rather than a sales tax. But, it boils down to the same thing. Whatever you think of the oil industry, for better or for worse, they are the ones who are paying the tax, and they are specially penalized to the same extent that other products are not taxed the same way (25). The supply of the product in question is lowered as some producers are driven out of that line of production. This will cause an upward trend in the price of the product as demand will not change. The tax, like all taxes, causes distortions in the economy, and these distortions favor government and government-subsidized firms at the expense of the independent private sector.

Consequences of a direct tax on income are more straightforward. It may be that this tax, which reduces the remuneration for your productivity, and hence your standard of living, can either discourage your productivity, or else the greater marginal value of what few dollars you have left can force you to work harder to make up for it (26). Either way, it is a loss. The same work means less income. More work means less leisure, and leisure is also an economic good.

Time preferences are adversely affected by the income tax (27). Less income means a greater percentage of the reduced income must be budgeted toward present necessities, such as food, clothing, and shelter that must be consumed before another paycheck is received. Therefore, a smaller percentage can go into savings and investment. A higher time preference, meaning a greater emphasis on now rather than the future, is forced onto individuals who really are wise enough to put something aside for future needs. Investment into badly needed capital is curtailed.

Those who retort that government expenditures are “investments” are kidding themselves or are being sucked in by propaganda such as education spending’s being an “investment in tomorrow’s leaders,” or highway work’s being an “investment” in the road. It is true that investment may occur (28). A rebuilt bridge today may prevent a catastrophe next year, or at least save on next year’s higher cost of the work, and under other circumstances education expenditures now would pay off in a more productive populace in future decades, were it not for the fact that government schools do not teach students to read or think, at least not very well.

The point really is that money spent by government is spent on things that the marketplace does not necessarily want as much as it wants the things the money would have been spent on had taxpayers been allowed to keep that money. There would have been real investment, directed by the marketplace.

The chapter continues the discussion of various kinds of taxes, one by one for about 100 pages, but the conclusion is always the same: The economy is distorted away from the approach the consuming public prefers, and economic signals to entrepreneurs and businesspeople are skewed so they are less able to profit by fulfilling the needs of consumers.

The “progressive” tax, whereby higher-income people pay a higher percentage of their income in taxes (29), is discussed at length. My gut reaction is that this is fairer than a flat tax, but my gut reaction is based on my emotional response to poverty. It is also based on the very long and numerous days I put into a career that paid only a moderate salary. Obviously we would all like to help the poor, and I make it a point to give to food banks and charitable activities of the church. But, my gut reaction to the progressive income tax is one hundred percent wrong, since Dr. Rothbard shows beyond doubt that what is wrong with this is the level of taxation in all brackets, and not the progressive nature of the tax (30). What is needed is an across-the-board tax reduction, even if this means a tax that is more steeply progressive. This would punish high-earners less and this would distort the economy less while forcing government to shrink.

Later in the chapter, Dr. Rothbard discusses the “just” tax. We covered the just price already last winter. This is whatever price people are willing to pay for a good. However, since in a truly free market, there is no tax, so the “just tax” is a contradiction in terms.

Adam Smith tried to describe a “just tax” (31). It should be inexpensive to collect and relatively convenient to taxpayers. But, since when do bureaucrats want to keep costs down? Their jobs are on the line, so make-work is inevitable. Also, an expensive and inconvenient tax is more likely to be flouted, so it is actually more just than a cheap, easy one (32).

In discussing the distribution of the tax burden (33) Dr. Rothbard reiterates something we all should understand (whether we agree or not), and that is that taxation is basically like slavery. Therefore an equal distribution of the tax burden is no better than equal enslavement, and that to escape taxation is no more immoral than it is to escape slavery. Some will cry that it isn’t fair that some can escape the tax while others cannot, so the means of escape must be cut off. The real solution to this inequity is to discontinue the tax altogether.

This does not even mention the problem of defining “income” (33). Would it include an increase in the market value of your house? The market value of plants grown in your garden? The wages you would have had to pay a housekeeper had you not done your own housework? If these market values were counted as income, in the absence of actual sales of these products, how are these values to be determined? And what about “capital gains?” Is this income? If it is, a correction for the purchasing power of money must be made (34).

In fact, if you want to make any attempt to be “fair,” the purchasing power of money must be considered in determining the tax.

So, Dr. Rothbard has shown that taxes are both immoral and impractical, and even if there were such a thing as a “just” tax, there is no way to calculate it justly. Nor is there any way to accurately calculate “ability to pay” (35).

Nor is there any way to calculate the sacrifice an individual makes to pay a tax. As individuals differ, the perceived sacrifice differs. If you are a libertarian and oppose just about everything the government does, a “small” tax is probably a big sacrifice, but to someone in the establishment, a “big” tax may be a small sacrifice. Therefore it is impossible to calculate a tax on the basis of sacrifice (36).

Then, beginning on P. 1245, Dr. Rothbard begins a section called “Voluntary Contributions to Government.” I had to laugh out loud. Say what? Anyone who thinks our “voluntary” income tax is voluntary in any way, shape, or form is out in la-la land. Hero Irwin Schiff had been preaching that there is no law saying one had to pay an income tax because the federal government could not produce one, and he has now gone to prison for that. He was right, but he is in prison. Others believe that because we use un-backed-up paper as money, we have no real money, so we owe no taxes. They are right too, but some of them are also doing time.

It is compulsory, it is harmful, and it is wrong. ’Nough said about taxation.

Rothbard then turns to the binary intervention of government expenditures. He points out right away that the intervention of credit expansion (a very important topic at this time) was discussed in Man, Economy and State (37).

Government expenditures have multiplied like rabbits, especially during the allegedly conservative but actually far-left Bush administration. Some of these expenditures are “transfer” payments such as subsidies, welfare, and Social Security payments, but many of the most recently prolific ones are what Dr. Rothbard calls “resource-using.” The wars are an example of that, as are the enforcing of numerous laws that have also multiplied like rabbits. The housing of millions of prisoners, many of whom are non-violent drug or gun offenders, is also an example as, in a free country, they would not be law-breakers at all. Actually, there is a lot of overlap between transfer and resource-using expenditures, but there is still a distinction (38).

Transfer payments such as subsidies encourage factors of production to remain in areas where they are used less efficiently. Right now, the automakers are a good example. Without going into why the automakers failed (over-expansion of credit and artificially low interest rates are at the bottom of the entire economic mess and that includes automaker failure), the Bush administration’s bailout of these companies is wrong because if these companies are failing, perhaps they should fail. While I feel for the workers being laid off during the holidays, a free market would open up new jobs for them, and this money, kept by the taxpayers, would be spent or invested in areas that the consuming public really wants. To keep these dinosaurs on life support now will only delay their demise and all the hardship that goes with it.

Another aspect of resource-using expenditures besides those above is the pricing (39). There is no way to determine the pricing of government activities. Those who consume government “goods” such as roads or schooling do not pay market prices. There is no way to tell if consumers are getting their money’s worth, as the paying and the consuming are severed. The government cannot find out how much to spend on what, so politicians and bureaucrats arbitrarily decide. Even if a government “enterprise” is run “like a business,” it is false because the government can always obtain more funds through taxation (40). Also, managers are not investing their own personal funds. If you can remember, the Post Office was “privatized,” re-named the Postal Service and run “like a business” in order to “make a profit.” Many people fell for this, and believed that the post office was then actually a private company. All who were paying close attention and had even rudimentary understanding of economics knew that there had been no real change. When losses occurred, tax money was injected. This gave the Postal Service an unfair advantage over UPS and other package delivery firms.

This is enough to drive anyone “postal.”

As we have pointed out before, the inability of government “enterprise” to determine prices is the most important practical reason socialism does not work. Socialism, whether it be actual undisguised socialism where government owns the means of production, or fascism where the means of production are nominally privately owned but actually directed by government (we are headed that way at breakneck speed as the Bush administration ends and the Obama administration begins) (41) never has worked and never will work because it cannot work. Prices, i.e., how much to pay, how much to charge, and how much of what to produce is impossible to calculate in a socialist (or fascist) “economy.” Dr. Rothbard, and Dr. Mises before him, and others, have proven that beyond a shadow of a doubt, and the results of socialist attempts around the world have vindicated them.

I personally consider socialism (including fascism) as in the same category with other superstitions. Socialism is false just as is the idea that a black cat crossing your path will bring you bad luck.

Socialism, Dr. Rothbard says, is the “polar opposite of the purely free market.”

I had to pause. “Polar opposite.” That is saying that socialism and freedom are as far apart as the two poles. I have to wonder. These left-wing types who preach socialism also want more freedom, so they say. They bemoan the insane war on drugs but want to step up the war on guns. They scream bloody murder when the police beat down someone’s front door but oppose the private ownership of land. They want to help the poor but criticize businesses like Walmart that sell for very low prices and also give first-time workers a chance to get started in the workplace. We all start at the bottom. To cut the bottom rungs off the ladder of success by jacking wages above market is not going to help. They want to help the poor but refuse to study their economics to find out why gouging the rich is going to hurt the poor.

The left, and the Bush-ite neoconservatives who prattle about the free market and are really part of the left, are trying to get to one pole by heading straight for the other one.

But, what about staying at or near the “equator”? What we have had here, and what they have in most countries, is a “mixed economy,” or a partially socialist and partially free economy. We have been moving toward the socialist “pole” for decades, at least 150 years, but we are not there yet.

While the plethora of rules and regulations and the extent of taxation are at the top of the list of culprits, the expansion of government lending is up there too (43). Dr. Rothbard makes this a very important point, as he says that, regardless of the legal status of the lender, the lender is also part owner (44).

Think about it. Did you make a sizeable loan to anyone? Or did you borrow a sizeable sum from anyone? Does that not change your relationship? If someone owes you thousands, don’t you feel you have a claim on them? Of course you feel that way, because you do have a claim on them. Even if you believe and follow the Bible and will forgive the loan, this is still the case.

This is another reason free market people like Ron Paul are so dead set against the bailout of banks and automobile companies. Of course, the banks have been in the government’s stable forever, and the big automakers have not exactly been averse to a centralized economy. But this bailout is horrific for numerous reasons and Dr. Rothbard is pointing this out. Government will now be part owner of these companies, which is a giant step to socialism.

And, we must not forget a lesson learned from Rothbard and others: “Public” or “government” ownership really means ownership by those officials who are the deciders (45). Additionally, there is no incentive for these officials to use the property efficiently, as when they leave office they cannot take it with them. Rather, they are inclined to abuse it for their own self-aggrandizement while in office.

The next chapter, “Antimarket Ethics: A Praxeological Critique,” explores some of the most popular criticisms of the free market.

One of them is individuals do not know what is best for them, so they need Big Brother to protect them from their own foolishness “for their own good” (46).

I suppose this is all right for children under ten or twelve, but they have their parents to guide them, and the rest of us are big boys and girls now, so who are these government officials to wreak all of this harm on us “for our own good?” Are they better than we are?

The free market assumes that all individuals act in their own perceived self-interest and that individuals are far more able to determine their own interests than anyone else. And, if one is not sure exactly what to do to further his own interests, one may hire a consultant (47). For example, to stay out of trouble with the IRS people, who, if they are paying attention, know that I am fiercely opposed to their very existence, I go to a tax preparer. I also pay the preparer extra to run interference for me. Chances are you have a doctor, a dentist, and maybe even a financial planner. You can discontinue these services any time. At the end of the day, you call the final shots. Or, at least you should. We are not a free society any more. You can do these things within the limits prescribed by Big Brother. In some areas of life, there is no freedom at all. Try to remodel your house. Even if the house is all paid for, just try it without Big Brother’s licenses and permits (for a fee, naturally). You will run into an avalanche of “have to’s” and “can’ts.” You will soon find out that one’s home is not one’s castle at all.

