A Cluster of Errors
As submitted to the Osseo-Maple Grove Press for publication in the June 3rd, 2009 edition, but rejected on account of length:
Driving an automobile is an inherently dangerous activity. Any number of things can go wrong: mechanical failure, distractions, adverse weather conditions, dangerous road conditions, and the actions of other drivers can all contribute to causing a devastating accident.
Still every day, millions of people take their chances and travel by automobile. Despite most people taking precautions and following all the rules of the road, there is still a more or less constant occurrence of accidents on a daily basis.
And so it is with business. There are many risks involved in business–whether you are an investor, a CEO, a small business owner, a manager, a salaried professional, a wage-earner, or even a consumer–investments don’t pan out, demand dries up, productivity slips, costs rise, competitors outperform, jobs are cut, prices rise, and products fail.
But every day, we all still go out and conduct our business. We construct our houses, build our cars, write our software, manufacture our products, serve our customers, bus our tables, and buy our groceries. As part of a normal, functioning economy–even in the boom years–some endeavors are bound to fail.
Suppose all of a sudden, for no apparent reason, we started seeing an up-tick in the number of car accidents–just a little at first, but then it continues to increase until it gets to the point where we have doubled and then tripled the average number of accidents with no end in sight. Certainly this would be cause for a serious, in-depth, honest investigation.
Had everyone forgotten how to drive? Had a few reckless drivers caused all the new accidents? Not likely. Given these trends, most people would drive less and take extra precautions when they do take to the roads. And even if people had forgotten how to drive or some drivers had suddenly become more reckless, what caused them to forget? What caused them to become reckless?
This closely mirrors what we have been seeing with the economy. Suddenly, for no immediately-obvious reason, we are seeing foreclosures, bankruptcies, lay-offs, pay-cuts, and companies going out of business. Have we all forgotten how to construct houses, build cars, write software, and all the rest? Not likely.
What could explain the “cluster of errors”, as British economist Lionel Robbins called it? In our road scenario, we would not be surprised to find out that traffic signals had been malfunctioning and were switching from green to amber to red too slowly and from red to green too quickly.
Like traffic lights on the roads, there are many signals in the economy, but the biggest and most important signal is the price of money–also known as interest rates. Most people do not realize in their day-to-day business that interest rates are a signal, nor do they even need to know. They simply know whether they can afford to take out a loan to start a business, build a house, or buy a car. They also know whether the rate of return on savings makes it sensible for them to save money in the bank.
In a functioning free-market economy, the interest rates are set naturally, like any other price, through the constant influences of supply and demand. If there is too much savings and not enough borrowing, the interest rates will drop, enticing entrepreneurs to start new projects with all the saved money. If there is too much borrowing and not enough savings, the interest rates will rise, enticing people to save rather than borrow, which will replenish the pool of savings for future borrowing. The rate may still fluctuate from time to time (as the stop lights may be timed differently for rush hour), but there is always a balance (as the properly-functioning stop light never lets cross-traffic through at the same time).
But we do not operate under a free-market economy. No, we, through unconstitutional legal tender laws, are forced to conduct our business using Federal Reserve Notes issued by the unconstitutional Federal Reserve System. The Federal Reserve System artificially sets interest rates. By arrogantly attempting to do what only the complexities of a truly free market can accomplish, the activities of the Federal Reserve System distort the signals in the market, causing untold destruction.
How does this destruction happen? Consider the case, as economist Peter Schiff explains, of a restaurant owner in a small rural town. Suppose one day the circus comes to town. Suddenly he sees a dramatic increase in sales. Thinking his business is booming, he builds an addition on his restaurant, hires new staff, and expands his menu. When the circus leaves town and all of the new business is gone for good, he has to face the harsh reality that the increase in sales was artificial and that he is now forced to lay off the new staff and return to a sustainable business model. The time, energy, and resources he used in the expansion have been destroyed forever, when they could have been used for truly productive ends.
Or consider the case, as economist Ludwig von Mises explained, of a bricklayer who has a limited stock of bricks. He designs a house that requires all his bricks and then sets out to build it. Unfortunately, he has been mislead and does not realize that he actually has twenty percent fewer bricks than he thought. He will never be able to complete the house as designed. He must build a smaller house that can be completed with the real amount of bricks. But the longer he proceeds to build his original design, the more bricks he will have to destroy and the fewer he will have left over for building a house that can actually be completed.
Of course these are contrived examples, but they illustrate the economic realities we are facing. We live in a world of finite time, energy, and resources. The currency a society uses needs to accurately represent the presently-available amounts of time, energy, and resources. We cannot change the laws of economics any more than we can change the law of gravity. To attempt to do so, as the Federal Reserve has been doing, inevitably leads to the massive amounts of destruction that we have been witnessing and that we will continue to endure until we abolish the Fed and return to sound money.
So, when the next house on your street goes into foreclosure, and when your next friend loses their job, and when your grocery store goes out of business–you will certainly be able to find plenty of proximate causes for each, but remember what the ultimate cause is and who the ultimate culprit is. You’re being ripped off. We’ve all been getting ripped off for decades.
The founders themselves understood the dangers of unsound money, as Thomas Jefferson said: “I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a monied aristocracy that has set the government at defiance. The issuing power (of money) should be taken away from the banks and restored to the people to whom it properly belongs.”
And understanding full-well the injustices of our current system, Henry Ford said, “It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”
June 10th, 2009 at 12:30 pm
For argument’s sake, don’t you think that without regulation we would actually see more economic disparity between the rich and the poor (and I’m not advocating a socialist redistribution of wealth) that would continue to grow over time? This might also result in greater economic disparity and resulting forms of discrimination.
