Peter Schiff Vlog February 1st 2010 From Nassau Bahamas

Political Economy of Monarchy and Democracy

Mises Daily: by Hans-Hermann Hoppe

I. The Comparative Economics of Private and Public Government Ownership

A government is a territorial monopolist of compulsion — an agency which may engage in continual, institutionalized property rights violations and the exploitation — in the form of expropriation, taxation and regulation — of private property owners. Assuming no more than self-interest on the part of government agents, all governments must be expected to make use of this monopoly and thus exhibit a tendency toward increased exploitation.[1]

However, not every form of government can be expected to be equally successful in this endeavor or to go about it in the same way. Rather, in light of elementary economic theory, the conduct of government and the effects of government policy on civil society can be expected to be systematically different, depending on whether the government apparatus is owned privately or publicly.[2]

The defining characteristic of private government ownership is that the expropriated resources and the monopoly privilege of future expropriation are individually owned. The appropriated resources are added to the ruler's private estate and treated as if they were a part of it, and the monopoly privilege of future expropriation is attached as a title to this estate and leads to an instant increase in its present value ("capitalization" of monopoly profit).

Most importantly, as private owner of the government estate, the ruler is entitled to pass his possessions onto his personal heir; he may sell, rent, or give away part or all of his privileged estate and privately pocket the receipts from the sale or rental; and he may personally employ or dismiss every administrator and employee of his estate.

In contrast, in a publicly owned government the control over the government apparatus lies in the hands of a trustee, or caretaker. The caretaker may use the apparatus to his personal advantage, but he does not own it. He cannot sell government resources and privately pocket the receipts, nor can he pass government possessions onto his personal heir. He owns the current use of government resources, but not their capital value.

Moreover, while entrance into the position of a private owner of government is restricted by the owner's personal discretion, entrance into the position of a caretaker-ruler is open. Anyone, in principle, can become the government's caretaker.

From these assumptions two central, interrelated predictions can be deduced:

1. A private government owner will tend to have a systematically longer planning horizon, i.e., his degree of time preference will be lower, and accordingly, his degree of economic exploitation will tend to be less than that of a government caretaker; and
2. subject to a higher degree of exploitation, the nongovernmental public will also be comparatively more present oriented under a system of publicly owned government than under a regime of private government ownership.

(1) Government Owners' Time Preferences

A private government owner will predictably try to maximize his total wealth, i.e., the present value of his estate and his current income. He will not want to increase his current income at the expense of a more-than-proportional drop in the present value of his assets, and because acts of current-income acquisition invariably have repercussions on present asset values (reflecting the value of all future — expected — asset earnings discounted by the rate of time preference), private ownership in and of itself leads to economic calculation and thus promotes farsightedness.

In the case of the private ownership of government, this implies a distinct moderation with respect to the ruler's incentive to exploit his monopoly privilege of expropriation, for acts of expropriation are by their nature parasitic upon prior acts of production on the part of the nongovernmental public. Where nothing has first been produced, nothing can be expropriated; and where everything is expropriated, all future production will come to a shrieking halt.

Accordingly, a private government owner will want to avoid exploiting his subjects so heavily, for instance, as to reduce his future earnings potential to such an extent that the present value of his estate actually falls. Instead, in order to preserve or possibly even enhance the value of his personal property, he will systematically restrain himself in his exploitation policies. For the lower the degree of exploitation, the more productive the subject population will be; and the more productive the population, the higher will be the value of the ruler's parasitic monopoly of expropriation.

He will use his monopolistic privilege, of course. He will not exploit. But as the government's private owner, it is in his interest to draw parasitically on a growing, increasingly productive and prosperous nongovernment economy as this would effortlessly also increase his own wealth and prosperity — and the degree of exploitation thus would tend to be low.

Moreover, private ownership of government implies moderation and farsightedness for yet another reason. All private property is by definition exclusive property. He who owns property is entitled to exclude everyone else from its use and enjoyment; and he is at liberty to choose with whom, if anyone, he is willing to share in its usage. Typically, he will include his family and exclude all others, except as invited guests or as paid employees or contractors.

"Where nothing has first been produced, nothing can be expropriated; and where everything is expropriated, all future production will come to a shrieking halt. Accordingly, a private government owner will want to avoid exploiting his subjects so heavily."

Only the ruling family — and to a minor extent its friends, employees and business partners — share in the enjoyment of the expropriated resources and can thus lead a parasitic life. Because of these restrictions regarding entrance into government and the exclusive status of the individual ruler and his family, private government ownership stimulates the development of a clear "class consciousness" on the part of the nongovernmental public and promotes opposition and resistance to any expansion of the government's exploitative power.

A clear-cut distinction between the (few) rulers on the one hand and the (many) ruled on the other exists, and there is little risk or hope of anyone of either class ever falling or rising from one class to the other. Confronted with an almost insurmountable barrier in the way of upward mobility, the solidarity among the ruled — their mutual identification as actual or potential victims of governmental property-rights violations — is strengthened, and the risk to the ruling class of losing its legitimacy as the result of increased exploitation is heightened.[3]

In distinct contrast, the caretaker of a publicly owned government will try to maximize not total government wealth (capital values and current income), but current income (regardless, and at the expense, of capital values). Indeed, even if the caretaker wishes to act differently, he cannot. Because as public property government resources are not for sale, and without market prices economic calculation is impossible. Accordingly, it has to be regarded as unavoidable that public government ownership will result in continual capital consumption.

Instead of maintaining or even enhancing the value of the government estate, as a private owner would tend to do, a government's temporary caretaker will quickly use up as much of the government resources as possible, for what he does not consume now, he may never be able to consume.

In particular, a caretaker — as distinct from a government's private owner — has no interest in not ruining his country. For why should he not want to increase his exploitation if the advantage of a policy of moderation — the resulting higher capital value of the government estate — cannotbe reaped privately, while the advantage of the opposite policy of increased exploitation — a higher current income — can be so reaped? To a caretaker, unlike to a private owner, moderation has only disadvantages and no advantages.[4]

In addition, with a publicly owned government, anyone in principle can become a member of the ruling class or even the supreme power. The distinction between the rulers and the ruled as well as the class consciousness of the ruled become blurred. The illusion even arises that the distinction no longer exists: that with a public government no one is ruled by anyone, but everyone instead rules himself. Accordingly, public resistance against government power is systematically weakened.

While exploitation and expropriation before might have appeared plainly oppressive and evil to the public, they seem much less so, mankind being what it is, once anyone may freely enter the ranks of those who are at the receiving end. Consequently, not only will exploitation increase, whether openly in the form of higher taxes or discretely as increased governmental money "creation" (inflation) or legislative regulation. Likewise, the number of government employees ("public servants") will rise absolutely as well as relatively to private employment, in particular attracting and promoting individuals with high degrees of time preference, and low and limited farsightedness.

(2) Subjects' Time Preferences

In contrast to the right to self-defense in the event of a criminal attack, the victim of government violations of private-property rights may not legitimately defend himself against such violations.[5]

The imposition of a government tax on property or income violates a property owner's and income producer's rights as much as theft does. In both cases, the owner-producer's supply of goods is diminished against his will and without his consent. Government money or "liquidity" creation involves no less a fraudulent expropriation of private-property owners than the operations of a criminal counterfeiting gang.

As well, any government regulation as to what an owner may or may not do with his property — beyond the rule that no one may physically damage the property of others and that all exchange and trade be voluntary and contractual — implies a "taking" of somebody's property, on a par with acts of extortion, robbery, or destruction. But taxation, the government's provision for liquidity, and government regulations, unlike their criminal equivalents, are considered legitimate, and the victim of government interference, unlike the victim of a crime, is not entitled to physically defend and protect his property.

Owing to their legitimacy, then, government violations of property rights affect individual time preferences in a systematically different and much more profound way than crime. Like crime, all government interference with private property rights reduces someone's supply of present goods and thus raises his effective time-preference rate. However, government offenses — unlike crime — simultaneously raise the time preference degree of actual and potential victims because they also imply a reduction in the supply of future goods (a reduced rate of return on investment).

"In contrast to the right to self-defense in the event of a criminal attack, the victim of government may not legitimately defend himself."

Crime, because it is illegitimate, occurs only intermittently — the robber disappears from the scene with his loot and leaves his victim alone. Thus, crime can be dealt with by increasing one's demand for protective goods and services so as to restore or even increase one's future rate of investment return and make it less likely that the same or a different robber will succeed a second time.

