Let the Euro Die . . . Soon
June 27, 2012
This is a critique of an article by Jesus Huerta De Soto, published on the Mises Institute site: "An Austrian Defense of the Euro."
In this article, I have had to go into old closets to drag out some skeletons. These skeletons have been hanging there for 70 years in plain sight, but ignored. De Soto has forced my hand.
MISES AND ROTHBARD ON BANKING
De Soto begins with a summary of the Austrian theory of the monetary system. He begins with Rothbard's position: 100% reserve banking. This means that banks may not legally issue warehouse receipts to gold or silver that they do not have in storage. They may not legally issue checks for more money than they have as deposits.
This restriction is opposed in theory to the rule proposed by Ludwig von Mises. Mises believed in free banking. He did not believe that the government should establish any reserve requirement for the commercial banks, because he did not trust the government to make a judicial ruling that would apply to all banks. He did not trust politicians' ability to make a judgment regarding the correct percentage. He believed that the banking system, through competition, and through the enforcement of contracts, would establish the proper reserve ratio.
Rothbard promoted 100% reserve banking. But there is something that is never mentioned by the Rothbardians in relation to banking: Rothbard was an anarchist. He did not believe that the state should even exist. Therefore, in his ideal banking system, it is impossible for the state to impose a 100% reserve requirement, because there is no state. There is no agency with the legal right to send an agent with a badge and a gun to tell a banker how much gold or silver he should have in reserve for accounts.
This means that, in practice, Mises's system of free banking is the operational standard for those people who are followers of Rothbard on the issue of banking and civil government. If there is no state to impose 100% reserve banking, then the system must operate in terms of a market-enforced banking system. While the two systems are opposed in theory, they would be the same in practice.
I saw this problem in 1966. I have never seen it discussed, although some specialist may have discussed it. This issue came up in an informal class that I taught in 1966. (I recall the dates clearly. I taught the little class once a month, and one of the classes was held on the night that Texas Western defeated Kentucky for the NCAA Division I basketball championship.)
As an ethical ideal, 100% reserve banking is correct. I know of no book that explains this better than De Soto's book on Austrian banking theory: Money, Bank Credit, and Economic Cycles. But, as a practical matter, politicians will eventually be corrupted by bankers, and therefore the politicians should stay out of all legislation regarding reserve requirements. This should be for the courts to decide. Judges are likely to be more reliable in enforcing contracts than politicians are.
The crucial fact is this: bankers distrust other bankers, and if the judicial system allows bankers to conduct bank runs on their brethren by demanding payment in gold or silver, depending on the contract/receipt, the system is more likely to approach 100% reserve banking than under a system in which legislators decide what the correct reserve ought to be.
De Soto calls for three reforms. First, he calls for 100% reserve banking. But he is not an anarchist, so he is not calling for Rothbard's version of it, as far as I can see. He believes in civil courts. If I am incorrect about this, then his book's theory of the evolution of Western law, which traces the judges' substitution of a new doctrine of contract, which permitted fractional reserves, for an older one which did not, would be irrelevant in a stateless world. Then my observation about Rothbard would apply to him, too.
Second, he calls for the abolition of all central banks. That certainly is consistent with both Mises and Rothbard.
THE CLASSICAL GOLD STANDARD
Third, he makes a catastrophic conceptual error, one that completely undermines Austrian economic theory and practice. He calls for "a return to a classic gold standard, as the only world monetary standard that would provide a money supply that public authorities could not manipulate and that could restrict and discipline the inflationary yearnings of the different economic agents."
No, no, no, a thousand times no. I have written about this repeatedly. The classic gold standard was always a counterfeit gold standard. It was a gold standard in which national civil governments had control over the terms of exchange between their respective domestic currencies and gold. Each government promised to redeem its national currency at a specific fineness and weight of gold.
The government owned the currency system. It was statist to the core.
Obviously, such a system is not consistent with Austrian school theory. The Austrian school's position is that government should have no role in the system of national currency at all, other than to establish a court system which will interpret contracts. Any monetary reform that attempts to reestablish the classical gold standard accepts a system of government promises.
The classical gold standard was a system of IOUs issued by politicians. It was a system that was guaranteed to turn into some variety of state-mandated economics. The most familiar form has been central bank control, guaranteeing an eventual default on the government's promise to redeem gold at a fixed rate.
This is why the classical gold standard turned into a complete fiat standard in Europe within weeks of the outbreak of World War I. It was a system that was corrupt conceptually and morally from the beginning, because it had the state as the guarantor of state currency. This was the Roman Empire revisited. This is the basis of every fiat money system that has ever been invented. It is based on the presupposition that the state's promises regarding the legal exchange rate between gold and the state's paper money system can be reliably established by the state and then enforced by the state on its own agents. Therefore, the classical gold standard of the nineteenth century was completely, utterly, guaranteed unreliable.
It was a gigantic hoax that was designed to strip the public of its gold coins. It was a gigantic fraud that was established by politicians to create confidence in the state's money. It was designed above all by the Bank of England, a private fractional reserve monopoly created by the government. The strategy was to persuade citizens to turn over there gold coins to the commercial banks. The banks gave a promise to the depositor: redemption in gold on demand. The state guaranteed these contracts. The central bank allowed fractional reserves. The government's treasury stood behind the banks. It delivered gold on demand.