More so than that, an argument for SOME regulation (in the form of the Fed, or some other variation) is that the overall economy would suffer, as it did in the days before Fed, from greater instability and lower overall potential due to a higher level of failure (essentially trial and error) that would be the natural regulation in a totally “free market” (unregulated). Over long periods of time, this may be the ideal ideal but most of us don’t enough time in our lifetime to try and fail a few times or to work for someone who’s going to try and fail with my job on the line.
You talk about it being unconstitutional. What passage in the constitution would indicate that this is unconstitutional? I don’t have the exact record of this legislation but the collective gov’t has the authority to pass laws fo the general welfare by passing it in the house/senate, signing into law by the executive, or being ruled unconstitutional by the court (the three branches, as laid out in the constitution). Even if it was unconstitutional in the first place, we’ve had almost 100 years to correct it.
I can appreciate that people like Jefferson and Madison opposed it. They didn’t put that in the constitution though.
June 17th, 2009 at 1:08 pm
“For argument’s sake, don’t you think that without regulation we would actually see more economic disparity between the rich and the poor (and I’m not advocating a socialist redistribution of wealth) that would continue to grow over time? This might also result in greater economic disparity and resulting forms of discrimination.”
NO! This is utter fallacy. This is the “conventional wisdom” they have been propagating for decades. It is simply not true. In a free market with an unwavering respect for property rights, the disparity of the rich and the poor tends to shrink as the producers are constantly competing to best serve the needs of the mass of customers. In contrast, as we have moved further and further away from true capitalism in the past few decades, we have seen the poor get poorer and the rich get richer. Plus, on the other hand, the disparity between the rich and the poor is really meaningless. If you live in a free society in which even the poorest people can feed, clothe, and shelter themselves, work in agreeable conditions for reasonable pay, can afford some leisure time, and can afford adequate health care–while the majority of humanity for the majority of history has, comparatively, lived in abject squalor–who cares if the free society also has people of great wealth who came upon their wealth by engaging in peaceful, voluntary exchange?
Secondly, the free market works to eliminate discrimination, not encourage or preserve it. If the majority of employers tended to discriminate against a certain class of people, then more shrewd employers would simply capitalize on this fact and hire only from this class of people, profit from the margin, and defeat his competitors. There simply is not room in a free market for arbitrary discrimination. The same holds true for producers–those that want to discriminate will lose valuable customers to those that serve all customers equally.
Also, who regulates the regulators? Government has proven time and again to be unworthy stewards of public trust.
“More so than that, an argument for SOME regulation (in the form of the Fed, or some other variation) is that the overall economy would suffer, as it did in the days before Fed, from greater instability and lower overall potential due to a higher level of failure (essentially trial and error) that would be the natural regulation in a totally “free market” (unregulated). Over long periods of time, this may be the ideal ideal but most of us don’t enough time in our lifetime to try and fail a few times or to work for someone who’s going to try and fail with my job on the line.”
Again, with all due respect, this is utter nonsense that does not hold up to theoretical scrutiny or the historical record. The artificial money creation and market interventions of the Fed create the malinvestment that causes the booms which lead to the busts. The “totally unregulated free market” always tends towards stability as the market participants are fully aware that they will have to bear the costs of failure–though failures themselves are indeed a normal part of a stable, functioning market. Also, the market signals are aligned with reality so that the forecasts of entrepreneurs and investors are more accurate, instead of being mislead by the fraudulent indicators created by the Fed’s interventions.
“You talk about it being unconstitutional. What passage in the constitution would indicate that this is unconstitutional? I don’t have the exact record of this legislation but the collective gov’t has the authority to pass laws fo the general welfare by passing it in the house/senate, signing into law by the executive, or being ruled unconstitutional by the court (the three branches, as laid out in the constitution). Even if it was unconstitutional in the first place, we’ve had almost 100 years to correct it.”
Article One, Section 8, Clause 5 of the United States Constitution: “[Congress shall have the power] To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures;”
Article One, Section 10, Clause 1 of the United States Constitution: “No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.”
“Congress shall have the power to COIN money.” Federal Reserve Notes are NOTES. They are NOT money.
“No State shall coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts” Nothing but GOLD and SILVER COIN.
A note is a certificate. If you have a “gift certificate,” you don’t have the /gift/, you have a certificate to /redeem/ the gift. If you give me an apple, and I give you an IOU for one ounce of silver, the transaction is not yet complete–you’re still stuck with nothing but an IOU. If you pay for something with a note, the transaction is not complete–you have not gotten any /money/ yet.
Legal tender laws that force people to accept Federal Reserve Notes for payment are unconstitutional and unlawful. They are “Law[s] impairing the Obligation of Contracts.” They presume to put limits on my unlimited right to contract by making it “illegal” for me and other voluntary parties to conduct our business using real money–gold and silver.
“I can appreciate that people like Jefferson and Madison opposed it. They didn’t put that in the constitution though.”
Clearly, they DID put it in the constitution. Not only that, but if you read the history, THE REASON they called the Philadelphia Convention was to improve the Articles of Confederation because the states were having problems with runaway inflation because they were all printing their own fiat, paper notes. While we can argue whether or not it was a good idea to discard the Articles of Confederation and write the Constitution, THE PRIMARY REASON for coming together to form a “MORE perfect union” was to make sure that only gold and silver could be used as money.