What follows is “Economic History” – interpreted using the correct praxeological theories – a tale of how vicious ideas on money and banking have incentivised immoral practices in business and politics.
Our story begins with the Royal Bank of Sweden – the first bank in the world to begin such practices, which was "nationalised" in 1688. The immoral practice being: issuing paper notes not backed by specie.
This extremely valuable nugget of historical information has come to me from Jesus Huerta de Soto’s excellent treatise pictured alongside – a theoretical-historical-legal analysis of all the issues named on its title. Highly recommended.
This was thus the world’s first State-owned central bank, with a monopoly on note issue within a “territory” – which is “nation.”
In stark contrast, gold knows no nationality. It is INTERNATIONAL MONEY.
Such monopolies – based on “national legal tender legislation" – enable the expansion of bank credit simply by issuing papers.
In other words, before the invention of paper, a banker could only lend gold deposited with him by a saver for a fixed period of time. Lending out mere paper – without gold reserves backing them – meant earning interest out of nothing: BIG PROFITS.
This Islamic Judgment on paper money is the finest legal opinion on the matter, easy to understand as well.
It is not that competing private goldsmith-bankers did not issue “fiduciary media” – or money based on trust, which are papers in excess of their reserves. But since these goldsmith-bankers were in free competition – none could claim “legal tender” privileges for his papers – they had to keep a very close watch over both their reserves as well as the excess of their note issue, knowing full well that if things went wrong, there would be no “lender of last resort.” He would be declared a bankrupt – and end up in the local Debtors’ Prison, on a diet of bread-and-water till all his assets were auctioned and his debts paid off.
It is modern practices that originated with the Royal Bank of Sweden that have finally resulted in a world of fiat paper money, credit creation out of nothing, lenders of last resort who possess no reserves themselves – such as the US Federal Reserve or our very own Reserve Bank of India – endless State expansion, through all the welfare, regulation, enforcement, and everything else based on inflationary finance.
Next: We move to England, the years between 1688 and 1690, when Parliament became “sovereign,” a figurehead of a King was installed, and when the Bank of England, modeled after the Swedish example, was established – to finance WAR!
What actually transpired is that a “hidden elite” of fraudulent financiers took shelter behind king and a “sovereign parliament” – and sought legitimacy in the name of religion, especially through the wars that followed, and which they financed.
Many honest “goldsmith-bankers” opposed this monopoly over note issue – and many supported it. One of the most intriguing tales of those times concerns Law – and the “Inns of Court,” which were all competing “private corporations” teaching the subject in the City of Westminster, very close to the courts, so that all decisions would reach them fast, and enable their scholars to discuss these. Today, only four such “Inns of Court” remain. But once upon a time, there were a great many – and one historian says quite a few “ended tragically.”
The story, related in brief in Valerie Hope’s My Lord Mayor, tells of how one of these Inns was burning – and the then Lord Mayor arrived on the scene with his men, and offered help to douse the flames. But the proprietors of this Inn refused his help – because he was carrying his Civic Sword, which he is not supposed to do outside his own city, and this was the City of Westminster!
Intriguing – because Money & Banking since then have nothing to do with Law.
But History still breathes - for in the Olde City of London, the Worshipful Company of Goldsmiths still conducts its traditional annual ritual of “testing the coinage” – but the Lord Mayor no longer attends!
Let us proceed to the 18th century – and to Scotland during Adam Smith’s time. The Scottish experience with so-called “free banking” was unsatisfactory – especially to the author of the Wealth of Nations. His most famous pupil lost a fortune – and his reputation as an economist took a beating. This is precisely what prompted Smith to inquire after the Bank of Amsterdam, known to be rock-solid throughout Europe. He located an Englishman settled in Amsterdam, wrote him, and from his reply learnt of this bank’s practice of always maintaining a 100 reserve in gold against all note issue. This knowledge was then incorporated by Smith into the fourth and final edition of the Wealth of Nations. He died a few years later – in 1790.
Jesus Huerta de Soto's treatise pictured above reveals the following - which is not a quote, but in my own words - about the Bank of Amsterdam, gleaned from historical records:
Jesus Huerta de Soto's treatise pictured above reveals the following - which is not a quote, but in my own words - about the Bank of Amsterdam, gleaned from historical records:
The Bank of Amsterdam conducted an annual public audit of gold reserves by City Aldermen. It was only when this practice was discontinued, to be replaced by “secrecy,” that this bank also went the wrong way.