To remodel your home, you should be able to choose your own experts (or do it yourself and learn the hard way as you go). And, in fact, you can, but these experts have to grovel to Big Brother’s “experts” for expensive licenses. Who is to say that Big Brother’s experts who license contractors, doctors, and just about all other professionals, know what they are doing or care what they are doing when they are tax-paid bureaucrats and probably tenured? Their positions are political, and perpetuating the system and their positions is their priority (48).

One of the main reasons some people advocate strong government is that people are evil (49). They are right that everyone is evil, but everyone is good, too. Everyone is a mixture of good and evil. No one is perfect. That is why Jesus died on the cross. Nobody can become perfect. Therefore, some say, we need a strong government to keep people in line. This is an error. First off, who determines what is good and what is evil? We have the Bible and we have our ability to reason. We may have some a priori knowledge that it is wrong to kill, steal, etc., and can agree that these acts should be prohibited. Some actions infringe on the rights of others and these are the actions that should be prohibited. But there are some actions that do not, or might not, infringe on the rights of others. They might be sinful, but should not be illegal. Smoking a joint, keeping a loaded gun in one’s purse, sleeping with someone who is not your spouse harm no-one except possibly the participants and violate no rights. My own view is that the first is sinful only because it is unhealthful, the second is not sinful at all, and the third is sinful because it may have far-reaching effects on the participants and also the new life it might bring, a child without two full-time parents. I think the last of the three is the worst, especially since it is one thing that the Bible expressly prohibits, but it is the only one that is legal.

I could try to foist these beliefs on others, but to do so I would have to believe that I am somehow better. But I am not. And, neither are any of those who are charged by our powerful government to enforce the rules.

There is one thing you may notice about those who advocate strong, all-inclusive government. They imagine themselves (or at least someone who thinks like them) as the one to determine what is allowed and what is not. In reality, not only will they not be in charge, but whoever is will foist rules on them that will be entirely different from the rules they want. It is then that they will realize that government officials are not better.

All the power that the neoconservatives worked so hard to give George W. Bush will now be in the hands of Barack Obama. They are already sorry. We warned them about this, but of course they would not listen.

The fact that we are all imperfect is one of the few things we all have in common. Dr. Rothbard treats the concept of “equality” by showing that there is no such thing except for equality of natural rights (50). We are not equal, rather we are all different. Different talents and different levels of ambition will reap different incomes. It is impossible that we even start out equally since being born in different places means different opportunities. And, there is no way to change that. Remember the Parable of the Talents (51). What the parable tells us is that we all have different resources and abilities, and the important thing is what we do with what we have.

In an effort to complete this segment and move on to some of Dr. Rothbard’s works on monetary policy which are so critical to understanding the situation at hand, I skipped over part of this chapter, but beginning on P. 1321 there is a section called “The Charge of ‘Selfish Materialism.’” The free market discourages altruism and distracts from “higher” goals is what we hear all the time. We do not even have a free market for gosh sakes but the establishment keeps talking about how “unfettered laissez-faire capitalism has caused the current recession” (52). This is such nonsense that I would hardly know where to begin if it were even necessary to hash over yet again how unfree our almost-socialist market actually is. If it is a free market at all it is only in comparison to the degree of socialism the establishment apparently wants.

As for “selfishness,” as a Christian I am put in an untenable position by the prattlings of the left/neoconservative, Bushite, Obamaite establishment. The Bible says help the poor, go the extra mile, turn the other cheek, love thy neighbor as thyself, and so on. And I certainly believe in that and live accordingly to the best of my ability.

This does not mean that one should not put oneself first. Rather, you have to put yourself first. If you do not take care of yourself, how do you expect to care for someone else? Your minister had to study, perhaps paying large sums to go to school for years before being able to do his or her job. The doctor needs to rest before surgery. I was operated on early in the morning. I wanted to make sure that the doctors had taken care of themselves before cutting me up.

Jesus often prayed for a long time in preparation for a major job.

You have to put yourself first! Any other idea is nuts! So, don’t listen to this B.S. about not being selfish.

A person’s monetary income serves his chosen ends which may be altruistic or “selfish.” Whatever the person does is what he believes is in his rational self-interest. A successful person might be able to afford a yacht for himself or to build an orphanage. He will choose according to his rational self-interest (53). The establishment person, thinking inside the box, will laugh and say, Guess which I will choose! Chances are he will be right.

Why would that be in many cases? Do you have any idea how difficult our so-called “free market” has made it to build an orphanage? No? Well, go down to your city hall and see where one can start all of the bureaucratic procedures to get the licenses, permits, zoning variances, etc., and don’t forget to ask about the fees and time frames! This is assuming you even can find out! I think you will agree with me that buying the yacht is far simpler, not to mention quicker. [Editor’s note: Look up the story of when Mother Teresa tried to open a shelter in New York City. Even her saintly patience was so tried, she gave up.]

In a truly free market, all it takes is to buy the land, hire the builders and architects, and go ahead and do it! Of course, one is responsible. But, even in our regulatory micromanagement, if anything goes wrong, the philanthropist or entrepreneur is still held responsible, even though it is government that makes it such an obstacle course that many additional things can go wrong.

In any case, the pursuit of monetary income cannot be rationally criticized. Altruism requires this as much as egoism does. Monetary rewards are good measures of how well one is serving consumers. As I said last winter, Bono’s income far exceeds mine, and rightfully so. If you want to be truly unselfish, then earn as much as you can by serving customers. Of course, the left-wing (and neoconservative) altruists will tell you that you are selfish. They will always do that, until you adapt your lifestyle to their dictates.

Many of these same establishment types that bleat “selfish!” at people who are well-to-do because they are ambitious (and that is no matter how charitable they are), will also say that a competitive free market takes us “back to the jungle” (54). I really do not think I need to say it again, as Murray Rothbard has made it so very clear as I have pointed out so many times, but the free market is not just competitive, it is also cooperative. Think back to Crusoe alone on the island and how difficult it was, and how much easier he and the other man made it for each other, and how much easier yet it was as more people arrived. Law of the jungle? Quite the contrary. Actually it is more government involvement that takes us back to the jungle.

Dr. Rothbard moves on to a section called “Power over Nature and Power over Man.” This is particularly interesting as in the beginning of Genesis we are told that man has dominion over the earth and what this means is that we human beings are responsible for the earth and all the plants and animals on it. It’s ours. God gave it to us (55). Of course we have learned that the best way to take care of the earth and ourselves is for individuals to privately own whatever they find, make, or exchange for. Dr. Rothbard has spent a lot of time and pages explaining this.

But some individuals believe they can own, or at least control, people. Of course, they cannot. What came to mind, even before reading the section, was those who presume that government should enforce morality as they see it, and that wars should be fought to uproot regimes they see as detrimental to their goals.

There is this group or these groups of people whom some call “dominionists” who believe that the admonition in Genesis also means dominion over people. I did want to include something about this in my essay, How the Bush Administration is Destroying our Country and Damaging the Christian Church (56), but never had time to research it. Most likely, the Bush administration was supported by these, and chances are there were many in the administration itself. It would be worth looking into.

I firmly believe in what Genesis says, not only because I believe in the Bible’s being the Word of God, but because it simply makes sense! Man must “conquer” or use nature in order to stay alive (57), and cooperation rather than coercion makes it possible to give and get help in doing that. This is compelling evidence that the Genesis passage refers to dominating the earth, plants, and animals, but not human beings.

Dr. Rothbard touches on the leftist-invented dichotomy of human rights and property rights (58). The left often talks about the need “to place human rights over property rights.” This makes no sense at all, as property rights are human rights. The individual owns himself, as he is his own property. Were this not true, he would be a slave to some other person (where would that person’s right to him come from?) or to society as a whole in which case he would have to ask everyone’s permission to do anything.

We have seen that this is incompatible with life.

Some individuals believe that the property rights to be abolished would be the right to land and big ticket items. This, they believe, would make it possible to respect human rights over property rights. The left, for example, is all for freedom of the press (or at least claims to be). In fact, some even agree with us libertarians that there should be no censorship at all, not even of (indefinable) hard-core pornography. However, the state, they believe, should own all the land and the means of production including printing presses. If the state owns all the presses (or, nowadays, a monopoly on Internet service provision), what makes you think it will allow just anything to be published? How do you think priorities will be set for publication?

Even if printing presses are allowed to be privately owned, what makes you think there will be land allocated on which to put the press? Or even put your feet if someone in power does not like you?

The answer seems to be: “Trust us.”

Yeah, right.

Human rights are property rights, and that includes the right to own land. It also includes the right to protect your property, and that means the right to self-defense, including the right to own a gun.

As the book is winding down, Dr. Rothbard critiques an important study that was published a few years before he wrote the book (59). Not having read the Henry M. Oliver study I cannot really judge, but Dr. Rothbard thought it was a pathetic attempt to explode laissez-faire. He goes through some or all of Oliver’s objections to the free market, which appear to me as pathetic. It would not be worth mentioning at all were it not for the fact that some of these objections are still being heard and that the book was very well received by the establishment. It would be worthwhile to read the Oliver book with the Rothbard critique close at hand.

Dr. Rothbard ends the book with an overview of all the principles that were explained in the book, the difference between a free market society and a socialistic one, with emphasis on the fact that every economy is somewhere in the continuum between them.

1) Rothbard, Murray, Power and Market, Auburn: Ludwig von Mises Institute, 2004, P. 1051.
(2) Ibid. P. 1051.
(3) Ibid. P.1052.
(4) Ibid. P. 1057.
(5) Ibid. P. 1058.
(6) Ibid. P. 1058 - 1059.
(7) Ibid. P. 1058 - 1059.
(8) Ibid. P. 1069.
(9) Ibid. P.1070.
(10) Ibid. P. 1071.
(11) Ibid. P. 1070 - 1074.
(12) Ibid. P. 1076 - 1077.
(13) Ibid. P. 1093.
(14) Ibid. P. 1094 - 1144.
(15) Ibid. P. 1117 - 1121.
(16) Ibid. P. 1117.
(17) Ibid. P. 1141 - 1142.
(18) Ibid. P. 1050.
(19) Ibid. P. 1151 - 1152.
(20) Ibid. P. 1152.
(21) Ibid. P. 1154.
(22) Ibid. P. 1155.
(23) Scroll down to Franklin Roosevelt to see a litany of blow after blow he dealt to the economy, preventing recovery and destroying freedom. Please do check out the works cited in the footnotes.
(24) Rothbard P. 1156 - 1162.
(25) Ibid. P. 1162.
(26) Ibid. P. 1165.
(27) Ibid. P. 1166.
(28) Ibid. P. 1168.
(29) Ibid. P. 1191 - 1196.
(30) Ibid. P. 1194 - 1195.
(31) Ibid. P. 1216.
(32) Ibid. P. 1217.
(32) Ibid. P. 1218.
(33) Ibid. P. 1222.
(34) Ibid. P. 1223.
(35) Ibid. P. 1227.
(36) Ibid. P. 1234 - 1235.
(37) Rothbard, Murray, Man, Economy and State, P. 989 - 1024 (Same volume as Power and Market)
(38) Power and Market, P. 1254.
(39) Ibid. P. 1261.
(40) Ibid. P. 1262.
(41) Ibid. P. 1273.
(42) Ibid. P. 1273.
(43) Ibid. P. 1274.
(44) Ibid. P. 1274.
(45) Ibid. P. 1277.
(46) Ibid. P. 1300.
(47) Ibid. P. 1301.
(48) Ibid. P. 1301 - 1302.
(49) Ibid. P. 1303 - 1308.
(50) Ibid. P. 1308 - 1312.
(51) Matthew 25:14-30.
(52), Woods, Thomas E., Jr., “We Need Our Heads Examined, Says Harvard.” This is of interest in this regard. In early March, 2009, Harvard sponsored a conference called “The Free Market Mindset” that included top establishment thinkers (?) who just did not see the “elephant in the living room.” Dr. Woods raises the obvious questions they never touched on.
(53) Power and Market P. 1322.
(54) Ibid. P. 1324 - 1326.
(55) Genesis 1:26.
(56) Click on 2007 in Blog Archive.
(57) Power and Market P. 1330 - 1331.
(58) Ibid. P. 1337.
(59) Oliver, Henry M., Jr., A Critique of Socioeconomic Goals, University Press, Bloomington, 1954. There is a link at

What Has Government Done To Our Money?