This was so glaringly, obviously statist and corrupt that it is inconceivable to me that any Rothbardian would promote it. But de Soto promotes it. He does not promote it as a second-best system. He promotes it as one of the three fundamental reforms that Austrian school economists ought to promote. Referring to his three reforms, he writes:
As we have stated, the above prescriptions would enable us to solve all our problems at the root, while fostering sustainable economic and social development the likes of which have never been seen in history. Furthermore, these measures can both indicate which incremental reforms would be a step in the right direction, and permit a more sound judgment about the different economic-policy alternatives in the real world. It is from this strictly circumstantial and possibilistic perspective alone that the reader should view the Austrian analysis in relative "support" of the euro that we aim to develop in the present paper.
The third reform guarantees the failure of the first two reforms.
Then he goes to a second conceptual error. He writes:
2. The Austrian Tradition of Support for Fixed Exchange Rates versus Monetary Nationalism and Flexible Exchange Rates
No, no, no, a thousand times no.
The Austrian position on exchange rates has always been the same: flexible exchange rates. What is a flexible exchange rate? It is an exchange rate established entirely by the free market, in which government has no say whatsoever.
Any government exchange rate that is fixed by law, which is the meaning of all fixed exchange rates, is a price control. All price controls break down. All price controls substitute coercion for the free market. All price controls are based on somebody with a badge, a gun, and a prohibition on voluntary exchange.
It is inconceivable to me that De Soto made this conceptual error. He falls into the error that has been thrown in Austrians' faces by the Chicago school economists for over half a century. They see -- as Austrians who promote fixed exchange rates do not see -- that the Chicago school economists are defending the free market, and the Austrians are defending government price controls.
In the classical gold standard, the government initially establishes a legal fixed exchange rate between its fiat currency and gold, either gold coins or gold bullion. This is a lie which will be broken.
Then the free market, not a government agency, establishes a floating exchange rate between this government-guaranteed gold standard currency system and all other currencies. The market exchange rate establishes the degree of public confidence in what is a lie by one government versus what is a lie by another government. All governments issue lies regarding gold redemption. No official IOUs will be honored in the long-term by any government. They all lie. If this is not the Austrian position on politicians' promises, then I do not understand the Austrian position.
When Government A says that it will exchange (say) 35 units of its currency for an ounce of gold, and Government B promises that it will exchange 35 units of its currency for an ounce of gold, the free market will probably establish a one-to-one exchange rate between the two currencies. Why? Because the free market establishes a one-to-one exchange rate between one ounce of gold and another ounce of gold of the same fineness. Because Government A has issued a lie that it will forever exchange its currency at 35 to 1, and Government B has issued a lie that it will do the same, the two currencies will exchange at approximately the same ratio until the public figures out which of the governments is going to break its promise first.
This is not a system of fixed exchange rates between national currencies. This is a fixed exchange rate between a domestic government currency and gold, and another fixed exchange rate between another domestic currency and gold.
Each government's fixed exchange rate domestically -- the government-guaranteed price of gold -- is a convenient lie, and it will eventually be broken.
Any disagreements here? Other than the Byzantine Empire from the time of Constantine until the 14th century, have there been any exceptions? The Byzantine monetary system was a gold coin standard. There were no IOUs for gold issued by the government that served as money.
All fixed exchange rates are lies. Only the market can safely establish an exchange rate, and the exchange rates will fluctuate in terms of investors' perception of the conditions of supply and demand, which include their perception of the near-term reliability of various lying governments. All governments lie, but some of them break their promises more often than others.
De Soto continues.
Traditionally, members of the Austrian School of economics have felt that as long as the ideal monetary system is not achieved, many economists, especially those of the Chicago School, commit a grave error of economic theory and political praxis when they defend flexible exchange rates in a context of monetary nationalism, as if both were somehow more suited to a market economy.
This statement is misleading. Anyway, I hope it is misleading, because if it is true, then Austrian school economists are terminally naïve.
Austrian school economists who promote a traditional gold standard (fiat money in disguise) are no different in principle from Chicago school economists who promote an openly fiat money standard. Any government-guaranteed promise to redeem its currency for gold is a fiat money standard. The enforcing agency is the government itself. It will break its promise at some point.
The government will renege at some point. The commercial banks will initially get their hands on the public's gold coins, and then the central bank will steal the coins in the name of the government. This is what happened in the early weeks of the First World War. It was what the United States government did in 1861, as the Civil War was expanding. It allowed the commercial banks to default. Then the banks bought government bonds with fiat money. This is how government works.
So, anybody who promotes a government-guaranteed gold standard is simply one more promoter of fiat money. His theory of money is not different from the Chicago school economists' theory. A government-guaranteed gold standard is different from a pure fiat money standard only in timing and the degree of illusion involved. The Chicago school accepts the existing fiat money system: no government price controls (fixed exchange rates). The traditional gold standard advocate accepts the pre-1914 gold standard: a fake promise that was converted overnight into a fiat money standard. Here is a fundamental rule: "Any time the government crosses its heart and hopes to die, you're as good as dead if you believe this."
"Fiat" means "spoken." Fiat money means money created by the word of government. The traditional gold standard was a fiat money standard: born by a government promise to redeem the paper currency for gold.