The 19th century: America had thrown the Brits out. The East India Company had learnt valuable lessons from this experience, and from Smith’s books, to apply to their “civilian administration” in India, Haileybury College was thus set up to teach “classical liberal political economy” to their recruits – then not taught in either Oxford or Cambridge. Smith, Gibbon, and Bentham – they all studied here decades before, and felt these famous universities were “dead.”
In the US, money and banking did not get off to a flying start – the man behind the mischief being Alexander Hamilton. Whereas “commodity moneys” that merged spontaneously worked perfectly well on the frontiers – like buckskin or tobacco leaves – money and banking ended up getting “rigged,” another word for “regulated.”
In England, whereas the “first working class mass movement for free trade” led by Cobden and Bright worked – and trade had to be unilaterally freed by the “conservative” Peel, this very same prime minister’s disastrous “legislation” of 1844 on banking failed miserably on all counts. Bank of England notes could not be redeemed – because the member banks expanded their “deposit accounts” to finance railways. Thrice was redemption suspended – and thrice this Banking Act amended, on the third occasion without debate!
These problems with Peel’s Banking Act of 1844 (legislation, once again) and how three amendments were passed illustrate the fact that problems of default are endemic to such a financial system based on mere paper.
The only moral choice is to liquidate real assets and destroy the credit created, thereby putting the system on a sound basis once again.
Then, there is the other choice – which these financial elites have been taking ever since – and that is further money and credit creation, which is inflation. It is the persistence, over centuries, of this immoral choice that has led to even more immoral practices – as I shall discuss below.
Further: With parliamentary government, Britain, for the first time in its history, established its own “constitutional bureaucracy” in Whitehall – departments of this, that and the other, budgets, and so on, which have only grown and grown and kept growing ever since, that being the nature of this beast. Jobs-for-the-boys, patronage, budgets, empire – that’s the Ugly Vote Motive.
It all began slowly in the 18th century, proceeded apace during the 19th, and exploded because of socialist-interventionist-welfarist legislationism in the 20th.
Within years after the third amendment to Peel's Banking Act, India was taken over by Parliament. Haileybury College was closed. Interventionism - both here as well as there - began.
In England, the rest of the 19th century was a clash between in the “imperialist” Tories and the Liberals, who were led by Gladstone. This was the brief period during which Globalisation 1.0 took place – the free world economy classical liberals believed in, and stood up for.
But socialist ideas were creeping on and on, until they took over in 1905, with the very same “liberals” of Gladstone’s party closing their political grouping down – and joining the new, socialist Labour Party. The Strange Death of Liberal England – as one historian has called it.
Mass democracy was the new watchword - unthinkable in Adam Smith's days. He himself admired the "republicanism" of Geneva - and travelled all the way there to breathe its free air. And as for Rousseau - there is an old post here.
So we see three trends in progress internationally as the horrible 20th century began:
US: Protectionism and the setting up of the US Federal Reserve.UK: LSE established. Socialism "taught" as respectable, even exported. Mass democracy progresses towards "welfare," and "nationalisation," all backed by "trade unions." The "working classes" now have a New Prophet - not Cobden.India: Curzon centralises the State, Divides the population on religious lines. And then the mayhem begins - as they too begin instituting "democratic reforms" in 1909, 1919, and then 1935. CONgress turns socialist. Centralised Constitution of India adopted - based entirely on the Government of India Act of 1935.
In between all this comes World War I.
And, after a brief interval, World War II.
Let us now look at 19th century Globalisation 1.0 more closely - and how it led to the corruptions of today:
The 19th century had domestic paper money monopolies – but and International Gold Exchange Standard. This proved unsustainable – leading to the closing down of national boundaries, each with its own “national currency area,” and protectionism as well.
Instead of international cooperation, as under international money and free international trade and travel, “narrow domestic walls” converted international relations into a “political” game – the final stage of this game being WAR.
At the end of WW II – a war supposedly waged in order to “save civilization,” but entirely financed through inflationary means – Keynes’ “new international monetary order” in which only the US$ would be tied to gold, and this would therefore be the world’s “reserve currency,” was admittedly not one that would survive for long. Indeed, Keynes himself said so, with his famous declaration, “In the long run we are all dead.”