(1990 Edition)
by Murray N. Rothbard

The question is asked: Why do we need money? Why do we exchange? I dealt with this last year in my first essay on the works of Murray Rothbard. Money is the medium of exchange, a marketable commodity that everyone wants for the purpose of exchange. I pointed out Dr. Rothbard's analysis of how exchange among diverse people in diverse locations is necessary to prosper and how money makes exchange much faster and easier. Gold and silver have the most time-honored uses as money, because through the centuries they have won out as the most marketable commodities.

It must be emphasized that money is a commodity. The only difference between the money commodity and other commodities is that the money commodity is demanded primarily as a medium of exchange (1).

Another emphasis is that the private manufacture (also called “minting”) of coins, or pieces of gold or silver resembling coins, is a legitimate function of the market (2). If someone owns a piece of metal, he or she has every right to shape it in any way, including a round, flat disk. However, if one does this today with gold or silver, one runs the risk of arrest for counterfeiting.

Dr. Rothbard continues his case for absolute freedom of money by discussing price stabilization and co-existing moneys before launching into “money warehouses” and banks.

Storing money (gold) in a warehouse and then using receipts for this money in trade was discussed in Man, Economy and State. The warehouse owner is in the business of safely storing money (gold) for his customers. He gives the customer receipts for the money that the customer placed in his care. These receipts may be traded for goods and services, and the money never needs to leave the warehouse unless the holder of the receipt wants to take it out (3). If the warehouse owner is honest he will not make up receipts that claim to represent physical money but in fact do not.

These warehouses are today analogous to banks. The receipts for the money are analogous to our dollar bills (and, of course, $5, $10, $20, etc. bills), but many people nowadays prefer to write an order to the warehouse (bank) to transfer some of their money to someone else without having to deal with “warehouse receipts.” This order is a check.

In an unhampered market with a commodity (such as gold) standard, checks and paper “money” are only stand-ins for the real deal.

The warehouses (banks) are businesses and have to make money just like any other business. They charge fees to their customers for keeping their money safe. If banks print up receipts for money they are not holding, they are being dishonest. Customers who find out will withdraw their money. And they will be quick about it too, as they know that phony-baloney receipts are redeemed, the bank will run out of money before all the real receipts are redeemed.

This issuance of un-backed-up receipts is called “fractional reserve banking.”

If enough banks do this, we have more receipts in circulation than there is gold in the bank. People believe they are richer than they really are. Now, we have “inflation” (4). Inflation is a fraud on bank customers. It would not be tolerated in a free market.

The important lesson we have learned from the book so far is that money, on the free market, must be a useful commodity that is used as a medium of exchange. If it is not, inflation is bound to occur.

Dr. Rothbard continues (5) to explain another very important concept: Inflation does not happen evenly across the board. The new money created reaches some people before it reaches others. These “first receivers” are usually people who are well connected. The recent bailout (recent when this was written in late October, 2008, and referring to the bailout of late summer, 2008) of $700 billion went primarily to banks and other fat-cat institutions. I never saw a dime. Did you? The only people on the lower rungs who get any will be borrowers. All recipients will go forth and spend a goodly portion of this new money. It will not be very long (a few months) before prices across the economy will drift up. In fact, I have begun to notice it already, except in the area of gasoline prices, which dropped in the fall of 2008. This came at an opportune time for me, since my summer place and my winter place are a few days' drive apart. This break in gasoline prices proves yet again the law of supply and demand. Had demand not fallen, I believe we would have been paying at least $4.00 a gallon, whereas it is actually well under $3.00 at this time.

Dr. Rothbard drove home that point many times, but right now he is talking about inflation. By the time the new money has “trickled down” (and up and over) to you, the well-connected have gone forth and spent, driving prices up. They did much of their spending before businesses had time to realize demand was up and adjust their prices accordingly. Later, if you are lucky enough to be still working and get a raise, the new money finally comes your way. But a lot of good it does if prices have already gone up. It is even worse for those on fixed incomes. The extra money you have to spend to pay the higher prices is like a transfer payment from you to the well-connected who get the new money first.

I have said many times that the establishment's system is set up in such a way as to assure that wealth gravitates to establishment interests.

Of course, prices do not all go up at the same time and rate any more than all people get the new money at the same time. This makes business calculation difficult (6). How can a business people determine what the cost of a capital good will be when they know it will have to be replaced in five years? Or even five months? They cannot. How can they even tell if they are making a profit if they cannot calculate their expenditures in five months? And, although it is very difficult for even a talented entrepreneur to anticipate consumer wants, it becomes nearly impossible when nobody knows how much purchasing power anybody will have in even a few weeks.

The exact situation we are in right now is what causes the business cycle (7).

After a brief history of coinage and bimetallism, Dr. Rothbard demonstrates that legal tender laws give rise to inflation. Legal tender laws give the government a money monopoly. Under them, only the sovereign government's money is legal to use as such and, therefore, the government has control of the nation's money.

As soon as governments took control of their countries' money in this manner, gold and silver was used in exchanges between countries only, not individuals (8).

As usual, it was government propaganda that sold the people on centralized control of the money by way of central banking. Then, as now, government blamed economic problems on the free market rather than government misbehavior.

We had free banking in the U.S. in the early part of the 19th century (9), and some of the bankers were unscrupulous and stole from their clients. The government did not stop this theft as it should have, and then blamed the free market for the problems. Today we do not even have a free market at all and haven't for several decades. In the early 19th century we did have a lot of freedom, but the government seemed to look the other way when real crimes were committed by its cronies such as bankers.

Central banking eliminates all checks on inflation because central banks have a monopoly on note issue. The only brake on inflation is the competition between national currencies. This is why the establishment's dream of a world-wide currency with a world central bank would be a disaster.

Dr. Rothbard briefly outlines the effects of fiat (government-issued or central bank-issued paper backed by nothing) money.

This was followed by Part IV of the book, beginning on P. 90 of the 1990 edition, where Dr. Rothbard traces the decline of money through inflation in the 20th century.

Until 1914 the situation approached the ideal, where most countries' currencies were defined as weights of gold. Exchange rates were therefore fixed, but not by government edict. An American dollar, for example, was worth 1/20 ounce of gold, and a British pound was about 1/4 ounce of gold. This meant that a pound was worth about $5 yesterday, today, and tomorrow, by definition (10). This made things a lot easier on people who traded with others in different countries. It was almost as good as having an international free-market currency. Dr. Rothbard emphasized that gold was not arbitrarily picked out of a hat by government bureaucrats as the commodity money, but that (despite what establishment textbooks teach) gold gradually came to be used on the free market because it fills the bill for consumers. Equally important, it wards off inflation and other government tampering and keeps the balance of payments in equilibrium (11).

The system broke down because governments broke it down (12). To the U.S. government, and other governments, the waging of the unnecessary World War I was more important than the well-being of the people. Big surprise! War is good for the establishment elite; the gold standard is not.

Later, the “gold exchange” standard was established. This was to allow foreign governments to exchange their dollars for gold, but individuals could not. Dr. Rothbard does not suggest it (although I have a strong hunch he would agree) but, judging from the havoc caused by this, I have to believe that the intentions were less than honorable.

Economic law will eventually catch up with government shenanigans, and in 1968 the system started to crack. The dollar was fixed at $35 per gold ounce. Americans were not allowed to own gold coins or bullion, but citizens in other countries were allowed to and did. They sold their American dollars for gold at $35 per ounce which was a real bargain because the real value of the inflated dollar was much less. Gold, therefore, was leaving the country, and dollars were returning. Why Americans obeyed the gold prohibition edict I will never understand.

The establishment was telling us that people's faith in paper would grow and that gold would drop in value in the marketplace. If you have been tracking the price of gold (and silver) you know how wrong they were!

On August 15, 1971, Mr. Establishment himself, arch-enemy of freedom President Richard Nixon went on television and announced the economy was about to be hit with two of the biggest blows he could deal, and be all but destroyed. He did not say it quite that way, of course, but he might as well have (13).

The first blow was “to combat inflation.” He froze all wages and prices effective immediately. Even a college freshman who has taken a microeconomics course knows what a disaster that was. I have written a lot in past essays so I will say no more here.

The second blow was a total severance of the dollar and gold. This meant that the dollar was now totally fiat. We have seen the results of that, too.

Older people can remember the price inflation that took place in the 1970s and in this book Dr. Rothbard briefly explains why.

What is needed is to go back to the classical gold standard, as he makes obvious. But, alas, since the book was written, we have gone in the opposite direction, drifting toward a world fiat currency, controlled by a world central bank and well-connected elite who would be the deciders about who would be the first receivers of newly printed money. I don't think you or I are in the running.

We already have a regional currency in Europe, the Euro. Internet savvy people are aware that there is a move toward another regional currency on the American continent called the Amero. A regional currency could be coming to the Far East, too. Eventually the establishment hopes to merge them all into one. This would pave the way for inflation to the establishment's stony heart's content.

Dr. Rothbard's work is a warning.

(1) P. 20, Rothbard, Murray N., What Has Government Done to our Money (1990 Edition), Praxeology Press of the Ludwig von Mises Institute, Auburn, 1990.


(3) What has Government Done to our Money, P. 43 - 45.

(4) Ibid. P. 48.

(5) Ibid. P. 55 on.

(6) Ibid. P. 58.

(7) Ibid. P. 61.

(8) Ibid. P. 68 - 69.

(9) Ibid. P. 70 - 71.

(10) Ibid. P. 91. Actually the pound was worth $4.86. P. 95.

(11) Ibid. P. 92.

(12) Ibid. P. 94.

(13) Ibid. P. 105.

The Case Against the Fed

by Murray N. Rothbard

However scary and threatening, government agencies, even the dread Internal Revenue Service, are all subject to being checked by Congress.

One entity, however, which people who know their economics believe is the scariest since it has iron-clad control of the nation's monetary system, is accountable to nobody, not even Congress. It is the Federal Reserve (1).

The establishment assures the public that the Fed needs to be in such a position. Anything as important as that needs to be “independent of politics.” Don't fall for it! What that really means is the Fed can do anything it darn pleases with the money supply (2). The banks the Fed controls like it that way. There is something fishy here. Since when do those who are being regulated want unbridled power in the hands of their regulators (3)? The Fed wants this power “to fight inflation.” Hah! And, since when do bankers want inflation checked (4)?

