Carlos Lara on the Economic Crisis, Part 3 of 9: Fiat Money
(Read Part 1 and Part 2 of Carlos Lara on the Economic Crisis.)
We learned in part 1 that Keynesianism, statist encroachment, and fractional reserve/central banking are grave dangers yet underlying pillars of the world's economic, social, and political systems. As we saw in part 2, the solution, according to Mr. Lara, is personal economic education. We learned about scarcity, the importance of private property, and the fallenness of human nature.
Next, Mr. Lara provided some important insights regarding our economy's fiat monetary system:
Fiat means "a declaration by a supreme commander," as in, "Let there be light"
Paper bills are legal tender and the only money in our economy, according to the fiat dictate of the state
Our nation had fiat money twice before the present system: 1) during the War for Independence we had the Continental (from which derives the phrase, "not worth a Continental," as this form of money was rapidly inflated and depreciated out of existence), and 2) during Lincoln's reign, we had the Greenback; in both these instances, gold circulated alongside fiat paper money, and gold tended to be driven out of circulation due to Gresham's law (bad money drives good money out of circulation when the state artificially imposes a price control to coercively equate the values of specie and paper money)
Mr. Lara went on to talk about FDR's confiscation of gold during the Great Depression because people tended to hoard the good money (gold specie) and spend the bad money (paper). Now, we have come to the point when our so-called "money" says "Federal Reserve Note," as the Fed controls the money supply. Mr. Lara pointed out that there is nothing federal about it, and it has no reserves. Yet, we now have "legal tender" laws, as indicated on the notes, which force us to take the notes as money.
The old Silver Certificates, one of which Mr. Lara displayed, did not say "Federal Reserve Note." They were simply payable in silver to the bearer on demand. After World War II, the U.S. created a worldwide banking and currency system, backing the dollar with gold and convincing foreign banks to simply back their currencies with dollars that were redeemable in gold. This system was established in 1945 by the Bretton Woods Agreement.
In 1970, the dollar lost its value and foreign countries got worried as the U.S. was inflating the currency to meet statist welfare and warfare obligations. Foreign countries, especially France, redeemed their dollars for gold, and gold flowed steadily out of the U.S. as we lost our reserves. Nixon closed the "gold window," where foreign banks could redeem U.S. notes for gold specie, in 1971 and said "we are all Keynesians now," which meant we would accept floating paper against paper -- with no gold backing -- in currency markets. Mr. Lara went on to explain exactly what inflation is, which we will discuss in the next installment.
Sound Christian theology asserts that God alone is sovereign. He transcends the limits of time, space, and matter. God is not constrained by the boundaries and laws He has imposed upon creation, such as the inability of creatures to make something out of nothing. Ex nihilo, nihil fit -- out of nothing, nothing comes -- a law that governs mankind, does not apply to God and God alone.
Not content with this arrangement, the state asserts fiat -- the power to create ex nihilo, out of nothing. When applied to monetary schemes, money created out of nothing is eventually worth nothing, as Lew Rockwell points out.
It seems that the day of reckoning is now here. Fiat money has wrought havoc, and now we are reaping an economic whirlwind. Stay tuned for the next installment, in which we will delve more deeply into the nature of inflation. And in future installments, we will discuss solutions.
As we saw in part 1, personal economic education is the starting point for a solution to the economic crisis. We cannot rely on political and financial elites, for they have caused the problems, and the course they are charting for us will prolong the crisis.
Getting down to the nitty-gritty of economics, Mr. Lara said that economics deals with making a living and setting aside resources -- in short, with the process of economizing. He presented three assertions:
We live in a world of scarcity, not abundance, which has been difficult for Americans to grasp; even though economics is subordinate to theology, economics deals with the earthly realities -- such as scarcity -- of what we have, not with spiritual ideas about where we came from
Private property is foundational to freedom and markets; we are losing freedom as private property and private property rights are taken away
Human nature has an evil side, as even Aristotle observed; men tend to hate the burdens of working and would rather steal; we are fallen and limited, as our Founders recognized when they set up a limited government to protect ourselves from ourselves
First of all, what is economics? The word derives from the Greek words oiko, meaning household, and nomos, meaning law or rule. Thus, an economist, in the original sense of the word, is someone who stewards the resources of a household. Although the precise word does not appear in these verses, the concept reminds us of Paul’s exhortations to wives in Titus 2:5 and I Timothy 5:14 to be keepers at home and to guide the house. It would appear that a good wife is a good economist, or steward of the household’s resources.
A similar word, oikonomia, is translated in the New Testament as “stewardship” or “dispensation.” We understand from Christ’s parable of the talents in Matthew 25 that God has entrusted to us a dispensation of talents and resources; we are not ultimately owners of anything, but rather stewards who must use these talents and resources for His glory and the greatest profit for advancing His Kingdom in time and history.