There are only floating exchange rates in a free market system, and anybody who thinks that a government guarantee of a fixed exchange rate is going to be maintained permanently is terminally naïve.
De Soto writes:
In contrast, Austrians believe that until central banks are abolished and the classic gold standard is reestablished along with a 100 percent reserve requirement in banking, we must make every attempt to bring the existing monetary system closer to the ideal, both in terms of its operation and its results.
So far, so good.
This means limiting monetary nationalism as far as possible, eliminating the possibility that each country could develop its own monetary policy, and restricting inflationary policies of credit expansion as much as we can, by creating a monetary framework that disciplines as far as possible economic, political, and social agents, and especially labor unions and other pressure groups, politicians, and central banks.
This is bait and switch. This is the promotion of fiat money internationalism. This is the promotion of central planners with badges and guns who send out bureaucrats to compel citizens of various nations to accept the currency of Jean Monnet's New World Order.
I have opposed this for all my adult life. From the day that I learned of what Monnet was promoting, and had been promoting ever since the Versailles Peace Conference of 1919, I have opposed the idea of managed trade as distinguished from free trade. An internationally managed fiat currency is not connected to anything Austrian that I can think of. It is one more example of the transfer of judicial sovereignty to central planners. The European public in 1999 was lied to systematically into accepting the surrender of national sovereignty on this basis: the promise of stable money. We have seen how that promise has blown up, in the same way that every other promise of monetary stability by government agents has blown up.
It was all a sham. From the day that Monnet and Robert Schuman promoted the European Coal and Steel Community treaty of 1951 until the next weekend emergency summit meeting in Europe, the plan has always been the same: to force an international bureaucracy on top of the sovereignty of nations. This is the essence of the New World Order.
SKELETONS IN THE CLOSET
The Rockefeller Foundation hired Mises to write Omnipotent Government (1944). He referred to this on page v. Why did the Rockefeller Foundation put up this money? In order to promote post-War political internationalism.
This had been John D. Rockefeller Jr.'s agenda ever since he got his agent, Raymond Fosdick, appointed to the Versailles Conference as the senior American planner. There, Fosdick and Monnet planned the League of Nations as the first step in world government.
Fosdick had been a minor city official in New York City when he was hired by Rockefeller, to act on Rockefeller's behalf. That was in 1913. Rockefeller began paying him $10,000 a year, which was the equivalent of $200,000 a year today, except that 1913 was the first year of the income tax, with rates for most people well under 6%.
Fosdick's career blossomed. By 1919, he was the American Undersecretary General of the Versailles Peace commission/League of Nations. He worked closely with Monnet, who was France's Undersecretary. The League of Nations had just been formed, although the United States was not yet part of it, and never would be. In 1919, Fosdick sent a letter to his wife. He told her that he and Monnet were working daily to lay the foundations of "the framework of international government." [July 31, 1919; in Fosdick, ed., Letters on the League of Nations (Princeton, New Jersey: Princeton University Press, 1966), p. 18.]
This was no idle boast. Fosdick returned to the United States in 1920 when the Senate refused to ratify the League of Nations treaty. He immediately went to work full-time for Rockefeller as the head of the Rockefeller Foundation. In 1958, he wrote the only official biography of Rockefeller. His brother, Harry Emerson Fosdick, became Rockefeller's pastor in 1925, for whom Rockefeller built the Riverside Church.
I have written about this on Lew Rockwell's site: http://www.lewrockwell.com/north/north381.html
Under Fosdick, the Rockefeller Foundation pursued the Fosdick-Monnet plan of 1919. Senior staffers understood that Mises's promotion of free banking and free trade could be used as one pillar in a plan to pull all of the Western economies into the New World Order after World War II.
This had been the program even before the War. The Rockefeller Foundation brought Wilhelm Röpke to a conference on international economics in 1937. It had hired him as early as 1927. Out of this conference came his book, International Economic Disintegration. He thanked the Foundation for its support on page vii.
Free trade (no tariffs and quotas) is part of the agenda of all post-Adam Smith economics. But low or no tariffs has also been part of the agenda of the political internationalists. Free trade is an extension of an analysis that begins with Smith and Jones, who trade. Managed trade is an extension of an analysis that begins with a political agenda: the destruction of national borders. The economist begins with methodological individualism. The political internationalist begins with methodological collectivism.
The internationalists are in control. They have the money and the power. They hire free trade doctrines. Why? In order to incorporate the structural benefits of free trade theory into their agenda of managed trade by trans-national unelected bureaucracies.
The same arrangement prevails inside the United States. The use of the commerce clause has replaced state sovereignty in the market. It promotes domestic managed trade. The Constitution abolished tariffs at state borders. The statists have substituted managed trade for free trade. This is always the pattern. First comes the promise of low or no tariffs: reduced sales taxes. Then come the bureaucrats from the central government. "We will set the terms of trade. Got it?" Out come the badges and guns.
The Rockefeller Foundation spent good money to hire Austrian school economists to promote free trade, but its ultimate agenda was always the establishment of the New World Order: a central government supreme over national sovereignty. The NWO agenda has always moved toward an international, centrally planned one-state world.