So, as before, humanity is faced with the same choices – one moral and legal; and the other fraudulent.
In this connection, the decision of the German Constitutional Court to allow their government to financially support the paper Euro is reminiscent of our own Supreme Court not challenging the “constitutional validity” of the draconian Foreign Exchange Regulation Act (FERA) and, instead, allowing the bureau it had empowered, the Directorate of Enforcement, to go about tyrannizing the innocent, while also allowing lawyers who were members of its bar councils to rake in the paper moolah handling all the litigation that resulted.
The legal question is: What is money – as a piece of Property?
That is: How much gold, or silver, or whatever, of what precise weight and fineness.
Methinks our world would be much better off with “private law” and “private money” than all that is nowadays parading around as both Law as well as Money.
I have a previous post on a Cardinal of the Roman Catholic Church which ought to be of interest at this moment of time, considering the fact that the present Pope is German – and one of the areas I discuss in this post is “Subsidiarity,” a value that the Church, the Pope, and this Cardinal all swear by.
The political meaning of the word “Subsidiarity” is – if free people can provide for themselves certain goods and services, there is no legitimate reason for any government agency, at any level, to enter this area.
My point was that money is most definitely something free people can (and should) produce for themselves – and always have.
Any History of Money will prove so – and Carl Menger’s theory of the origin of money will say how and why this happens “spontaneously,” without any “common will” directing all the free individuals engaged in “indirect trade” powered by their individual “trading minds.”
Having said that, let us now proceed to Carl Menger, and the School of Economic Thought he founded. Their language was German. All the original texts are in the German language.
The Austrian School of Economics - from 1871 till today:
Below are two portraits of Carl Menger (1840-1921), the founder of this school of thought, one while he was still young; the other, towards the end of this life. Quite clearly, Menger could see disaster looming - for Europe, and for civilisation. His older face reflects extreme pessimism.
His intellectual heir, Ludwig Von Mises wrote Theory of Money and Bank Credit in 1912. A few years later, in Vienna, he established the world's first research institute dedicated to the study of "business cycles" - these ever-so-regular episodes of economic "boom and bust" that seem to never end plaguing humanity. And then came the "Crash of 1929" - in New York.
But then. all the pessimistic visions of Menger came true - Hitler, wars, inflationism, "national socialism." These can never occur without their own "ideologues."
Mises then had to flee Europe - for America. He arrived in New York harbour in 1940 - and died there in 1973, some months after Nixon broke the US dollar's relationship to gold. Towards his end, he confessed to a student: "I started off a reformer, but ended up a historian of decline."
The ideas of John Maynard Keynes had taken over the planet. He established the IMF and the World Bank, too. Thus, the "international monetary system" we have today is a creation of Keynes' diabolical mind.
And from 1973, when Mises passed away, till today, we can all pen a "history of decline."
Or, at least, for technological progress and the stock market tends to blind most people to the underlying "capital consumption" going on - and the DE-CIVILISATION looming ahead:
A history of the decline in the purchasing power of the national legal tender fiat paper currency unit – in terms of gold.
Socialist-Democratic India Right Now - the "Daily Noose":
A report in Mint says "fear psychosis grips public sector banks" and tells the sordid tale of how they are all "over-exposed" to allottees of the 2G spectrum; to allottees of coal blocks; and to real estate (in our horribly overcrowded cities). They all need "recapitalisation."
An interview with the chairman of the State-owned Coal India titled, quoting him, "Coal benefits should be for the people." Well, given what has happened over 2G spectrum allocation, over coal, and over iron ore, all I can say is that these only prove my "theorem" (published in the Times of India in 2003, almost a decade ago):
So, we arrive at a theorem: There is no such thing called public property. Whatever goes under that name is very much private property, in the hands of someone or a group that claims to represent the public.
An editorial that says they are trying to MUZZLE THE PRESS, quite naturally, of course. A "free and fair trial" has always meant a PUBLIC TRIAL, open even to television these days.
Montek, from Keynes' "funny money" IMF, for long an associate of Manmohan, and for long the head of the socialist-centralised Planning Commission, says in an interview that he wants to "universalise healthcare"!