The fact is, there is inflation. Only one institution can bring it about (legally, that is, but illegal counterfeiters are few and far between) and that is the Federal Reserve as it creates more money out of thin air. The Fed stays away from “inflation” to about the extent that I stay away from pasta, and that is darn little.

So, the Federal Reserve is not a solution but is a big problem. To understand this, Dr. Rothbard says (5) we need to understand the history of money. I have discussed this in other essays in reviews of Rothbard's other works, so it is not really necessary to go into much detail here. Suffice it to say that any commodity that is used in the market and is marketable enough can be used as a medium of exchange, or money. This commodity can either be used as a consumer good in its own right or as something to exchange for other goods. Gold and silver are both time-honored moneys (6). This did not come about by government edict. It came about over time in a free marketplace. Having such a medium of exchange greatly facilitates and accelerates prosperity. It also allows business firms to calculate profits and losses more accurately than is possible under barter.

Dr. Rothbard reiterates, and I will too, briefly, that, even though money is a “good thing,” an increase in the supply of money in the economy will not be helpful (7). This is because this increase cannot augment the amount of available goods and services in the market. There is no “optimal” supply of money. Now we are beginning to see through the Fed's and the establishment's propaganda.

That counterfeiting is wrong should be obvious to anyone. But what is not so obvious is that the manufacture of un-backed-up money by the Federal Reserve is really not different (8). The temptation to counterfeit is in the fact that the counterfeiters get to spend the “money” they manufacture before the increase in the money supply they are causing has had a chance to raise the price level. This enriches the counterfeiters at the expense of the rest of us. Those who get this new money first, the counterfeiters themselves, are the “first receivers” of the money. They get to spend it right away. Those businesses they patronize and their employees receive it next, and the businesses they patronize receive it next after that, and so on and so on. By the time you and I get it, the new demand caused by it has already long since pushed up prices, so actually the “first receivers” of the money have benefited at our expense (9). As I said before, this amounts to a transfer payment from you to the well-connected.

Inflation, therefore, does not happen evenly.

Next time you pour cream into your coffee, observe something. When you pour the cream in (slowly near the edge of the cup will illustrate this better), the coffee nearest the cream source gets the cream first. The coffee on the other side of your cup stays black a while longer.

Think of the coffee as the marketplace, the cream pitcher as the Federal Reserve and the cream as money. When the Fed manufactures money backed up by nothing and adds it to the economy, they add it through the banks. The first receivers are the well-connected establishment people, for the most part, although there might be an occasional dissident first receiver. Their place in the “coffee” is near the source of the “cream.” People like most of us are closer to the other side where the “coffee” remains “black,” meaning it lacks the new money. By the time we get it, supply and demand have already raised the price level.

This is why wealth gravitates toward establishment interests. And, as far as the Federal Reserve's manufacture of money is concerned, is this really any different from counterfeiting?

Is it? Just because it has the blessing of the government? Unless you think of government as some sort of god, you have to agree with Dr. Rothbard and me on this!

This is the root cause of our economic problems in late 2008. Obviously greed in places other than government is a factor, but the main blame is on the Fed and the federal government (10). But people will fall for any propaganda the establishment dishes out because almost all public school graduates and most private school graduates are illiterate when it comes to monetary economics.

And, you can bet your last nearly-worthless dollar that, while government officials are acting as though they are scrambling for solutions and throwing you a few crumbs, they are laughing all the way to their cronies at the bank! They are aware that inflation is more than just a general rise in prices due to an increase in the money supply. They are aware that it is an uneven distortion of the economy through transfers of wealth (11). They know this; how could they not?

Dr. Rothbard then discusses loan banks in a free market. These banks borrow from you when you set up a certificate of deposit for interest, and then they lend that money at higher interest (12). There is nothing crooked or inflationary about this.

Next, he turns to the subject of warehousing and warehouse receipts, which is something we have seen in other works.

The point driven home (13) is this. Right now, in November, 2008, the government is anxious to “get the economy going again” by a couple of ways that Dr. Rothbard believed (and so do I) are totally pernicious. One is they want to encourage borrowing. So they enact this $700 billion “bailout,” giving huge amounts of money to banks and other such entities. Where did this money come from? Thin air! It rolled off the printing press. This is a blatant case of first receivers being the bankers. So is the money being loaned? From what I hear, no. Well, thank goodness! It is the low interest rates and liberal lending practices that got us into this mess in the first place! Do you seriously think the same practices will get us out? The banks seem to know better, so they are being cautious.

The other way they claim to be restarting the economy is “economic stimulus packages.” Tax “rebates” went out to less well-to-do taxpayers last spring, and I wrote in last year's essay that I hoped people would be smart enough to use this to pay down their debts and to squirrel away what was left for a rainy day. This is exactly what people did. This isn't rocket science! If you are in debt and realize you have nothing at all saved for retirement, and this check comes in, what would you do? Buy a big-screen TV? Not if you have a measurable I.Q. But the Bush administration, which created this money out of thin air, wanted you to do just that.

In Man, Economy and State, Dr. Rothbard explained why saving and investing creates more employment and wealth over the long run than spending does. This is why bailouts and “stimulus” packages will not work in the end.

Now, President-elect Obama (as I write this in November, 2008) wants another “economic stimulus package” and will probably call for another bailout too.

Back to the bankers, they want to keep the public in the dark, or at least in blind faith, about their solvency. They are not solvent, thanks to fractional reserve banking. This means the banks only hold a fraction of the reserves needed to cover all the demand deposits. Now, what if all, or even some, of the depositors wanted to draw out all their money at the same time? This thought strikes fear into the bankers because banks cannot honor their promise to very many people (14). The bank would go belly-up, unless it got a supply of cash from the Federal Reserve's printing press. That would really be inflationary.

If there are monetary problems (and there are right now in November, 2008) and banks begin to worry about runs on banks (which they do), what they are likely to do is curtail loans (which they are) (15). Obviously, this is the smart thing to do. Just as you and I cannot spend ourselves rich, banks that are in trouble due to loan defaults are likely to hold on to their money. Prospective borrowers are thinking twice also.

The Bush administration, and the coming Obama administration want more lending and more credit and the Fed is pumping new money into the banks. I have said this before and will be the first to admit that I seem like a broken record. But this is critical. This is exactly the wrong thing to do, and in the long run it will not solve the problems that government's poor monetary policy has created. I will belabor this no more right now. I think you get the point, or at least you will if you read the book.

Dr. Rothbard gives a brief history of central banking. We learn that this creates a cartel among a country's banks. They all do together what, in a free market, no one bank would dare do and that is to not have sufficient funds in case all the depositors wanted their money at the same time (a bank run), or if there were anything like a gold standard, not have enough gold deposits either in the bank or at the central bank.

One bank trying that in a free market would quickly go out of business as has been explained. But all of them together, under the central bank, would only have a problem with banks in other countries (16). The central bank has no control over banks in other countries. This is why the establishment would like to see a world central bank.

Once the brief history of central banking in general is discussed, Rothbard gives us a brief history of banking in the United States. It was interesting to note that it was the Republican Party during Lincoln's time that called for a central bank and inflationary policies, where it was the Democrats (the party of Jefferson) who were calling for sound money. Actually that should be no surprise after reading my The Three Worst American Enemies of Freedom on this blog and the references listed (17).

And, of course, nobody should be surprised that it was the big industrialists who were also the top Republicans who were the most avid supporters of central banking (18). The Panic of 1873, which was caused by war and inflation, was what brought about at least a temporary victory for gold (19). I guess it is too much to hope that the economic crisis of today would re-kindle a gold standard, as today's people are so terribly uninformed of such matters and government is so much stronger. Unfortunately, by the turn of the century, the Democrats fell and became even worse than the Republicans.

As the strong belief in freedom decreased, the power of the anti-hard-money establishment increased (20). In Dr. Rothbard's narrative on how central banking with its attendant inflation and gravitation of wealth toward establishment interests, it is plain that the establishment snookered the general public into acceptance of central banking. It did it through academia and newspapers such as the Wall Street Journal (21), which should surprise nobody since in modern times the “educational” system and the “news” media have replaced the church as the means of keeping the people in line.

The actual bill to authorize the central bank was hammered out at a posh resort on Jekyll Island, Georgia, in 1910. The participants were a who’s-who of the new establishment which still has to this day a stranglehold over each and every honest, hard-working person on the planet, and which is responsible for the poverty, illness, and death of billions of people worldwide. These people, and those who took over for them after they died and went to where nobody wants to go, have destroyed our freedom and prosperity, and somehow have managed to fool enough people enough of the time to continue the destruction.

Dr. Rothbard (22) describes a step-by-step process of how the money supply is inflated, at least how it was done when the book was written. I doubt there has been much change, unless it is for the worse.

So, what to do? Obviously the Fed has to be abolished. While this is not going to happen any time soon, Dr. Rothbard ends the book with ways it could be done.

(1) Rothbard, Murray N., The Case Against the Fed, Ludwig von Mises Institute, Auburn, 2007 edition, P.3.

(2) Ibid. P. 4 - 5.

(3) Ibid. P. 7.

(4) Ibid. P. 9.

(5) Ibid. P. 12.

(6) Ibid. P. 16 - 17.

(7) Ibid. P. 19.

(8) Ibid. P. 20 - 22.

(9) Ibid. P. 24.

(10) Ibid. P. 24 - 25.

(11) Ibid. P. 25 - 26.

(12) Ibid. P. 29 - 33.

(13) Ibid. P. 39 - 40 in particular.

(14) Ibid. P. 46.

(15) Ibid. P. 54 - 55.

(16) Ibid. P. 64.


(18) The Case Against the Fed P. 78.

(19) Ibid. P. 78.

(20) Ibid. P. 91.

(21) Ibid. P. 112 - 113.

(22) The Case Against the Fed starting P. 137.

The Mystery of Banking

(Second Edition, 2008)
by Murray N. Rothbard

The foreword to this book, by Prof. Joseph T. Salerno, who is an associate of the Ludwig von Mises Institute ( which I proudly support, points out that an important aspect of the book, possibly the most important, is that it asks and answers the question: Just who benefits the most from the Federal Reserve? In fact, who benefits the most from all the various government regulatory agencies?

I have said often the system is set up in such a way that wealth gravitates toward establishment interests. Let's see if it does.

The first two chapters examine concepts Dr. Rothbard explained in Man, Economy and State and other works. I wrote on this last winter in The Works of Murray Rothbard, Part I on this blog. One of these concepts is how money originated, how a marketable commodity gradually, by custom, comes to be used in trade to alleviate the need for a “double coincidence of wants.” I illustrated by asking what would happen if my favorite rock band were headed this way and tickets had to be obtained by barter in the absence of a marketable commodity that is customarily used as money. How would I get a ticket? Somebody has a ticket he will part with but he wants a dog. I have no dog I will spare, so decide to go to the pound to get one for the ticket man. How will I pay for the dog? Well, dogs like steak and the pound has dogs to feed, so I get a few steaks out of my freezer and go to the pound. I surrender the steaks and they surrender a dog. I take him and surrender him to the ticket man, who gives me the ticket. Everyone is happier, but look at all the work that had to be done, and all the luck that was necessary. Over time, people realized some commodities were always welcome in a trade. These commodities could have been anything, but silver and gold prevailed. These became money, and that is how money originated. Government is nowhere in the picture.

The other concept is the law of supply and demand. I illustrated this with my own demand for T-shirts. I can often find nice T-shirts in a thrift store for $1. I will almost always buy one if I see one or, as an economist would say, the “quantity demanded” is high at that low price. Conversely, if the shirt is $25 I will probably take a pass. The “quantity demanded” is very low. The price on the tag depends on what the shop keeper believes he can get. If the supply in the store is too much and he wants to get rid of them, he will lower the price to attract more buyers.