NAFTA, WTO, AND THE EURO
I have always opposed NAFTA and the World Trade Organization (WTO) for the same reason that I opposed the euro and the European Union. I oppose them all because they are not based on the principle of free trade, free markets, and private property. They are based on the principle of managed trade, managed markets, and international fascist planning: the beloved government-business alliance.
Anyone who promotes the euro, including De Soto, has been suckered into the New World Order's 80-year plan to bamboozle free-market economists into becoming promoters of the New World Order in the name of free markets.
De Soto opposes monetary nationalism. I say this: if monetary nationalism is the only available political option to fiat money and central planning by the New World Order's central bankers, then let us have monetary nationalism. If it is a question of the European Central Bank vs. the central banks of the European nations, let us have decentralization.
De Soto lives in Spain. He lives in a PIIGS economy. My condolences. But if I were a German, I would say "let's pull out while we still can."
The eurozone is a judicial system that imposes a bait-and-switch operation. It gets free-market economists and businessmen on board the New World Order's system of managed trade, the surrender of national sovereignty, and the creation of an international bureaucracy that local voters cannot displace.
And, just for the record, I hold the same position with respect to the Constitution of the United States, which was the very first successful attempt to use the goal of free trade to get politicians at the state level to surrender state sovereignty to a centralized government. That newly centralized government was not openly and clearly governed by a precious metals standard, and immediately invoked a massive national debt and the creation of a national central bank, privately owned, but operating with the monopoly of control over all other banks that was transferred to it by the central government.
This agenda has always bait and switch, and it usually works. Each time it works, some free market economist comes out as a cheerleader for the entire bait-and-switch operation. He tells us that the creation of centralized fiat money is superior to national fiat money. This promotes the substitution of the New World Order's central planning system over everything else, meaning managed trade, all in the name of defending the integrity of a fiat money international monetary standard. It means a common central bank. It means international bureaucracy over national sovereignty.
I recall the punch line of the 1928 New Yorker cartoon, where the mother says, "It's broccoli, dear." The little girl was not fooled. "I say it's spinach, and I say the hell with it."
We can see how this plan is working today. The Eurocrats are pointing to the failure of the euro, and they are demanding the surrender of the right of national governments over their own spending policies, to be transferred to international bureaucrats operating in Brussels.
De Soto sees the euro as the outworking of free market ideas, not as part of a plan that goes back to at least 1919.
It is only in this context that we should interpret the position of such eminent Austrian economists (and distinguished members of the Mont Pèlerin Society) as Mises and Hayek.
On the contrary, we should see the entire operation as an extension of Jean Monnet's vision and the vision of the exceedingly private people who financed him.
EXCHANGE RATES
De Soto addresses the issue of exchange rates. He invokes Hayek
For example, there is the remarkable and devastating analysis against monetary nationalism and flexible exchange rates that Hayek began to develop in 1937 in his particularly outstanding book Monetary Nationalism and International Stability. In this book, Hayek demonstrates that flexible exchange rates preclude an efficient allocation of resources on an international level, as they immediately hinder and distort real flows of consumption and investment. Moreover, they make it inevitable that the necessary real downward adjustments in costs take place via a rise in all other nominal prices, in a chaotic environment of competitive devaluations, credit expansion, and inflation, which also encourages and supports all sorts of irresponsible behaviors from unions by inciting continual wage and labor demands that can only be satisfied without increasing unemployment if inflation is pushed up even further.
Do you see Hayek's conceptual error? Hayek did not begin with the acting individual. He adopted instead the statist pattern of comparing the international allocation of resources.
The supreme question is not the international allocation of resources; rather, it is the question of the liberty of an individual to make a voluntary contract with another individual. Hayek bought into the statist methodology analysis from the beginning. He never accepted Mises's far more individualistic methodology. So, he analyzed the monetary situation from the point of view of national currencies, the national allocation of capital, and flexible exchange rates.
Fact: all exchange rates are flexible if they are voluntary. All exchange rates are flexible if there is not an official with a badge and a gun pointed at the belly of one of the traders.
Why can't free market defenders understand this? You would think that of all economists, Austrian economists would understand this. They say they begin with the epistemology of methodological individualism. They say that they build their case in terms of voluntary exchange between individuals. Why, then, do they rest their case against flexible exchange rates in terms of the supposed inefficiency of flexible exchange rates? This is a categorical denial of the epistemological presuppositions of the Austrian economic school.
The Austrians argue that flexible exchange rates between Jones and Smith lead to greater freedom and greater wealth. Then why do any of them argue that fixed exchange rates, meaning price controls, between 10 million Joneses and 20 million Smiths also somehow lead to greater freedom and greater wealth? This is epistemological schizophrenia. Somewhere in between the voluntary exchanges of individuals and the compulsory fixed exchange rates between governments, some Austrian economists have gone off the track. I hope you do not go off track.
On this point, Hayek was a statist in both his methodology and his conclusions.
So long as the preservation of the external value of the national currency is regarded as an indisputable necessity, as it is with fixed exchange rates, politicians can resist the constant demands for cheaper credits, for avoidance of a rise in interest rates, for more expenditure on "public works," and so on.
First, there should not be any national currency. The whole idea is statist to the core. It means political money. Political control over the monetary system is the ultimate statist form of control over the economy.