In contrast, because they are legitimate, governmental property rights violations are continual. The offender does not disappear into hiding but stays around, and the victim does not "arm" himself but must (at least he is generally expected to) remain defenseless. The actual and potential victims of government property-rights violations respond by associating a permanently higher risk with all future production, and systematically adjusting their expectations concerning the rate of return on all future investment downward.

By simultaneously reducing the supply of present and expected future goods, then, governmental property-rights violations not only raise time preference rates (with given schedules) but also time-preference schedules. Because owner-producers are — and see themselves as — defenseless against future victimization by government agents, their expected rate of return on productive, future-oriented actions is reduced all-around, and accordingly, all actual and potential victims become more present-oriented.[6]

Moreover, because the degree of exploitation is comparatively higher under a publicly owned government, this tendency toward present-orientation will be significantly more pronounced if the government is publicly owned than if it is owned privately.[7]

II. Application: The Transition from Monarchy to Democracy (1789–1918)

Hereditary monarchies represent the historical example of privately owned governments, and democratic republics that of publicly owned governments.

For most of its history, mankind, insofar as it was subject to any government control at all, was under monarchical rule. There were exceptions: Athenian democracy, Rome during its republican era until 31 BC, the republics of Venice, Florence and Genoa during the renaissance period, the Swiss cantons since 1291, the United Provinces from 1648 until 1673, and England under Cromwell from 1649 until 1660. Yet these were rare occurrences in a world dominated by monarchies. With the exception of Switzerland, they were short-lived phenomena.

Constrained by monarchical surroundings, all older republics satisfied the open-entry condition of public property only imperfectly, for while a republican form of government implies by definition that the government is not privately but publicly owned, and a republic can thus be expected to possess an inherent tendency toward the adoption of universal suffrage, in all of the earlier republics, entry into government was limited to relatively small groups of "nobles."

With the end of World War I, mankind truly left the monarchical age.[8] In the course of the one-and-a-half centuries since the French Revolution, Europe, and in its wake the entire world, have undergone a fundamental transformation. Everywhere, monarchical rule and sovereign kings were replaced by democratic-republican rule and sovereign "peoples."

The first assault of republicanism and the idea of popular sovereignty on the dominating monarchical principle was repelled with the military defeat of Napoleon and the restoration of Bourbon rule in France. As a result of the revolutionary terror and the Napoleonic wars, republicanism was widely discredited for much of the 19th century.

However, the democratic-republican spirit of the French revolution left a permanent imprint. From the restoration of the monarchical order in 1815 until the outbreak of WWI in 1914, all across Europe popular political participation and representation was systematically expanded. The franchise was successively widened and the powers of popularly elected parliaments increased everywhere.[9]

From 1815 to 1830, the right to vote in France was still severely restricted under the restored Bourbons. Out of a population of some 30 million, the electorate included only France's very largest property owners — about 100,000 people (less than 0.5 percent of the population above the age of 20). As a result of the July Revolution of 1830, the abdication of Charles X and the ascension to the throne of the Duke of Orleans, Louis Philippe, the number of voters increased to about 200,000. As a result of the revolutionary upheavals of 1848, France again turned republican, and a universal and unrestricted suffrage for all male citizens above the age of 21 was introduced. Napoleon III was elected by nearly 5.5 million votes out of an electorate of more than 8 million.

In the United Kingdom after 1815, the electorate consisted of some 500,000 well-to-do property owners (about 4 percent of the population above age 20). The Reform Bill of 1832 lowered the property owner requirements and extended the franchise to about 800,000. The next extension, from about 1 million to 2 million, came with the Second Reform Bill of 1867. In 1884 property restrictions were relaxed even further, and the electorate increased to about 6 million (almost a third of the population above age 20 and more than three-fourths of all male adults).

In Prussia, as the most important of the 39 independent German states recognized after the Vienna Congress, democratization set in with the revolution of 1848 and the constitution of 1850. The lower chamber of the Prussian parliament was hence elected by universal male suffrage.

"In addition to increased exploitation and social decay, the transition from monarchy to democracy has brought a change from limited warfare to total war."

However, until 1918 the electorate remained stratified into three estates with different voting powers. For example, the wealthiest people — those who contributed a third of all taxes — elected a third of the members of the lower house.

In 1867, the North German Confederation, including Prussia and 21 other German states, was founded. Its constitution provided for universal, unrestricted suffrage for all males above the age of 25. In 1871, after the victory over Napoleon III, the constitution of the North German Confederation was essentially assumed by the newly founded German Empire. Out of a total population of around 35 million, nearly 8 million people (or about a third of the population above 20) elected the first German Reichstag.

After Italy's political unification under the leadership of the Kingdom of Sardinia and Piedmont in 1861, initially the vote was only given to about 500,000 people out of a population of some 25 million (about 3.5 percent of the population above age 20). In 1882, the property requirements were relaxed, and the minimum age was lowered from 25 to 21 years. As a result, the Italian electorate increased to more than 2 million. In 1913, an almost universal and unrestricted suffrage for all males above 30 and minimally restricted suffrage for males above 21 was introduced, raising the number of Italian voters to more than 8 million (more than 40 percent of the population above 20).

In Austria, restricted and unequal male suffrage was introduced in 1873. The electorate, composed of four classes or curia of unequal voting powers, totaled 1.2 million voters out of a population of about 20 million (10 percent of the population above 20). In 1867 a fifth curia was added. And forty years later the curia system was abolished, and universal and equal suffrage for males above age 24 was adopted, bringing the number of voters close to 6 million (almost 40 percent of the population above 20).

Russia had elected provincial and district councils — zemstvos — since 1864; and in 1905, as a fallout of its lost war against Japan, it created a parliament — the Duma — which was elected by a near universal, although indirect and unequal, male suffrage. As for Europe's minor powers, universal or almost universal and equal male suffrage has existed in Switzerland since 1848, and was adopted between 1890 and 1910 in Belgium, the Netherlands, Norway, Sweden, Spain, Greece, Bulgaria, Serbia, and Turkey.

Although increasingly emasculated, the monarchical principle remained dominant until the cataclysmic events of WWI. Before 1914, only two republics existed in Europe — France and Switzerland. And of all major European monarchies, only the United Kingdom could be classified as a parliamentary system; that is, one where the supreme power was vested in an elected parliament.

Only four years later, after the United States — where the democratic principle implied in the idea of a republic had only recently been carried to victory as a result of the destruction of the secessionist Confederacy by the centralist Union government[10] — had entered the European war and decisively determined its outcome, monarchies had all but disappeared, and Europe turned to democratic republicanism.[11]

In Europe, the defeated Romanovs, Hohenzollerns, and Habsburgs had to abdicate or resign, and Russia, Germany, and Austria became democratic republics with universal — male and female — suffrage and parliamentary governments. Likewise, all of the newly created successor states — Poland, Finland, Estonia, Latvia, Lithuania, Hungary, and Czechoslovakia (with the sole exception of Yugoslavia) — adopted democratic-republican constitutions.

In Turkey and Greece, the monarchies were overthrown. Even where monarchies remained nominally in existence, as in Great Britain, Italy, Spain, Belgium, the Netherlands, and the Scandinavian countries, monarchs no longer exercised any governing power. Universal adult suffrage was introduced, and all government power was invested in parliaments and "public" officials.[12] A new world order — the democratic-republican age, under the aegis of a dominating US government — had begun.

III. Evidence and Illustrations: Exploitation and Present-Orientedness under Monarchy and Democratic Republicanism

From the viewpoint of economic theory, the end of WWI can be identified as the point in time at which private government ownership was completely replaced by public government ownership, and whence a systematic tendency toward increased exploitation — government growth — and rising degrees of social time preference — present-orientedness — can be expected to take off. Indeed, this has been the grand, underlying theme of post-WWI Western history: from 1918 onward practically all indicators

1. of governmental exploitation and
2. of rising time preferences have exhibited a systematic upward tendency.

III.1. Indicators of Exploitation

There is no doubt that the amount of taxes imposed on civil society increased during the monarchical age.[13] However, throughout the entire period, the share of government revenue remained remarkably stable and low. Economic historian Carlo M. Cipolla concludes,

All in all, one must admit that the portion of income drawn by the public sector most certainly increased from the eleventh century onward all over Europe, but it is difficult to imagine that, apart from particular times and places, the public power ever managed to draw more than 5 to 8 percent of national income.

