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Walter Bagehot, father of central banking and supporter of free banking

Walter Bagehot (1826-1877) was the most famous editor of The Economist. (His last name, by the way, is pronounced “BADGE-it.”) For his wisdom on financial matters, he was dubbed “the spare chancellor,” a reference to the Chancellor of the Exchequer, the British minister of finance. His book Lombard Street (1873), named after the English equivalent of Wall Street, criticized the Bank of England for not using its powers to alleviate financial crises. Bagehot argued that the Bank’s monopoly position gave it both the responsibility and the ability to do so, and that the Bank should not conduct itself as if it were an ordinary commercial bank.

For its explanation of how the Bank of England should act, Lombard Street became the foundation document of modern central banking. As I explained in an earlier post, Henry Thornton had anticipated some of Bagehot’s ideas about 70 years earlier, but by the time of Lombard Street Thornton’s monetary thought had faded into obscurity, and would not be rediscovered for another half-century. The Bank of England followed Bagehot’s prescription during the worldwide financial crisis that occurred later in 1873, establishing a pattern that other central banks would imitate.

It is worth recalling, though, that Bagehot did not view central banking as the natural monetary system. Here are his words:

We are so accustomed to a system of banking, dependent for its cardinal function on a single bank, that we can hardly conceive of any other. But the natural system—that which would have sprung up if Government had let banking alone—is that of many banks of equal or not altogether unequal size. In all other trades competition brings the traders to a rough approximate equality. In cotton spinning, no single firm far and permanently outstrips the others. There is no tendency to a monarchy in the cotton world; nor, where banking has been left free, is there any tendency to a monarchy in banking either. In Manchester, in Liverpool, and all through England, we have a great number of banks, each with a business more or less good, but we have no single bank with any sort of predominance; nor is there any such bank in Scotland. In the new world of Joint Stock Banks outside the Bank of England, we see much the same phenomenon. One or more get for a time a better business than the others, but no single bank permanently obtains an unquestioned predominance. None of them gets so much before the others that the others voluntarily place their reserves in its keeping. A republic with many competitors of a size or sizes suitable to the business, is the constitution of every trade if left to itself, and of banking as much as any other. A monarchy in any trade is a sign of some anomalous advantage, and of some intervention from without.

I shall be at once asked—Do you propose a revolution? Do you propose to abandon the one-reserve system, and create anew a many-reserve system? My plain answer is that I do not propose it. I know it would be childish. Credit in business is like loyalty in Government. You must take what you can find of it, and work with it if possible. A theorist may easily map out a scheme of Government in which Queen Victoria could be dispensed with. He may make a theory that, since we admit and we know that the House of Commons is the real sovereign, any other sovereign is superfluous; but for practical purposes, it is not even worth while to examine these arguments. Queen Victoria is loyally obeyed—without doubt, and without reasoning—by millions of human beings. If those millions began to argue, it would not be easy to persuade them to obey Queen Victoria, or anything else.

Those who believe Bagehot thought that “there were responsibilities in emergent capitalism that only governments could assume, centralized control of the banking system chief among them” should be aware of this passage. And given that the Queen of England no longer reigns over millions of square miles teeming with hundreds of millions of subjects, but merely over the 80th largest country in the world plus some tiny outlying islands and a patch of frozen wasteland in Antarctica, we should consider that a return “the natural system” of free banking is likewise more possible than Bagehot imagined.

Concerning my last post, stating that central banking is a form of central planning, note that I did not state that it is the whole of central planning. As a commentator remarked, one of the ten key economic policy measures to implement communism that the Communist Manifesto proposed was “centralization of credit in the hands of the State, by means of a central bank with State capital and an exclusive monopoly.” Marx and Engels had in mind what was later called a monobank system, unifying central and commercial banking functions under one management. A central bank that is not also a monopoly commercial bank does not go nearly as far as Marx and Engels would have liked, but within its sphere, it is undoubtedly a form of central planning. And it is not like a government monopoly of, say, tobacco sales because monetary policy has effects that pervade throughout the economy, rather than being confined to a single industry.


  1. Well, you left out the rest of the quote, which is just as important. Like Burke, Bagehot separated Politics from Political Theory and Political Economy from Economics. Hence, he can have a Theory about Banking that he doesn't believe will ever come into existence, at least in his lifetime or the foreseeable future. It's still useful to have such a theory, but one should focus on actually making the world or banking slightly better, if you can. I don't think Bagehot had much use for Theorists.

    His point about the populace trusting the B of E is also important. Banking Rules are not made for the savvy, but for the distrusting and less sophisticated, so that they might buy into the system, as it were. It's an empirical question whether the average person places more trust in bankers or govt where the Banking System is concerned. As Bagehot says, you might not like the answer you receive on that score, but it isn't wise to push too hard against it.

    Purely my interpretation of Bagehot, with no guarantee he'd agree with me.

  2. Yes Walter Bagehot (third editor of the Economist magazine – thanks to his marrying the daughter of the founder of the publication) was dreadful.

    He was terrible in his politics (his "we should concede everything that it is safe to concede" line, in "The English Constitution" and other writings and speeches, was a matter of conceding to demand that government should "help" people in X,Y,Z, ways, and this line [of Bagehot and others] led to the decline and fall of British liberalism).

    And Bagehot was terrible in his economics – failing to understand (although even the Governor of the Bank of England at the time understood – and tried to explain the matter to Bagehot) that once there is a "lender of last resort" banking credit bubbles will get wilder and wilder – the whole basis of Bagehot's view of banking policy was wrong (fundementally wrong).

    HOWEVER, Walter Bagehot was nothing like as bad as the modern establishment – they have taken his ideas (and the ideas of others) and taken them to a government subsidy (a credit bubble financial system) extreme that he would NOT have supported (and "not supported" is to put the matter mildly).

    Indeed I firmly believe that if Walter Bagehot was alive today he would, for example, not only not support the policies advocated by the Economist publication (and other establishment types) – he would not even have the publication in his home.

    And if Bagehot (retuned to life) ever visited the modern H.Q. of the publication he once editied – he would be carrying a horse whip (and would use it).

  3. Also observe the false choice that Bagehot offers – the false choice also offered by some (although far from all) "Free Banking" supporters in the 19th century.

    The choice between "one reserve" (the Central Bank – as Bagehot, against the advice of then Governor of the Bank of England, believed it should operate) and "many reserves" (the theorectical position).

    In a honest economy NEITHER is the case.

    A banker (like any other money lender) takes money (his own real savings and/or the savings of other people who have entrusted them to him) and lends them out (keeping a fraction of the savings in his vaults – to guard against some people requesting their money before the people he has lent the money to, repay it).

    This is indeed "fractional reserve banking" in a sense – but not in the sense that is meant here.

    Indeed, even in Walter Bagehot's day banks lent out MORE money (not a "fraction" of the real savings) than actually existed (than there actually were real savings) this was "achieved" by various book keeping tricks (legal – as regards to criminal law, but damaging – as regards to economic law).

    However, the gap between real savings and bank credit in the time of Bagehot was relatively small – as the Bank of England did not stand behind the unlimited credit money expansion.

    The gap today – the gap between the "monetary base" (now itself only government fiat notes – there being no real link to gold or any other commodity) and bank credit (between "MB" and "broad money" M2, M3 M whatever) is now vast.

    Although (in the United States) the Federal Reserve system has been desperatly (for some years) trying to expand the monetary base (indirectly – for it is not printing vast numbers of extra Dollar bills as a primary policy) in order to prop up the financial system – i.e. to prop up the credit money bubble.

    Given the general line of Bagehot's writings I find it impossible to believe that even he (the "bad guy" in terms of the monetary disputes of his time) would have supported the present credit bubble financial system – or believed it could be saved, no matter how desperate the Central Bank efforts to do so.

    Hard times are ahead.

  4. In my (myopic legal) mind, the conflict is no longer between free banking vs. central banking, Hayek vs. Keynes, Locke vs. Marx, etc.

    One either believes that paper and electronic money should enter the economy with the IRS pointing a gun at our heads, or one believes that metallic coined money should enter the economic system through human labor. (Whenever I say the word “money” I want to put the words “property rights” in parenthesis directly after it.)

    To borrow words used by Georg Knapp, one is either a “chartalist” or a “metallist” (and under the 1942 Wickard v. Filburn case I mentioned in an earlier post, there is no legal way to be both).

    If free banking ever does take hold, in the way Bagehot nicely described above, it will happen after: (1) a critical mass of people stop using the central bank’s currency and start demanding their right to make their local bank hold accounts in Treasury-Direct current coin, and (2) government stops limiting the liability of fractional reserve banking corporations.

    This probably sounds incredibly simplistic, but if you’d like to discuss or debate this perspective, I recently posted a blog topic at my website entitled “Government Needs to Know if You’re a ‘Chartalist’ or a ‘Metallist’”:

    Note: If Bagehot was as highly critical of the American government’s legal structure as Wikipedia states (in his book “The English Constitution”), I just want to mention that I totally disagree with his view that a constitutional monarchy is a better form of government than our wide-open, people-owned, constitutional republic.

    Also, I’m uncomfortable with portraying the U.K. as an insignificant force in the world. If one considers her control over global sea lanes (which the U.S. is constantly helping to defend), as well as her influence over other nations through her jury-less admiralty legal system (upon which our tax enforcement system is based), the U.K. influence in the world is enormous.

  5. To follow up on a prior post by Kurt about the relationship between central banking and central planning, as well as a prior comment of mine which hinted at the fact that law students are getting a central-planning-biased legal education, in this post I wanted to inform the group of blog by a law professor who is challenging the American Bar Association's monopoly on legal education, following the trend my law school (Massachusetts School of Law at Andover) started many years ago.

    The law professor, who I believe is Paul Campos, was originally blogging anonymously, but has recently been "outed." Here is a link to his blog if anyone is interested:

    Central banking and its partner, central planning, affects everything and legal education is no exception.

  6. Where there is licensing so there will be guild like organizations – both to press for it and to take advantage of it.

    Of course the danger of the Bar Association is not just a matter of greed (of pushing up legal costs – for union/guild reasons) RichDiMare is quite correct – it has a much wider agenda.

    Putting such things as legal education (and, in many States, the de facto selection of judges because the Bar Association dominates the bodies who make the "recomendations") is terrible – for the political ideology of the Bar Association (and, yes, they have one) is deeply hostile to liberty and the idea that government should be strictly limited.

  7. It is said that questions are statements in disguise. That may be so, but I'd still like to a few questions of this group to get an idea of what exactly "free banking" means to them. The first two questions refer to free banking as it existed in the U.S. prior to the Federal Reserve Act, and the second two questions refer to a new more liberal free banking model advocated in this blog.

    My questions are based on Hayek's Chapter 16 "Free Banking" in his "Denationalisation of Money–The Argument Refined," where, in speaking about what free banking meant prior to the central banking era, he states:

    " . . . the demand for free banking at that time was wholly a demand that the commercial banks should be allowed to issue notes in terms of the single established national currency. So far as I am aware, the possibility of competing banking issuing DIFFERENT currencies was never contemplated. . . . The demands for free banking (i.e. for the free issue of bank notes) were mostly based on the ground that banks would thereby be enabled to provide more and cheaper credit. They were for the same reason resisted by those who recognized that the effect would be inflationary–although at least one advocate of the freedom of note issue had supported it on the ground that 'what is called freedom of banking would result in the total suppression of bank notes in France. I want to give everybody the right to issue bank notes so that nobody should take any bank notes any longer.' [footnote: H. Cernuschi, as quoted by L. v. Mises] The idea was, of course, that the inevitable abuse of this right, i.e. the issue of an amount of notes which the banks could not redeem from their own reserves, would lead to their failure."

