We are all suspects now.

This post originally appeared on cobdencentre.org.

Cobden Centre Chairman, Toby Baxendale, and Corporate Affairs Director, Steve Baker, are this week in Salamanca, Spain for the Ludwig von Mises Institute’s Supporters Summit 2009:

One of the great discoveries of the 20th century concerns the origins of economic science in the late middle ages in Spain and Italy. Long before Adam Smith wrote, many scholastics from the 14th through the 17th centuries were writing systematic economic theory.

We heard this morning how the Salamancan friars were liberals, believers in freedom, who advocated:

• Free markets and free enterprise
• Low taxes and a small state
• Free movement of people and products
• The rule of law and the equality of all before the law
• Individual liberty
• Separation of the powers of the state
• Democracy within limits set to protect minorities and individual rights
• Justice: the defence of life, liberty and property

The Salamancans promoted subjective value and argued that an abundance of money makes it worthless. As early as 1544, they argued from legal principle for 100% reserves on demand deposits with depositors paying for safekeeping services.

In other lectures, we learned:

• How recent Nobel Laureate Oliver E. Williamson has opened the way to a capital theory in neoclassical economics which could converge on Austrian-School theory through his “asset specificity”.
• How timely is Adam Smith’s Wealth of Nations, a systematic treatise which, despite its limitations, could still refute today’s flawed policies.
• Some lessons from a career in modern banking: how bank failures occur and what history has to teach us.
• What Federal Reserve Chairman Ben Bernanke could learn from Juan de Mariana’s 17th century treatise De Monetae Mutatione: stop inflating the money supply.

Toby speaks tomorrow, presenting “An Entrepreneur’s Tale: The Meltdown of 2008”.

On a grey and showery day, skydivers at Weston on the Green commemorated D-day, not by skydiving, but by jumping static line at what for us is a low level: 3500ft. It makes you think.

D-day Commemoration – Dornier G92, originally uploaded by stevenjbaker.

Sport parachuting is relatively low risk, believe it or not. We go high with modern equipment: it works reliably and there is time to take the reserve if the main fails. No one is, or will be, shooting at you. But to be on a static line, lower, is a little unnerving.
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Reflecting on aspects of the debate about capitalism, I picked this out of Liberalism, the Classical Tradition:

To advocate private ownership of the means of production is by no means to maintain that the capitalist social system, based on private property, is perfect. There is no such thing as earthly perfection. Even in the capitalist system something or other, many things, or even everything may not be exactly to the liking of this or that individual. But it is the only possible social system. One may undertake to modify one or another of its features as long as in doing so one does not affect the essence and foundation of the whole social order, viz., private property. But by and large we must reconcile ourselves to this system because there simply cannot be any other.

In Nature too, much may exist that we do not like. But we cannot change the essential character of natural events. If, for example, someone thinks — and there are some who have maintained as much — that the way in which man ingests his food, digests it, and incorporates it into his body is disgusting, one cannot argue the point with him. One must say to him: There is only this way or starvation. There is no third way. The same is true of property: either-or — either private ownership of the means of production, or hunger and misery for everyone.

By this point, Mises has considered — bullets my own — “five different conceivable systems of organizing the cooperation of individuals in a society based on the division of labor [sic]:

• The system of private ownership of the means of production, which in its developed form, we call capitalism;
• The system of private ownership of the means of production with periodic confiscation of all wealth and its subsequent redistribution;
• The system of syndicalism;
• The system of public ownership of the means of production, which is known as socialism or communism;
• and, finally, the system of interventionism.”

Also, the point is explored that socialism can be brought about by retaining private ownership of property but so tightly controlling its use through rules and regulations that the fact of private ownership is of no consequence.

I won’t quote the book all day: I do recommend it.

Via A Golden Way Out of the Monetary Fiasco – Thorsten Polleit – Mises Institute, essential reading for anyone interested in the financial crisis, its causes and a route out (despite its use of the G-word!):

The government-controlled monetary regime — the most destructive force set into motion by state interventionism — has finally been blown to pieces. This is the message conveyed by the monetary fiasco in global capital markets, typically referred to as the international credit crisis.

However, politicians and central bankers the world over are taking great efforts to hide this truth and its full consequences from the public’s attention by taking recourse to even more far-reaching market interventionism.

Central banks provide commercial banks with any amount of base money needed to prevent them from defaulting on their payment obligations. The Federal Reserve, for instance, keeps expanding the monetary base at the highest rate seen since 1919 (see graph below).

 

The article succinctly covers:

• The situation: monetization of paper assets, interest rates, yield spreads, public debt and the risk of government defaults
• The likely future pattern of state intervention
• The causes of the present “fiasco”
• Inflation and deflation
• Returning to free-market money

Highly recommended and it’s perhaps no surprise that Mises’ “The Theory of Money and Credit” is currently sold out at Amazon UK.

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Is it time for ordinary people to ask how the world’s system of money works?

Consider the words of Wright Patman, a US democratic congressman and Chairman of the Committee on Banking and Currency, 1963-1975:

I have never yet had anyone who could, through the use of logic and reason, justify the Federal Government borrowing the use of its own money….I believe the time will come when people will demand that this be changed. I believe the time will come in this country when they will actually blame you and me and everyone else connected with this Congress for sitting idly by and permitting such an idiotic system to continue. I make that statement after years of study.

I have talked to the Secretary of the Treasury and members of the Federal Reserve Board and other people who are supposed to know about the money system of our country. They know this can be done easily and conveniently and will save money…. We have what is known as the Federal Reserve Bank System. That system is not owned by the Government. Many people think that it is because it says “Federal Reserve.” It belongs to private banks, private corporations. So we have farmed out to the Federal Reserve Banking System that which is owned exclusively, wholly, 100 percent to the private banks – we have farmed out to them the privilege of issuing the Government’s money!

But that’s the USA. Consider these words, usually attributed to Josiah Stamp, Director of the Bank of England 1928-1941 and possibly England’s second-richest man at the time:

The modern banking system manufactures money out of nothing. The process is perhaps the most astounding piece of sleight of hand that was ever invented. Banking was conceived in inequity and born in sin . . . . Bankers own the earth. Take it away from them but leave them the power to create money, and, with a flick of a pen, they will create enough money to buy it back again. . . . Take this great power away from them and all great fortunes like mine will disappear, for then this would be a better and happier world to live in. . . . But, if you want to continue to be the slaves of bankers and pay the cost of your own slavery, then let bankers continue to create money and control credit.

Some questions:

1. Why do governments choose to borrow money from private banks at interest when they could create all the money they need themselves?
2. What would happen if governments spent all the money they need into existence?
3. Why create money as debt at all?
4. Why not create money that circulates permanently instead of money that must be perpetually borrowed at interest for the system to function?
5. How can a money system dependent on perpetually accelerating growth be used to build a sustainable economy?

This complex subject was popular a hundred years ago: it may become popular again.

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