Behind this inflationist-welfarism lies the UGLY VOTE MOTIVE - so, you decide, you wanna vote for State healthcare? Or you want LIBERTY!
In the Economic Times of today, there is this Finance Ministry dud saying fixing THEIR DEFICIT will mean "hardship" for the rest of us! I don't remember it exactly now, but when Pranab presented his last Budget - which I called "High Treason" - he quoted some Shakespeare to the effect that he would cause us some pain now so as to deliver us some greater good, later.
Best is ABOLISH THE STATE - all taxes, all welfare, EVERYTHING.
Even if we THINK about it, THEORETICALLY, that is, we will surely realise this will be NO PAIN for the people; only for all these tax-parasites.
Do read my old column, "The Morality of Markets."
Speaking of morality, that is, Victorian morality, Samuel Smiles' Self-Help - penned by the greatest "moralist" of that era, and was in international bestseller, begins by saying, "help from without is often enfeebling in its effects, while help from within invigorates." He adds this is why "the usefulness of legislation as a means to social improvement has been very much overestimated – and no amount of legislation can make the drunken sober, the idle industrious, or the thriftless prudent."
This book, in translation, fired the Japs in their catch-up with the West in the 1860s.
So, what is the REAL CAUSE of this mess of today?
Only one answer:
STATE EDUCATION, WORLDWIDE.
The ugliest State Monopoly ever to be imagined.
The solution to the Money & Banking crisis of today is fully explained in this recent post. But the State Monopolist will teach you Keynesian Macroeconomics! Get it - this is how DE-CIVILISATION continues.
And, of course, we have a Competition Commission of India - and none can compete in the world of opposing IDEAS!
Which brings me to the United Nations - and UNICEF.
The diabolical monetary ideas of Keynes combined with the even more evil agenda of the British socialists to found the United Nations – a club of all these nation-states that would henceforth practice “national socialism.” A new, international “super elite” was established – entirely funded by paper money, tax-free for all its personnel. The ostensible purpose was world peace and all that – but the results, and the track record, speaks for itself. The enormous number of UN Agencies reads like the Government of India’s 70+ “central ministries,” each engaged in selfish turf- and budget-maximisation, which is all that bureaucrats are good at.
So, when wars occur is some poor parts of the world, the UN sends in its UN Peace Keeping Force; if poor people flee from here to there, they send in the UN High Commissioner for Refugees; and, lo-and-behold, if by miraculous chance some poor people actually succeed in multiplying somewhere on this troubled planet, they send in the UN Fund for Population Activities!
You want trade – UNCTAD, GATT, and now WTO.
You want development – UNIDO plus UNDP. Not one, but two, just to make sure there are more “jobs for the boys.”
You want “food security” – the FAO. Most definitely not the “unilateral free trade” of Cobden, the repeal of the Corn Laws that protected domestic landlords from the competition of foreign growers of cheaper wheat.
You want good health – the WHO.
You want “culture” and all that – UNESCO.
You hate drugs – the UN Drug Control Programme.
And let us never forget “education for poor children” – and UNICEF.
All this stems directly from the UN Declaration of Human Rights, which was drafted by a committee that included Harold Laski of the LSE. This very “socialist” declaration is nothing but a manifesto for national-socialist welfarism globally – and it lists, among other things, that each of us has a “right to education.” All part and parcel of the socialist “mirage of social justice” – so make sure you read the brief appendix in Hayek’s Law, Legislation and Liberty Vol. 2: The Mirage of Social Justice in which he rubbishes the UN Universal Declaration on Human Rights, and make sure you read his footnotes.
Note: The UN’s socialist leanings becomes apparent when we look at one if its most important agencies, one that “legitimizes” trade unionism worldwide – the International Labour Organisation.
Now, trade unionism is the beginning of the socialist desire to “represent workers” in so many myriad ways – and it begins with “representation on wage.” Armed with “members” to represent, and with legislation indemnifying their use of force and violence, socialists proceed to expand – and go on expanding – all that they “represent” for all workers, worldwide. This leads them on and on towards their Ultimate Goal – the Total Ownership of All Property Worldwide.
DICTATORSHIP OF THOSE WHO CLAIM TO REPRESENT THE PROLETARIAT.