    (1) Are there any advocates who believe that free banking should consist only of banks issuing their own notes and/or checks that are redeemable "in terms of the single established national currency" (which today for Americans means current U.S. coin, not the Federal Reserve note)?

    (2) Of the free banking advocates who believe that free banking should consist of banks issuing their own notes and/or checks that are redeemable in an "established national currency," how many believe that these kinds of free banks should be allowed to open shop without seeking a limited-liability charter? Or, in other words, should free banks petition Congress or the Treasury Department for a charter?

    (3) Of the free banking advocates who believe that free banks should be allowed to issue their own completely DIFFERENT currencies, how many believe that these kinds of free banks should receive a limited-liability charter from the government(s) with whom their notes will be competing?

    (4) Of the free banking advocates who believe that free banks should be allowed to issue their own completely DIFFERENT currencies, how many hold this view because, as may happen if drugs or prostitution are legalized, the practice of free issue of bank notes will lead to the "inevitable abuse of this right" and that government only makes things worse by trying to prevent free banks from engaging in activity that is likely to "lead to their failure"?

  8. I believe that banks (and anyone else) should be allowed to make contracts in anything they want to – if both sides to the contract agree. If people want to have contracts in gold that is fine, ditto silver or anything else. Including bits of government paper – fiat notes.

    If people want their contracts in that – well that is fine, good luck to them.

    Of course the money (whatever has been agreed to in the contract) must physically exist – i.e. the bank (or what or whoever) must have what it says it has. And (also of course) all loans must be from real savings – the something for nothing idea of haveing more borrowing than there actually is real savings, always ends in tears ("boom", turns to "bust").

    Private coins (such as those minted before Congress banned the practice in the 1850s) – fine, if they are actually what they say they are (no cheating on weight or purity).

    Private notes – also fine. As long as the bank (or what, or whoever) actually has the stuff the notes say they have.

    1. Paul, when you say “banks” in your first sentence, I doubt you mean unincorporated banks whose shareholders are personally liable in the event of bank insolvency. You are likely talking about a typical (highly regulated) banking corporation which has been granted a charter by a government under that government's Constitution, so I don’t think you can say “banks” along with "and anyone else” because non-incorporated persons ("anyone else") don't share in the government’s money-creation/distribution process.

      So, in other words, unless you're talking about unincorporated bank-like entities, the "banks" you mention are not free to "make contracts in anything they want to." People or natural persons can, as you describe, trade in anything they want to, but not banking corporations, i.e. government conduits.

      (I'm still trying to reconcile my Constitutional or legal view of money with the one I'm finding here in this blog, where people seem to imagine banks and monetary systems appearing "organically" or completely separated from a legal system. This is an impossible thing in my mind, unless like Martin Brock was explaining, people agree to trade in a kind of labor credit system to acquire the goods and services they need, which I think is unworkable.)

      1. I don't imagine money separated from a legal system. Private property requires a legal system, and the only money I imagine requires private property.

        In my way of thinking, money is a negotiable, promissory note (recorded in someone's head, on paper, in a computer's memory or anywhere else, even in the form of a metal coin). I do you a favor, and we agree that you owe me a favor in return.

        We agree that you don't owe me a specific favor in return. We defer specification of the favor, agreeing currently only on a comparable favor in terms of some standard of value.

        We also agree that your obligation to me is negotiable. I may transfer the obligation to someone else willing to exchange a good for the promise of a favor from you.

        Our mutual trust create this money. Our property backs it up. Labor is property, but it is not the only property I accept. If you want to promise gold and deal only in notes promising gold, you can do that, but most of us don't have much gold to promise. The problem with gold as a standard is that most people don't possess much of it, so I can't expect people to deliver much of it on demand.

        People do possess their labor, and we can define a commodity labor as the standard of value. All labor is not this commodity, only labor requiring common skills. "Hour of common labor" seems less exact than "ounce of gold", but ounces of gold aren't really the medium of change under a gold standard. Promises of gold are the medium of exchange.

        Under a gold standard, most people rarely touch gold, because they have no use for it. When you understand that your money is only the promise of something, a promise of common labor seems practically as "definite" as a promise of gold.

        To resolve disputes, common law can govern what qualifies as a "common" skill and when a delivery of common labor satisfies an obligation, but as in any monetary system with a standard of value, most transactions do not involve the standard.

        I like this idea, but I'm not married to it. If most people will not accept promissory notes for common labor, defined this way, then I must deal in something else. Gold or silver can be the standard of value in a freer monetary system, but these commodities raise more legal questions (in my mind), since both may be legal tender; however, the most important issue is getting on with it. If we wait for permission from the central bankers, we'll wait forever.

        1. All government-issued money is a legal fiction, not really property, but in the U.S. we're fortunate to have (1) legal fiction coined dollars backed by the labor of coin makers (which labor can effectively serve as the "standard of value" you mention), and (2) legal fiction fiat paper and electronic dollars, which require a coercive tax to create and regulate demand for it.

          But, unless it comes down to some form of bartering (which doesn't concern us here), I still can't conceive of private money , i.e., private parties having the requisite power to create the legal fiction that is money.

          In Chapter 12 of "Denationalisation of Money" Hayek states, "it is my thesis that the public would select from a number of competing currencies a better money than governments provide," but as brilliant as the man was, I doubt he adequately understood U.S. Constitutional structure. (Indeed, it's almost impossible to find a U.S. lawyer today who does!)

          Also, Hayek has some interesting comments at the end of Chapter 14: "Americans may be fortunate in never having experienced a time when everybody in their country regarded some national currency other than their own as safer. But on the European Continent there were many occasions in which, if people had only been permitted, they would have used dollars rather than their national currencies. . . . "

          And, a paragraph after this comment, he supports my view that he really didn't understand the uniqueness of the U.S. monetary system: "I must confess, however, I am somewhat surprised that Professor Friedman of all people should have so little faith that competition will make the better instrument prevail when he seems to have no ground to believe that monopoly will ever provide a better one and merely fears the indolence produced by old habits."

          And, by the way, if Hayek is supporting multiple competing private currencies, why does he say that a single "better instrument" will prevail? Does this mean monopoly of money is inevitable?

    2. If people want to have contracts in gold that is fine, ditto silver or anything else. Including bits of government paper – fiat notes.

      How about house shares? Why limit ourselves to gold, silver or shares of a protection racket, particularly since gold and silver may be a statutory legal tender and thus also shares of a protection racket? Surely, something other than shares of a protection racket can have value.

  9. Do you propose to abandon the one-reserve system, and create anew a many-reserve system? My plain answer is that I do not propose it. I know it would be childish.

    Seven years ago, Facebook was childish. I suppose it's still childish, but it has three-quarters of a billion users anyway, more than twice the population of the United States.

    So imagining a world without Queen Victoria is childish, but the world is full of children, and many of us never grow up, so childishness seems a very small impediment.

    A free banking system can challenge a central bank in seven years. With modern information processing and communication technology, this possibility is unquestionable, and the net is full of people who don't know that they aren't supposed to extend credit outside of a statutory monopoly.

    The only question is: what will the state do about it?

  10. Should people be allowed to have a contract with the money as houses – or shares of houses?

    Well I would not be interested. But if people want to do that then YES they should – ditto labor tickets or what not.

    American fiat money based on the value of the work of coin makers or note producers – no it is not. The value of the Dollar comes from two things – the folk memory (the habit if you will) of when the currency was actually a commodity, and (of course) the legal tender laws (pay your taxes in this stuff – and so on).

    Labor is not value – although it may well be needed to produce something we do value (an important difference).

    1. "American fiat money based on the value of the work of coin makers or note producers"

      No, Paul. Fiat money is not based on labor. As I said above, it's based on a completely different system than that of a coined money system; it's based on Knapp's state theory of money attaining a sense of value through coercive taxation (the tax creates the negative incentive to go out there and work to pay income taxes in the money required by the tax. … in other words without the tax, the worthlessness of the money becomes readily apparent).

      However, metallic coin DOES creates a "labor standard of value," which need not be regulated by income taxation. And this is not to say that the coin is a commodity, or needs to have intrinsic value, or that value of the metal contained in the coin must equal the labor value you gave me, but only to say that the more I owe you, the more of the coin makers' labor I must pay you.

    2. If specified coins are legal tender (for payment of taxes and other rents imposed by the state) and other coins are not, the specified coins will circulate more than the other coins, even if the other coins have exactly the same metal content.

      When a token has intrinsic value and is also a legal tender, the coin's value is not determined solely by its intrinsic value or solely by fiat (fear of the state's penalty for failure to pay the rents it imposes). If the coin plays both roles, both roles influence its exchange value.

      The dollar is a fiat currency. People collect dollars to pay taxes and other rents for which the dollar alone is the accepted tender. Folk memory has little to do with it.

      "Labor is not value" makes no more sense than "gold is not value". Labor is valuable, and gold is valuable, and the total value of all labor is far greater than the total value of all gold, as a matter of fact today. If gold had never been a legal tender, the difference would be even greater, because when pure fiat money falters, many people expect a return to gold as a legal tender.

  11. Money as "you do me a favour – I promise to do you a favour in return".

    Most currencies (commodity or fiat) have had nothing to with this.

    "Money depends on a legal system – it depends on property rights".

    Agreed – otherwise someone could smash you over the head and take your stuff (including whatever you were using as money).

    Of course the anarchocapitalists would deny that a legal system needs a state. But that is a BIG debate.

    1. All monies have had something to do with voluntary exchange and the promise of something other than the money accepted in an exchange, but voluntary exchange has never been the only consideration. "Nothing to do with this" is false.

  12. I agree with the first paragraph (about the importance of taxation in a fiat money system – by the way that is why non commodity private money from banks will not work, they have no power to tax).

    The second paragraph, different matter.

    1. I don't expect private money backed by nothing (something like Bitcoins) to work.

      Promissory notes must promise something of value, but they need not promise gold or silver. Even under a gold standard, banknotes represent assets valued relative to the value of gold, not gold itself.

  13. Am I including unincorporated banks? Yes I am.

    Indeed I would even include an individual money lender.

    Sorry lads (and lasses), but the money you are lending out better actually exist. Better be either your real savings – or the real savings of other people.

    I am not saying what credit bubble lenders do is criminal (it may well not be criminal) – but does violate economic law (although it may not violate criminal law) and it will create a boom/bust.

    Whether they are incorporated or not. Although if the credit bubble money creation is small (as it is likely to be small with small unincorporated banks) the boom/bust is going to be very small as well.

    1. The act of extending credit against collateral itself creates money. Any property of the recipient of credit may be collateral, including the recipient's labor. The money created signifies an entitlement to exchange the value of the collateral for other goods. The recipient possesses this entitlement before the act. His creditor possesses it after the act.

      No state creates this money, except insofar as a state secures titles to property. With property established, the proprietors themselves create this money, and they also routinely destroy it.

      I asked a question in another thread and never received an answer. Suppose you have a hundred ounces of gold. You deposit this gold in my bank, expecting me to lend the gold for interest and share the interest with you. I give you a deposit receipt.