And he then goes on to note that this portion was not systematically exceeded until the second half of the 19th century.[14] Until then, of all Western European countries only the United Kingdom had an income tax (from 1843 on). France first introduced some form of income tax in 1873, Italy in 1877, Norway in 1892, the Netherlands in 1894, Austria in 1898, Sweden in 1903, the United States in 1913, Switzerland in 1916, Denmark and Finland in 1917, Ireland and Belgium in 1922, and Germany in 1924.[15] Yet even at the time of the outbreak of WWI, total government expenditure as a percentage of Gross Domestic Product (GDP) typically had not risen above 10 percent and only rarely, as in the case of Germany, exceeded 15 percent. In striking contrast, with the onset of the democratic-republican age, total government expenditure as a percentage of GDP typically increased to 20 to 30 percent in the course of the 1920s and 1930s, and by the mid-1970s had generally reached 50 percent.[16]

There is also no doubt that total government employment increased during the monarchical age. But until the very end of the 19th century, government employment rarely exceeded 3 percent of the total labor force. In contrast, by the mid-1970s government employment as a percentage of the total labor force had typically grown to above 15 percent.[17]

The same pattern emerges from an inspection of inflation and the money supply. The monarchical world was generally characterized by the existence of a commodity money — typically silver or gold. A commodity money standard makes it difficult, if not impossible, for a government to inflate the money supply.

There had been attempts to introduce an irredeemable fiat currency. But these fiat-money experiments, associated in particular with the Bank of Amsterdam, the Bank of England, and John Law and the Banque Royale of France, had been regional curiosities which ended quickly in financial disasters, such as the collapse of the Dutch "Tulip Mania" in 1637, and the "Mississippi Bubble" and the "South Sea Bubble" in 1720. As hard as they tried, monarchical rulers did not succeed in establishing monopolies of pure fiat currencies, i.e., of irredeemable government paper monies, which can be created virtually out of thin air, at practically no cost.

It was only under conditions of all-around democratic republicanism, after 1918, that this feat was accomplished. During WWI, as during earlier wars, belligerent governments went off the gold standard. Unlike earlier wars, however, WWI did not conclude with a return to the gold standard. Instead, from the mid-1920s until 1971, and interrupted by a series of international monetary crises, a pseudo-gold standard — the gold-exchange standard — was implemented. In 1971, the last remnant of the international gold standard was abolished. Since then, and for the first time in history, the entire world has adopted a pure fiat-money system of freely fluctuating government paper currencies.[18]

"The natural outcome of the voluntary transactions between various private property owners is decidedly nonegalitarian, hierarchical, and elitist."

As a result, a seemingly permanent secular tendency toward inflation and currency depreciation has come into existence.

During the monarchical age, with a commodity money largely outside of government control, the "level" of prices had generally fallen and the purchasing power of money increased, except during times of war or new gold discoveries. Various price indices for Britain, for instance, indicate that prices were substantially lower in 1760 than they had been a hundred years earlier; and in 1860 they were lower than they had been in 1760.[19] Connected by an international gold standard, the development in other countries was similar.[20]

In sharp contrast, during the democratic-republican age, with the world financial center shifted from Britain to the United States, a very different pattern emerged. For instance, shortly after WWI, in 1921, the US wholesale-commodity price index stood at 113.[21] After WWII, in 1948, it had risen to 185. In 1971 it was 255, by 1981 it reached 658, and in 1991 it was near 1,000. During only two decades of irredeemable fiat money, the consumer price index in the United States rose from 40 in 1971 to 136 in 1991, in the United Kingdom it climbed from 24 to 157, in France from 30 to 137, and in Germany from 56 to 116.[22]

Similarly, during more than 70 years, from 1845 until the end of WWI in 1918, the British money supply had increased about 6-fold.[23] In distinct contrast, during the 73 years from 1918 until 1991, the US money supply increased more than 64-fold.[24]

In addition to taxation and inflation, a government can resort to debt in order to finance its current expenditures. As with taxation and inflation, there is no doubt that government debt increased in the course of the monarchical age. However, as predicted theoretically, in this field monarchs also showed considerably more moderation and farsightedness than democratic-republican caretakers.

Throughout the monarchical age, government debts were essentially war debts. While the total debt thereby tended to increase over time, during peace time at least monarchs characteristically reduced their debts. The British example is fairly representative. In the course of the 18th and 19th centuries, government debt increased. It was 76 million pounds after the Spanish War in 1748, 127 million after the Seven Years' War in 1763, 232 million after the American War of Independence in 1783, and 900 million after the Napoleonic Wars in 1815. Yet during each peacetime period — from 1727–1739, from 1748–1756, and from 1762–1775, total debt actually decreased. From 1815 until 1914, the British national debt fell from a total of 900 to below 700 million pounds.

In striking contrast, since the onset of the democratic-republican age British debt only increased, in war and in peace. In 1920 it was 7.9 billion pounds, in 1938, 8.3 billion, in 1945, 22.4 billion, in 1970, 34 billion, and since then it has skyrocketed to more than 190 billion pounds in 1987.[25]

Likewise, US government debt has increased through war and peace. Federal government debt after WWI, in 1919, was about 25 billion dollars. In 1940 it was 43 billion, and after WWII, in 1946, it stood at about 270 billion. By 1970 it had risen to 370 billion, and since 1971, under a pure fiat-money regime, it has exploded. In 1979 it was about 840 billion, and in 1985 more than 1.8 trillion. In 1988 it reached almost 2.5 trillion, and by 1992 it exceeded 3 trillion dollars.[26]

Finally, the same tendency toward increased exploitation and present-orientation emerges upon examination of government legislation and regulation. During the monarchical age, with a clear-cut distinction between the ruler and the ruled, the king and his parliament were held to be under the law. They applied preexisting law as judge or jury.

They did not make law. Writes Bertrand de Jouvenel,

The monarch was looked on only as judge and not as legislator. He made subjective rights respected and respected them himself; he found these rights in being and did not dispute that they were anterior to his authority.… Subjective rights were not held on the precarious tenure of grant but were freehold possessions. The sovereign's right also was a freehold. It was a subjective right as much as the other rights, though of a more elevated dignity, but it could not take the other rights away.[27]

To be sure, the monopolization of law administration led to higher prices and/or lower product quality than those that would have prevailed under competitive conditions, and in the course of time kings employed their monopoly increasingly to their own advantage. But as late as the beginning of the 20th century, A.V. Dicey could still maintain that as for Great Britain, for instance, legislative law — public law — as distinct from preexisting law — private law — did not exist.[28]

In striking contrast, under democracy, with the exercise of power shrouded in anonymity, presidents and parliaments quickly came to rise above the law. They became not only judge but legislator, the creator of "new" law.[29] Today, notes Jouvenel,

we are used to having our rights modified by the sovereign decisions of legislators. A landlord no longer feels surprised at being compelled to keep a tenant; an employer is no less used to having to raise the wages of his employees in virtue of the decrees of Power. Nowadays it is understood that our subjective rights are precarious and at the good pleasure of authority.[30]

In a development similar to the democratization of money — the substitution of government paper money for private commodity money and the resulting inflation and increased financial uncertainty — the democratization of law and law administration has led to a steadily growing flood of legislation. Presently, the number of legislative acts and regulations passed by parliaments in the course of a single year is in the tens of thousands, filling hundreds of thousands of pages, affecting all aspects of civil and commercial life, and resulting in a steady depreciation of all law and heightened legal uncertainty.

As a typical example, the 1994 edition of the Code of Federal Regulations (CFR), the annual compendium of all US Federal Government regulations currently in effect, consists of a total of 201 books, occupying about 26 feet of library shelf space. The Code's index alone is 754 pages. The Code contains regulations concerning the production and distribution of almost everything imaginable: from celery, mushrooms, watermelons, watchbands, the labeling of incandescent light bulbs, hosiery, iron and steel manufacturing, and onion rings made out of diced onions, revealing the almost-totalitarian power of a democratic government.[31]

III.2. Indicators of Present-Orientedness

The phenomenon of social time preference is somewhat more elusive than that of expropriation and exploitation, and it is more complicated to identify suitable indicators of present-orientation. Moreover, some indicators are less direct — "softer" — than those of exploitation. But all of them point in the same direction and together provide as clear an illustration of the second theoretical prediction: that democratic rule also promotes shortsightedness (present-orientation) within civil society.[32]

The most direct indicator of social time preference is the rate of interest. The interest rate is the ratio of the valuation of present goods as compared to future goods. More specifically, it indicates the premium at which present money is traded against future money. A high interest rate implies more "present-orientedness" and a low rate of interest implies more "future-orientation."