My first college economics textbook defined the discipline of economics as the “science of scarcity.” Without scarcity, economics would not exist. So, what is scarcity? The textbook said it is the condition of unlimited human wants and limited available resources to satisfy those wants. In more familiar economic terms, Dr. Gary North says it is the state in which demand exceeds supply at zero price. Thus, economic reality leads to a need for some sort of rationing mechanism such as a money price. The foundation of economics is the reality that humans make choices and act by scarce means to satisfy the most pressing of their unlimited needs and wants.
We must battle the errors and crises of our day, plowing forward as stewards and dominion-bearers, by learning, embracing, and practicing sound economics. As Mr. Lara said, the solutions begin with us as individuals. I conclude with an exhortation I gave in my essay on economics:
I encourage everyone to pursue the study of economics as autodidacts, self-taught learners. Ludwig von Mises, the scholar I mentioned earlier, stated, “Economics deals with society's fundamental problems; it concerns everyone and belongs to all. It is the main and proper study of every citizen.” In his important book, The Philosophy of the Christian Curriculum, R.J. Rushdoony says, “Economics deserves a place in the high school curriculum, not as a branch of civics or civil government, but as an independent law sphere.”
Trade, Specialization, and Social Development vs. Self-Sufficiency, Living off the Land, and Simple Lifestyles
I have recently had discussions about the "self-sufficient lifestyle," "living off the land," "living off the grid," "living simply," etc. Although I certainly respect and appreciate folks who are able and willing to live in a rigorous and uncompromisingly agrarian manner, I have a nuanced perspective on the course of life that I find appealing, as I will attempt to explain below.
Cooperation is the economic foundation for social progress. Men and families are inherently inefficient when they keep to themselves and attempt to provide all of life's basic necessities on their own -- access to God's Word, food, water, clothing, shelter, warmth, healthcare and medicine, education, sanitation and cleaning facilities, transportation; not to mention the blessings and pleasures of music, arts, and all the other "non-necessities" that we enjoy. Under a strict "self-sufficient" lifestyle, we are unable to exploit the benefits of comparative advantage that I explain in my economics essay.
Men and families can cooperate by trading. They can divide their labors, specializing in the areas in which each has a comparative advantage. Trading, division of labor, and specialization -- all of which make economic development and social progress possible -- are facilitated by money. The best economists define money simply as the most highly valued commodity in an economy. Thus, money serves as a means for roundabout trade, as when, for example, a farmer trades some wheat for gold, which he intends to later trade for clothing. Rather than directly trading the wheat for clothing, which would require finding someone with clothing who would accept his wheat (economists call this the "double coincidence of wants" problem), he could easily trade and calculate his revenue, expenses, and profits, from business and trading, in one common denominator of money.
I am in favor of sound money, which facilitates efficient and mutually beneficial exchanges in a free society. Trading allows us to move beyond self-sufficiency, which has never been a realistic option for large populations of people. Scripture speaks repeatedly of the blessings of fruitfulness and multiplication and commands us to have dominion over the earth, which are facilitated when men and families cooperate by dividing and conquering. This is why I believe in trade rather than strict self-sufficiency. I believe that specializing to some extent will enable me to better steward my gifts rather than attempting a "jack of all trades, master of none" lifestyle.
A caveat: I believe in having "multiple irons in the fire" -- a recent "lesson learned," borne out through practical experience. Thus, I am opposed to "hyper-specialization," even though I believe in a wise level of specialization, division of labor, trading, and money.
Another caveat: What happens when money itself breaks down, as when the state inflates the fiat currency and "bails out" the fraudulent fractional reserve banks that it has propped up over the years? Without sound money, roundabout trade becomes nearly impossible, and the complex social order built around division of labor, specialization, and mutually beneficial exchange, collapses. Thus, the self-sufficient lifestyle appears to be a winner in this scenario.
In a world of freedom under God's Law, with honest money and morally upright people, self-sufficiency would, in my opinion, be undesirable. In a world under man's folly, with fiat money, fractional reserve banking, widespread hyper-specialization, and a complex, unsustainable social (dis)order, some level of self-sufficiency is desirable.
Actually, in either scenario of the above paragraph, godly communities are desirable. Personal relationships with neighbors, with whom one can trade and cooperate in good times or in bad times, are desirable no matter what. Large plots of country land on which to build epistemologically self-conscious homes to raise large families and grow nutritious, delicious, economical, and reliably accessible food supplies, are desirable no matter what. And the list continues.
In short, I am very sympathetic to many elements of the worldview of self-sufficiency and simple living. However, I disagree with the approach that eliminates trade; specialization among craftsmen, laborers, professionals, and entrepreneurs; division of labor for various needs and wants in society; and the monetary unit that makes all of this possible. Rather, I propose moderate specialization, as when a man acts entrepreneurially by seeking many opportunities to wisely steward his resources and create value in society.