      I lend the gold to Rick, and Rick uses it to purchase a house from George. George decides also to deposit the gold in my bank, so I also give him a deposit receipt for the gold. I commit no fraud here. I may not know that George deposits the same gold that you deposited earlier. Even if I do know, the gold is George's property, and he is as entitled to deposit it in my bank as you were.

      I lend the gold again, receive it back again from another depositor and issue another deposit receipt. Eventually, ten different depositors possess deposit receipts for this gold.

      Is this the money lending model you have in mind? If not, what is the model you have in mind?

      Trusting my business model, each depositor values his receipt as much as the gold itself. Neighbors of the depositors share this impression of the value of the receipts, so the receipts become a common medium of exchange. Would you prohibit the depositors and their neighbors from exchanging these receipts for other goods? How else would you prevent "fractional reserve" banking?

  14. "Nothing to do with this" – my apologies, I meant to say "the labor theory of value is nothing to do with this". Of course voluntary exchanges are at the heart of a free economic system. By definition if an exchange is not voluntary it is not free – so I can hardly deny that.

    1. I understand the labor theory of value and reject it. Using a commodity labor as a standard of value and common tender has nothing to do with the labor theory of value, particularly since the great majority of labor doesn't meet the standard.

      A gold standard doesn't imply that gold is the only thing of value either. As Bastiat often noted, confusing money with the valuable goods that money signifies is the source of endless misunderstanding.

  15. We are united in rejecting the labor theory of value.

    I may be a bit paranoid about forms of words that could lead other people to the labor theory of value.

    1. My view is that "labor theory of value" refers to Marx's erroneous belief that the value of goods can be determined objectively by figuring out how much labor went into producing the good. But of course, Marx was wrong because all value is subjective. That is, the value of an item all depends on what's going on in the mind of a particular consumer at a particular point in time. In other words, only the free market can determine the economic value of a good, not some central planner or central guiding market-mind.

      However, I'd like to try to distinguish "labor theory of value" from Martin's "labor standard of value" we discussed above.

      What I think Martin is getting at is that for money to be stable and reliable, it must be pegged to a "standard" that is stable and reliable, and I basically agreed by showing that the labor used to create current U.S. coin (in whatever metal it happens to consist of) provides such a stable "standard," which fiat money does not provide.

      So, Martin's "labor standard of value" (using the coin-makers' labor as a relatively stable measuring tool or "standard") has nothing to do with "labor theory of value" (where one tries to objectively, centrally determine the market price of something).

      Fiat money, without a centrally-administered coercive tax, provides no real standard for measuring the value of goods and services at all. In a fiat system, like the money itself, goods and services only have a sense of being valuable because the IRS is holding a gun to our heads.

      1. As I understand it, the Ricardian theory of value goes something like this. If comparable land is common and freely available for homesteading, then the value of land reflects the value of improvements due to the labor of a proprietor, so when a proprietor sells land, he captures only the value of his labor, not the value of undeveloped land. The value of undeveloped land is common to all land, including land common land in its natural state available freely for homesteading, so market prices do not reflect this value.

        Of course, that's a big "if", so I can't accept the theory even in this form. In reality, the value of undeveloped land varies widely, and statesmen grant titles to land for all sorts of reasons having nothing to do with anyone's improvement of the land. A state may grant title to land to a Lockean proprietor, or it may not.

        From the Ricardian idea, a more general theory of value assumes that all value in human exchange derives ultimately from human labor. Marx leaps to this more general conclusion and also assumes that the value of labor can be known apart from subjective market prices, so that economic administrators may simply add up the value of all labor inputs to calculate the value of products of labor.

        You're right that using a labor commodity as a standard of value in a monetary system has nothing to do with the labor theory of value. All commodities must be standardized. Under a gold standard, a note promising an ounce of gold promises an ounce of 24k gold. When you see the price of "corn" in a commodities market, you don't the price of just any corn. You see the price of corn of a standard variety and quality understood by market participants. Other varieties of corn trade at different prices, some higher and some lower.

        A monetary system using labor as a standard of value must also define labor of a standard variety and quality, so its promissory notes do not promise just any labor. They promise the standard labor. Most labor does not meet the standard, and this other labor doesn't trade at the same price as the standard labor.

        The standard labor need not be the most valuable labor, in the way that standard, 24k gold is the most valuable gold. On the contrary, I suppose the standard should not be the most valuable labor. It should be more common labor, labor that most people can perform.

        For similar reasons, if I wanted a metal standard, I'd prefer a silver standard to a gold standard; however, I prefer a corn standard to either a silver or a gold standard.

        1. "A monetary system using labor as a standard of value must also define labor of a standard variety and quality, so its promissory notes do not promise just any labor. They promise the standard labor. Most labor does not meet the standard, and this other labor doesn't trade at the same price as the standard labor."

          Yes, Martin, that's the importance of, in addition to giving Congress an exclusive power to coin metallic money under Article 1, Section 8 (which power cannot be delegated to the central bank), the framers also gave Congress the power to "regulate the value thereof, and of foreign coin, and fix the STANDARD of weights and measures." (emphasis added)

          In effect, when Congress issues the cupro-nickel coins that circulate today, it is saying: "The standard of value used as a basis for the Treasury-Direct monetary system is the labor expended to create this particular coin, made of this particular combination of metals, using these particular weights and measures of each metal."

          1. Credit extended to me leverages my labor, not the labor of someone producing coins for the Treasury. The cost of making the Treasury's tokens is unrelated to the value of my labor. If people want to labor to create coins and sell the coins, that's fine with me, but I don't need coins to labor myself.

            I also don't need coins to offer my labor for money in a market, because digital money is far superior to coins. You might as well insist that I use snail mail rather than email, to keep all the postal workers employed. Yes, delivering snail mail is laborious, but a postal worker's labor is not my labor, and when it comes to delivering information, I don't value the postal workers' labor anymore, so I don't want to exchange any of my labor for their labor.

        2. "The cost of making the Treasury's tokens is unrelated to the value of my labor."

          Yes, it probably is, but we're not using gov't money as a commodity or for bartering; we're using it as "dollars," which is a social, political, psychological, economic medium.

          Also, whether you know it or not, you DO need gov't to issue money, along with its legal system that can protect and enforce the property rights that your money represents. Private parties issuing notes or coins can't do this properly, even if they eventually develop a powerful private enforcement gang.

          1. I use dollars, because statesmen threaten to harm me if I do not collect enough dollars, as I trade with others, to pay the statesmen's rents. I use dollars for no other reason, and if I could avoid the statesmen's threats, I would use other money.

            If I want particular standards of propriety, I need minimal government to establish and enforce the standards, but I don't need government to issue money. Money is a contract between me and anyone else choosing to deal in the same money. I need minimal government to enforce particular contracts, but I don't need government to create particular contracts.

            I don't want any enforcement gang, public or private, to force you to pay your debts to me. I want to deal with trustworthy people who respect me enough to honor their commitments, and I want to avoid other people.

            If I deal with the other people, I want to suffer the loss, and I want my more trustworthy friends to know that I have suffered the loss, so they can avoid similar losses. Where debts are concerned, this ostracism satisfies me. I want no other force.

            In general, I want minimal force.

          2. Martin, I feel like I'm blogging to myself when I was 30 years younger, but no, you don't want "to suffer the loss" of dealing with criminally-minded people that the gov't sees coming a mile away and you don't, and you won't always be able to accurately judge who are "trustworthy people."

            Also, I've tried to show you that there are two kinds of "dollars." One of them, as you say, threatens to harm you if you don't collect enough of them, but the other, which admittedly the gov't doesn't recognize yet, is the Treasury-Direct coin-based system.

          3. I'm 49, but I do want to suffer the loss of extending credit poorly, and I want others extending credit poorly to suffer their losses as well. I also want complete transparency in extending credit. I don't want to pay anyone to enforce debts, and I certainly don't want the losses socialized involuntarily.

            You and I can agree to insure one another against loss, but this sort of insurance only encourages us to police trustworthiness less diligently. We are the only people competent to police the trustworthiness of our own trading partners.

            On the other hand, if you want to deal with people differently, that's OK with me. If you want to specify in your contracts that failure to comply with specified terms subjects the failing party to specified harms, like being locked in a cage, that's OK with me. Of course, I would never contract with you on these terms, and I expect none of the bill for your cages, feeding the caged, paying their guards, etc.

            Also, if some fool agrees to being shot by you for failure to pay a debt or suffering some other grave injury for this reason, I want my state to prevent you enforcing the terms of this agreement.

            I prefer money that the government doesn't recognize as money, but calling this money "dollars" and associating it with the U.S. Treasury seems the wrong strategy. The United States is an increasingly corrupt institution, and I don't expect any reversal of this trend.

          4. OK, Martin, I can't really argue with you, and I even admire your views, but I just don't think they're realistic, at least within the economy we're living in today, where you very often don't know, or don't have the time to know, the people you're trading with.

          5. The more the state pretends to police our relationships for us (because it can't do more than pretend) and the more it socializes our losses (because it can do that), the less time we make for policing the relationships ourselves.

            We can police these relationships, and we can help one another police relationships by contracting transparently, but we won't do so if the state socializes our losses anyway. Emerging technology makes this policing far easier, not more difficult. Only a few years ago, a thorough credit history search was very costly. Now, it's hardly more costly than googling.

            We can even agree to share some of the risks of extending credit, through default swaps and similar instruments, but the "fat tailed", "black swan" nature of the risks involved makes an insurance scheme less valuable than it might appear, and the "market value" of these instruments is meaningless while the state socializes losses.

            Have you ever used eBay? Millions of people send money to other people they've never met for products they've never seen. The other people are individuals, not large corporations with established reputations. The only policing occurs on the web site itself, as buyers report their dealings with sellers. If you don't deliver a few times, you're finished, but of course, most sellers want to deliver.

            eBay is not pie in the sky idealism. It's a very real, extremely successful business model.

  16. Paul stated above: "I agree with the first paragraph (about the importance of taxation in a fiat money system – by the way that is why non commodity private money from banks will not work, they have no power to tax)."

    Paul, I think this is correct, but since we all have a Constitutional right to demand current U.S. coin at U.S.-incorporated banks, it's still possible that Congress could make free-banking alternatives available to coin-only depositors.

    The people in this blog with real banking experience are likely to know how a coin-based, free-banking system would really play out, but here, using 3 scenarios I'd like to give my brief opinion, which is based on my understanding of Constitutional monetary law and economic incentives.

    The first two scenarios involve Congress formally issuing free-banking charters to banks that would cater to coin-only depositors, and the third scenario works with the current banking system.

    (1) Congress issues coin-only, free-banking, unlimited-liability charters that, based on the 19th century Scottish system, holds banks personally liable for insolvency. This would be Congress' most maintenance-free option because the unlimited liability causes banks to self-regulate, i.e., to engage in note issue and fractional reserve practices that assures solvency and keeps federal prosecutors away.

    (2) Congress issues coin-only, free-banking, limited-liability charters, but because banks will take more risks with note issue and fractional reserve practices when their liability is limited, this option would require more regulation, oversight, deposit insurance, etc.