Under normal conditions — that is, under the assumption of increasing standards of living and real-money incomes — the interest rate can be expected to fall and ultimately approach, yet never quite reach, zero. With rising real incomes, the marginal utility of present money falls relative to that of future money, and hence under the ceteris paribus assumption of a given time preference schedule,the interest rate must fall. Consequently, savings and investment will increase, future real incomes will be still higher, and so on.

"The fortunes of great families have dissipated, and their tradition of a culture of economic independence, intellectual farsightedness, and moral and spiritual leadership has been lost and forgotten. Rich men still exist today, but more frequently than not they owe their fortune now directly or indirectly to the state."

In fact, a tendency toward falling interest rates characterizes mankind's suprasecular trend of development. Minimum interest rates on "normal safe loans" were around 16 percent at the beginning of Greek financial history in the 6th century BC, and fell to 6 percent during the Hellenistic period. In Rome, minimum interest rates fell from more than 8 percent during the earliest period of the Republic to 4 percent during the first century of the Empire. In 13th-century Europe, the lowest interest rates on 'safe' loans were 8 percent. In the 14th century they came down to about 5 percent. In the 15th century they fell to 4 percent. In the 17th century they went down to 3 percent. And at the end of the 19th century, minimum interest rates had further declined to less than 2.5 percent.[33]

This trend was by no means smooth. It was frequently interrupted by periods, sometimes as long as centuries, of rising interest rates. However, such periods were associated with major wars and revolutions.

Furthermore, whereas high or rising minimum interest rates indicate periods of generally low or declining living standards, the overriding opposite tendency toward low and falling interest rates reflects mankind's overall progress — its advance from barbarism to civilization. Specifically, the trend toward lower interest rates reflects the rise of the Western World, its peoples' increasing prosperity, farsightedness, intelligence, and moral strength, and the unparalleled height of 19th-century European civilization.

Before this historical backdrop and in accordance with economic theory, then, it should be expected that 20th-century interest rates would have to be still lower than 19th-century rates. Indeed, only two possible explanations exist why this is not so. The first possibility is that 20th-century real incomes did not exceed, or even fell below, 19th-century incomes. However, this explanation can be ruled out on empirical grounds, for it seems fairly uncontroversial that 20th-century incomes are in fact higher.

Then only the second explanation remains. If real incomes are higher but interest rates are not lower, then the ceteris paribus clause can no longer be assumed true. Rather, the social time preference schedule must have shifted upward. That is, the character of the population must have changed. People on the average must have lost in moral and intellectual strength and have become more present-oriented. Indeed, this appears to be the case.

From 1815 onward, throughout Europe and the Western World, minimum interest rates steadily declined to an historic low of, on the average, well below 3 percent at the turn of the century. With the onset of the democratic-republican age, this earlier tendency came to a halt and seems to have changed direction, revealing 20th-century Europe and the United States as declining civilizations.

An inspection of the lowest decennial average interest rates for Britain, France, the Netherlands, Belgium, Germany, Sweden, Switzerland, and the United States, for instance, shows that during the entire post-WWI era interest rates in Europe were never as low or lower than they had been during the second half of the 19th century. Only in the United States, in the 1950s, did interest rates ever fall below late 19th-century rates. This was only a short-lived phenomenon, and US interest rates even then were not lower than they had been in Britain during the second half of the 19th century.

Instead, 20th-century rates were universally higher than 19th-century rates, and if anything they have exhibited a rising tendency.[34] This conclusion does not substantially change, even when it is taken into account that modern interest rates, in particular since the 1970s, include a systematic inflation premium. After adjusting recent nominal interest rates for inflation in order to yield an estimate of real interest rates, contemporary interest rates still appear to be significantly higher than they were 100 years ago.

On the average, minimum long-term interest rates in Europe and the US nowadays seem to be well above 4 percent and possibly as high as 5 percent — that is, above the interest rates of 17th-century Europe and as high or higher than 15th-century rates. Likewise, current US savings rates of around 5 percent of disposable income are no higher than they were more than 300 years ago in a much poorer 17th-century England.[35]

Parallel to this development and reflecting a more specific aspect of the same underlying phenomenon of high or rising social time preferences, indicators of family disintegration— "dysfunctional families" — have exhibited a systematic increase.

Until the end of the 19th century, the bulk of government spending — typically more than 50 percent — went to financing the military. Assuming government expenditures to be then about 5 percent of the national product, this amounted to military expenditures of 2.5 percent of the national product. The remainder went to government administration.

Welfare spending or "public charity" played almost no role. Insurance was considered to be in the province of individual responsibility, and poverty relief seen as the task of voluntary charity. In contrast, as a reflection of the egalitarianism inherent in democracy, from the beginning of the democratization in the late 19th century onward came the collectivization of individual responsibility.

Military expenditures have typically risen to 5–10 percent of the national product in the course of the 20th century. But with public expenditures currently making up 50 percent of the national product, military expenditures now only represent 10-20 percent of total government spending. The bulk of public spending — typically more than 50 percent of total expenditures (or 25 percent of the national product) — is now eaten up by public-welfare spending.[36]

Consequently, by increasingly relieving individuals of the responsibility of having to provide for their own health, safety, and old age, the range and temporal horizon of private provisionary action have been systematically reduced. In particular, the value of marriage, family, and children have fallen, because they are needed less as soon as one can fall back on 'public' assistance.

Thus, since the onset of the democratic-republican age the number of children has declined, and the size of the endogenous population has stagnated or even fallen. For centuries, until the end of the 19th century, the birth rate had been almost constant: somewhere between 30 to 40 per 1,000 population (usually somewhat higher in predominantly Catholic and lower in Protestant countries).

In sharp contrast, in the course of the 20th century all over Europe and the US birthrates have experienced a dramatic decline — down to about 15 to 20 per 1,000.[37] At the same time, the rates of divorce, illegitimacy, single parenting, singledom, and abortion have steadily increased, while personal savings rates have begun to stagnate or even fall rather than rise proportionally with rising incomes.[38]

Moreover, as a consequence of the depreciation of law resulting from legislation and the collectivization of responsibility effected in particular by social security legislation, the rate of crimes of a serious nature, such as murder, assault, robbery, and theft, has also shown a systematic upward tendency.

In the "normal" course of events — that is, with rising standards of living — it can be expected that the protection against social disasters such as crime will undergo continual improvement, just as one would expect the protection against natural disasters such as floods, earthquakes and hurricanes to become progressively better. Indeed, throughout the Western world this appears to have been the case by and large — until recently, during second half of the 20th century, when crime rates began to climb steadily upward.[39]

To be sure, there are a number of factors other than increased irresponsibility and shortsightedness brought on by legislation and welfare that may contribute to crime. Men commit more crimes than women, the young more than the old, blacks more than whites, and city dwellers more than villagers. Accordingly, changes in the composition of the sexes, age groups, races, and the degree of urbanization can be expected to have a systematic effect on crime.

However, all of these factors are relatively stable and thus cannot account for any systematic change in the long-term downward trend of crime rates. As for European countries, their populations were and are comparatively homogeneous; and in the United States, the proportion of blacks has remained roughly stable. The sex composition is largely a biological constant; and as a result of wars, only the proportion of males has periodically fallen, thus actually reinforcing the "normal" trend toward falling crime rates.

Similarly, the composition of age groups has changed only slowly; and due to declining birth rates and higher life expectancies the average age of the population has actually increased, thus helping to depress crime rates still further. Finally, the degree of urbanization began to increase dramatically from about 1800 onward. A period of rising crime rates during the early 19th century can be attributed to this initial spurt of urbanization.[40]

Yet, after a period of adjustment to the new phenomenon of urbanization, from the mid-19th century onward, the countervailing tendency toward falling crime rates took hold again, despite the fact that the process of rapid urbanization continued for about another hundred years. And when crime rates began to move systematically upward, from the mid-20th century onward, the process of increasing urbanization had actually come to a halt.

It thus appears that the phenomenon of rising crime rates cannot be explained other than with reference to the process of democratization: by a rising degree of social time preference, an increasing loss of individual responsibility, intellectually and morally, and a diminished respect for all law — moral relativism — stimulated by an unabated flood of legislation. Of course, "high time preference" is by no means equivalent with "crime." A high time preference can also find expression in such perfectly lawful activities as recklessness, unreliability, poor manners, laziness, stupidity or hedonism.