The shop keeper's supply, plus the supply in other shops, constitutes the “supply.” The “demand” comes from customers who are in the market for the product in question. You can plot it on a graph to find the “equilibrium price,” or the price at which all the items are sold and all who want them can buy.

Once these concepts are reviewed, Chapter 3 goes into the demand for money itself. Right away, I see where Dr. Rothbard explodes the actions of the Obama administration, and the Bush administration before it. (There is really not that much difference between them.)

An individual's demand for money is the amount of money he wishes to hold on to (1). Obviously, everybody wants to have as much money as he can get. But he only has X amount. He spends or invests some of what he has, and keeps the rest. The part he keeps, or his cash balance, is his demand for money.

The demand for money is tied to the price level. If prices are high, one's demand for money or one's need for a cash balance is high, and vice versa.

If new money is pumped into the economy by the Federal Reserve, such as by way of bailouts or “stimulus packages,” people, particularly the “first receivers” or early receivers of the new money, will see that their cash reserves are higher than their demand for money, so they will go out and spend, bidding prices up (2). This means the purchasing power of each dollar has gone down, because of more dollars chasing the same amount of goods. Now, prices are rising and people are now finding themselves short, so they are demanding more money by trying to add to cash balances and therefore cut back on spending.

The government has been yapping because people are not spending. The myth it is trying to make us believe is that economic problems now are the result of a cutback in spending and borrowing. It is not difficult to see what hogwash this is: You do not spend yourself rich. You save yourself rich.

So, the general price level is determined by the supply of and demand for money itself. If one of these changes, the price level changes.

Let's assume the money supply in the economy increases (3). This causes the people (or some of the people) to have extra cash in their balances. What do these people do? They go right out and spend, driving prices up. After they spend for a while, they see that their extra cash is almost gone, partly because of rising prices. When they see that their cash balances do not exceed their demand for money, they slow down their spending and things return to normal (sort of). Of course, the early receivers of the new money have benefited at the expense of the later receivers, as was explained by Dr. Rothbard in Man, Economy and State and other works, and I hope I have made it very clear in my reviews.

When the money supply falls, the opposite occurs, but how often does that happen?

That is how the money supply affects the general price level. The other factor is the demand for money (4). There might be a reason the demand for money rises, that is, a lot of people are holding on to more of their money. This means they are spending less, causing a shift in their demand schedules, which encourages a reduction in prices. A general reduction in prices means the money they have is worth more and that will reduce their demand for money. Of course, when the demand for money decreases, the opposite occurs.

My main focus here is the supply, even though Dr. Rothbard seems to be focusing on both the supply of and the demand for money in the next two chapters. The reason for my focus is that, right now, as 2009 and the new Obama administration begin, and government seems to want to bail out anything that shows signs of life, this bailout and the new “stimulus package” might total up to a trillion and a half dollars! Now, where in the heck is all this going to come from? We have to remember that this is on top of other government expenses! I needn't list these, but I cannot resist throwing some more darts at the illegal, immoral, and completely wrongheaded wars and the monstrosity unleashed here at home called “Homeland Security” which are worst than wastes of our productivity.

And, because the States are all strapped for funds (they cannot possibly consider any cutbacks now, can they?), I think the Obama administration is more than likely to bail them out too.

Naturally these bailouts will always mean more federal control over the industries and states to be bailed out and, yet again, power will gravitate to Washington.

Were I a betting person I would wager that Obama will out-Bush Bush in centralizing power into the federal government, into the Executive Branch and into the White House.

Goodbye, cruel world, I am off to Canada.

But, the money has to come from somewhere. Taxes? That would necessitate a huge tax hike. The left is screaming for more taxes on “the rich.” There are lots of issues here (the destruction of jobs is one, since the “rich” use their wealth to provide jobs), but right now the main issue is that there are not nearly enough truly rich people to be taxed enough to cover the kind of expenditures the government is considering. And, if the “rich” are taxed that way, they will not remain rich very long. This tax hike would have to be a major one on everybody. This will be a tough sell, and will take a very long time.

So, how else can they raise the money? What is almost certain is that money will simply be made (printed) out of thin air, backed up by nothing but pure faith. This means an increase in the money supply, and that is what Chapter 4 is about and is my main focus. The demand for money is important, too, but the supply of money is what I think is the most critical right now.

So, what is the optimal supply of money (5)? Isn't more money better than less? When we are talking about the supply of money in the economy, the answer is no. Unlike consumer and capital goods (which are always scarce), money is not used up. It goes from one person to another to another as it is being exchanged for what people want. Goods and services, like concert tickets, dogs and steaks, are what people want. You cannot eat, be loved by, or listen to money. Assuming the same amount of goods and services in the economy, when the money supply increases, so do prices. An increase in the money supply does not bring about any increase in goods and services. It simply dilutes the purchasing power of the dollar. Therefore, what the money supply quantitatively is doesn't matter. What does matter is the qualitative change in the money supply.

If we had a strict gold standard as Dr. Rothbard advocates (and I agree), there would be only one way to increase the money supply and that would be to dig more gold out of the ground. That is tough work, so the money supply would remain about the same. And it is really difficult to pass off something else as gold (6).

However, let's say someone could pass a cheap metal off as gold and manufactured some coins. He benefits from these, and whoever he buys from with them is next in line to benefit. If enough of these phony coins are passed off as gold, they will cause a rise in consumer demand as they flood the market. Prices will rise as a result. The “first receivers,” i.e., the counterfeiter himself and the first few who receive the fake money, will benefit. Those who are late in receiving the coins will have to pay these higher prices before the coins reach them. They lose out as the early receivers gain.

This is an important concept and I am belaboring it because it is key.

Once the printing press was invented (which is one of the best inventions ever but it can be misused) and paper money began, all bets were off. Counterfeiting became easy. And, while it is one of the most serious felonies for individuals, governments are tempted (7). Government greed goes on forever. So, if a government can print paper tickets and people believe these tickets are worth something, then governments have the means to take as much wealth as they can without people catching on.

This is how the money supply is increased. Right now, another big bailout is pending, and the first receivers of the new money are government cronies, the banks, automobile companies, and certain others. They will benefit. The rest of us are in the back of the bus. Inflation will kick in, big time, before we see a dime of it. The added cost of living can be thought of as a tax on us, paid to the government and its rich cronies. Don't think for one minute that it is accidental because it is not (8). In fact, because it is covert, it is worse because there is no protest.

Chapter 5 discusses the possible causes of a change in the demand for money other than the purchasing power of money. These are the supply of goods and services, how frequently people are paid, how fast clearing systems operate, public confidence in the money, and, most important, the expectation of inflation or deflation.

Right now I believe we can expect some major inflation because of all the money being pumped into the economy. Wise people are thinking they should buy their needed big-ticket items now or soon.

So the choice is now or soon. I was thinking of what I really needed and should get that would keep me from having to get it when prices soar. I got a car last winter. Should I have waited another year? The dealerships have more cars than they know what to do with and prices are reduced. But, last winter, I feared the old one would break down on this last summer's trip and I would have had to pay out-of-pocket for repairs. The new one did not, but a problem later on did strand me for a few days. At least this time there was a warranty. I don't know if it was the right decision. I'd have to contact the new owner of the old car to see if it in fact broke down.

That is water under the bridge. Right now, after a holiday season with deep discounts and very good prices, I went and got a few new middle-ticket items that were name brands for very reasonable prices. Because of these low prices, my demand for money decreased and I spent some that had been kept for just such a situation. I cannot say this situation is “deflation,” but when items I need are on sale at 70 percent off I think I can spend my money stash down a bit.

It would be different if lower-yet prices were expected. Then, my demand for money would be up right now, not down. But they are not; higher prices are almost inevitable. Therefore, my demand for money is down right now, and will go up as prices rise. Why hang on to money that is going to depreciate in value when, instead, one can hang on to items such as furniture, appliances, and especially gold and silver (9).

Prices have not gone up much yet. (Of course the major part of the government spending has not happened yet, but it is expected.) This actually worries me more. When the bailout and other money hits the economy, how much lag time will there be before prices start to really rise? People seem to expect the results of a monetary action within one day. Actually it may take a few months. The bailout may seem to be working. Unemployment may go down for a while and the foreclosures may drop for a while. But that is only postponing the inevitable. Later it is bound to catch up with us, just as it did in Germany in 1923 (10). What will the government do? I think there will be yet another bailout, this one bigger than ever! Inflation will accelerate, and the demand for money will actually drop as people realize that it will buy less and less.

The demand for money drops because people have to pay higher prices for necessities. When they do not have enough, they start to clamor for more money, meaning more inflation (11). This is a vicious circle where inflation is causing higher prices, higher prices cause a clamor for more money, and more money causes inflation. We will be in big, big trouble.

Where will it all end? We hope with the shutoff of the money spigot. But, barring that, it will end with barter, the use of foreign currencies and/or the use of gold (12).

The next question is, where do loans fit into the picture? I have been having a hissy-fit about how people get themselves into debt, and how government wants to re-start loans, as though borrowing made the world go around.

Chapter 6, “Loan Banking,” is about that. Normally in a free market, people keep their savings in a bank at interest, and the bank lends and invests this money at a higher interest. Dr. Rothbard gives a very simple, scaled-down summary of how the books in loan banks are kept (13), although, of course, we have to remember that the first edition of the book was written before the sophisticated computers we now have were in use. But I doubt much has really changed in this regard. What change has occurred is the whole banking system because of central banking. For one thing, Federal Reserve and government actions have changed market signals in such a way that people borrow money they believe they can pay back but later find they cannot.

After this description of loan banking, Chapter 7 is titled “Deposit Banking.” This is a different kind of banking. In fact, Dr. Rothbard regretted that both kinds of banks were called “banks” (14). Deposit banks came into being as warehouses where people kept their valuables, such as gold and silver, safe. One would leave one's valuables and receive a warehouse receipt, and when he wanted some of these valuables back he would go back to the warehouse and present the receipt.

It got so that when people left money in the warehouse, rather than take it out to pay debts, they would remit the receipt to their creditor. This way neither debtor nor creditor would have to make a trip to the warehouse (15).

The warehouse finally evolved into the deposit banks, and the warehouse receipts evolved into the checks we are so familiar with. Unlike loan banks, these banks do not borrow the money from depositors; rather they store it. (At least that was the case.) The major difference is that the loan bank borrows and must pay interest and the deposit bank stores and probably charges a fee. The loan bank borrows for a fixed period of time and the depositor makes a time deposit (such as a CD). A depositor of a deposit bank can take money out or put it in at any time (16).

Of course, as Dr. Rothbard points out and as everyone has thought, embezzlement is always a temptation. It always has been and always will be, particularly when the stored gold is something fungible like money. The warehouse, or bank, has many depositors and it is very unlikely that very many of them will withdraw their funds at the same time. It might not even be necessary for the embezzler to remove the money itself; he or she might simply write checks against it. Or, today, maybe it is only necessary to change computer records to embezzle or counterfeit money. In the old warehouse days, a dishonest warehouse keeper might have printed out fake warehouse receipts and passed them off as receipts for gold stored.