    (3) Congress does not issue new free banking charters, but simply enforces unlimited liability on all banks that violate a depositor's coin-only election. This is the easiest option to implement and can be done immediately. When Treasury-Direct coin-only accounts are demanded by depositors, banks have no more right to irresponsibly loan out that money than it would have if the depositors funds consisted of Series EE Savings Bonds, Postal Money Orders, TreasuryDirect bills, notes or bonds, etc.

  17. I do not go for a labor standard of value either. For example coins are not valuable because of the labor of the people who mint them.

    On coin – well if you have deposited (the word "deposited" is misleading as the money is lent out, not left in the bank vault – but everyone uses the words "deposit" and "deposited"…. so forgive me for using them) coin you have the right to ask for coin back (IF your contract with the bank does not say something different).

    The default assumption is that you have a right to get back the sort of stuff you put in (unless you signed a contract waving any such rights – and why would you do that?).

    If you put in American government coins – or the coin of some other nation, or private coins from a private mint (there were such mints before Congress banned them in the 1850s).

    Of course the value of the coin (historically) is either because people value the material it is made of (gold, silver, whatever) or because the government stands behind the coin (with legal tender laws, taxes and so on).

    A private coin does not have taxes (and so on) to fall back on – so private coins tend to only have value if people value the material they are made of.

    For example, when private mints were legal…. if a private mint debased the coinage it produced (let us say it produced coins it claimed were an ounce of gold of certain degree of purity – and it was proved they were underweight or lower purity) its REPUTATION was destroyed (and it went out of business).

    A private mint could not fall back on legal tender laws and "you have to pay your taxes in this…."

    Ditto bank notes.

    If a bank issued notes saying "we have the commodity these notes say we have" and it was proved they did NOT…..

    Well then either the bank would go out of business (following a "run" on the bank where everyone tried to get the commodity for the notes and so on….) or the bank would have to appeal to the government (not just the executive – but also such things as government courts) to save it – by allowing the bank to not honor the contracts it had made.

    Modern "private bank notes" (including those nice looking ones the Bank of Ireland produces – by the way the "Bank of Ireland" is not the Central Bank of the Republic of Ireland, and the notes it produces are actually used in the United Kingdom, a different country…. there are historical reasons) are really just fiat notes, part of the government fiat money system.

    Once that was not so – but these days it is.

    1. " … coins are not valuable because of the labor of the people who mint them."

      No, they're not.

      I don't know the word for it, but the more "dollars" in coined money I may have to give you from my coin-only account, the more coined-money-labor I must give you. In other words, there's a kind of cumulative labor-relationship between an increase in coinage I give you that cannot be said for fiat money, i.e., it takes the same effort for the central bank to create $1 as it does for it to create $1 billion.

      In a fiat system we're dealing in money that is imbued with "value" through coercive taxation, and in the other coin-based system we're dealing in money that bears a relationship to human labor.

      I know there's a word or phrase for what I'm trying to say, but it escapes me at the moment.

    2. I do not go for a labor standard of value either. For example coins are not valuable because of the labor of the people who mint them.

      The labor of people minting coins has nothing to do with labor as a standard of value, any more than the labor of people mining gold has anything to do with gold as a standard of value.

      A standard of value is a standard good assigned a standard price. The price of another good then is a subjective assessment of the value of the other good relative to the value of the standard good.

      Without such a standard, a good has no single price. I may value a loaf of bread as much as a gallon of milk or a pound of cheese or a pint of beer. A loaf of bread has all of these different prices in a barter market. A monetized market establishes a single price.

      Any commodity may serve as a standard of value, and gold isn't a particularly useful standard for many reasons.

  18. On the labor theory of value.

    One of the best short refutations of it is given in lecture nine of Richard Whately's "Introductory Lectures on Political Economy" (1832 – although the lectures were actually given before this date).

    The lecture is on confusions in logic and language – specifically in economics. The pages concerning the labor/labour theory of value are (in my edition of the work – 2nd edition, reprints of economic classics, Augustus M. Kelley Publishers, New York 1966) are pages 252-253.

    For once that is not one of my (endless) typing mistakes – Whately does manage to expose the confusion in just about a page.

    However, the theory hung on (inspite of Whately, and Samual Bailey, and Rau and Gossen, and Ferrara, and the Say family and…..) till the "Marginalist Revolution" of the 1870s.

    Most importantly Carl Menger's "Principles of Political Economy" – which is still well worth reading now (oddly enough the first edition is a lot clearer than Menger's later efforts to "improve" it). For example, it is well worth reading on the origins of money.

    Although (before anyone asks) I can not really read German – so standard rule applies, make sure you are getting a good translation (and one with proper notes to explain examples that would have been common knowlege at the time, but no longer are).

    1. I will look into Whately's and Menger's work, Paul, but I don't see how you can deny that a coined-based system (regardless of metal type) corrects many, if not most, of the evils of a fiat system.

      1. CORRECTION:
        I will look into Whately's and Menger's work, Paul, but I don't see how you can deny that a fiat coined-based system (regardless of metal type) corrects many, if not most, of the evils of a fiat paper or electronic system.

  19. Martin.

    There is no objective economic value – based on labor (or anything else).

    Economic value is subjective – people will accept offers for something that are greater than the (subjective) value they put upon it, and people make offers for something that are less than the (subjective) value they put upon it. Thus trade takes place.


    I did not say I was opposed to coins.

    Of course coins that are valued because of government order are just a fiat (fiat = order) as a note.

    The Romans (and many others) managed to produce vast inflations without ever printing a banknote. A dishonest coin (a coin that is just based on force and fear – rather than on a material that people CHOOSE to value) is as bad as any other form of dishonest currency.

    As for notes (or computer entries) – if they really represent what they say they do, then there is no problem.

    A banknote is not bad just because it is a banknote – it is only bad if the promise upon it is false.

    By the way credit money expansions often have noble motives.

    People do not like the hard and stony road – the road that holds for every Dollar invested a Dollar must have been saved (thrift, hard work and self denial).

    Many people (vastly more clever than any of us here) spend their lives trying to find ways "round" this – so there can be investment without sacrifice (investment without people choosing not to consume – but to save money instead).

    The plans they produce are very complex and sometimes of genius level intelligence – but, in the end, they always fail.

    Intelligence (even incredible cleverness) is not the same thing as common sense.

    1. Paul, unless you're reverting back to the barter argument, where money needs to have intrinsic value, there's no such thing under Article 1, Section 8 as a "dishonest coin," so long as it is metallic and actually consists of the weights and measures specified by Congress.

      No wonder we're practically under martial law. People are given a Constitution that specifies only that Congress "coin money," but that's not good enough. People think "coin money" should mean gold or silver, and simply because they think that's the way it should be, they won't regard the money as representing "honest" dollars.

      Even if Congress issued only pure gold coins, the coins are still "fiat." The whole system is "fiat" or "legal fiction" if you want to go there. The federal government is a legal fiction (based on the corporate model), which created the Federal Reserve corporation legal fiction, and both of these legal fictions create their own version of the legal fiction we call U.S. money.

    2. Right. Market values are subjective, and I want goods trading at market values. We agree on this point. I never evade it.

      Again, I'd like to know precisely how you propose to extend credit in the system you imagine, without "fractional reserves". You deposit gold in a bank and receive a deposit receipt. The banker lends the gold to someone else who wants to purchase a house with it. Is this the model? Yes or no?

      1. Martin, not quite.

        You, me and many others deposit current U.S. coined money in a bank (not necessarily gold, but whatever the current metal coin happens to consist of), or we simply start making legal demands on banks that our accounts be maintained in coined money under McCulloch v. Maryland (1819).

        Soon after, even though the deposits are in coin (and therefore not subject to central bank or income tax regulation), both bankers and depositors notice that lots of idle coin is laying around.

        Temptation to loan out the idle coin is going to mount, for sure, but in a coin-based system, bankers are personally liable for bank insolvency (see post 16 above), so fractional reserve banking is practiced in a much more responsible manner. To use your example, granting a mortgage to someone buying a house will only happen if (1) the bank is fairly certain the mortgagor is credit worthy; (2) bankers feel certain that enough reserves remain at the bank for depositors who might want to take physical possession of the coin; (3) bankers can induce depositors to keep the coin on deposit through, for example, sale of certificates of deposit; etc.

        I would apply the same logic to private note issue, i.e., it will be done in a much more responsible manner.

        However, the ball game is over once bankers convince the gov't to grant them limited liability, and for sure, pressure will quickly mount for banks to figure out a way to get it. There's no way around it, the price of freedom is "eternal vigilance."

        1. I'd like to believe that I can avoid income tax regulation as you suggest, but I suppose the IRS disagrees with you, and I suppose my bank will go along with the IRS.

          Still, we can discuss hypotheticals here. Suppose everything you say is true, and the real world operates as you suggest.

          So my coins sit in a bank, and I happily owe no income tax. The banker has found the most creditworthy borrower imaginable. This borrower will definitely repay the debt. He won't die. He won't become unable to earn coins. He is the personification of integrity.

          The banker lends my coins to the borrower. The borrower uses the coins to buy a house. The seller of the house now has the coins. The coins are now property of the seller, free and clear. He owes the coins to no one else.

          The seller deposits the coins in the bank, just as I did. The banker finds a second borrower who will certainly repay his debt. The banker lends the coins to the second borrower.

          Eventually, a dozen different people have deposited the same coins in this bank, and the bank has lent these same coins to a dozen different people to buy a dozen different houses. Is this the model you have mind?

          If so, how does this model differ from fractional reserve banking? I'm not asking you to interpret the U.S. Constitution or banking law here. I take everything you say about the law for granted.

          1. Of course the IRS is always free to disagree with us, but it would be on the wrong side of the legal argument, and no matter how hard it tries or violates, at some point (hopefully within our lifetimes) it must recognize that our coin-based accounts are not subject to Knapp's & Keynes' theory of coercive state money. (But note, you may still owe income tax on capital gains, rental income, profits from hiring others, etc., but no, you don't owe an income tax on the receipt or use of non-coin money.)

            Regarding your scenario about multiple lending of the same coin (which I regard as a responsible and benign version of fractional reserve banking), assuming that bank owners are truly held personally liable for their lending, whatever new money was created by the multiple lending was offset by the bank owners' personal money (which, theoretically at least, has been removed from the money supply). So, in other words, for all the new money that was created from the sale of the dozen houses, an equal amount of "old money" was tied up or made unavailable to adversely affect the economy or distort market prices.

            However, if in your opinion, this is still dishonest, you may also be within your rights to require the bank to strictly act as a storage facility for your coin. My guess is that banks would have special fees for this service, but they should not be allowed to discriminate against you by making the fees unreasonable.

          2. How does the bank owner's personal liability change anything? The bank owner could have no personal assets.

            The bank's capital increases with each loan, because the bank holds the house titles, but that's just what I've been saying all along.

            I don't understand how old money is tied up. A bank could recycle these coins as described to extend credit for the purchase of a thousand houses, and if the deposit receipts circulate as money, the money supply grows with the demand for credit. The coin supply is largely irrelevant.

            I see nothing dishonest about it, but I don't see the point of the coins.

          3. Martin, under the 19th century unlimitied-liability Scottish system, or at least under the one I'm envisioning for free-banking today, bankruptcy laws were very strict. The (usually wealthy) people who owned banks were well known, their economic condition was constantly monitored, and the legal system was ready to pounce as soon as the bank showed signs of becoming insolvent, but it very rarely needed to. (In fact, under the Scottish system if a bank went belly up, bank owners were even required fork over money they might inherit well after the bankruptcy was settled.) This is why I think it's imperative that the Treasury Department supervise the issuance of corporate free-banking charters, even though the liability of the corporate shareholders is not limited.