Nonetheless, a systematic relationship between high time preference and crime exists, for in order to earn a market income a certain minimum of planning, patience and sacrifice is required. One must first work for a while before one gets paid. In contrast, most serious criminal activities such as murder, assault, rape, robbery, theft, and burglary require no such discipline. The reward for the aggressor is immediate and tangible, whereas the sacrifice — possible punishment — lies in the future and is uncertain. Consequently, if the social degree of time preference were increased, it would be expected that the frequency in particular of these forms of aggressive behavior would rise — as they in fact did.[41]

IV. Conclusion: Monarchy, Democracy, and the Idea of a Natural Order

From the vantage point of elementary economic theory and in light of historical evidence, then, a revisionist view of modern history results. The Whig theory of history, according to which mankind marches continually forward toward ever higher levels of progress, is incorrect. From the viewpoint of those who prefer less exploitation over more and who value farsightedness and individual responsibility above shortsightedness and irresponsibility, the historic transition from monarchy to democracy represents not progress but civilizational decline.

Nor does this verdict change if more or other indicators are included. Quite to the contrary. Without question the most important indicator of exploitation and present-orientedness not discussed above is war. Yet if this indicator were included the relative performance of democratic-republican government appears to be even worse, not better. In addition to increased exploitation and social decay, the transition from monarchy to democracy has brought a change from limited warfare to total war, and the 20th century, the age of democracy, must be ranked also among the most murderous periods in all of history.[42]

Thus, inevitably two final questions arise. What can we expect? And what can we do? As for the first question, the answer is brief. At the end of the 20th century, democratic republicanism in the United States and all across the Western world has apparently exhausted the reserve fund that was inherited from the past. For decades, real incomes have stagnated or even fallen.[43] The public debt and the cost of social security systems have brought on the prospect of an imminent economic meltdown.

At the same time, societal breakdown and social conflict have risen to dangerous heights. If the tendency toward increased exploitation and present-orientedness continues on its current path, the Western democratic welfare states will collapse as the East European socialist peoples' republics did in the late 1980s. Hence one is left with only the second question: what can we do in order to prevent the process of civilizational decline from running its full course to an economic and social catastrophe?

First, the idea of democracy and majority rule must be delegitimized. Ultimately, the course of history is determined by ideas, be they true or false. Just as kings could not exercise their rule unless a majority of public opinion accepted such rule as legitimate, so will democratic rulers not last without ideological support in public opinion.[44]

Likewise, the transition from monarchical to democratic rule must be explained as fundamentally nothing but a change in public opinion. In fact, until the end of WWI, the overwhelming majority of the public in Europe accepted monarchical rule as legitimate.[45] Today, hardly anyone would do so.

On the contrary, the idea of monarchical government is considered laughable. Consequently, a return to the "ancien regime" must be regarded as impossible. The legitimacy of monarchical rule appears to have been irretrievably lost. Nor would such a return be a genuine solution. For monarchies, whatever their relative merits, do exploit and do contribute to present-orientedness as well. Rather, the idea of democratic-republican rule must be rendered equally if not more laughable, not in the least by identifying it as the source of the ongoing process of decivilization.

But secondly, and still more importantly, at the same time a positive alternative to monarchy and democracy — the idea of a natural order — must be spelled out and understood. On the one hand, and simply enough, this involves the recognition that it is not exploitation, either monarchical or democratic, but private property, production, and voluntary exchange that are the ultimate source of human civilization.

On the other hand, psychologically more difficult to accept, it involves the recognition of a fundamental sociological insight (which incidentally also helps identify precisely where the historic opposition to monarchy went wrong): that the maintenance and preservation of a private-property based exchange economy requires as its sociological presupposition the existence of a voluntarily acknowledged "natural" elite — a nobilitas naturalis.[46]

The natural outcome of the voluntary transactions between various private property owners is decidedly nonegalitarian, hierarchical, and elitist. As the result of widely diverse human talents, in every society of any degree of complexity a few individuals quickly acquire the status of an elite. Owing to superior achievements of wealth, wisdom, bravery, or a combination thereof, some individuals come to possess "natural authority," and their opinions and judgments enjoy widespread respect.

"It is now of central strategic importance that ideological support be given to all decentralizing or even secessionist social forces."

Moreover, because of selective mating and marriage and the laws of civil and genetic inheritance, positions of natural authority are more likely than not passed on within a few — noble — families. It is to the heads of these families with long-established records of superior achievement, farsightedness, and exemplary personal conduct, that men turn with their conflicts and complaints against each other, and it is these very leaders of the natural elite who typically act as judges and peacemakers, often free of charge, out of a sense of obligation required and expected of a person of authority or even out of a principled concern for civil justice, as a privately produced "public good."[47]

In fact, the endogenous origin of a monarchy (as opposed to its exogenous origin via conquest)[48] cannot be understood except before the background of a prior order of natural elites. The small but decisive step in the transition to monarchical rule — original sin — consisted precisely in the monopolization of the function of judge and peacemaker. The step was taken, once a single member of the voluntarily acknowledged natural elite — the king — could insist, against the opposition of other members of the social elite, that all conflicts within a specified territory be brought before him.

From this moment on, law and law enforcement became more expensive: instead of being offered free of charge or for a voluntary payment, they were financed with the help of a compulsory tax. At the same time, the quality of law deteriorated: instead of upholding the preexisting law and applying universal and immutable principles of justice, a monopolistic judge, who did not have to fear losing clients as a result of being less than impartial in his judgments, could successively alter and pervert the existing law to his own advantage.

It was to a large extent the inflated price of justice and the perversions of ancient law by the kings which motivated the historical opposition against monarchy. However, confusion as to the causes of this phenomenon prevailed. There were those who recognized correctly that the problem lay with monopoly, not with elites or nobility.[49] But they were far outnumbered by those who erroneously blamed it on the elitist character of the ruler instead, and who accordingly advocated to maintain the monopoly of law and law enforcement and merely replace the king and the visible royal pomp by the "people" and the presumed modesty and decency of the "common man." Hence the historic success of democracy.

Ironically, the monarchy was then destroyed by the same social forces that kings had first stimulated when they began to exclude competing natural authorities from acting as judges. In order to overcome their resistance, kings typically aligned themselves with the people, the common man.[50]

Appealing to the always popular sentiment of envy, kings promised the people cheaper and better justice in exchange and at the expense of taxing — cutting down to size — their own betters (that is, the kings' competitors). When the kings' promises turned out to be empty, as was to be predicted, the same egalitarian sentiments which they had previously courted now focused and turned against them.

After all, the king himself was a member of the nobility, and as a result of the exclusion of all other judges, his position had become only more elevated and elitist and his conduct only more arrogant. Accordingly, it appeared only logical then that kings, too, should be brought down and that the egalitarian policies, which monarchs had initiated, be carried through to their ultimate conclusion: the monopolistic control of the judiciary by the common man.

Predictably, as explained and illustrated in detail above, the democratization of law and law enforcement — the substitution of the people for the king — made matters only worse, however. The price of justice and peace has risen astronomically, and all the while the quality of law has steadily deteriorated to the point where the idea of law as a body of universal and immutable principles of justice has almost disappeared from public opinion and has been replaced by the idea of law as legislation (government-madelaw).

At the same time, democracy has succeeded where monarchy only made a modest beginning: in the ultimate destruction of the natural elites. The fortunes of great families have dissipated, and their tradition of a culture of economic independence, intellectual farsightedness, and moral and spiritual leadership has been lost and forgotten. Rich men still exist today, but more frequently than not they owe their fortune now directly or indirectly to the state.

Hence, they are often more dependent on the state's continued favors than people of far lesser wealth. They are typically no longer the heads of long-established leading families but "nouveaux riches." Their conduct is not marked by special virtue, dignity, or taste but is a reflection of the same proletarian mass-culture of present-orientedness, opportunism, and hedonism that the rich now share with everyone else; and consequently, their opinions carry no more weight in public opinion than anyone else's.

Hence, when democratic rule has finally exhausted its legitimacy, the problem faced will be significantly more difficult than when kings lost their legitimacy. Then, it would have been sufficient by and large to abolish the king's monopoly of law and law enforcement and replace it with a natural order of competing jurisdictions, because remnants of natural elites who could have taken on this task still existed.