NOTE:Laski’s “favourite pupil” was the “dalit” KR Narayanan, who returned from the LSE to become a “diplomat,” proceeded to academics as Vice-Chancellor of Jawaharlal Nehru University, and finally rose to President of India. This is how the LSE – and Laski, in particular – exported the “ideology” of the Evil Empire behind the Iron Curtain. Just as this very JNU of Narayanan exported to Nepal the Chief Ideologue of the Maoists there.
Thus, if the Coal India chairman says all his coal is “for the people,” and the chairman of Air India says his planes “belong to the people,” then what is wrong with Chidambaram saying the radio spectrum “belongs to the people,” and so on. Did SAIL, GAIL, ONGC, LIC or the Indian Railways ever “belong to the people”? Is property “private” or is it “collective”?
Workers, beware! In truth, each of you competes at work – for the next promotion.
And the work itself is sweat, toil and trouble – whereas socialists CHEAT you when you go to market to make purchases with your hard-earned wages.
No socialist “workers’ paradise” has ever been good for workers as consumers, never a place where the Consumer is King. USSR, Maoist Red China, Nehru-Indira India, Cuba, North Korea…
Capitalism is Individualism – each competing as sellers as well as buyers.
Each Individual the Architect
of his own Fortune.
Each man for himself.
Each man by himself.
With the UN, the British socialists and their allies, the financial elites, established precisely the sort of “bureaucratic organization” that all the lunatic French sociologists looked upon as the pathway to socialism.
Their PLOT was nothing but seeking UNIVERSAL SUBORDINATION – by putting right up there on top a massive “supra-national elite” that would do their bidding, for which they could easily “create” the necessary budgets out of thin air.
Their plot was ELITISM – not EQUALITY.
They claimed the UN would lead mankind to peace and security – but that requires a free international economy, completely “de-politicised.”
Because the UN Security Council is full of “permanent political diplomats” who are “representatives” of each and ever member-state endless wars and unrest have been the inevitable result. – from the 1950s till date, and continuing.
Parliaments in England began not as legislatures – but for the sole purpose of voting on taxes proposed by monarchs: the “common consent of the realm” mandated in the Magna Carta.
Representation on Taxation – and nothing else.
From there to here – it is but a HORROR STORY!
Legislationism – all post-1905, because of “democratic national socialism,” beginning in Westminster, and then spreading worldwide. Interventionism. Regulationism.Welfarism. Inflationism.
So, let us forget about all these “representatives” way up there in Laputa-on-High and think:
How can each of us be SECURE – in our lives, in our properties, on our city streets?
The UN Security Council?
And Shashi Tharoor?
You gotta be kiddin’.
“A gun in the hand is better than a cop on the phone,” if you ask me.
I do believe we need to return to Reason and Common Sense, and for that we must ask ourselves certain fundamental questions:
1. What is Property?
2. What is Law?
3. What is Money?
4. What does MY HAPPINESS lie in?
5. What is REPRESENTATION, as in "elected representative"?
6. Why do I pay taxes? (All poor people pay "indirect taxes")
7. What is CIVILISATION?
On the last, interestingly, I met a guy from Banares boasting about his very regular bathing habits - and told him he might be better off if his CITY IS CLEAN. It most certainly isn't, ask me?
In Northern Europe, they most certainly do not bathe every day - but every city and town is spotlessly clean.
Are we not getting truly DE-CIVILISED?
Take Lucknow, where the polite pehle aap culture has vanished – only because socialism is inherently “anti-social,” being based on LAWLESSNESS, BULLYING, and endless violations of the rights and properties of all others, which is RAPE.
Anyway, all this happened when Roman Emperors pursued military conquests in the hope of raking in tax revenues - that never came. And all these military campaign emptied their treasury. So they "debased the coinage." In time, the civilisation collapsed, the urban division of labour broke down, cities empties out, everyone went off to live on isolated, self-sufficient country estates - and it took the vast region over 400 years to recover.
Gibbon told the story in 1776 - the same year as the Wealth of Nations. And Gibbon outsold Smith.
But the end of Rome was not just an “end of empire.” It was, more importantly, the “end of a civilization.”
This is precisely what DE-CIVILSATION is all about.
And this is what is looking the world in the face.