            Also, when bank owners are personally liable for their loans and "fracking" they don't consciously say to themselves with each mortgage, "I must put aside a sum of my personal wealth equal to my potential share of liability in the event this mortgage is a loser," but that's generally what happens. A sum roughly equal to the lending risk is put aside or withheld from circulation, so the effect is to offset the new money injected into the economy by the mortgage, thereby keeping the economy and its pricing mechanism stable. When the mortgage is eventually paid back (usually after many years of labor by the mortgagor), the lender has received a tidy profit in interest payments and is free to lend out the coin again, the former mortgagor has a house, and the new money that used to represented by the mortgage has been replaced with money that came into existence from the former mortgagor's labor.

            I keep stressing the use of current Treasury-Direct cupro-nickel U.S. coin, as impractical as its use is, but it's the only legal way I know of that gives us a right to avoid overwhelming central bank dominance. Kind of like a password to a computer program can be very unusual or irrational, it's nonetheless necessary to gain access to the program.

          4. I don't want an extraordinarily rich guy insuring my credit. Extraordinarily rich guys don't insure my life. Other people like me insure my life.

            Many eyes on one person might have been a more practical method of policing credit in the nineteenth century, but we aren't living in the nineteenth century.

            eBay does not insure anyone's purchase as far as I know. If I send you $50 for something and never hear from you again, eBay does not compensate me. Maybe PayPal does, but this sort of insurance does not keep eBay sellers honest (more nearly the opposite). Buyer feedback posted at eBay keeps sellers honest. eBay is a repository for this information, but no central authority at eBay polices eBay users. eBay users police each other. This model is not merely theoretical. It is very real and successful.

            I don't want the banking business limited to extraordinarily rich guys. A bank doesn't need to put aside assets when it writes a mortgage. It holds the title to the house. The house itself is collateral for the loan.

            A bank can overextend credit by loaning too much money for the purchase of houses at excessive prices. The solution to this problem is bank failure. Banks behaving this way should fail, and their note holders should lose money … or the illusion of money.

            Note holders don't necessarily lose anything real in this scenario. They may only lose wealth that they imagined. Their banknotes represent the value of houses, and the houses are less valuable than they thought. So what? They should stop whining and get on with their lives. With the market volatility of the last few weeks, I've lost tens of thousands of dollars in a day. No one is bailing me out.

            On the other hand, if you want default insurance, you can buy a default swap from a rich guy, or you can join an insurance pool with lots of not so rich guys. Either way, your insurance isn't worth much unless default risks are independent. If the risks are correlated, your rich guy may be not so rich by the time he gets around to you.

            Rich uncles can't take the risk out of life, not even a rich Uncle Sam. Look closely at my picture here. I'm hanging from a biplane flying upside down. I let go a few seconds later. Don't worry so much about the risks, least of all the risk of losing money. Losing money is no big deal. 21st century poverty is 18th century wealth.

  20. Rick.

    I believe in freedom of contract.

    For example, the government voiding of gold clauses in private contracts in 1933 was an outrage.

    And I believe that if the clauses were about sliver voiding them would still have been an outrage. Ditto if the private contracts had specified that payment was to be made in bits of colored paper.

    It is the freedom of contract (of choice) that matters to me – not the specific material people agree to use.

    By the way money is a lot older than coinage and both gold and silver were used as money long before coins were invented.

    1. Paul, I believe in freedom of contract, too, but when our contracts involve money, there's a third party involved in the contract, the U.S. gov't, whether we like it or not. Otherwise, if we don't like it, we barter. Then there are only two parties to the contract.

      Regarding the voiding of the gold clauses in 1933, that's only an outrage if, again, you think of money as a commodity that must have intrinsic value. There was a 1935 Supreme Court case that dealt with the removal/devaluation of the gold from the dollar. In short, one private party was trying to hold another party to gold content prior to the devaluation, but since the Court found that the contracts were for money (dollars) and not for bullion, they were not allowed to do so, which would have had the absurd effect of giving private parties legal power to control the monetary system.

  21. Rick.

    A "dishonest" coin (or a dishonest anything) is something that says it is one thing – whilst it is in fact something else. Silver Dollars were not popular in the new world because the Empress Marie Theresa was popular, or because of fear that the Hapsburg legions would make people accept payment in these coins.

    They were popular for the reason that the conis of the Republic of Venice were popular for centuries (far away from anywhere the Republic could enforce their use), because they were honest coins – they did not cheat on standards of weight and purity ("weights and measures").

    Sorry but not even the United States Constitution can make debasement of the coinage (IF accepting the coins is compuslory) not a bad thing.

    What was bad when the Roman Empire did it is not good if America does it – it is the ACTION (not who does it) that is bad.

    Rick you quote Article One, Section Eight – that gives Congress the duty to safeguard "weights and measures", it does not say they should pervert weights and measures (that goes against everything the Constitution was trying to stop – such as the "not worth a Continental" inflation – it DOES NOT MATTER IF IT IS DONE WITH NOTES OR DEBASED COINS).

    The stealing of privately owned gold and the voiding of gold clauses in private contracts only an outrage if one believes money "has an instrinsic".

    NO, NO, NO.

    Stealing stuff (be it gold or anything else) is wrong.

    And voiding private contracts (whether the clauses be for payment in gold, silver, copper, or bits of colored paper) is wrong.

    Asking why stealing and cheating (voiding voluntary contracts) are wrong (wrong – period) is like asking "why is rape wrong".

    If a person really does not know – then there is no way to explain it to them.

    Of course stealing and cheating are also economically damaging – but that is a side matter.

    As for economics……

    All lending must be from real savings.

    A simple principle, but a vital one.

    All efforts to "get round" this principle (whether with coins, notes, or computer credit entries) end badly.

    1. Paul, we need to keep unpacking your views about what is dishonest coin, or whether Congress steals money, voids contracts, perverts the standard of weights and measures, etc. when it changes the coin's metal type under Article 1, Section 8.

      Perhaps one of the most unlearned lessons of the 20th century is that a legitimately coined (fiat) "dollar" need not be made of precious metals in order to maintain a meaningful economic relationship with human labor, which relationship a fiat paper or electronic dollar cannot have (unless we define "labor" as adding extras zeros to paper notes or typing extra zeros on a computer).

      Having said this, though, I do believe that as demand for current coin increases, banks will automatically want higher denomination coins for inter-bank dealings, and will eventually ask Congress to use metals that are perceived to be valuable in the eyes of the public.

    2. Paul, FYI, here is a link to Wikipedia's summary of the four 1935 Supreme Court cases known as the "Gold Clause Cases" ( ), which contains links to the actual cases if you want to look further into the Court's reasoning.

      These cases are considered to be revolutionary, but are actually just an extension of what was started in 1837, when Congress began reacting to Andrew Jackson's move to block federal attempts to take monetary powers away from state banking corporations.

      My opinion is that the Gold Clause Cases represent the idea that, whether one is a "metallist" who believes in federally-minted, labor-based, fiat coined dollars, or a "chartalist" who consents to federal income-tax-regulated fiat paper or electronic dollars, the word "dollar" is purely a psycho-political unit that is unrelated to any unit of weight or mass.

  22. I agree that market values are subjective – the buyer has one view of the value, the seller another view of the value (thus trade takes place).

    Lending – I have no objection at all to people lending out savings (if the savers have agreed to this).

    I do have an economic (and moral) objective to people trying to lend out more than was actually saved (via book keeping tricks).

    "Fractional reserve banking" depends what you mean.

    I have not problem with people lending out a fraction of the real savings put in their bank (even almost all of them).

    But I do have a problem with "fractions" such as one thousand tenths.

    Nine tenths is one thing (the bank may go bankrupt – but it is NOT producing an economic bubble), but one thousand tenths is a different thing.

    Still if banks (and other such) who play these games are allowed to go banktrupt, the problem sorts itself out (after very harsh times – but only for a brief while, if markets are allowed to clear).

    The broad money (bank credit) goes back down the monetary base again.

    1. Paul, we certainly agree that bankruptcy, whether in the form of liquidating a bank or reorganizing it, is not presently allowed to clear the markets of illegitimally-created credit. That is perhaps the greatest problem with banking today, i.e., that it doesn't effectively allow poorly run banks (assuming it even knows how to identify them) to fail or reorganize, and it doesn't "pierce the corporate veil" of failed banks to attach the personal assets of the owners and officers.

  23. Rick – it is not that that FDR stole gold that bothers me or that he voided gold clauses of private contracts.

    What bothers me is the fact the government stole stuff (I would not care what stuff it was) and voided the payment clauses in private contracts.

    Even the ministers of George III (Lord North and the rest of them) never dreamed stuff like this – the ideas of the New Deal (from ripping up private contracts to trying to set up a corporate state with cartels in each industry coordinated by the government) owe more to the Fascism of Mussolini than do to the Constitution of the United States.

    You direct me the "reasoning" of the Supreme Court (I have read this stuff before – but, fair enough, you had no reason to know that). I will control my anger (my anger with the five "Justicies" not with you) and simply say the following.

    If what FDR did in 1933 is Constitutional then ANYTHING is Constitutional.

    Your last e.mail.

    Two different things there Rick.

    One is whether corporations (including banks) should be allowed to go bankrupt.

    Of course they should (and let the chips fall where they may – there are no costless policy alternatives). Someone who says "I have to spend your money to save X enterprise because it is TOO BIG TO FAIL" is a scumbag (and should be treated as such – regardless of their party).

    However, you also make a second point.

    This point (I believe) is against allowing corporations at all – i.e. I believe you hold the point of view that the owners of an enterprise should be liable in their personal assets, not just the money they put in their investments (money in the "trading pot" as it were).

    I hold a different opinion. I believe that AS LONG AS EVERYONE KNEW IN ADVANCE they were dealing with a limited liablity enterprise then freedom of contract applies.

    However, the decline of the use of the "Inc" after a company name (in the United States) or "Ltd" (in Britain) raises a question.

    Does everyone who does business with a limited libility enterprise actually know it is a limited liablity enterprise?

    Do they know that, if it goes bankrupt, the shareholders will lose their investment but NOT their personal assets?

    If people do not know – then my arguement above (based on freedom of contract – people choosing to do business with an enterprise knowing it is a limited liability one) may fall.

    It is one thing to see the owners of a limited liability enterprise drive off in fancy cars (after it goes bankrupt) to big houses – when one knew that was the position when choose to do business with the enterprise.

    It is a rather different thing to see exactly the same thing – if one did not know IN ADVANCE that this was the position if the enterprise went bankrupt.

    Think of the following example…..

    Every tenth person to visit a shop loses his shoes – the shop keeper just takes them.

    Now the shop offers really good deals – so a lot of people risk being the tenth person to visit.

    Nothing unlibertarian about the above.

    But let us say the shopkeeper and so on DID NOT TELL PEOPLE of their rule.

    Let us say that you are just the tenth person to enter the shop and the shop keeper and his employees just demand your shoes – and will not let you leave unless you hand them over….

    This is (perhaps) a rather different position.

    Surely it is not unreasonable to expect a sign outside the shop that says "every tenth person who enters this shop must give up their shoes" – and then let people make a choice.