Are trade and self-sufficiency mutually exclusive? Strictly speaking, yes -- if one trades, he is no longer functioning self-sufficiently. The self-sufficient person would desire to minimize his output of anything he does not need for himself because he would not intend to trade his surplus for other goods and services. At some level, then, even the proponents of so-called "self-sufficient" lifestyles are, almost without exception, inconsistent. There is relative "self-sufficiency" and relative "hyper-specialization," and our culture has certainly swung to the latter extreme without a doubt. But almost no one is completely "self-sufficient" or "hyper-specialized."
We should strive to create godly communities and personal relationships; develop large plots of productive land; steward our abilities, resources, talents, and other gifts God entrusts to us as we cooperate with others in our communities and larger economy; and strive for social development and progress through sound money, moderate specialization, division of labor, and mutually beneficial exchange. In my view, this is a biblical, balanced, and practical outlook on applied economics.
Carlos Lara on the Economic Crisis, Part 1 of 9: Three Pillars of Modern Social, Economic, and Political Systems
Carlos Lara is a management consultant in Nashville, and, as I mentioned in my previous post, I recently had the opportunity to hear his lecture on economics. Although he is not an academic economist, Mr. Lara has extensively studied Austrian economics under the mentoring of Austrian economist Professor Paul Cleveland of Birmingham-Southern College. In the next few weeks, I will provide insights and expand upon Mr. Lara's lecture in light of our economic crisis.
Mr. Lara introduced three areas of concern that he says are pillars of modern social, economic, and political systems:
The destructiveness of Keynesian economics
The encroachment of the state on the economy and society
The workings of the central bank and fractional reserve banking systems
Throughout his lecture, Mr. Lara expounded on these three points. In his introduction, Mr. Lara encouraged the audience to look up a bio of John Maynard Keynes, the most famous economist of the 20th Century. I took him up on this and found some great resources by Murray Rothbard, Ludwig von Mises, and Hans-Hermann Hoppe.
John Maynard Keynes, the man—his character, his writings, and his actions throughout life—was composed of three guiding and interacting elements. The first was his overweening egotism, which assured him that he could handle all intellectual problems quickly and accurately and led him to scorn any general principles that might curb his unbridled ego. The second was his strong sense that he was born into, and destined to be a leader of, Great Britain’s ruling elite. Both of these traits led Keynes to deal with people as well as nations from a self-perceived position of power and dominance. The third element was his deep hatred and contempt for the values and virtues of the bourgeoisie, for conventional morality, for savings and thrift, and for the basic institutions of family life.
. . .
Keynes eliminated economic theory’s ancient role as spoilsport for inflationist and statist schemes, leading a new generation of economists on to academic power and to political pelf and privilege.
. . .
Above all, he was the extraordinarily pernicious and malignant figure that we have examined in this chapter: a charming but power-driven statist Machiavelli, who embodied some of the most malevolent trends and institutions of the twentieth century.
The unprecedented success of Keynesianism is due to the fact that it provides an apparent justification for the "deficit spending" policies of contemporary governments. It is the pseudo-philosophy of those who can think of nothing else than to dissipate the capital accumulated by previous generations.
Yet no effusions of authors however brilliant and sophisticated can alter the perennial economic laws. They are and work and take care of themselves. Notwithstanding all the passionate fulminations of the spokesmen of governments, the inevitable consequences of inflationism and expansionism as depicted by the "orthodox" economists are coming to pass. And then, very late indeed, even simple people will discover that Keynes did not teach us how to perform the "miracle ... of turning a stone into bread," but the not at all miraculous procedure of eating the seed corn.
. . . Keynes's "new" General Theory of Employment, Interest, and Money [is] fundamentally flawed and the Keynesian revolution [is] one of [the 20th] century's foremost intellectual scandals.
Mr. Lara pointed out that Keynes was a trained mathematician and not originally an economist. He turned economics upside-down with his General Theory and, in the words of Dr. Cleveland, made the prodigal son the hero and the father the bad guy. Keynes' ideas took a world in crisis by storm as a solution for governments, and worldwide social, political, and economic systems -- including the universities from Harvard on down -- have adopted, in greater or lesser degrees, elements of Keynesianism.
When Mr. Lara started to present his ideas on economics to clients and other audiences two years ago, the crisis had not yet hit. However, a year ago, as the crisis got underway, his listeners demanded to learn more. Widespread fear and confusion arose because the media, Wall Street, and Washington were caught by surprise. Now that many investors have lost large sums of money and the crisis is hitting close to home, many have concluded that we are not getting the full truth. For example, Treasury recently could not tell Congress where the bailout money went.
Austrian economists have predicted this and other crises for decades. Now we have two potential courses: 1) continued destruction of our monetary system and society, or 2) the people will rise up and make a difference, even if only 10% of the population is willing to do its part.
The important starting point for making a difference is economic education. As concerned citizens, we need to contribute to changing public opinion. Change will not come in Washington or among the financial elite but must be at our level.
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