There was a court case in England in 1848 that ruled money deposited in a deposit bank belonged to the banker (as in a loan bank) rather than to the depositor, giving the banker free reign (17). This was a disaster as it went a long way toward paving the way to our present fractional reserve banking. I would also add that it is a disaster twice over, not just because of that but because a ruling by a foreign court in a foreign country was an influence here, undermining our national sovereignty. This is particularly serious these days as “transnationalism” is being advocated by the New World Order crowd, and being taken very seriously. Our side must also take this very real threat seriously.

I think most people who set up demand deposit accounts such as checking accounts believe the money in these accounts belongs to the depositor, not the bank. If your deposited money in your checking account is the bank's, then the bank can do any darn thing it wants with it. It could add your money to its balance sheets. As long as the bank keeps your (or the bank considers it its) money right there anyway, it is not going to do that much harm. But, the temptation is not to keep it there, but to lend it out. (Remember, loan banks can do this; it is on the up-and-up because depositors have loaned their money to the bank at interest, but deposit banking is different.) The deposit bank that lends money that is in your checking account is lending your money out which is at the same time also in your account. Problem is, money cannot be in two places at once any more than you and I can. You and the bank's borrower both have receipts for the very same money, and that is fishy at best (18).

This is the essence of fractional reserve banking, and this is one way the money supply is increased. To be blunt, it's inflationary and fraudulent (19).

This is the creation of money out of thin air (20) and this is probably the single most important point Dr. Rothbard is making in the book.

It is also the most important reason I am doing this particular project at this particular time. Our economy is in a state of ruin, and this increase in the money supply with money created out of thin air, backed up by nothing but faith, is the root cause.

Maybe you think I am a conspiracy theorist and this is exaggerated or completely wrong. No! This is really how it is and has been for a very long time. It caused the Great Depression, and I am about to review Dr. Rothbard's America's Great Depression. It is about to cause another great depression.

And, of course, again as we have mentioned, the new money does not reach all parts of the economy at the same time. It is injected into the economy at some particular point, and that point is more likely to be Joe Biden than Joe Blow (21). Those at that point will benefit at the expense of the rest of us, and wealth will gravitate toward establishment interests.

Dr. Rothbard points out (22) that the expansion of bank credit (which this is) makes banks “shaky,” as he puts it, and leaves them open to a contraction of their credit. If the money supply contracts, so will prices, and people will want to withdraw money from the shaky banks. Banks will want to call in or not renew loans (23).

This is what seems to be happening now if I read it right, and government wants to get the lending and borrowing (and inflation) going again.

Bank credit expansion causes a “boom,” which is inflationary with the late receivers of the new money having to pay what amounts to a tax to the early receivers, and this is followed by a contraction where credit and investments are liquidated. This is the business cycle (24).

Because of the ability to inflate, deposit banks and loan banks started to combine, forming “commercial banks” (25).

This made it possible to inflate even more. What we need, Dr. Rothbard says, is a requirement that banks keep a 100 percent reserve (26). What happens if banking is left entirely free? Some believe inflation will go totally wild, while others believe the market would keep it in check.

Chapter 8 is about that. What if banks were given free reign and could treat demand deposits such as your checking account as though they were the bank's and not the depositor's? Those who advocate central banking say this would cause hyper-inflation. I would like to know exactly what they believe central banking causes. However, in a free market, a bank, like any other business, must earn a reputation. I can open a restaurant or health clinic without a license. But, I will not see customers arriving unless and until I can show that my food is fit to eat or that my doctors are real doctors. Chances are I will hire a reputable firm (if not five of them) to come in and carry on an inspection in hopes of earning their seal of approval, since if I do not convince people that I am legitimate, I will not make a dime in profits. And I will have to continue to toe the line. The same goes for banks. In a free market they toe the line and do not claim to have money they do not have, and withdrawal requests are promptly granted, or else it is belly-up.

Not only that, people have to be willing to use the bank's drafts. If you get a draft or counter check from the Bank of America from someone in payment for something (I paid the car dealership last year with just such a check), the recipients (once they know the check is actually a BOA check) need to have enough trust in the BofA to accept it. They “know” that when they take the check to the bank, the money will be there.

The problem is, it might not be! Under fractional reserve banking, the banks do not have enough cash on hand to cover all the deposits recorded on their books. If enough of their depositors decided to withdraw their funds at a given time, or a “run” on the bank occurred, there would be trouble (27). A few months ago, people were losing faith and a lot of withdrawals were taking place, and the banks had to get more cash (backed up by nothing) from the Federal Reserve.

I was in Canada at the time and felt some anxiety about getting back into the country to stock up on cash. By the time I crossed the border, things had cooled off a bit, but I bee-lined to my bank's ATM.

Also, a free market in banking will allow many banks to operate, limiting the clientele of each one (28). In a free market, my BofA draft to the car dealership would probably be cashed with the money ending up at a competitive bank. The BofA had better be prepared to come up with the cash. Of course, in my counter check's case it was, but not because of free banking. Actually, all the banks are tied together to the Fed, so we are all clients of the same bank. There might be an element of competition. Many years ago I was a lot sloppier and did not always balance my checkbook. One time I overdrew and had to go into overdraft protection, i.e., I had to actually borrow. When the bill came, not only did I pay it in full the same day it came, but I did it in person. Later I got a letter telling me that this payment had been late, and that in order to keep my overdraft protection I would have to fill out a form listing all my monthly payments. I adamantly refused for a number of reasons, not the very least of which was the very on-time payment. After I would not budge for a few weeks I had to threaten to close my checking and savings accounts and move them to another bank if the bank did not relent. It relented. What I did not tell it, however, was that from then on I would be more careful about balancing my books.

So, the banks at least feel competitive. Most people probably think the banks are different companies, and, on paper I think they are. However, they are all tied together by the Federal Reserve. The only exceptions I can think of might be state banks and credit unions, but I really don't know much about these.

This element of competition is a brake of sorts on inflation, as no bank wants to be the first to be hit with a bank run, but that could change at any time. Under free banking, competition is a major brake on inflation with no change in sight.

What little competition there exists is likely to end. Right now (I am writing this the night before the Obama Inauguration) there is talk of “nationalization” of the Bank of America, Citibank, and other major banks. This talk is not just libertarian and Constitutionalist hooey. The bailouts and the move toward more regulation are a very big step in that direction. Whether these bailouts are gifts or “loans” does not matter. You infuse government money into an area, more regulation follows as surely as night follows day, and whoever makes decisions over a concern might as well be the owner. So this talk of nationalization must be taken very, very seriously. That will stop competition dead in its tracks, and fuel inflation.

The only brake on inflation in that case is banks in other countries (29). If we are going to have a world central bank, that the establishment is working toward with its “New World Order,” we are done for.

In conclusion to that chapter, free market banking is the best way to curb inflation. Dr. Rothbard then turns to the real reason for central banking: to use government-granted privilege to remove the barriers to inflation (30). A central bank has the government monopoly privilege of issuing bank notes or cash. For banks to issue cash to clients, they have to obtain the cash from the central bank. So the central bank is the “bankers' bank.”

Next is a discussion of exactly how the money supply is expanded (and even contracted sometimes) (31) which I will not go into; for one thing it is like a very complicated shell game. Suffice it to say that the banks hold only a fraction of the money that is deposited in them.

The way things are now, with the Federal Reserve and totally fiat money (fiat meaning not backed up by gold or any other commodity), all money kept in banks is subject to inflation (32). What should one do? Yank your money out? Even I use a bank, because paper money kept in one's house or one's car is subject to theft. This is not to mention that, while it is technically legal to have as much cash as one wants, if one is caught with enough of it, it will be stolen (the euphemism is “forfeited”) by government officials and the owner will be labeled a “drug dealer.” Many innocent people have lost their life savings in this manner (33) to greedy government.

So the use of a bank is practical. Don't “do your part.” Rather, look out for number one.

If your bank inflates, it is not checked by competing banks. They are really all the same bank under the Federal Reserve, or at least they are cartelized. The banks welcome this as it is their road to easy wealth (34).

Banks are allowed to inflate because the reserve requirement is only a fraction of the money that is deposited. For example, if the reserve requirement is 1/10, then the banks can lend $100 for every $10 deposited. This is what the infamous money multiplier is (35). They want to lend as much as they can, too, as this is how they make their profits. They also want to minimize the reserve requirements in order to make more loans. This increases the money supply. If the reserve requirement is changed from 1/10 to 1/20, the money supply can double! (36).

How are total reserves determined? This is what Chapter 10 is about. There are two general factors, one being the marketplace and the other being the central bank.

The public's demand for cash is a big market factor. Most people feel the way I do about keeping large amounts of cash at home or in their car because they fear theft. (I am dismayed that a lot of people are oblivious to the specter of asset forfeiture of cash by police or they are foolish enough to believe that it is legitimate.) So most people keep most of their money at the bank. The more money is in the bank, the more the bank can inflate on that money. This is another reason banks dread bank runs: Money withdrawn is money that cannot be inflated upon (37).

In 1933, the federal government decided to try to end the possibility of the loss in public confidence that causes bank runs. It established the Federal Deposit Insurance Corporation (FDIC) which used the power of government to guarantee replacement of deposits that are lost up to a very high amount. This opened the door to far more inflation, as money would be manufactured out of thin air to replace the lost funds.

Under a gold standard, the public's demand for gold would similarly affect the total reserves. Of course, we are now completely off the gold standard (38).

The Federal Reserve can expand or contract the total bank reserves by increasing or decreasing its outstanding loans to banks. (It also uses this power to manipulate bank behavior) (39).

There are short term loans that are usually made to bring a bank back into line with the reserve requirement, and corrections are made so as to return the loan as soon as possible (40). More often nowadays, however, banks borrow for this reason from other banks (41).

But by far the most important method of manipulating bank reserves by the central bank is open market operations. The term “open market” does not have anything to do with any free market. What the central bank does is to buy an asset, any asset. (Usually these assets are U.S. government securities.) These assets are paid for by check, the check being backed up by nothing. The recipient of the check takes it to a local bank to cash. The local bank deposits the check at the central bank, increasing the local bank's reserves. The money supply has gone up by the amount of the check and the amount that can be inflated upon it by more bank loans. How much more depends on the reserve requirement (42).

Conversely, the reverse is true if the Fed holds an open market sale, selling off assets.

Inflation could be halted in its tracks by a law prohibiting the purchases of assets by the Fed (under the naive assumption that the law would be followed). But this will not happen; the government puts the blame for inflation everywhere but where it belongs (43).

Listen to the mainstream news these days and you will see this in action! Of course, Dr. Rothbard believes, along with Ron Paul (and I agree) that the real solution to inflation is to abolish the Fed and return to the gold standard!

Exactly how is bank credit expanded? This is what Chapter 11 explains. Now, if all the banks were the same company, i.e., the same bank with many branches, this would be no problem as all the bank would need to do for a loan client would be to simply open an account for the borrower, list the amount loaned, and allow the borrower to write checks (44). The recipients of these checks would also be clients of the same banks and would deposit the checks there.

But, the way things are now, at least here in the U.S., there are many bank companies (at least on paper) and they compete (sort of). Dr. Rothbard is reviewing what he has gone over once: What happens if the recipient of the borrower's check is a client of a different bank? That bank goes to the first bank with the check for cash. But with the reserve requirement being so low, the first bank might not have the cash. Then what? Bankruptcy?

That is why a bank cannot just lend money in such amounts as to simply comply with the minimum reserve ratio. They all expand much less, according to a formula. The expansion is such that the first bank will be able to pay the second bank, so this problem is averted (45). In the end, the aggregate expansion (on the part of all the banks) is as high as it can be.

