Ron Paul on Banking
In this FOX Business interview Ron Paul is challenged to justify his opposition to central banking and fractional-reserve banking, even though “[t]he fact that the banking system was allowed to make loans for which it didn’t have the capital allowed new enterprises to exist that wouldn’t have existed otherwise. Our entire computer revolution was built on this kind of debt. So was our cable system for our cable TVs by which people are now seeing you, so in fact there are some real purposes, real creations, because of our banking system.”
I think Paul should have mentioned the key word, malinvestment. Many of those new enterprises were not sound investments. Yet they were revealed as such only after a period of time. The production structure was being torn apart, and something had to give. Further, we see the computer revolution, etc. that did take place; we do not see sustained growth with many fewer wasted resources and even greater progress that would have taken place given sound money and banking.
Update. Mises thought that what sustained the present business cycle-generating system was the ideology of “inflationism,” that is, the belief that credit expansion unbacked by real voluntary savings can make us all vastly more prosperous than the alternative of honest banking and commodity money. The host is clearly a believer in this ideology.
Posted: May 14th, 2008 under Economics.
Comments
Comment from Nullasalus
Time May 17, 2008 at 7:12 pm
Hey there, Dmitry. Just wanted to tell you I really enjoy reading your blog – thoughtful arguments all around, and you hit a range.
So count me as one more lurking reader.
Comment from Adam E Zandarski
Time August 18, 2008 at 11:02 pm
So, how are you going to use logical twists that central banking doesnt expressly show the inherent failures of a completely free market? I know that, because its a failure, it must be the fault of the state. How has the state, that demon, ruined such a remarkable free-market policy as centralized, private banking? How was it a good thing to privatize our issuing of currency?
And please dont refer me to someone you’ve read. You dont really believe anything if you’re just copy and pasting what someone else has said.
Comment from Dmitry Chernikov
Time August 19, 2008 at 12:56 am
Central banking is not a free-market policy. It is based on
(1) legal tender laws, such that bad money drives out good.
(2) fractional reserve banking which is arguably fraudulent, representing the state’s refusal to enforce private property rights of the depositors.
(3) FDIC which “insures” deposits with taxpayer money and the general duty of the Fed to act as lender of last resort, guaranteeing statist bailouts of any bank that fails.
(4) monetizing government debt with the help of the Federal Reserve, such that the government continually issues new debt despite the mountains of old debt it has already piled up.
(5) the Fed’s ability to inflate by creating money out of thin air by buying securities, simply by writing a check to the seller and adding the price of the security to its liabilities, once the check is deposited at a regular bank.
(6) the Fed’s central planning of the interest rates which are the price of time on the market which leads to business cycles.
If you mean that free market in banking is discredited, simply because it was supplanted by central banking, then I suppose that peace and health are discredited, too, whenever there is a war or plague.
Comment from Adam E Zandarski
Time August 20, 2008 at 10:57 pm
The only mention of government you had was the FDIC, an independant agency. The whole apparatus of central banking is run by collections of private banks with little to no oversight. There will always be some form of governance. I argue for government by the people; implementing libertarian policy always seems to end up with government by corporation.
Your experiences under the Soviet “union” has led you to believe that people like me want centrally run economies. You couldnt be further from the truth. I argue for a real free market system; wherein it is governments job to make sure it is open, available, and free of corruption and exploitation.
Do you agree or disagree with 90% of the worlds wealth being in 10% of the worlds hands? The more your austrian school takes over, the worse this problem gets.
Comment from Dmitry Chernikov
Time August 21, 2008 at 2:49 pm
No, I mention government’s legal tender laws, government’s refusal to prosecute fractional-reserve bankers for fraud, government’s propping up and insuring failed banks, government’s prohibition of banks’ issuing their own currency. It is true that even removing these perversions may not be enough naturally to monetize gold and silver. But it would be a good start. Also, the Federal Reserve does not stand aloof from political influences. It does the bidding of the federal government, e.g., at election times.
I don’t know the statistics on how much wealth is in whose hands. But whatever the correct numbers are, if they indicate great inequalities, then it must be due to anti-capitalistic policies. In the modern free market societies the bulk of the population consists of prosperous middle class. It is true that Bill Gates has a lot more money than I do. But that’s only because he has created so much value for hundreds of millions of people who were quite willing to outbid each other to obtain his software and services. His success is due to pleasing his customers. To rob him as you advocate would be to deter other entrepreneurs from trying to beat him and in so doing to create still more value for the rest of us.
Comment from Adam E Zandarski
Time August 22, 2008 at 1:10 am
Really Bill Gates stole a stolen software, changed it, and marketed it as his own. But Im not against wealth and competition in the free market. Thats what makes the world go ’round, and it is the biggest cotributor to what I advocate…Progress.