The currency system is at the center of all exchanges in a high division of labor economy. Control over money is the most important single area of control that the politicians can get. Mises argued this from 1912 onward. It is the basis of his monetary theory of the trade cycle. But his student, Hayek, never really came to a full commitment to his mentor's individualism. He always argued that the government can and should tamper with the monetary system, and he provided a series of alternative monetary reforms that were going to let government get more efficient. He believed in state control over money. He wanted government to be more efficient in its control over money.
Second, I do not want government to be more efficient. I want government to be less efficient. I want to get less than I pay for out of government. But I am not a Hayekian.
With fixed exchange rates, a fall in the foreign value of the currency, or an outflow of gold or foreign exchange reserves acts as a signal requiring prompt government action.
What is wrong with this picture? I will tell you what is wrong: the signal prompts government action. There should be no government action. Government should not be in the money business. Government should not care one way or the other whether gold flows in or gold flows out. It is none of the government's business. The government makes it its business, because the government wants control over the terms of trade, both inside the national boundaries and across the national boundaries. Politicians want an expansion of control, so that they can send out people with badges and guns to tell the public what to do. This is mercantilism.
With flexible exchange rates, the effect of an increase in the quantity of money on the internal price level is much too slow to be generally apparent or to be charged to those ultimately responsible for it. Moreover, the inflation of prices is usually preceded by a welcome increase in employment; it may therefore even be welcomed because its harmful effects are not visible until later.
Why is it bad to suffer a slow increase in prices rather than an overnight political devaluation of the currency? Slow economic change is a great benefit of the free market. It enables people -- speculators -- to adjust their forecasts. It allows all market participants to adjust their plans as information and tastes change. This adjustment process was the heart of Hayek's analysis of the free market as a process of discovery and the coordination of plans.
Then he got to monetary theory and reversed himself.
De Soto ends his discussion of Hayek with this quotation from Hayek:
I do not believe we shall regain a system of international stability without returning to a system of fixed exchange rates, which imposes on the national central banks the restraint essential for successfully resisting the pressure of the advocates of inflation in their countries -- usually including ministers of finance. (Hayek 1979 [1975], pp. 9--10)
Hayek called for price controls. Let us not fool ourselves about this. This is statist to the core. It establishes the right of central bankers to oppose voters. It substitutes the rule of central bankers for democracy. What is the long-term political price of this system? It means the surrender of national sovereignty to a bunch of self-interested bureaucrats who run the common central bank for the benefit of multimillionaire bankers inside the fractional reserve banking system. It is the substitution of politics over voluntary exchange.
Monetary nationalism is morally wrong and conceptually wrong, because the national government claims sovereignty over the domestic monetary system. But conceptually, the eurozone is monetary plunder on steroids. Under all state-controlled monetary systems, national and international, the monetary system becomes an issue of political control: central economic planning. Political interest groups want to get control over the money system, precisely because the state has established such control. Special-interest groups want to get their hands on the ultimate loot: the printing press. Why should this surprise us?
If you want to get special-interest political groups to stop competing against each other in their quest to stick their hands in each other's wallets, then there is only one solution: get the government out of the looting business. For as long as governments control the national currency, the essence of the economy will be based on who controls the money supply. Why should this surprise us?
Handing the money system over to an international central bank transfers sovereignty over money to a monopoly that cannot be reformed by the voters of any nation.
It's spinach.
WORLD WAR I
De Soto says that Mises was correct when he wrote the following regarding the world before the outbreak of World War I.
The gold standard put a check on governmental plans for easy money. It was impossible to indulge in credit expansion and yet cling to the gold parity permanently fixed by law. Governments had to choose between the gold standard and their -- in the long run disastrous -- policy of credit expansion. The gold standard did not collapse. The governments destroyed it. It was incompatible with etatism as was free trade. The various governments went off the gold standard because they were eager to make domestic prices and wages rise above the world market level, and because they wanted to stimulate exports and to hinder imports. Stability of foreign exchange rates was in their eyes a mischief, not a blessing. Such is the essence of the monetary teachings of Lord Keynes. The Keynesian School passionately advocates instability of foreign exchange rates. (emphasis added)
This is the heart of the matter. The governments destroyed the international gold system at the outbreak of World War I. Of course they destroyed it. The war overcame the world's commitment to free trade in the name of war itself. So, the governments had to get their hands on the public's gold. They stole the gold from the central banks, which had collected the gold from the commercial banks, which had lured the gold out of the hands of private citizens by means of a lie: fractional reserve banking. Why should any of this surprise us?
From the time that the fractional reserve bankers promised people that they could get their gold back on demand, the system was set up for massive confiscation. It was all a pack of lies. Why should anybody at this late date promote anything that central bankers want, and do this in the name of free-market principles and monetary stability?
De Soto writes:
Furthermore, it comes as no surprise that Mises scorned the Chicago theorists when in this area, as in others, they ended up falling into the trap of the crudest Keynesianism. In addition, Mises maintained that it would be relatively simple to reestablish the gold standard and return to fixed exchange rates: "The only condition required is the abandonment of an easy money policy and of the endeavors to combat imports by devaluation."
Mises was so obviously politically wrong here that it boggles the imagination. There was no possibility of post-War governments' establishing a gold standard. The condition required was obviously utopian: the abandonment of an easy money policy.