So the Federal Reserve purchases a bond, this expands the money supply by however much it paid for the bond, and then when the check for it was deposited, the money supply was expanded more by the portion of that money that was loaned out. That money too was spent and the check taken to a third bank. And so on and so on (46). What I could see here was that the same money was added over and over, and I have to wonder how that kind of arithmetic could be used. Had I done this in third grade, I would have had to stay after school.

But this is how it is done, and this is how the “money multiplier” (inflation) comes about.

Now, the next question is, how do government deficits come into play? This is an important question because the Bush administration spent with the abandon of a drunken sailor (this is really unfair, to drunken sailors that is) and I am fearful of how the Obama administration will behave. Are government deficits really as important as free market people claim?

Actually, government deficits and inflation do not necessarily go together. Government can be in the black while the Fed is inflating and vice versa. The government bonds the Fed buys are old ones (47). Deficits can be financed by the Treasury’s selling new bonds to the public which shifts money to the Treasury but does not create any new money (48).

The problem here is that money spent on government bonds is money taken away from true private-sector production. And, when payback time comes, it will raise the tax burden. This is why free market people complain that deficit spending is a tax on future generations who will be in the work force when payback time comes (49).

(They no longer simply “print out” currency to spend, even though free market people often say the “printing presses at the mint speed up.” That is purely an expression, but it boils down to the very same thing.)

The Treasury might also sell new bonds to commercial banks. This “monetizing the debt” creates new demand deposits to cover a government deficit. Thus, future taxpayers must not only pay for this with their taxes, but they must pay interest on it as well. This is both inflationary and a future tax burden, and it lines bankers' pockets (50).

So actually there is a connection between government deficits and inflation, and inflation if left unchecked can lead to runaway inflation (51).

So much for the nuts and bolts. Not very pretty, is it?

How did the scourge of central banking come to be, anyway? Dr. Rothbard turns to that next.

It started in England in the 1600s (52) with a deal between a government nearly broke from war (chances are that war was no more legal or moral than our wars in Iraq and Afghanistan, but that is only my making a presumption) and corrupt money-changers. The Whig Party was in control and that consisted of special-privileged monopolists. The foreign policy was imperialist and mercantilist (Gads! This sounds familiar!), the very thing that our Founders were so dead set against and that spurred on our founding. It was also the very same system we have today, thanks largely to the three villains I raked over the coals in Three Enemies.

These shenanigans cost big money then just as they do now. Government bonds did not sell, and the government did not dare raise taxes, as civil wars had been fought over this issue (53).

Where would the money come from? A diabolical scheme was hatched. A “Bank of England” would be founded, which could “buy” government bonds with “money” simply printed up. This “bank” would run the presses and print out notes. If you had a copier in your basement, printed up bills, took them to the store and tried to pass them off as the real deal you would be guilty of counterfeiting.

But that is exactly what this “Bank of England” did. It printed them and took them to the treasury and “bought” bonds. Then the government was no longer broke, and could finance its deficit.

Once this “bank” was chartered, the king and some in Parliament rushed right in and bought shares of stock in it. This whole thing was shrouded in mystery (which I read as hocus-pocus) and prestige, and I can only imagine the pomp and ceremony that went with it.

Later – long story short – the government allowed the Bank of England to stop paying its obligations in gold, but allowing it to demand payments to it be made in gold. This happened on and off for quite some time. The bank nearly failed, however, when some enterprising Tories founded a competing bank. This failed, and the Bank of England got its cronies in Parliament to outlaw such competition (54). Not only that, but banks became more strictly regulated in order to empower the Bank of England more.

England was beset with boom and bust, inflation and all that goes with it thanks to the central bank. Scotland, by contrast, had free banking and none of these problems (55). Mainstream historians and economists conveniently forget this. In fact, Scottish money was so much better than English that in border counties the English were using it instead of their own.

Later, in 1844, finally a classical liberal (libertarian), Sir Robert Peel became prime minister (56). As an advocate of 100 percent reserves, he instituted a crackdown on the Bank of England to stem the tide of inflation. However, his policies were flawed. Rather than close down the central bank, he gave it monopoly power. Monopoly privilege always has a corrupting influence. He also insisted that demand deposits were not part of the money supply, and that their issue (which I believe could mean loans of demand deposits) was not inflationary. So fractional reserve banking was not ended at all (57).

Let that be a word to the wise. It is a major step forward if a libertarian is in high public office. At least we would have a fighting chance to remove many shackles, but that libertarian had better understand monetary economics backwards, forwards, and sideways or else his or her policies might backfire.

In the United States, central banking got its start in the beginning. Not all the Founders were decentralist, small-government libertarians. Robert Morris, a war contractor supplying the Revolution, drove a central bank through the Continental Congress. He also favored a mercantilist system of the English sort against which the people had rebelled (58). A central bank would be part and parcel of that. Needless to say, a lot of money flowed into Morris's pockets, just as today it lines establishment pockets as a result.

Fortunately, the public was sharp (would that it would be so sharp today) and notes from the central bank were not well received. Finally, Morris decided the bank would have to change into a commercial bank like any other, and the federal government gave up its stock in it.

That ended the central bank scourge here in the States, for the time being at least.

But, alas, self-proclaimed authority always rears its ugly head, which is why the price of freedom is eternal vigilance.

Morris's cronies, called Nationalists (they called themselves “Federalists”), were still bound and determined to foist English-style mercantilism and statism on the American people, most of whom were in the libertarian Thomas Jefferson's camp. Secretary of the Treasury Alexander Hamilton, one of the Founders who was not on the right side, was a lapdog of Morris, and led the charge. Hamilton founded the next central bank, the First Bank of the United States. Unbacked paper money paid government debts and subsidized big-business cronies of government (59).

The wholesale price index rose by 72 percent in the 1790s, which should surprise nobody, and a score of new commercial banks came into being. Ditto for state banks and they multiplied like rabbits. These banks could print their own notes. The Jeffersonians could not do much about it as moderates took the wrong side. I really understand as today's libertarians (particularly we radicals) cannot even get a platform except on the Internet. The moderates at least could stop those radicals on the other side, the radical Nationalists or Federalists (60), which slowed down the slide down to despotism, but they also thwarted the rise up to freedom.

When this bank's charter was not renewed, causing it to close, free banking was tried again, but this time it did not work very well because it was not really tried! (This is kind of like capitalism today, when so many problems are blamed on capitalism; we do not have even a speck of free-enterprise capitalism.) Under free banking, when a bank cannot pay the checks on it, it goes bankrupt and must close. But this was not allowed. Banks were allowed to not pay their debts, and they were allowed to continue to print notes. This is a free ride, not free banking, and it really opened the floodgates to inflation (61).

Something had to be done, and there were two choices. One was to go back to hard (backed-up) money, compelling the banks to redeem in gold or else liquidate. This way was not chosen by the powerful elite. Rather, a new central bank was founded, the Second Bank of the United States, which opened in 1817.

At least a few people in Congress were able to be heard advocating a gold standard. Today there is one in Congress, Ron Paul, and how often do you see him on the news? Not very, even though he has a tremendous following, including myself.

Just one year later, in 1818, inflation was so rampant that the central bank curtailed loans and credit, beginning an enormous contraction and a depression (62). This seems similar to what we are seeing today.

Finally, during the 1820s, a serious move to restore the gold standard and laissez-faire was made. President Andrew Jackson, who was by no means perfect (63), was part of this movement and in 1831 his veto prevented the renewal of the Bank's charter. That veto also got him re-elected in 1832.

Some claim there was no inflation in the 1820s because prices did not really rise (the very same thing happened a century later in the 1920s). The reason prices did not rise was gains in productivity increased the amount of goods and services in the market, and this increase pushes prices down. What is important is that prices are higher than they would have been had inflation not occurred (64).

Inflation continued even after the central bank was jettisoned, but this time it was for an unrelated reason. There was an influx of silver coins from Mexico, caused by the Mexican government’s minting copper coins and trying to pass them off as equal in value to silver ones. We still had fractional reserve, so we were not in free banking heaven, and banks inflated on top of this silver (65).

The deflation and recession that was sure to follow had a very speedy recovery (66). Of course, at that time we were not saddled with any “New Deal” as we were later in the 1930s or any “bailouts” as we are now, which really only make matters worse as those who know sound economic theory understand.

But, alas, people did still have confidence in the banks and the cycle continued until the central bank closed in 1841.

Meanwhile the states were going broke, as so many are now, and, as now, were pleading for federal help over the objections of the citizens, who at that time had the brains and the backbone to look out for #1 rather than the state and its rich cronies (67). The Whigs were in power and they issued $200 million in bonds to help. Of course at that time that was an astronomical sum, maybe even more than today's bailout.

If you read my Three Enemies on this blog, you might remember the Whigs and Henry Clay's totally evil “American System.” I can pick up the strong, putrid stench of that here.

Dr. Rothbard points out that the recession at that time was not a hardship on the people (except for a few months), at least not compared to the Great Depression and the deep recession we are experiencing at this time, as I write this on January 28, 2009 (68). There is absolutely no comparison between the economy then and the economy now. Despite all the advanced technology today, problems of unemployment, foreclosures, etc. are rampant. The difference is, today's economy is riddled with regulation, sometimes hair-splitting rules from all levels of too-big and ever-growing government. And the rules are very strict these days with enforcers who act as if they think they are better. In the 1840s, the economy was very free, the freest on earth, allowing individuals to go as far as their ability and ambition would take them.

After these episodes, central banking was ended once and for all and a system of “free banking” was instituted. However, it was anything but free; it bore no resemblance to the free banking described by Dr. Rothbard earlier in the book. For one thing, banks were allowed to inflate on top of state government bonds they had invested in (69), meaning they could inflate on state government debt. This, along with a myriad of regulations and special privilege, did not add up to free banking, but at least it was not fiat money.

When the War Against Southern Independence began in 1861, however, money (greenbacks) was simply printed up to finance the war. The money supply almost doubled in three years (70). Later, the greenbacks were discontinued, but public debt financed the rest of the war. This public debt was bonds sold to the public, like today's savings bonds or municipal bonds, the bond issues I always vote “No” on.

Then the National Banking Acts were passed which were worse for the monetary system than anything else. (I also notice the same names coming up again and again; the same elite fatcats are always at the bottom of it.) This was not a central bank, but it was a cartelized and inflationary banking system. It paved the way to the central bank that has wreaked so much havoc on us during the twentieth and twenty-first centuries so far: the Federal Reserve. The statist mentality prevailing after the turn of the twentieth century made it inevitable that central banking was here to stay. During and after the War of Secession, inflationary policies were going gangbusters (71).

After the war, National and State banks proliferated like rabbits and all of them inflated on their deposits (72). This caused a few “panics” (recessions), the last one being in 1907, the worst one before the Federal Reserve. Bankers wanted the possibility of a government bailout were their banks to get into trouble (73). And they wanted money to be “elastic,” a fancy term meaning they wanted government to create more when “needed.” Of course, the entire establishment was on that page; there is no way they could not know that this would cause the gravitation of wealth into establishment coffers. Either they had seen it happen, they had studied it, or they had figured it out. People are not part of the establishment because they are dumb or ignorant.

People are part of the establishment because they are evil!

This statist, collectivist mentality was called progressivism and (like “progressive” education) it was modeled after Bismarck’s Germany (74). It was about as progressive as taking a wife by clobbering her over the head and dragging her off by the hair, and no more respectful of individual rights. But, alas, the term “progressive” is still used to describe this mentality, and when young people hear the term and look it up in the dictionary, they often say, “Gee! That's me!” I made that mistake myself, but fortunately got disillusioned right quick. The same applies to the term “liberal.” It is very backward and very illiberal.