Bill Gates, as far as I know, is in no way my enemy. I think Gates, and most other major corporations could offer some of their profits back to the workers and consumers that fill their pocketbooks. But, as long as you’re not commiting fraud, exploiting the people or market, or hiding some danger in your product, you are perfectly entitled to your wealth. I congratulate you on your success. And I strive to do the same.
Ok, so we have the FDIC; an independant organization. We also have governments legal tender laws; which were privatised with the FED and the removal of the metals standards. That is the only government policies; the others are failures to execute the law and corruption.
And as far as banks printing their own currency; isn’t that kind of what is happening. The FED is a collection of private banks that prints and regulates our currency. Nobody should have to “buy” their money.
And though I think our currency should be based off of something real and concrete; I worry that gold and silver no longer have the ability to carry a functioning modern society. The “mathematically perfect economy” (not my name for it) raises some interesting points about gold and silver.
On a side note; if the FED says you can redeem their notes for “legal tender,” what is that legal tender? Do they mean you can exchange their currency for their currency?
Comment from Dmitry Chernikov
Time August 22, 2008 at 2:35 pm
I, too, advocate progress. So, we agree on the end that we both want to achieve but disagree only on the means to that end. Because this is a disagreement about means, it can be settled by looking at the relevant sciences, such as economics.
I agree that banks are happy to live under the Fed. Money is fundamentally social, and fiat currencies, fractional-reserve banking (especially that), and central banking are social problems. They can only be resolved by political action. Everyone must be involved. I think you’ll be heartened to see me write that.
I’m not sure what you mean, legal tender laws are privatized? A merchant cannot by law refuse to take Fed notes and demand gold; he is required to accept the notes, and under Gresham’s law, why would anyone pay for anything with precious metals, when they can give fiat dollar bills — so bad money drives out good. Now one can try to evade these laws by setting two prices for a good, say, a kiwi: $1,000,000 in dollar bills and some reasonable amount in silver. But I don’t know if that trick can be successful.
The result of free banking may well be a much more disciplined banking industry and an end to business cycles, to perpetual threat of hyperinflation, and to the American war machine.
Redeeming a Fed note for legal tender means, I think, that you can exchange an old worn-out note for a crisp new one, that’s all.
Comment from Adam E Zandarski
Time August 22, 2008 at 11:27 pm
But we dont even disagree on the means; we both advocate an open market. We both know the drug war and military complex, excess spending, inflation, rising debt, and general mistrust in representative government stems from central banking, fiat money (or in the very least, total reliance upon it), and the Federal Reserve.
I just advise govts to regulate against lying to and taking advantage of people. And I believe in free education, aid to the unemployed (which I believe would virtually disappear with a better monetary system), social security, and research grants. I think all insurances; home, life, car, health, dental, etc. should have already been paid for when we paid our taxes. (What I’m saying is, any insurance in which I have no ability of a refund, is exploitation.)
If a revolt happened tomorrow, I would be there. But when the dust clears, I’m still going to believe people can come together and pitch in for a greater society.
Comment from Adam E Zandarski
Time August 22, 2008 at 11:28 pm
What would happen were I to open a store that only excepts gold or silver currency, and no “legal tender?”
Comment from Dmitry Chernikov
Time August 23, 2008 at 10:36 pm
I think that one’s stance on the Fed and war are two litmus tests for libertarianism and for good citizenship in general. Any enemy of them is a friend of mine. Here is another Mises quote you might enjoy: “Everyone carries a part of society on his shoulders; no one is relieved of his share of responsibility by others. And no one can find a safe way out for himself if society is sweeping towards destruction. Therefore everyone, in his own interests, must thrust himself vigorously into the intellectual battle. None can stand aside with unconcern; the interests of everyone hang on the result.”
Aid to the unemployed is problematic. First, subsidizing the unemployed will result in more unemployment. Second, it is protecting failure, very much like a bailout of a failed business. If you got fired or the company you worked for went out of business, society must not diminish your incentives to find work as quickly as possible.
If you were to open such a store, I think you’d be prosecuted for breaking the legal tender laws. Unless you can argue that you are bartering goods, and that’s not illegal either.
Comment from Adam E Zandarski
Time August 24, 2008 at 12:05 am
I do like that quote. And that is the point I try to make. My argument is that we will always need some kind of system of governance. But we invented this nifty trick in the 18th century; representative government based on a constitution. It had its ineptitudes (a cause of human interaction). Neither was it implanted in exactly the way it was planned. But to say we should abandon all systems of control, or give them up any class of “wise men,” will end all progress and lead to even worse measures then those libertarians are fighting so valiantly against.