Everybody in politics wants easy money policy. Everybody in politics wants to cheat his creditor. Everybody in politics wants to stick his creditor with depreciated money. Everybody in politics wants to keep the boom going. So, there has been not one tiny step in the direction of reestablishing the classical gold standard since August of 1914.
De Soto writes: "Only when exchange rates are fixed are governments obliged to tell citizens the truth."
I take the opposite view. From the day that governments asserted sovereignty over money, the lies began. This goes back as far as there is written history. Fixed exchange rates are price controls. They are lies. The very essence of a fixed exchange rate is a lie. It is the lie of economic stability enforced by badges and guns.
Only when exchange rates are flexible are governments obliged to deal with reality, whether or not they tell the citizens the truth. The assumption ought to be that the government will lie to the citizen under any system of exchange rates, but flexible exchange rates force governments to deal with free market prices. The essence of a fixed exchange rate is a government lie, namely, that that the state can provide monetary stability by means of badges and guns.
My conclusion is simple: Get the government out of the money business. If the voters grant to the national government sovereignty over money, they have granted to the government sovereignty over prices. They have granted sovereignty to the government over the central market institution: money.
The monetary goal of Austrian school economics should be this, and this alone: the removal of all sovereignty over money by the state. Anything else will wind up being an apology for this or that fiat money system, this or that price control system, this or that lie by the government to the people regarding the reliability of government planning over money, and from money over the whole economy.
Then De Soto quotes Walter Block. Here, Block comes out foursquare in favor of price controls.
Even in the absence of a pure gold standard, fixed exchange rates provide some insurance against inflation which is not forthcoming from the flexible system. Under fixity, if one country inflates, it falls victim to a balance of payment crisis. If and when it runs out of foreign exchange holdings, it must devalue, a relatively difficult process, fraught with danger for the political leaders involved. Under flexibility, in contrast, inflation brings about no balance of payment crisis, nor any need for a politically embarrassing devaluation. Instead, there is a relatively painless depreciation of the home (or inflationary) currency against its foreign counterparts. (Block 1999, p. 19, emphasis added)
What kind of stability is this? A stability imposed by price controls. Price controls do not provide any insurance against inflation. They insure cheating by central bank cartels. They insure overnight "revaluations" and "devaluations" that shock the capital markets. Price controls substitute political lies for entrepreneurship.
Price controls provide opportunities for George Soros to make a billion dollars in one shot.
Once you surrender the principle that the market is sovereign over money, you are caught in the lobster trap of statism. You we will find yourself defending this or that price control, this or that interference with liberty, all in the name of stability, and all in the name of statism.
Every time you see any proposed monetary reform, think: "How is this consistent with the principle of individual voluntary exchange?" No matter what the proposed reform is, ask this question.
MIDDLE-OF-THE ROAD MONETARY REFORM
Mises argued that the middle-of-the-road policy leads to socialism. I argue that the middle-of-the-road monetary policy leads to central banking, gold confiscation, and big bank bailouts. More than this: the middle-of-the-road policy on monetary theory or policy always leads to the New World Order, followed, I hope, by international monetary disintegration, the breakup of all central governments, and the reestablishment of the private gold coin standard.
I want the euro to collapse because I want the eurozone to collapse. I want the eurozone to collapse because I want the European Union to collapse. I want the European Union to collapse because I want the New World Order to collapse.
I will now offer this judgment. It is more important to defend national sovereignty over money than to defend international sovereignty over money.
I justify this position on only one basis: the goal of national political monetary sovereignty over money is to undermine the New World Order.
Any promotion of national political sovereignty over money must always be made as part of a systematic plan to remove all political sovereignty over money. It is part of a plan to get government out of the money business.
This strategy is based on a fact of political life: it is easier to control local politics than it is to control international politics. In the defense of localism, which I regard as basic to the reestablishment of liberty, it is important to challenge every so-called reform by monetary Keynesians, Chicagoans, or defenders of any system that rests on the principle that some group of distant bureaucrats is better able to plan the economy than local people are.
Local planning is better than central planning, because local planning cannot extend its plans very far. We then have the right to vote with our feet. It is easier to vote with your feet for 50 miles or a hundred miles than across a national border. It is better to have 1000 inefficient, competing plans at the local level than to have a have a central government that exercises sovereignty across 25 governments or 200 governments. Better to suffer the rule of local politicians than to live under the rule of distant bureaucrats.
This is a political judgment, but it is one that I am committed to after a lifetime of study of central planning, central monetary planning, and conspiratorial plans to create a New World Order.
INTERNATIONALISM
And then De Soto gets worse.
3. The Euro as a "Proxy" for the Gold Standard (or Why Champions of Free Enterprise and the Free Market Should Support the Euro While the Only Alternative Is a Return to Monetary Nationalism)
No, no, no, a thousand times no. Champions of free market economics should not become cheerleaders for the New World Order.
Mises had little money in 1944, so he took the Rockefellers' money and wrote a book on the evils of central planning. But he fell into a catastrophic error: he called for the creation of an international political order comparable to the United Nations. I regard this as the single worst policy recommendation that he ever made. In chapter XII, Section 3, he called for political union of the Western democracies. In 1944, that meant something like the United Nations Organization.