The biggest shots in the establishment held the infamous Jekyll Island, Georgia, meeting in December, 1910, to hammer out the details of the even more infamous Federal Reserve Act of 1913. The year 1913 was a very dark one because of that, and also because the federal income tax was rammed through (via chicanery) in the same year.

The Federal Reserve was created for the purpose of inflation (75). For one thing, it had a legal monopoly on the legal printing of notes, so banks had to go to it for money for their customers. The Fed's “reserve banks” got to inflate on top of their deposits at the Fed, member banks could inflate on top of their deposits at reserve banks, and non-member banks could inflate on top of their deposits at member banks (76). This added up to a heck of a lot of inflation! Not only that, the reserve requirement was halved (77).

At first, gold certificates were made available. These were backed 100 percent by gold, but it was not long before these were withdrawn by the Fed and substituted for by Federal Reserve notes which were backed only 40 percent (78).

Bank deposits rose during the boom of the 1920's. Dr. Rothbard points out that the boom was largely fueled by credit expansion going into time deposits, especially in New York and Chicago where the Fed's open market operations were conducted. These time deposits “were not genuine savings but merely a convenient means by which the commercial banks expanded on top of new reserves generated by open market operations,” he wrote (79). Businesspeople and others would borrow, and any borrowed money they did not need right away would be placed in an interest-bearing time deposit.

Dr. Rothbard goes on to name names. It reads like a who's who of the establishment of the time. There were connections with munitions factories which, along with the inflation, spurred us on into unnecessary involvement with World War I (which also led to a draft and the early death of many thousands of the best and brightest).

Now, in Chapter 17, “Conclusion: The Present Banking Situation and What to Do About It,” Dr. Rothbard winds the book down. Right off, he says that, after the crash of 1929, the Fed under Hoover went right to work to inflate the currency, with open market purchases and heavy loans to banks. But the public distrusted the banks, and that stonewalled the whole thing. I guess the public was a bit more sophisticated then, at least in that regard. (People were pretty naive, however, being tricked into giving up their gold, obeying a ton of rules that only made things worse, not to mention allowing freedom's arch-enemy Franklin Delano Roosevelt to imprison 110,000 law-abiding Americans of Japanese ancestry for absolutely no reason at all. Please see my Three Enemies essay on this blog where I am proud to have excoriated this evil-doer.)

Another evil thing the Roosevelt administration did (the list seems to go on forever; you would think they were trying to stamp out prosperity and individualism forever) was to take the country off the domestic gold standard. Internationally, we were still on the gold standard, albeit with a debased dollar. Americans' gold was taken away (“borrowed,” but of course it was never given back). The Federal Deposit Insurance Corporation guaranteed bank deposits and that calmed the fear of bank runs. It still does. If your bank goes belly-up, the FDIC will refund your money (80). That seems good, but it is only one bright spot in an otherwise dark picture. Individuals are, quite honestly, screwed by the system no matter what they do.

What galls me the most is that most people do not even know it! One of these years, I will have to write about the school system...

All of this is one thing that prolonged the Great Depression. Another equally important factor was President Herbert Hoover's economic interventions followed by President Roosevelt's, the latter magnifying the former's regimentation of the economy. The Depression went on and on. Dr. Rothbard's very brief list of what they did (81) reads like a brief rundown of what the Bush and Obama administrations are trying to do now, and the results will be no better.

After World War II – Dr. Rothbard mentions international monetary policy as a big reason for the United States to enter (82) – there was a turn of events in Europe. Some countries wised up and turned to hard money and free market principles, leaving the U.S. as the most inflationary power. Gold flowed out of the country into the hands of Europeans (83).

Of course, one of the darkest days in history, August 15, 1971, the diabolical President Richard Nixon declared a complete end to the gold standard. He also declared an across-the-board price freeze. I did not understand the part about the gold at the time, but even I knew the damage price controls would do. I thought I was having a nightmare.

Now we come to the present. Just how is the Fed to control the money supply? And just what is the money supply? With this confusing array of M1, M2, M3, etc., nobody can agree on that (84)! The lines between these Ms get fuzzier. I remember when my savings bank gave me checks to write against my money market account. I also remember when my simple checking account started to pay interest. Checking account money and money market or CD money are not the same M. Or are they? There are lots of changes like that.

The real difference between money that is part of the money supply and money that is not part of the money supply, says Dr. Rothbard, is whether it is available in cash, on demand at par (presumably this means without a penalty). If it is, it is part of the money supply. If not, it isn't (85).

In other words, your checking account that you use day in and day out is part of the money supply. It is money in, money out all the time. But your certificate of deposit (CD) is a time deposit and you must wait until the end of the term to withdraw or else pay a very large penalty. This is because the bank has loaned the money out on a time loan. That CD is not part of the money supply.

“M1” is cold cash plus demand deposits, and things like travelers' checks. “M2” is that plus short term deposits. There are a lot more Ms that I remember from economics courses (seems like they go up to 25 or so), and the higher they go, the more illiquid the money is. I think of the cash in my billfold and money in my checking account as “liquid.” And, I think of my CDs as “gelatinous” (my term, not Dr. Rothbard's) since I can get money out but it will cost me plenty. These, I think, become “liquid” during rollover time. So, what would the CDs actually be? M2 because of their smaller size? M3 because of their longer term? I am not sure and I do not think that is agreed upon (86). What about money I could get by exercising my God-given right to sell a kidney? That money is not at all liquid, but is rock solid. M100 perhaps? That particular liquidation is not on my agenda, at least not for the foreseeable future. That would be last resort, but since individuals have every right in the world to do that, it is a possibility. (A God-given right, though, is not necessarily legal, and man-denied rights include selling body parts, which is illegal. Editor)

The Ms are not easy to sort out, as Dr. Rothbard illustrates toward the end of the chapter.

Lastly, he discusses how to return to sound money. I guess first of all we have to give the entire establishment one-way tickets to a long and happy retirement some place outside the U.S. and lock the door behind them. The French Riviera perhaps? That expense would be a drop in the bucket compared to the astounding deficit the government has racked up at this time.

To abolish the Fed, return to the gold standard, and separate money from state would be necessary. A 100 percent reserve would have to be enforced (87).

The dollar must be redeemable in gold on demand, regardless. In a free country, the government has no “emergency powers.” Rights are unalienable and these include the right to own gold. This is the only way to have a true gold standard that people can trust.

However, it has to be determined some way how many dollars shall equal an ounce of gold. It was $20, then $35 decades ago, but that is certainly dated now. How about Ludwig von Mises' proposition to use the current market price? Right now I believe that would be about $1000 per ounce [which is down to below $900 toward the end of April. Editor]. This illustrates the inflation we have undergone: Today's dollar is worth about what two cents was at one time. Maybe less! My parents, when they were dating in the early 1930s, frequented restaurants where they could get a full-course dinner for a dime. After dinner, they would go to a local “speakeasy” (an illegal bar during prohibition – they made me proud!! and I wasn't even to be born for quite some time). Today a dinner like that could easily be well more than $20, which is two hundred times as much! So, today's dollar is worth about a half cent!

But, once the price of an ounce of gold is established, it must be fixed by definition. A dollar would be defined as 1/1000 of an ounce of gold, just as a yard is defined as three feet.

And, Dr. Rothbard adds, the gold that was stolen from the people in 1933 must be returned by the redemption in dollars (88). I personally think it should be returned to the heirs of those from whom it was stolen, but I don't know how or if records were kept.

He briefly outlines a step-by-step plan for the changeover (89). After the dollar is defined, all the gold should be removed from Fort Knox and other places where the Treasury has it (is there really any left?) and sent to the banks, liquidating their accounts at the Fed. Banks would have to keep a 100 percent reserve. Banks would have to keep a tight ship or else bank runs would bankrupt them. The minting of coins could be done by private companies on a competitive basis.

My only question: What would keep the gold from exiting the country? We would hope other countries would see the benefits of a gold (or some commodity) standard and follow suit with their own gold. Otherwise, that question is unanswered.

But, at the end of the day, a gold standard is by far and away better than what we have now.

(1) Rothbard, Murray N., The Mystery of Banking, Second Edition, Ludwig von Mises Institute, Auburn, 2008, P. 32.

(2) Ibid. P. 34.

(3) Ibid. P. 36.

(4) Ibid. P. 39.

(5) Ibid. P. 44 - 45.

(6) Ibid. P. 48.

(7) Ibid. P. 51.

(8) Ibid. P. 5.

(9) Ibid. P. 67.

(10) Ibid. P. 68 - 69.

(11) Ibid. P. 72.

(12) Ibid. P. 74.

(13) Ibid. P. 76 - 79.

(14) Ibid. P. 85.

(15) Ibid. P. 86.

(16) Ibid. P. 87.

(17) Ibid. P. 92.

(18) Ibid. P. 96.

(19) Ibid. P. 97.

(20) Ibid. P. 98.

(21) Ibid. P. 101.

(22) Ibid. P. 101.

(23) Ibid. P. 102.

(24) Ibid. P. 103.

(25) Ibid. P. 107.

(26) Ibid. P. 110.

(27) Ibid. P. 112 - 113.

(28) Ibid. P. 114.

(29) Ibid. P. 123.

(30) Ibid. P. 125.

(31) Ibid. P. 126 - 132.

(32) Ibid. P. 132.

(33) See

(34) The Mystery of Banking P. 134.

(35) Ibid. P. 136.

(36) Ibid. P. 137 - 138.

(37) Ibid. P. 147.

(38) Ibid. P. 149.

(39) Ibid. P. 149.

(40) Ibid. P. 150.

(41) Ibid. P. 151.

(42) Ibid. P. 155 - 156.

(43) Ibid. P. 158.

(44) Ibid. P. 161.

(45) Ibid. P. 164.

(46) Ibid. 166 - 169.

(47) Ibid. P. 170.

(48) Ibid. P. 171.

(49) Ibid. P. 171.

(50) Ibid. P. 172.

(51) Ibid. P. 176.

(52) Ibid. P. 177.

(53) Ibid. P. 178.

(54) Ibid. P. 180.

(55) Ibid. P. 183.

(56) Ibid. P. 186.

(57) Ibid. P. 188.

(58) Ibid. P. 192.

(59) Ibid. P. 193 - 194.

(60) Ibid. P. 195.

(61) Ibid. P. 197.

(62) Ibid. P. 203 - 204.

(63) According to left-wing historian Howard Zinn, Pres. Jackson mistreated the Indians terribly. See Zinn, Howard, A People's History of the United States, HarperPerennial, New York, 1990.

(64) The Mystery of Banking P. 204.

(65) Ibid. P. 210.

(66) Ibid. P. 211.

(67) Ibid. P. 212.

(68) Ibid. P. 213 - 214.

(70) Ibid. P. 219.

(71) Ibid. P. 226 - 229.

(72) Ibid. P. 229.

(73) Ibid. P. 230.

(74) Ibid. P. 232.

(75) Ibid. P. 235.

(76) Ibid. P. 236. See the reverse pyramid.

(77) Ibid. P. 238.

(78) Ibid. P. 238.

(79) Ibid. P. 240.

(80) Ibid. P. 248.

(81) Ibid. P. 248.

(82) Ibid. P. 249.

(83) Ibid. P. 251.

(84) Ibid. P. 252.

(85) Ibid. P. 254 - 255.

(86) Ibid. P. 255 - 256.

(87) Ibid. P. 261.

(88) Ibid. P. 262.

(89) Ibid. P. 263 - 264.