I respect anybody who believes and stands up for liberty. If one such as Ron Paul were to become president, I would have no problem with that. I would have my disagreements, but I dont think I’ve met a candidate without one issue on which we disagreed.
You first issue on unemployment was a good point. But the second issue shows the limit of the first. Unemployment is not always failure. And many people look for work and cant find any; one doesnt make a good impression on the hirer, looks funny, scatter brained, cant pass a drug test, bad personal record, everyone they have ever known is “street wise” (and I dont mean that in a good way), whatever. You cant punish a child becuase his family were scavengers. Yes, he makes a conscious choice to be immoral. But his way of thinking is skewed by his history. It is very easy to choose to do the right thing when you’ve grown up around people who always make that choice. Its just as easy to make that choice if you haven’t really had to worry where you were going to live and what you were going to eat in a month.
Subsidizing unemployment,” thats a good way to put it. But most people without jobs didnt lose them becuase they tried to defraud the system like fannie mae. Its nothing like that at all.
Enough research and you can argue anything, and get well thinking people to believe you. That is one of the many obstacles any intellectual faces. But we all know what is really right and whats not. The problem is we only think about after the fact. My argument is that we should start think about what could happen before it happens. The only wise words I have ever heard come out of Rumsfield’s mouth were “unkown unkowns.” And everyone made fun of him for it. But we should probably try to think of the things that we dont know we didnt know. Its there youll find the true nature of the divine.
What about golden dollars? Is that the only gold you can buy and sell with? I think one should be able to accept anything, within the limits of decency, that he sees of equal value to the purchase.
And there I think is where our argument is; “within the limits of decency.” In my view, if you break that limit, no matter what your profits, it is not of equal, nor any value.
A person buys 10 grams of hashish for $20. He sells 3g at under market prices of $25 (it would usually cost $60 for 3g). That is fine for the most part, right? But lets say his business has 30k employees across a given area. His employees did most of the work for him. We update his profits to say $20 million and gives $10 million total to the employees. To the average wage of $333.33 He made $10 million, just for supplying the origional money of the transaction. I have a problem with that.
Comment from Dmitry Chernikov
Time August 24, 2008 at 9:50 am
Prolonged unemployment is not only an individual failure to foresee or adjust to market conditions, but it also hurts society, because (1) an unemployed person does not benefit others with his work; (2) he becomes a politically destabilizing influence on society. A society cannot afford to house too many people who do not participate in social cooperation, too many useless wretches who cannot find a place for themselves in the social system of production. Before the Industrial Revolution as population was growing, there began to appear more and more landless peasants. Society did not have a use for them. They were extraneous, disposable, and also dangerous. It is capitalism which converted these outcasts and paupers into employable workers and gave them income and dignity. To promote unemployment is, in my view, an irresponsible throwback to pre-capitalistic times.
Golden dollars are worth a lot more than their face value. So, it’s senseless to give what’s worth $500 for $1 worth of blueberries. Such an exchange ought still to be classified as barter, then.
High profits are an incentive to other potential entrepreneurs to enter the market. As the economy moves toward equilibrium, profits tend to disappear. Further, high profits are a reward for entrepreneurial alertness, insofar as the businessman found underpriced and undercapitalized resources which he converted to new goods and services demanded by the consumers more urgently than other goods into making which those resources went before his discovery. The businessman found better uses for those resources. This entrepreneurial sagacity is a unique function on the market. It is not reducible to any other factor of production, such as labor, land, or time.
Comment from Adam E Zandarski
Time August 24, 2008 at 11:56 pm
Those useless wretches are people. You don’t know the circumstances of their life. The argument you consistently put forth is one of business to benefit the market. I argue for business to benefit the economy. Even Adam Smith argued for restrictions such as a minimum wage. What good is a stong market if it only benefits the privelaged few?
I don’t argue against business; nor is my enemy profit. But private property is a contract with the people of the land that give you that property. I come to strengthen their ability to negotiat such contracts.
Where can I exchange gold dollars for their worth in fiat notes?
Comment from John
Time May 17, 2008 at 10:23 am
The Economist recently had an article about Argentina and “modern banking.” Basically since 2001 Argentina has been unable to make these types of loans and how the country has prospered since then. Of course, they make the argument that this can’t go on forever and now that Argentina can make the loans, it should.
Personally, I would agree that such loans are necessary (I think in this youtube or the Economist article mentioned telecoms and laying fiber optic cable) but it’s quite a different story between infrastructure investment which pays off over a long period of time and a Ponzi real estate scheme (inflationism, as you mentioned).