If the Western democracies do not succeed in establishing a permanent union, the fruits of victory will be lost again. Their disunity will provide the defeated aggressors with the opportunity to enter anew the scene of political intrigues and plots, to rearm and to form a new and stronger coalition for another assault. Unless they choose effective solidarity, the democracies are doomed. They cannot safeguard their way of life if they seek to preserve what the terminology of diplomacy calls "national sovereignty." They must choose between vesting all power in a new supernational authority or being enslaved by nations not prepared to treat them on an equal footing. The alternative to incorporation into a new democratic supernational system is not unrestricted sovereignty but ultimate subjugation by the totalitarian powers.(pp. 265-66).
On the contrary, Western nations cannot safeguard their way of life if they seek to extend what the terminology of what diplomacy calls "international sovereignty." This is what the United Nations Organization was initially designed to be, and after it failed to exercise sufficient sovereignty, what Jean Monnet and Robert Schuman were able to establish in Europe, beginning in 1951 with the European Coal and Steel Community.
De Soto then gets to the point.
The introduction of the euro in 1999 and its culmination beginning in 2002 meant the disappearance of monetary nationalism and flexible exchange rates in most of continental Europe. Later we will consider the errors committed by the European Central Bank (ECB). Now what interests us is to note that the different member states of the monetary union completely relinquished and lost their monetary autonomy, that is, the possibility of manipulating their local currency by placing it at the service of the political needs of the moment. In this sense, at least with respect to the countries in the eurozone, the euro began to act and continues to act very much like the gold standard did in its day. Thus, we must view the euro as a clear, true, even if imperfect, step toward the gold standard.
The eurozone as a pseudo-gold standard? I find this inconceivable. The euro is a step, not to the gold standard, but toward the extension of the New World Order in Europe. From the beginning, it was a self-consciously imperfect initial step towards that goal.
The conspirators and politicians who had been pushing for polktical integration for 80 years realized in the 1990s that they could not get the voters of all 17 eurozone countries to surrender fiscal control over their economies, meaning Keynesian taxing and spending. So, they compromised with the eurozone: the surrender of sovereignty to the European Central Bank, which would make the decision about how much inflation to permit.
This transferred sovereignty to the largest banks in Europe. The bankers then lent enormous sums of money to the PIIGS. They are now calling on the northern European politicians to bail them out. But the politicians are facing resistance to increased taxation in order to bail out the PIIGS, so they are looking to the European Central Bank to bail them out. This is a daisy-chain of debt. It is a daisy-chain of guys pointing to somebody else and saying: "You come up with the money. You bail out the system."
We do not see any politician in Europe calling for the reestablishment of the pre-1914 gold standard. We see weekly calls for the destruction of national sovereignty and the transfer of control over taxing and spending to a distant group of bureaucrats in Brussels.
De Soto sees all this as positive.
Hence, in the absence of the euro, authorities would again have taken what up to now has been the usual path -- i.e. a forward escape consisting of more inflation; the depreciation of the currency to recover "full employment" and gain competitiveness in the short term (covering their backs and concealing the grave responsibility of labor unions as true generators of unemployment); and, in short, the indefinite postponement of the necessary structural reforms.
More inflation. Well, so what? First, the ECB has inflated and will inflate more. Second, we can hedge against inflation. We cannot hedge well against the New World Order. The essence of the NWO is this: No exit.
The principle of national sovereignty is based on the idea that local voters, who must suffer the consequences of their votes, should have the power to determine which group of lying politicians will impose which system of looting on them. But under the European central banking system and the European Union, voters have almost no choice at all. This is what the promoters of the New World Order have been after for at least 80 years. They want operational sovereignty transferred from voters in specific nations to bureaucrats with allegiance only to a distant central government.
De Soto goes on with a detailed description of various aspects of why the euro is unique. The euro was not unique. The United States dollar is unique. It is unique because the Constitution, in the name of central sovereignty, created a national central bank, and imposed a national currency on the people.
The government was not initially successful. The silver coins issued by Spain, the famous pieces of eight, circulated widely in the United States until the 1840s. But, in the long run, monetary nationalism overcame voluntary currencies used by the general public. Step-by-step, monetary nationalism, which was fiat money based, stretched from the national government into every aspect of the lives of Americans. It culminated with the confiscation of gold by Franklin Roosevelt in 1933.
This is where Europe's bureaucrats learned the lessons necessary to create the euro. They copied the political revolution of the United States, which was the centralization of power in the name of establishing free trade, which was Madison's bait-and-switch operation. They copied this for the European Union. This was self-conscious. They claimed that they were creating a United States of Europe, which would be comparable to the United States of America. They were not lying in this case. Madison really did provide the political model. He engineered a coup d'état against the decentralized Articles of Confederation, all in the name of getting rid of tariff barriers between states: Annapolis Convention (1786), Philadelphia Convention (1787), and state ratifying conventions (1787-88). I have written a book about this strategy. You can download a free copy here. Monnet imitated this strategy, beginning in 1951. It is still going on.
De Soto wants us to believe that any call by European politicians and bureaucrats for the further centralization of Europe should be regarded as a move toward a workable gold standard, meaning an exclusively free-market system. This is way beyond my power of comprehension. I have spent 45 years watching these people, and the one thing we can be sure of is this: their goal is the centralization of power, the removal of individual liberty, and all in the name of monetary stability and free trade.