    Ditto – surely it is not unreasonable for a corporation, a limited liability enterprise, to clearly tell people what it is, and then let people make choice about whether or not to do business there.

    So instead of (for example) "Bank of America " it would be "Bank of America: Incorporated".

    Of course not everyone would understand what the words "incorporated" or "limited liability" mean – by some people do not understand anything.

    One has to fall back on the "reasonable man" (now "reasonable person") test – is it reasonable to assume that someone actually understood the legal position before they made their choice to do business.

    But we live in a world where corporations now seem very hostile to even putting the letters "Inc" after their names.

    And this is a rather troubling attitude.

    1. Paul, I can't respond to all the points you're making here, but I think the major one is whether consumers have a right to "informed consent" when dealing with a corporation, and I agree that it's "a rather troubling attitude" that we're deceived about how corporations represent themselves (especially private corporations like the Federal Reserve, which is neither federal nor a reserve, and which should have a big "Inc." or "Ltd" after its name at all times).

      I ran across similar corporate deception when I was in the wholesale food business and noticed companies wanted desperately to hide from consumers the fact that their foods were irradiated, genetically modified, not "organic," etc. I can't tell you the lengths to which some companies will go to deceive consumers and still be considered "legal" (with the help of their lawyers, of course).

      The same goes for limited liability banking corporations trying to hide the fact that they're incorporated, such as the example you gave of Bank America avoiding its truthful title: "Bank America, Incorporated."

      At least the new "artificial person" on the block, the LLC or limited liability corporation, has "limited liability" embedded in its title and companies are required to state "LLC" after their name.

      I would even suggest that when banks don't fully inform us of our relationship with them, any contract formed with them may be "null and void" because of "unconscionability" or "misrepresentation," two of about 18 defenses to contract formation. The bottom line is that we need many more attorneys who are willing and able to start challenging these paper tiger corporations, as intimidating as they may appear.

  24. Andrew Jackson:

    Of course the State "pet banks" he put tax money into where just as bad as the Bank of the United States he got rid of. They built inverted pyramids of debt upon the tax money (just as the Bank of the United States, both of them, had) and the boom-bust madness continued.

    Although he got the blame for a bust and lost office (in reality the bust, like ALL busts, was caused by previous credit money boom) Martin Van Buren had it right.

    Real "pay as you go" (as opposed to "pay as you go" as meaningless slogan) – take in the tax money, and keep it in an independent Treasury as it is spent. Do not use a Federal bank or State Banks – keep banking and government distinct.

    Martin Van Buren was denounced for going back to "primitive" methods "straight out of the Middle Ages", but he was not some hick farmer from the hills. On the contrary he was a life long New York banker – it was not ignorance of the system that made him want to keep the government out of it, it was knowledge of the system that made him want to keep government out of it.

    The Fascist New Deal:

    Of course today the very notion that the New Deal was Fascist (that it was nothing to do with "Andrew Jackson" or any other figure from the American past) is denounced by the establishment (who control almost all universities – and most other institutions also).

    But at the time it was openly admitted that one of (although not the only) inspiration for the ideas of the New Deal was Fascist Italy.

    Everything from the drunken General with his National Recovery Administration thugs (basically an American version of the Blackshirts – accept they had a Blue Eagle sign) attacking shop keepers for such "crimes" as offering cheaper prices, to the silk shirt "intellectuals" who paid court to the new Emperor (sorry "President"), was in the "Progressive" Fascist side of politics (fairly openly so). The only real division at the higher levels was between the Fascist "Progressives" and the Marxist Progressives (loyal to Moscow), and even Mussolini started out as a Marxist (indeed one of the leading Marxists in the world) and still held himself to be a socialist to his dying day (although of a "modern" kind – this was his heresy as far as orthodox Marxists were concenned, and they do not like heretics).

    Ronald Reagan remembered his father (a WPA administrator – being a drunken bum, as his father was, did not stop a person getting such a job, indeed it was almost a qualification for the position) comming home each day from the office (well the bar… having been dragged home,) singing the praises of the New Deal and all that went with it.

    Reagan (Ronald WILSON Reagan – remember, named after Woodrow Wilson, the totalitarian book "Philip Dru: Administrator" was written by Wilson's "Other Self" Colonel House and is indeed the logical end point of Wilson "New Freedom" – i.e. slavery) remembered how almost all the New Dealers of the time (bar the orthodox Marxist ones – and they tended to keep rather quiet) were admirers of Facist Italy, and not because they liked Italian culture (it was the POLITICS they liked).

    However, when he mentioned this (back in 1981) the media (and academia) went nuts.

    You see ever since World War II Fascist Italy has been seen as bad (and it was bad) – so the fact that their Holy Saints (the New Dealers) had based much of their economic policies (and as much of their politics as they dared to) on Fascism – was shoved down the "Memory Hole".

    And anyone who mentioned it….. well they were guilty of blasphemy. The establisment may not believe in God ("collective salvation" does not count) – but that does not mean they do not have a religion. They do worship something – they worship the collective (what the call "the people" but really mean the state). And anyone who commits blasphemy against their religion (and its patron saints such as FDR)……..

    How dare anyone suggest that the New Deal "intellectuals" were not in the tradition of the Founding Fathers (and of Andrew Jackson and …..) – that they actually had more in common with Fascism (apart from the ones who were even worse – the orthodox Marxist ones, getting their orders from "Uncle Joe").

    But it failed – at least partly.

    The United States did not become a total state – it did not fall to totalitarianism (it still has not – not even today).

    Why not?

    Was it the Supreme Court striking down the National Recovery Administration (thus taking the teeth out of the National Industrial Recovery Act)?

    Was it the resistance of people like Al Smith and the Liberty League?

    Perhaps – but I think there is a different explination.

    F.D.R. himself.

    Franklin Roosevelt could not care less about the United States Constitution (or about historical figures such as Andrew Jackson).

    BUT he did not really care about Fascism (or Marxism) either.

    Roosevelt did not have a totalitarian objective – he did not really have a clear objective at all.

    At school and university he had basically just played about – and he continued like that.

    Polio hurt him physically (a lot) – but it did not really change his character.

    He did not become a man who read books or was interested in ideas.

    In short…..

    The "intellectuals" thought they were using Franklin Roosevelt – but really he was using them.

    He was not interested in building some utopia (Fascist or Marxist) – he was not wildly interested even in ending the Depression (he would have liked it to end – but he was not a driven man living in horror of it).

    What Roosevelt used the academics, administrators, and (yes) media types for – was simple.

    To become President of the United States.

    To win relection four times.

    And to die still President of the United States.

    That is what he cared about – to be the man in the big chair. And if that meant using the Progressive movement (to build a vast political machine – with tens of millions of voters dependent on government handouts), fine.

    BUT no nasty totalitarian death camps. True FDR said he liked the script of William Randolph Hearsts "Gabriel Over the Whitehouse" (something that Jonah Goldberg makes a big thing of in his "Liberal Fascism"), but (and this Goldberg just does not understand)…. Roosevelt said things to people on the basis of what he thought they wanted to hear (sincerity was not a big thing for him). He did not really mean to set up a Fascist state – he was just using people who liked the idea (and told them he like it to), just as he said much the same sort of thing to the Marxist faction of the Progressives (accept this time it was Uncle Joe who was the "Christian Gentleman" – leaving aside the little matter of the tens of millions of people Stalin had murdered).

    Making alliances with totalitarians (at home or overseas) is not, in the end, the same thing as being one oneself.

    Bottom line – the only way the Progressive Totalitarian State can be established and maintained is by TERROR.

    Not drunken General Hugh Johnson and his National Recovery Administation goons – but real terror. Millions (indeed tens of millions) of Americans would have had to be killed.

    Was FDR prepared to do that? Not a chance – that is why the New Deal was going to fail to achieve the Progressive dream (totalitarianism).

    That is why the political system of the United States was not destroyed – and also why a lot of the New Deal was rolled back later.

    It was not because the resistance was wonderful, but because the man at the centre of the Progressive movement did not really believe in its totalitarian agenda.

    In fact – he did not really believe in anything (other than him being the man in big chair).

    There are a lot worse people than the insincere.

    Better an insincere Roosevelt, than a sincere Bill Ayres, J. Wright, or….

    1. Paul, the only thing I can think to say about this post is, if you're interested, look into the concept of "judicial review" established by the famous 1803 case Marbury v. Madison:

      In other words, individual U.S. presidents may represent certain political philosophies in our history, but they don't really drive it. Rather, Supreme Court justices and their decisions do, and the Supreme Court has power even to strike down acts of Congress. This is why I pretty much ignore what the executive and legislative branches do.

      Also, I don't agree that the New Deal era was such a bad thing, and at least from what I've gleaned from 1937 Supreme Court decisions, its revolutionary effects may not have materialized yet.

      What I mean is that, instead of only authorizing an income tax on the receipt of Treasury-Direct paper money (greenbacks) as Lincoln did during the Civil War, the 1937 Court seems to be authorizing an income tax on the receipt of ANY foreign or domestic currency that is not U.S. coin.

      This means to me that if foreigners really want a relationship with the U.S., ultimately they will need to make a legal demand for Treasury-Direct current coin authorized by Congress. (Of course, this is not the way the U.S. currently extends its influence, but instead, the executive branch conquers other nations to support our arrogant corporations, then we "nation build" in an effort to make foreigners respect our corporations, apparently based on the idea that if Americans are so deferential to private corporations, foreigners will be also.)

  25. Rick.

    Chief Justice Marshall? You are trying to drag him in now?

    Marshall believed in the Supreme Court defending the Constitution of the United States (including against both State and Federal governments), he did not believe in using the Constitution for toilet paper and allowing the government to loot all privately owned gold, and to rip up the payment clauses in private contracts.

    Rick even the ministers of George III (Lord North and the others) never dreamed of doing stuff like this.

    Will you please stop trying to pretend that the New Deal (Fascism – although Fascism that wimped out on the mass terror that is the only that collectivism can survive in the long term) was something to do with the traditions of the Founding Fathers, or with Chief Justice Marshall or with Andrew Jackson. It was not.

    "I do not agree that the New Deal was a bad thing" – well that is fine, you are on the other side. Although exactly why you are here is a question.

    If you want to be a collectivist then be a collectivist (and I am NOT being insulting – I mean it), but be an honest one – like the poet E.P. Do not pretend to be pro civil society tradition (or other such stuff).

    O.K. You are an enemy – that is your choice. But do not come on with the free market pose. Let your words OPENLY reflect what you are. Then I have no problem with you.

    By the way – although Lincoln was a Henry Clay Whig in his economic ideas (and went a further than that, due to the need to win the war) trying to associate him with the New Deal is false.

    As for the rest of your post…..

    If someone wants to trade with someone else – then they settle between them what they want to be paid in (period).

    Nothing to do with "having a relationship with the U.S." it is one person (or organization) trading with another person (or organization).

    There is only a role for government if the contract is violated (and even then the parties may prefer an non government panel to decide their dispute – that is how Law Merchant evolved over time).

    "Arrogant Corporations".

    I have no idea whether they are "arrogant" or not – although my guess is that some corporate managers are and some are not.

    I do know the following….

    American companies face some of the highest taxes in the world – and (contrary to the myth) not every company has the political connections of pro Obama General Electric (a lot of companies actually have to PAY these insane tax rates).