Now, this will no longer be sufficient. If the monopoly of law and law enforcement of democratic governments is dissolved, there appears to be no other authority to whom one can turn for justice, and chaos would seem to be inevitable. Thus, in addition to advocating the abdication of democracy, it is now of central strategic importance that at the same time ideological support be given to all decentralizing or even secessionist social forces; that is, the tendency toward political centralization that has characterized the Western world for many centuries, first under monarchical rule and then under democratic auspices, must be systematically reversed.[51]

Even if as a result of a secessionist tendency a new government, whether democratic or not, should spring up, territorially smaller governments and increased political competition will tend encourage moderation as regards exploitation. And in any case, only in small regions, communities or districts will it be possible again for a few individuals, based on the popular recognition of their economic independence, outstanding professional achievement, morally impeccable personal life, and superior judgment and taste, to rise to the rank of natural, voluntarily acknowledged authorities and lend legitimacy to the idea of a natural order of competing judges and overlapping jurisdictions — an "anarchic" private law society — as the answer to monarchy and democracy.

The Fed as Giant Counterfeiter

Mises Daily: by Robert P. Murphy

San Jose State economics professor Jeffrey Rogers Hummel tells all his students that the easiest way to understand the Federal Reserve is to think of it as a giant, legalized counterfeiter. I had always known that the Fed and other central banks were like counterfeiters, but I still thought that the actual mechanics of open-market operations and so forth actually provided some important distinctions.

In large part because of my frequent email exchanges with Hummel, I now realize that I was being naïve. Once you understand the details of modern central banking, you are able to step back and see that it truly is a way for the government to use the printing press to pay its bills. All of the complicated process of targeting interest rates through buying Treasuries simply hides this essential point — and perhaps deliberately so.

An Old-Fashioned Monarch With a Printing Press

Before we examine Fed operations, let's start with something simpler. Suppose there is a powerful monarch reigning over a large, industrialized country. The monarch has managed to wean his subjects off commodity money such as gold or silver, and instead they use fiat notes, rectangular slips of paper featuring the king's portrait. The king has a printing press at his disposal, which gives him unlimited ability to create more slips of paper with which he can buy goods throughout his kingdom.

At first, one might think that our hypothetical king has infinite wealth. But upon reflection, we see that there are actually pragmatic limits on how much new money he will print up each year. It's true that there are no legal constraints on how many notes he can create, but the more monetary inflation he sows, the greater the price inflation he will reap.

At some point, the monarch would actually make himself poorer in the long run by running the printing press too heavily in the present. For example, if he doubled the stock of money in one year, the resulting price inflation would destabilize his economy and cause much needless capital consumption. His subjects would be less willing to invest in their businesses and retirement portfolios, knowing that he might effectively confiscate their savings again through massive creation of new money. Foreign investors too would be wary of exposing themselves to his country if he made his fiat currency too volatile.

Because of these considerations, the monarch would no doubt run off new money every year from his printing press, but he wouldn't overdo it. He would aim for a moderate level of constant price inflation, with the purchasing power of his fiat currency slowly falling over time in a predictable manner. Each year, the new influx of money into the economy would represent a transfer of wealth from all other currency holders into the king's possession.

Now what if our monarch is really profligate? What if he wants to spend more money than the income and tribute he earns in his position as monarch, even including the amount of new money he dares to create each year with his printing press, can support? In this case, the monarch can still resort to old-fashioned borrowing. Therefore in any given year, the monarch can only spend what he collects in tribute (taxes), debt financing, and inflation.

Modern Counterfeiting, Fed Style

At first glance, our present monetary system is nothing like the simple tale of a king with a printing press. For one thing, the US Treasury is a distinct entity from the Federal Reserve. When the US federal government runs a budget deficit, it can't simply have the Fed print up enough $100 bills to cover the shortfall. No, the Treasury always covers its budget deficits by issuing debt, referred to as Treasuries. These are bonds, IOUs sold by the Treasury to outside investors who lend the Treasury money today in the hopes of being paid back in the future.

But wait, there's more to the story. One of the main buyers of this Treasury debt is the Federal Reserve itself. This phenomenon is especially pronounced during emergencies such as major wars and the current financial crisis. Indeed, in the second quarter of 2009, the Federal Reserve was the effective buyer of some 48 percent of the new Treasury debt issued that period, as part of its "quantitative easing." It's true, the Fed doesn't show up at the Treasury auctions and directly buy the new T-bills and so forth, but private dealers pay higher prices for the Treasuries knowing that the Fed is waiting in the wings to pick them up.

At this point let's review exactly what happens when the Federal Reserve buys Treasuries from private dealers. Let's say the Fed wants to buy $1 million worth of T-bills from Joe Smith. So it writes Joe a check for $1 million, drawn on the Fed itself. Joe hands the T-bills over to the Fed, where they end up on the asset side of its balance sheet. Joe then deposits the check in his personal checking account, which goes up by $1 million.

"If nothing else, the Fed's massive buying of Treasury debt pushes up the auction price of the Treasuries, meaning the federal government can borrow at cheaper interest rates."

So at this point the Fed has increased the money supply by $1 million. In normal times, because of the fractional-reserve banking system, Joe's bank would lend out $900,000 of the new deposit to another customer, so that the money supply would grow even further. But that's not what interests us in this article, so we'll leave that train of thought.

What we want to focus on is the effect of the Fed's purchase on the US Treasury. By entering the bond market and buying Treasuries (with money created out of thin air), the Fed pushes up the price of the bonds. That of course means that their yield drops. So, for example, if the Treasury issues a T-bill promising to pay the holder $10,000 in 12 months, then the auction price determines how much money the Treasury actually gets to borrow now in exchange for this promise to pay back $10,000 in one year. If the demand is such that people pay $9,901 for each T-bill with a face value of $10,000, then the Treasury gets to borrow money for a year at an interest rate of 1 percent.

Already we see why the folks at the Treasury are big fans of the Fed's "quantitative easing" program, in which Bernanke decided it was in the national interest to begin adding more than a trillion dollars' worth of Treasury debt to the Fed's balance sheet. If nothing else, the Fed's massive buying of Treasury debt pushes up the auction price of the Treasuries, meaning the federal government can borrow at cheaper interest rates.

Now, if this were the whole story, it would be fishy but not nearly as bad as our hypothetical monarch with the printing press. Sure, the Fed would create new dollars (which would push up dollar prices of goods and services) in order to keep the Treasury's borrowing costs low. But still, the Treasury would have to pay some interest on its debt, especially for longer-dated debt with higher yields, like 10-year Treasury notes. So although the mechanism we have described would encourage the Treasury to run higher deficits at the expense of average people, who suffer from rising prices, things don't seem nearly as crooked as they were in the case of our monarch.

Ah, but we're not done yet. Not only does the Fed's accumulation of Treasury debt artificially push down the interest rate, but the Fed gives the interest payments right back to the Treasury! After all, interest is how the Fed "makes money." It writes checks on itself (created out of thin air) and accumulates assets, and then earns the interest and (in some cases) capital gains on the assets. But after the Fed pays its employees, pays its electric bill, and throws the staff Christmas party, it remits the excess earnings back to the Treasury.

For example, in fiscal year 2008 the Federal Reserve distributed to the US Treasury some $31.7 billion (page 173) of its net earnings. To repeat, much of this money consisted of interest payments that the Treasury paid out to the holders of its debt, who just so happened to be the Fed for much of it. So not only is the official rate of interest kept artificially low by the Fed's money-creation, but the interest payments themselves are largely refunded to the Treasury, to the extent that the Fed ends up holding the Treasuries rather than outsiders.

"But after the Fed pays its employees, pays its electric bill, and throws the staff Christmas party, it remits the excess earnings back to the Treasury."

All right, so the Fed (a) suppresses the interest rate on Treasury debt and (b) refunds virtually all of the interest payments on Treasury debt held by the Fed. And remember, the way the Fed does this is through creating new dollars out of thin air, in order to buy the Treasury debt from the original investors who lent money to the Treasury. Therefore the Fed is clearly giving aid to the US government's deficit spending at the expense of everyone holding assets denominated in US dollars.

Still, the one thing holding back the complete recklessness of the feds is that they still have to pay off the principal of their bonds when they mature, right? In other words, all we've really shown is that the Fed allows the Treasury to run deficits virtually at zero interest expense, at least for debt held by the Fed. But this is still a far cry from our hypothetical monarch, who had a whole component of his expenses which he met year in and year out by running the printing press.