Then he writes this:
Hence, to a certain extent it is amusing (and also pathetic) to note that the legion of social engineers and interventionist politicians who, led at the time by Jacques Delors, designed the single currency as one more tool for use in their grandiose projects to achieve a European political union, now regard with despair something they never seem to have been able to predict: that the euro has ended up acting de facto as the gold standard, disciplining citizens, politicians, and authorities, tying the hands of demagogues and exposing pressure groups (headed by the unfailingly privileged unions), and even questioning the sustainability and the very foundations of the welfare state.
This "legion of social engineers and interventionist politicians" are now pushing hard to centralize political sovereignty in the eurozone. If they are successful, this will be the culmination of the plans of Jean Monnet as early as 1919, and probably before World War I. They may not pull it off. I hope and pray that they will not pull it off, but it is consistent with what they originally scheduled for the euro.
Their mistake in 1999, as always, was to trust the powers behind the throne, namely, the big banks. The big banks thought they could make a killing by lending money to PIIGS governments at Germany's low interest rates. But this was nothing new. Central bankers have empowered fractional reserve commercial bankers to make bad loans ever since the creation of the Bank of England. They just do not learn. But neither do some Austrian economists, who think this is a prelude to the reestablishment of a gold standard. It is a prelude to another round of political centralization.
De Soto goes on to sketch a detailed consideration of nation-to-nation exchanges. "Now let us consider the difference between the euro and a system of fixed exchange rates, with respect to the adjustment process that takes place when different degrees of credit expansion and intervention arise between the different countries."
None of this discussion is relevant to these issues: (1) the centralization of political power in Europe, (2) the concentration of control by the European Central Bank, (3) the extension of the New World Order beyond Western Europe.
One more time: we should begin our analysis with a detailed discussion of Smith and Jones, not with the nation-state.
De Soto says:
We must not fail to stress that Keynesians, monetarists, and Mundellians are all mistaken because they reason exclusively in terms of macroeconomic aggregates, and hence they propose, with slight differences, the same sort of adjustment via monetary and fiscal manipulation, "fine tuning," and flexible exchange rates. They believe that all of the effort it takes to overcome the crisis should therefore be guided by macroeconomic models and social engineering. Thus, they completely disregard the profound microeconomic distortion that monetary (and fiscal) manipulation generates in the structure of relative prices and in the capital-goods structure. A forced devaluation (or depreciation) is "one size fits all," i.e., it entails a sudden linear percentage drop in the price of consumer goods and services and productive factors, a drop that is the same for everyone.
To paraphrase Forrest Gump's mother, microeconomics is as microeconomic does.
Don't start with Hayek's macroeconomic analysis. Start with Smith and Jones.
Show me how the sovereignty of the state over money is in any way consistent with the logic of exchange between Smith and Jones. And if it isn't, don't tell me how to reform the system. Tell me how to abolish it.
De Soto sees the push toward centralization in Europe. He opposes it.
Third, and above all, there is mounting pressure for a complete European political union, which some suggest as the only "solution" that could enable the survival of the euro in the long term.
Here is where De Soto and I part company:
Despite the above, the most serious problem does not lie in the threat of an impossible political union, but in the unquestionable fact that a policy of credit expansion carried out in a sustained manner by the ECB during a period of apparent economic prosperity is capable of canceling, at least temporarily, the disciplinary effect exerted by the euro on the economic agents of each country. Thus, the fatal error of the ECB consists of not having managed to isolate and protect Europe from the great expansion of credit orchestrated on a worldwide scale by the US Federal Reserve beginning in 2001.
On the contrary, the euro, the eurozone, and the ECB are merely aspects of the larger picture: the creation of the New World Order. The most serious threat today is what it has been for 80 years: the creation of an all-too-possible eurozone political union.
I hope he is right about "impossible." But the only long-term alternative is a break-up of the entire system, including the euro.
I say: "Let the euro die, taking the eurozone with it. May the European Union follow soon thereafter."
CONCLUSION
Read his conclusion.
In any case, we must recognize that we stand at a historic crossroads. The euro must survive if all of Europe is to internalize and adopt as its own the traditional German monetary stability, which in practice is the only and the essential disciplinary framework from which, in the short and medium term, European Union competitiveness and growth can be further stimulated. On a worldwide scale, the survival and consolidation of the euro will permit, for the first time since World War II, the emergence of a currency capable of effectively competing with the monopoly of the dollar as the international reserve currency, and therefore capable of disciplining the American ability to provoke additional systemic financial crises that, like that of 2007, constantly endanger the world economic order.
So, it's a war between the dollar and the euro. Then I know who will lose: anyone who trusts either of these fiat-money turkeys to deliver us into permanent liberty and prosperity.
Here is the eurozone designers' program: managed trade, managed money, and managed people. It rests on the substitution of international bureaucracy for national sovereignty. It is bait and switch.
The euro is like the road to hell: paved with good intentions (no tariffs, a single currency, capital mobility). It leads to a political dead end: "No Exit."
The sooner this monstrosity dies, the better.
I say it's spinach, and I say the hell with it.