    American companies also face more (not less) regulations than in any advanced country I can think of. The directors of American companies can be sent to prison for "crimes" that are considered clerical errors (or even normal practice) in most other countries.

    Neither of these things (super high taxes and endless regulations) used to be true – but they are now.

    These taxes and regulations come at a price – at that price will be increasely felt over time.

    What are you going to do as long term investment (and, therefore, job prospects) go down the tubes?

    Keep blaming "arrogant" corporations who "export jobs overseas" as part of some nasty plot?

    Oh well, I feel like Edmund Burke when he understood (after years) that people who talk about "freedom" and "the ancient constitution" and "the traditions of law" often mean the exact opposite.

    But Burke had an excuse (he did not have the work of other people to open his eyes), I have no excuse – as Edmund Burke (and others) did all the work a long time before I was born.

    Sadly some collectivists choose to wear masks.

    I would be a lot better for everyone (even for yourselves) if you did not wear masks – but you do.

    Annoying – but it is just the way things are.

    "But you have not suggested any books on the anti side of the New Deal – or the pro side of the Constitution".

    If you are thinking this, the reason I have not done so is simple.

    From what you have already said I know there is no point.

    1. Paul, when you can demonstrate that you know the difference between "taxes on income derived from property sources" vs. "taxes on income not derived from property," then perhaps I would consider your comments about the Constitution, and the New Deal Supreme Court's interpretations of it.

      Granted, the Supreme Court is often splitting hairs (to maneuver around subtle Constitutional rights, and still deal with the reality that most people could care less about what the Constitution really stands for), but that's no excuse for fluffing everything off as some kind of conspiracy (i.e., the gov't "stealing" our gold).

      The fact is, the vast majority of people across the globe are not going to understand what a (Lockean) property right in human labor is, which can only be claimed by rejecting "fiduciary media" (any currency that is not current U.S. coin). So, all I'm saying is that the New Deal Supreme Court deals with this reality by saying that anyone who doesn't really understand what the U.S. Constitution stands for will be subject to a regulatory income tax. What's wrong with that?

      Would you prefer the alternative, which is to simply regard the Constitution as a mistake that was formulated by a few fanatical, unrealistic, renegade lawyers? If you do, I'm afraid it could happen.

      Finally, the Constitution was written for "natural persons," not the highly-taxed corporate executives (as if they really suffer) you sympathize with.

  26. In case anyone thinks the above is too harsh…..

    Well you did not read the first reply I wrote (but did not send) – about the mildest line in that was "you patronising son-of-a….", after all that would be a logical response to someone who mentions judicial review and Marbury V Madison, sarcastically pretending I had never heard of such things.

    I believe people have a right to hold any ideology they want. But I also have a right to despise people who pretend to hold to one tradition and, in fact, hold to its enemy.

    No one has to believe in the ideas of limited government held by Classical writers such as Cicero, or in such other examples of the Western tradtion as the Edict of Quierzy (877 – upholding the view that even the King of France could not take a fief of land from the children of the holder of the fief and give the land to someone else, this being a great divide between Western civilization and what came to be known as "Asiatic Despotism", which the American Founder Fathers thought of in terms of the example of the Ottoman Empire), or Henry I's Charter of Liberties of 1100 (sure it was a cynical attempt to gain support against his elder brother – but the motives do not undermine the ideas expressed), or the Magna Carta (certainly forced from John by people who had their own private grudges – but still expressing the tradition), or the works fo Chief Justice Coke, and Montesquieu, and Burke, and (on and on).

    One can reject it all – and hold that "the rich" or "corporations" are the thing that needs limiting. Limiting by a government that serves "the people" (as every despotic regime in history has claimed to do – indeed this is the very definition of despotism, a government that accepts no limits to its interventions, for it holds limitations to be against the interests of the people).

    Fine – totally fine. Hold this "Progressive" point of view if you wish to do so. It is, after all, a long established tradition – going all the way to Plato (and so many others) and thus nothing to hide away and pretend to be something else.

    But do not then start citeing the United States Constitution, of the Founding Fathers, or Chief Justice Marshall. For one tradition to pretend to be its opposite (its foe) is vile.


    Let your words openly show your position – be a man.

    "Post 1937 Supreme Court judgements".

    Let us say I was to take that seriously (as an honest position).

    This would mean (for example) taking seriously the idea that a man growing a crop in his own farm (for his own use) is "interstate commerce".

    And, of course, it would mean taking seriously the reversal of the word "regulate".

    In the 18th century context it meant to "make regular" – to ensure free trade between people and enterprises in different States (to prevent restrictions upon trade and commerce).

    The EXACT OPPOSITE of what the New Dealers meant by "regulate interstate commerce" – which they then had the "audacity" (not the first word to spring to mind of course) to apply to things that werre not even interstate commerce at all.

    Progressivism is not about "developing" the Constitution – it is about OPPOSING it, but not openly (that is the nauseating part – NOT the oppostition to the Western tradition, but the dishonesty, the pretense of being part of a tradition one is, in fact, intending to destroy). As was said by some of the New Dealers themsleves – the whole point of their "jurisprudence" (again not the word I would use for it) was to make it seem the Constitution allowed the government to do the very things the Constitution was designed to STOP the government doing.

    An honest man would oppose the Constitution by suggesting Amendments (or perhaps a Convention) to give the government new powers (this was done in Australia – where the Welfare State was established by Constitutional Amendments), a dishonest person tries to do the same thing (and much more) by "interpretation" (and via the process of Case Law – each case getting a bit further away from the Constitution and Precedent building upon Precedent). Indeed one can even go 180 degrees – and end up claiming the Constitution REQUIRES the government to do the sort of things the Constitution was designed to prevent (indeed that is the desired end point as far as Progressives are concerned).

    It is not the fact that the collectivists are enemies that makes me despise them – enemies have a right to be respected.

    What I despise some (certainly not all – for it is NOT true of all) collectivists for is the "false flagism", the dishonesty, the deceptions, the vileness.

    We have come a long way from banking…..

    But it is not really so far at all.

    For the problem (the moral problem – not the criminal law problem) of some forms of banking is the same….

    It is the basic deception – saying one thing, and doing something radically different.

    A banker says he is just "putting people's savings to work" – i.e. lending out savings.

    But this is not really what is going on – or it is only a small part of it.

    "Fractional Reserve Banking" is not really about lending out most real savings and keeping a "fraction" in reserve.

    It is really about lending out far more than ever existed in real savings.

    Building a pyramid of credit money – based on book keeping tricks (book keeping tricks which, I hasten to add, are quite legal and have nothing much to do with whether the money lender is a limited company, "corporation", or not).

    And (contra Krugman) there is a relationship between imoral (even if not ilegal) actions and long term general well being – the universe is just like that, "by chance" ("if chance you call it").

    One can build inverted pyramids of debt, fairy castles in the air. But there are consequences for that.

    In the end there is no way to general long term prosperity other than by hard work (sweat and self denial), keeping one's word (a society where a handshake is not, normally, enough is already spiritually dying – and, contrary the moderns, moral/spirital matters have direct economic consequences) and the freedom to develop ideas – to make one's dream real, or to give the task one's best efforts (for even in failing one helps others succeed later).

    Certainly individual con artists (sorry "confidence" artists) can prosper – but a soceity dominated by such folk never does, not in the long term.

    And there is no bigger con or scam, than holding that real prosperity can be built upon credit (whether in the form of computer entries, notes, or coins) that is not from real savings.

    1. Paul, first, I didn't mean to be sarcastic or patronizing but you (and everyone else here) needs to look closer at U.S. legal precedent before recommending ways to transition away from central banking.

      Second, your farmer (Filburn) "growing a crop in his own farm (for his own use)" WAS engaged in interstate commerce. He was not just some ordinary innocent farmer (as you portray … does this make you a "liar"?), but someone benefiting from higher prices for his crop after he (voluntarily) registered with the Department of Agriculture (DOA) under the Agriculture Adjustment Act of 1938 (AAA). Then, after he registered, and agreed to the terms of the AAA, the DOA allowed him to plant 11 acres of wheat, but he planted 23 acres, claiming that planting more than twice his allotment was for his own personal use. Who's the "liar" here? Nobody forced farmer Filburn to take the gov't handout and belong to the program. To make myself "an honest man," do I really need to propose a Constitutional amendment to prevent gov't from offering such programs to farmers? Maybe it's the many people like yourself (who don't object to the "elastic" central bank money that makes these programs possible) who are really the problem.

  27. Rick this conversation is pointless – 20 years ago (even ten years ago) I might have thought otherwise, but I know enough about "flase flaggers" now, to know the conversation is pointless.

    However, NO the 16th Amendment (the income tax amendment) does NOT just apply to income from property – it clearly says "from whatever source derived" and you know perfectly well that includes labor income.

    And NO

    1. No, the 16th Amendment is not necessary to tax labor as income. If someone was using non-coin currency (usually greenbacks) between the Civil War and ratification of the Sixteenth Amendment, his/her labor (wages) could be Constitutionally taxed as income "derived not from property sources." The problem came when wealthy employers and landlords hired lawyers to challenge the 1894 income tax, claiming that they should be exempt from the income taxes because they might be direct taxes on their land (property) and employees' labor (property) under the 2 Direct Tax Clauses, and therefore the gov't would need to apportion the tax and make it proportional according to census data. The Supreme Court agreed, therefore forcing the "from whatever source derived" language of the 16th Amendment of 1913. But this doesn't mean labor (as represented by wages) is always income. It can also be property, which would entitle it to the kind of legal protection that the landlords and employers were looking for. The whole point of my effort in this blog is to try to show how labor can be a natural person's property, not income, and how money affects that property right.

  28. And NO the Fouding Fathers were not hostile to employers and estate owners. The Constitution was not designed to fight evil employers (such as trading companies) and evil landlords.

    Such claims are not just false, they are LIES – because the people who make such claims KNOW they are false.

    I repeat – stand openly as what you are. A foe of the Constitution – indeed of the Western tradition of civil society (what you would call "capitalist" society).

    In short PLEASE be a man.

    As for the Lockian labor theory of property….

    You are quite correct – most of the world (indeed most of the West) never held to it.

    This is because of the popularity of the Roman Law view – that just ownership is based on long unchallenged holding. Whether or not there was any labor involved – and even if the property was taken by force (by people long dead).

    Common Law is no different than Roman Law in this respect.

    If an estate has been long held (held without challenge) then there is no need to enquire into "labor" or into how the property (centuries before) came into the hands of a particular family (or institution).

    A case from the time of the Founders illustrates the point nicely.

    The Duke of Portland was challenged by "The Crown" (not King George III personally – but the officials who were, and are, known as "the Crown" in law) over some of the land in his possession.

    "Produce documents proving your family justly own this land" was the demand.

    Of course the land had been in their possession for centuries – there were no documents (there may never have been – after all even over the border in Scotland written documents were not the only thing till as late as 1845).

    As Portland's defenders (in the courts and the country) were quick to point out……..

    If the Crown (the state) can take "doubtful" property it will not just be the Duke of Portland who is hit – not eventually.

    ALL land is "doubtful" if one looks back far enough – and small farms (and shops and….) no less so than big estates.

    What starts off with a rich man (picked on for political reasons) will not stop with him.

    Every person (and insitution – company, church, charity, association) is laid open to attack.

    Once government is allowed such power.