Sorry, but our own monetary system has the same feature. When the Treasury securities held by the Fed mature — so that the Treasury has to pay back the face value in principal — the Fed rolls over the debt. Over time, the nominal market value of the Fed's holdings of Treasury debt continually grows. Barring a sudden reversal in this policy, the Treasury knows that it will never have to pay off this debt. For all practical purposes, any Treasury debt ultimately finding its way onto the Fed's balance sheet is economically equivalent to our monarch running the printing press to pay his bills.[1]

We have just one last consideration. Up till now we've seen that the modern US government, with its complicated central bank and fiat money system, operates essentially as a king with a simple printing press, to the extent that the Fed is willing to accumulate larger holdings of Treasury debt. But what determines how much the Fed is willing to take on? At what point would the Fed decide to ease off on its open-market operations and stop creating so many new dollars to (indirectly) hand over to the government?

The ultimate constraint on the Fed's operations is the same one our hypothetical king faced: investor and citizen backlash in response to rising prices. That is, the Federal Reserve can only absorb so much of the Treasury's new debt each year because too much dollar-creation would lead to unacceptably high price inflation. Thus our profligate government, like the hypothetical monarch, must finance some of its spending through traditional borrowing from private citizens and other governments.

Conclusion

Stripped of its fancy terminology and confusing mechanics, modern central banking boils down to a legalized counterfeiting operation. If there were suddenly a widespread public outcry to "punt the press," we can bet our hypothetical monarch would mobilize all his allies in the media to discredit the people threatening his source of revenue. In that light, we can understand the reaction today to people calling to "end the Fed."

The Only Way to Get Money out of Politics

The Only Way to Get Money out of Politics
by Sheldon Richman

Last week’s Supreme Court ruling striking down the ban on corporate and union spending at election time is both a blessing and a curse. On the one hand, removing a legal barrier to free speech is always a good thing in itself. Government shouldn’t dictate who can speak or from where people may get their information. This is more than a matter of abstract freedom; it’s also a practical matter. More contentiousness in politics is better than less. Free-wheeling debate is more likely to produce good outcomes than a controlled flow of information.

But there is a downside to the ruling that we should freely acknowledge. If history and recent times are any indication, big corporations and unions will use their new freedom of political speech to promote bad ideas. By “bad ideas” I mean proposals for more government interference with our lives and liberty. (Not that the spending ban kept them from doing that in other ways.)

It’s a great myth that businesses, especially big prominent corporations, want less government intervention in the economy. On the contrary, they love government power because it provides things they can’t achieve in a freely competitive marketplace where force and fraud are barred. Corporations support and lobby for interventions that benefit themselves by hampering their competitors, both foreign and domestic. You often find companies asking for tariffs and other restrictions on imports that compete too effectively with their products. Agribusinesses welcome government (taxpayer) help in selling their products abroad; they also love subsidies, price supports, and acreage allotments.

Businesses, despite public impression, routinely support regulations imposing product standards and other requirements. Why? Burdens from government rules don’t fall uniformly on all firms. Major corporations with big legal and accounting departments can handle regulations far more easily than small firms can — or one that is still only a gleam in the eye of an aspiring entrepreneur. Moreover, when government dictates product standards, say in the name of safety, it removes that factor from the competitive arena, giving companies less incentive to outdo their competitors along that dimension. This means fewer threats to the market share of incumbent firms and less chance for new challengers to make headway. It also means inferior and more expensive goods for consumers.

In American history big companies were behind virtually ever advancement of the regulatory state. Things are no different today — even under Barack Obama. It’s easy to be fooled by appearances. Banks may balk at a new regulation, but only because they prefer their government privileges with as few restrictions as possible. Major corporations lobby for new controls on and subsidies to energy production not out of concern for the environment, but because they stand to gain profits. The government is literally seen as a tool for enhancing their investments. Instead of decisions being made by entrepreneurs trying to anticipate what consumers will want, they are made on the basis of cronyism and other political considerations.

Often big companies and unions are on the same side of regulatory issues, as when the heads of Walmart and the Service Employees International Union stood shoulder to shoulder to support Obamacare. But even when they disagree, it is usually over how government should manipulate the economic system. The debate is never between regulation and hands-off.

Admittedly this is not the way the story is usually told. Business is thought to favor deregulation, while progressive forces favor enlightened government guidance. But in fact, big business (and a lot of small business too) would panic at the thought of thorough laissez faire — the end to all guarantees. The books of conservative writer Timothy Carney fully document this. Others have an interest in portraying business as pro–free markets because without the charade the public might catch on to the scam.

So here’s the dilemma: limits on free political speech for corporations and unions offend our sense of justice, but they will use free speech to pursue unjust ends. What shall we do?

There is only one answer. We must strip government of the power to dispense privileges to anyone. If we can pull that off, the problem of money in politics will evaporate.

Sheldon Richman is senior fellow at The Future of Freedom Foundation, author of Tethered Citizens: Time to Repeal the Welfare State, and editor of The Freeman magazine. Visit his blog “Free Association” at www.sheldonrichman.com.

Washington's ears are still plugged

Examiner Editorial
February 1, 2010

President Obama has proposed more funding for high-speed rail. And once again, the middle-class taxpayer gets hit in the wallet to pay for somebody else’s ride in life. (Photos.com)

When pollsters ask people about government, politicians, and the direction of the country, a frequently expressed frustrations is that officials aren't listening to their constituents. Signs asking "Are you listening now?" were prominent during the celebration of Massachusetts Republican Scott Brown's victory in the recent special election for the Senate seat. President Obama's insistence that Congress pass his health care reform despite the opposition of a strong majority of Americans illustrates the way Washington thumbs its nose at people beyond the Beltway. Another example is Obama's announcement Thursday of more than $8 billion in economic stimulus grants for 13 high-speed rail transit projects.

The president says these projects should be built because they will put trains capable of traveling at 168 mph on routes between Los Angeles and San Francisco, Tampa and Orlando, Fla., and 11 other "transportation corridors." But the people who will have to pay for these massive spending programs have been voting against heavy rail projects for decades. Automobiles account for 88 percent of all passenger travel in this country, and commercial airlines make up most of the rest. Commercial passenger rail lines -- think Amtrak-- have been money-losing propositions for so long that only continuous infusions of federal tax dollars have kept them operating.

Public administration expert Randal O'Toole told The Examiner that Obama "has effectively committed the federal government to tens if not hundreds of billions of dollars for an obsolete technology that few people will use. California's high-speed rail plan will cost at least $45 billion to $60 billion and the state fully expects the federal government to pick up half the cost. So this initial grant will have to be followed by at least $20 billion more." He also notes that the Florida project's environmental impact statement recently recommended against approval, and that rail is always much more expensive than going by bus or car. That means the few who use the high-speed trains will be wealthier (remember the Concorde?), so once again the middle-class taxpayer gets hit in the wallet to pay for somebody else's ride in life.

There will be those who are quite pleased by the projects, however. As O'Toole points out in his book, "The Best-Laid Plans," rail transit projects mean big bucks for engineering and design firms, construction contractors, rail car manufacturers, and a host of other transit businesses. Does anybody doubt these firms will eagerly show their gratitude with millions of dollars in campaign contributions to the politicians behind the projects?

The US game in Latin America

US interference in the politics of Haiti and Honduras is only the latest example of its long-term manipulations in Latin America

• 
• • Mark Weisbrot

When I write about US foreign policy in places such as Haiti or Honduras, I often get responses from people who find it difficult to believe that the US government would care enough about these countries to try and control or topple their governments. These are small, poor countries with little in the way of resources or markets. Why should Washington policymakers care who runs them?

Unfortunately they do care. A lot. They care enough about Haiti to have overthrown the elected president Jean-Bertrand Aristide not once, but twice. The first time, in 1991, it was done covertly. We only found out after the fact that the people who led the coup were paid by the US Central Intelligence Agency. And then Emmanuel Constant, the leader of the most notorious death squad there – which killed thousands of Aristide's supporters after the coup – told CBS News that he, too, was funded by the CIA.

In 2004, the US involvement in the coup was much more open. Washington led a cut-off of almost all international aid for four years, making the government's collapse inevitable. As the New York Times reported, while the US state department was telling Aristide that he had to reach an agreement with the political opposition (funded with millions of US taxpayers' dollars), the International Republican Institute was telling the opposition not to settle.

In Honduras last summer and autumn, the US government did everything it could to prevent the rest of the hemisphere from mounting an effective political opposition to the coup government in Honduras. For example, they blocked the Organisation of American States from taking the position that it would not recognise elections that took place under the dictatorship. At the same time, the Obama administration publicly pretended that it was against the coup.