    Once the benefit of the doubt is not given to the subject – but it given to the state instead.

    1. I would not say the founding fathers were hostile to employers and estate owners, but they were skeptical of the human tendency to control, "libido domini" as I think Judge Napolitano called it, the "urge to dominate." That's why we control and regulate employers, landlords and investors, but we still need them to create jobs, economic growth, etc. … If it wasn't for the country being formed in the midst of full-blown slavery conditions, the entire concept of "income derived from [the] property source [of labor]" may never have developed.

    1. Paul, by the mere fact that one is using "elastic" Federal Reserve notes, people are taking subsidies.

  29. I see Rick.

    So your opinion is if people use money produced by the authority of the Federal government (whether by the "private" Federal Reserve system, or directly as in the emergency measures taken by Salmon P. Chase during the Civil War – even though, after the war, Chase himself in his capacity as Chief Justice of the Supreme Court denounced fiat money as unconstitutional) they are taking a subsidy – and are, therefore, subject to whatever regulations the collective power (call it the government or "the people" or whatever you wish) see fit to produce.

    I oppose this point of view, on principle. As would all the Founders you claim to support, and (indeed) everyone from their tradition of thought (in all nations and periods of history) – this tradition being the enemy of the tradition of thought of which you are part. As for quoting Judge N. from Freedom Watch…….

    Will you please cite people who are actually on your side of the divide (for example Woodrow Wilson or Benito Mussolini – both, I fully admit, highly intelligent and well read human beings) – rather than people who are, in fact, the sworn enemies of your side. I find false flagism somewhat annoying – as I thought I had made clear.

    As for the effect of government interventionist regulations….

    The effect is (of course) to help (not to hurt) cartels and undermine real competition (it is no accident that one of the first victims of the "antitrust" statutes was J.J. Hill – who was challenging the railroad and other cartels, "anti trust law" is one long list of cases where enterprises have been attacked for such "crimes" as charging lower prices and offering better service – thus annoying politically connected competitors). It is also to increase (not reduce) long term prices, and to reduce (not increase) the quality of goods and services over what would have otherwise been the case over time.

    For example, one of the best ways of promoting corporations is to have high top income tax rates and high death tax rates – these undermine owner mangager enterprises in competition with corporations. Of course the existing mega rich can avoid high income tax rates (for example by putting their money in government bonds), but people trying to get rich (trying to create new enterprises to challenge existing ones) find it much harder to avoid high income tax rates.

    And one of the best ways of promoting (not reducing) inequality is to have a policy of inflation (of increasing the money supply – whether it leads to higher prices in the shops or not) as such new money (whether it be in the form of computer entries, notes or coins) tends (natually) to concentrate in the hands of certain people – see Hayek's essay on the subject (if my memory serves the title is "Three Elucidations of the Ricardo Effect" – but it is about 20 years since I read it) in his "New Studies" (1978).

    Human nature is indeed flawed – which is one of the reasons why government should NOT have the powers you want it to have (government people are human also).

    However, even if human beings were angels (at least the human beings with the tanks and the prisons were angels) they should still NOT have these powers.

    Good intentions do not alter economic law – as is made clear in Ludwig Von Mises' "Human Action" (and many other works).

    As for the existance of economic law (for example contrary to the German "Historical School" that held, amongst many other collectivist things, that money has value simply because the State says it has value) see Carl Menger and his side of the "War of Method".

    Or the other forms of war between the collecivist and anti collectivist sides in many nations and in many periods of history.

    George Selgin (good man that he is) still seems to hold the view that people like Lord S. (or you Rick) can be won over by arguments and evidence.

    Experience has led me to take a radically different view from George Selgin (and I do not mean his support of a little credit money expansion, on the margin in certain circumstances, and my total opposition to it), I mean in relation to debate.

    I hold that when the objectives of two groups of people (not just their policy suggestions, but also their AIMS) are radially opposed – then discussion is essential a ritual.

    A form of shadow boxing – before more serious events occur.

    1. Paul:

      First, I think Salmon P. Chase did the right thing in the 1870 Hepburn case by denouncing his Civil War support for irredeemable greenbacks, but as you know, this position was reversed by 2 or 3 cases that immediately followed in 1871-1875.

      Around the time Chase denounced his own wartime money manipulation, the temporary income tax ended also, and I believe he supported this, though I have no proof. (By the way, Chase didn’t even need Knapp’s 1924 “State Theory of Money” to know that fiat paper money needs a regulatory income tax).

      But I also generally respect Chase for recognizing that, when an irredeemable currency is issued under the Borrowing Clause, it can only be done temporarily, and only for extraordinary circumstances (like states seceding from the Union), while the mints retool (a huge feat) to account for the change in metal type or “weights and measures” that is surely to follow the war (which wars, again, are supposed to be extraordinary events, not perpetual events we see today, along with our permanently irredeemable currency, with a permanent regulatory income tax to support the perpetually-unconstitutional borrowing.

      In short, under the Legal Tender Cases (1871-1875), any paper money “borrowing” under the Borrowing Clause which does not constitute an actual borrowing of current coin is an unconstitutional borrowing. This is what Chase understood that the Federal Reserve doesn’t.

      Second, the “subsidy” (maybe “insurance” is a better word) people are receiving by using “elastic” Federal Reserve notes is reflected in the very loose ways people can use this currency without bearing risk of loss, whether it’s expecting overdraft protection at the bank, forgery protection for check writing, re-imbursement for lost or stolen credit cards, etc. This is not to say that the use of Treasury-Direct coin should be totally unprotected by Congress, but banks and the Treasury Department are unlikely to insure for reckless or careless use of coin-only accounts.

      Third, I don’t know anyone who supports my position. Even Judge Nap and Ron Paul want to abolish the 16th Amendment, which I think would be a huge mistake. In fact, I’m not into abolishing anything, including the Federal Reserve. I’m saying let a new system emerge from people claiming Treasury-Direct coin at any U.S. bank (which they have a right to do anyway under Marshall's McCulloch case), but just allow them to do without being blocked or harassed by banks and the IRS. Whether this fixes existing banks, or leads to a new free banking system, I really don’t care. All I really want is to prevent a Lockean-based property right in human labor from perpetually being a victim of this battle over money. If you want to call my desire to stay within my rights by following Supreme Court precedent “false flagism,” well forgive me for annoying you. Your endless complaining about historical figures with no viable or practical solution to our problem is no less annoying to me.

      But, if you really want me to label myself, let me know how much “Lockean Libertarian” or “Constitutional Tax Law Libertarian” annoy you.

  30. Well you havwe managed to surprise me Rick. So I have to admit that.

    I did not expect you to support Chase on the first Greenback case.

    Any more than I expected you to support the ending of the Civil War income tax – of couse the Confederate one was both higher and more "Progressive" than the Union one (but then the Confederacy was more statist generally – something that certain Rothbardians should be reminded of more often than they are).

    On the present 16th Amendment income tax…..

    The real problem is government SPENDING. And you are right – just getting rid of the 16th Amendment does not even touch that problem.

    Most of what the Federal government spends money (from farm subsidies to Medicare) it was not given any power to spend money on.

    The "common defence and general welfare" being the purpose of the following specific powers granted by Article One, Section Eight to the Congress (there being no catch all "general welfare spending power" allowing the Congress to spend money on anything it feels like spending money on).

    Whilst the vast government spending is untouched then the problem of financing it remains.

    If the income tax was abolished what would finance the government spending?

    Or would the United States just go bankrupt? Something that may (de facto – although not legally) happen anyway of course).

    A national sales tax would have to be rather high to replace the income tax. Not as high as the British sales tax (VAT) which is 20% (along with a top rate of income tax of 50% – by the way the British government deficit is just as big as a percentage of GDP as the American one, so super high taxes solve nothing), but (unlike most other countries) on top of State and local income taxes.

    For example Chicago/Cook County has some of the highest sales taxes in the country (so much for the Hyde Park types and their talk of caring about the poor) adding a big Federal sales tax on top of the local and State ones would price a lot of goods out of the reach of the poor(and I mean the working poor).

    My fear is also that a national sales tax will be imposed ON TOP OF the income tax (possibly in return for empty promises about reducing the income tax).

    Perhaps a simple flat rate income tax (not the thousands of pages of IRS code) is the way to go – many nations in Eastern Europe have already done this (finding that people do not spend fortunes to avoid paying income tax, if the income tax is at a reasonable level).

    However, that would still leave the real problem untouched.

    The problem of out of control Federal government spending.

    Some spending can be reduced simply by having political guts to admit things.

    For example, the Afghan war is lost – no one will admit it, but it is (so bring the troops home).

    But most Federal government spending involves real sacrifice.

    For example, farmers have been told (for decades) that the government will subsidise them – they have got themselves into debt in the expectation of these subsidies. If they were suddenly cut off…..

    Ditto such things as a Medicare and Social Security.

    What does one do?

    Go to an 80 year old and say "well you should have joined a mutual aid society when you were 21 – sorry but the programs you depend on are unconstitutional and this is your last payment from them".

    Perhaps the best one can hope for is to freeze (not even cut) entitlement spending – and hand the money over to the States as a block grant.

    Yes, I know, this is really "we do not know what to do – you figure it out" passing the buck.

    Of course there is also that third of the United States the Federal government claims to own…..

    That might help – soften the blow to the old and sick who have been told (all their lives) they do not need to prepare for anything, as the government will pay for them.

    "Your State is, most likely, not going to be able to give you as much money as we did – but here is a payment from the sale of Federal public lands, that may make things less hard for you."

    And the young?

    Young people who think the govenment is going to be able to pay for their old age and medical problems (even before they are old) are nuts – it will just be impossible in the future (the numbers do not work).

    However, the public schools (and the universities) are teaching the young these delusions.

    It is unfortunate.

  31. The above should have read "on top of State and local Sales Taxes".

    A big problem with a national sales tax that was high enough to replace the income tax. Although I am certainly not ruling it out (but it has a downside that must be faced).

    And, of course, a national sales tax ON TOP OF the Federal income tax would be a terrible idea. "Cuts and simplification" of the Federal income tax would either not happen, or not last.

    Much like the "spending cuts" in return for tax increases – spending cuts that never happen.

    A couple of tax INCREASES that I sometimes think about (not saying I am in favour of them, but….).

    Ending the favourable tax treatment of local, State and Federal government bonds.

    These are NOT "investment" – they are just borrowing money to finance goverment spending (and the corrupt government building programs are not "investment" either).

    Such bonds are a favourate bolthole of the rich – but pension funds and other such use them also (which means the money does not get used for real investments).

    By the way the muni bond market is a about to blow up – avoid it.

    Also ending the practice of deducting State and local income from income liable to the Federal income tax.

    Again if rich "liberals" in New York and California want to support high government spending – that is up to them.

    But they should not be able to protect their income by saying "that money went in State and local income tax".

    Sorry – but you support such taxes, so we are just going to tax (Federally tax) your gross income – without deducting the State and local income tax from it.

    I suspect there might be a few political conversions (even in New York City and Hollywood Califorina) if this was done.

  32. It's interesting how Austrian Economists are quick to point out that Bagehot's recommendations were a best-case-scenario under the circumstances but that he himself did not believe in Central Banking and had argued against it while completely failing to extend the same courtesy when accusing Milton Friedman of supporting a Central Bank and condescendingly dismissing him as a "Statist".

    Gee, I wounder why that is…

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