This was only partly successful, from a public relations point of view. Most of the US public thinks that the Obama administration was against the Honduran coup, although by November of last year there were numerous press reports and even editorial criticisms that Obama had caved to Republican pressure and not done enough. But this was a misreading of what actually happened: the Republican pressure in support of the Honduran coup changed the administration's public relations strategy, but not its political strategy. Those who followed events closely from the beginning could see that the political strategy was to blunt and delay any efforts to restore the elected president, while pretending that a return to democracy was actually the goal.

Among those who understood this were the governments of Latin America, including such heavyweights as Brazil. This is important because it shows that the State Department was willing to pay a significant political cost in order to help the right in Honduras. It convinced the vast majority of Latin American governments that it was no different from the Bush administration in its goals for the hemisphere, which is not a pleasant outcome from a diplomatic point of view.

Why do they care so much about who runs these poor countries? As any good chess player knows, pawns matter. The loss of a couple of pawns at the beginning of the game can often make a difference between a win or a loss. They are looking at these countries mostly in straight power terms. Governments that are in agreement with maximising US power in the world, they like. Those who have other goals – not necessarily antagonistic to the United States – they don't like.

Not surprisingly, the Obama administration's closest allies in the hemisphere are rightwing governments such as those of Colombia or Panama, even though Obama himself is not a rightwing politician. This highlights the continuity of the politics of control. The victory of the right in Chile, the first time that it has won an election in half a century, was a significant victory for the US government. If Lula de Silva's Workers' party were to lose the presidential election in Brazil this autumn, that would be another win for the state department. While US officials under both Bush and Obama have maintained a friendly posture toward Brazil, it is obvious that they deeply resent the changes in Brazilian foreign policy that have allied it with other social democratic governments in the hemisphere, and its independent foreign policy stances with regard to the Middle East, Iran, and elsewhere.

The US actually intervened in Brazilian politics as recently as 2005, organising a conference to promote a legal change that would make it more difficult for legislators to switch parties. This would have strengthened the opposition to Lula's Workers' party (PT) government, since the PT has party discipline but many opposition politicians do not. This intervention by the US government was only discovered last year through a Freedom of Information Act request filed in Washington. There are many other interventions taking place throughout the hemisphere that we do not know about. The United States has been heavily involved in Chilean politics since the 1960s, long before they organised the overthrow of Chilean democracy in 1973.

In October 1970, President Richard Nixon was cursing in the Oval Office about the Social Democratic president of Chile, Salvador Allende. "That son of a bitch!" said Richard Nixon on 15 October. "That son of a bitch Allende – we're going to smash him." A few weeks later he explained why:

The main concern in Chile is that [Allende] can consolidate himself, and the picture projected to the world will be his success ... If we let the potential leaders in South America think they can move like Chile and have it both ways, we will be in trouble.

That is another reason that pawns matter, and Nixon's nightmare did in fact come true a quarter-century later, as one country after another elected independent left governments that Washington did not want. The United States ended up "losing" most of the region. But they are trying to get it back, one country at a time. The smaller, poorer countries that are closer to the United States are the most at risk. Honduras and Haiti will have democratic elections some day, but only when Washington's influence over their politics is further reduced.

Personal income was up 0.4%

Data Watch
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Personal income was up 0.4% in December while personal consumption increased 0.2%
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist

Personal income was up 0.4% in December, slightly higher than the consensus expected. Personal consumption increased 0.2% (0.4% including upward revisions to prior months), versus a consensus expected 0.3%.

Disposable personal income (income after taxes) was up 0.4% in December and is up at a 5.5% annual rate in the past three months. Private sector wages and salaries increased for the eighth time in the past nine months.

The overall PCE deflator (consumer inflation) was up 0.1% in December and is up at a 2.6% annual rate in the past three months. The “core” PCE deflator, which excludes food and energy, was also up 0.1% in December and is up at a 1.2% rate in the past three months.

After adjusting for inflation, “real” consumption increased 0.1% in December (0.3% including upward revisions to prior months). Real consumption is up at a 3.6% annual rate in the past three months.

Implications: Consumers are getting more confident about opening their wallets and purses, and they don’t need government aid to do it. Cash-for-clunkers ended in August and was supposed to reduce spending late in 2009. But in the past three months, “real” (inflation-adjusted) consumer spending is up at a robust 3.6% annual rate. One key reason is the turnaround in earnings since the low in March. In the past nine months, even though payrolls continued to decline, compensation per worker (wages, salaries, and fringe benefits like health insurance) increased at a healthy 4.7% annual rate (2.2% inflation-adjusted). And with the jobless rate at or near a peak, income gains are likely to accelerate. Meanwhile, households are repairing their balance sheets, with more aggressive saving and falling debt levels. The personal saving rate is 4.8% (and has averaged 4.6% over the past twelve months) versus a low of less than 1% in early 2008. The financial obligations of households (debt service plus rents and car leases) are now the smallest share of after-tax income since mid-2000. Of course, the improvement in household balance sheets has been accompanied by a deterioration of the government’s balance sheet, but this problem, if not corrected by spending limits, will have a gradual negative impact on the economy over a long period of time. It is not going to derail the V-shaped recovery in the next couple of years. On the inflation front, overall consumer prices are up 2.1% versus a year ago, but up at a 2.6% annual rate in the past three months. Expect further acceleration of inflation in the months ahead.
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The US budget

Budget day

Barack Obama is caught between a rising deficit, stubborn unemployment and political paralysis

A MEETING between Barack Obama and Republican members of the House of Representatives last week proved to be an unusually frank, if polite, affair. The president sought to put the members of the minority party on the spot before the television cameras, allowing them to voice their concerns but also asking them to offer proposals. Both sides were pleased with having a chance to make their rivals squirm. The deficit was an area of particular focus.

The Republicans, as well as the amorphous but vigorous “tea party” movement, have managed to put deficit spending on the national agenda like at no time since the early 1990s when Bill Clinton came to office on a wave of anxiety about the economy. During Mr Clinton’s terms the economy boomed and deficits became surpluses. During those of his successor, George Bush, the public let slip its attention on overspending. Two wars, two popular tax cuts, economic ups and downs, and an expensive drug benefit for Medicare (the health system for the elderly) that was supported by both parties, pushed public finances deep into the red.

As hard as Mr Obama and his advisers have tried to remind voters of the fiscal situation that he inherited, the president is now seen to “own” the economy and the tide of red ink that America faces. So as he proposes his first full-year budget on Monday February 1st, he is stressing not the goodies the budget will dole out but the programmes he is cutting and consolidating. According to the White House, the new budget cuts 120 programmes, with savings expected to total $20 billion. These include combining 38 education programmes into 11, and cutting money for parks, brownfield development and other areas.

Whereas the deficit has become more prominent the White House has its eyes on another concern: jobs. In the early 1980s under Ronald Reagan, and then in the late 1990s under Mr Clinton, the unemployment rate and presidential popularity corresponded eerily closely. Late last week GDP figures for the fourth quarter of 2009 showed the strongest quarterly economic growth since 2003. But the president and his supporters have reacted cautiously, as economic analysts warn that the recovery remains fragile and as job figures and (closely related) consumption numbers remain weak.

Can the president get Americans back to work? On Friday he proposed a package of tax incentives for job creation: small businesses would get a $5,000 tax credit for every worker hired. In addition, those who raise pay above inflation for existing workers will get a credit on their Social Security taxes, a payroll tax that adds a good deal to the cost of every worker. Republicans dismiss this as small beer and remind the president that not just Reagan but John Kennedy pushed through economy-wide, broad-based tax cuts to stimulate the economy in a recession.

Neither party talks comfortably about the real tax-and-spend issue, entitlements. Last week the Congressional Budget Office said that the national debt is on course to triple in ten years. The three-year discretionary-spending freeze Mr Obama backed at his state-of-the-union address last week would reap only small savings next to the rising costs of Medicare, Social Security and Medicaid, the health-insurance programme for the poor. Mr Obama wants a commission to propose a deficit-reduction plan that would have to pass Congress without amendment. This could be one way to tackle entitlements.

But Mr Obama could not get the creation of such a commission through the Senate (and thus has talked of creating one by executive order). Many Republicans want such a commission to focus only on spending cuts and not tax increases, and some Democrats fear entitlement cuts. The Republican refusal to countenance tax increases could make them look irresponsible. But they may gamble that with control of Congress and the presidency, any political pain for deficits, joblessness and the rest will only be felt by the Democrats. The most shameless partisans on both sides glory in trying to make the other look like it will throw the elderly out in the cold if Medicare and Social Security are reformed. Making hard choices is all but impossible when political gamesmanship is at the fore.