Archive for June 2012

Liberty: The Key to Progress

I was in Washington on what was an historic day, June 28, 2012 to testify at Subcommittee on Domestic Monetary Policy and Technology, Committee on Financial Services, U. S. House of Representatives, chaired by Congressman Ron Paul. While it would be nice to think the day was historic because Dr. Paul was continuing his informational hearings focusing on a return to sound money, other events were perhaps more important to most Americans.

In the morning I had time to wander around the Capitol area. While searching for a shady place to sit and rest, I wandered up to Robert A Taft Memorial  and was struck by the quotation of Taft on one side of the memorial. It is ironic as I was reading these words my wife called to inform me of the Supreme Court decision on the monstrous health care reform bill. The quote, “Liberty has been the key to our progress in the past and is the key to our progress in the future.  If we can preserve liberty in all its essentials there is no limit to the future of the American people.”

How true these words are and it struck me how unfortunate we are as a people that Congressman Paul, who I was to meet later that day, is one of probably no more than a handful of men in public office who truly believe in liberty in all its essentials.

The memorial also includes this inscription, “This Memorial to Robert A. Taft, presented by the people to the Congress of the United States, stands as a tribute to the honesty, indomitable courage, and high principles of free government symbolized by his life.” The website for the memorial, reminds us that “He (Taft) was affectionately dubbed “Mr. Republican.”

As Lew Rockwell not too long ago argued, (, based on the principles that made Taft” Mr. Republican”,  in a previous era, Ron Paul, with his honesty, courage, and high principles    should be Mr. Republican today. How much brighter our future would be if the prospects were better that this “Mr. Republican” would become next leader of the United States.

Banks, Central Banking and Economic Instability

Oral Argument at Hearing entitled “Fractional Reserve Banking and the Federal Reserve: The Economic Consequences of High-Powered Money” Thursday, June 28, 2012
Domestic Monetary Policy and Technology
by John P. Cochran. Full testimony and video of proceeding at .

Fractional reserve banking has historically been viewed by some economists and most monetary cranks as a panacea for the economy─a source of easy credit and new purchasing power to quicken trade. Better economists, however, recognized fractional reserve banking with its ability to create credit, as a major source of financial and economic instability. Credit created by fractional reserve banks, credit extended beyond what could be supported by actual savings, while initially appearing beneficial ─output and employment increase in areas supported by the expanding credit─is unsustainable and will end in a bust. A secondary consequence of the bust is a financial and banking crisis─the bank run and associated panic.  The establishment of a central bank was often, when not driven by fiscal priorities of government, an attempt to achieve the first while mitigating or eliminating the second. For the United States, in particular, the effort was misguided. Per Vera Smith (1990 [1936], 166):

A retrospective consideration of the background and circumstances of the foundations of the Federal Reserve System would seem to suggest that many, perhaps most, of the defects of American banking could, in principle, have been more naturally remedied otherwise than by the establishment of a central bank; that it was not the absence of a central bank per se that was at the root of the evil,  …

Recent research supports her conclusion. Compared to the pre-Federal Reserve era, the Fed has failed to provide the promised stability and the Fed has guided a significant (massive) decline in the purchasing power of the dollar. The dollar currently has a purchasing power less than 5% of a 1913 dollar. Selgin, Lastrapes, and White summarize:

Drawing on a wide range of recent empirical research, we find the following: (1) The Fed’s full history (1914 to present) has been characterized by more rather than fewer symptoms of monetary and macroeconomic instability than the decades leading to the Fed’s establishment. (2) While the Fed’s performance has undoubtedly improved since World War II, even its postwar performance has not clearly surpassed that of its undoubtedly flawed predecessor, the National Banking system ….

Fractional reserve banks developed from two separate business activities: banks of deposit or warehouse banking offering transactions services for a fee, and banks of circulation or financial intermediaries. Circulation banking if clearly separated from deposit banking, reduces transactions costs and enhances the efficiency of the capital markets, leading to more savings, investment, and economic growth. Fractional-reserve banking combined these two types of banking institutions into one—a single institution offering both transaction services and intermediation services. With the development of fractional reserve banking, money creation, either through note issue or demand deposit expansion, and credit creation became institutionally linked.

Banks create credit if credit is granted out of funds especially created for this purpose. As the loan is granted, the bank prints banknotes or credits the debtor on deposit account. It is creation of credit out of nothing” (Mises pdf p. 194). Created credit is “credit granted independently of any voluntary abstinence from spending by holders of money balances.”


The existence of a central bank with the ability to create high-powered or base money is a necessary prerequisite for excessive credit creation and the resultant boom–bust cycle. While 100% reserves could eliminate or reduce boom-bust cycles and eliminate the threat of bank runs and panics, boom-bust business cycles are really a phenomenon of central banking, not of fractional-reserve free banking per se.

Without a central bank, credit creation by fractional reserve banks would be limited in extent.  Large misdirection of production caused by credit creation require either newly created base money or the promise to create new base money in the event of a crisis by a central bank.

During a period known as the Great Moderation, roughly 1982-2000, the U. S. economy experienced a period of apparent relative stability and prosperity. The U. S. economy was then buffeted by two boom-bust cycles tied directly to credit expansion and low interest rates. While much of the discussion following the recent crisis focused on why the recovery has been so slow, a lesson that should have been learned is that a credit driven artificial boom cannot last. High-powered money driven credit expansion enhanced by the money multiplier is a major destructive power that misdirects production, falsifies calcu­lation, even in a period of relatively stable prices, and destroys wealth. Policy-induced booms tend to piggyback on whatever economic development is underway. The interest rate brake which would normally stop such events before they turn into bubbles and booms is effectively neutered by credit creation, thus booms and busts remain a significant threat in the current policy framework.

Central bank response to the most recent crisis has moved in the direction of greater, not lesser central bank involvement in the economy. Recent trends are troubling. John B. Taylor recently reported that the Federal Reserve purchased 77% of the net increase in the debt by the Federal government in 2011. The Fed is moving from monetary policy to a “Modustrial Policy, a policy environment that is not a monetary framework. It is an intervention framework financed by money creation. The current Fed is engaged in picking winners and losers, crony capitalism, and thus becoming a gigantic financial central planner.

These trends make a return to sound money which “involves abolishing central banking and paper fiat money and restoring a commodity money chosen by and totally subject to the market” (Salerno, Money: Sound and Unsound, p. 474) imperative.

Fractional reserve banking supported by a central bank is the cause of boom-bust business cycles. Both the 2000 bust and the 2007-08 financial crises and Great Recession were policy induced boom-busts. Elimination of this source of instability requires monetary reform such as H.R. 1094 which is most consistent with reforms recommended in the written testimony. H. R. 4180 would be a strong improvement over current Fed operations as would H. R. 245, but both of the these would while improving monetary policy, still leave the economy subject to boom-bust cycles as monetary policy would still not prevent boom-bust which piggy-back created credit driven unsustainable growth on top of productivity driven sustainable growth.

Misesians in Mordor: The Video

Ron Paul, Joseph Salerno, John Cochran, and Lawrence White on fractional reserve banking and the Federal Reserve.

Written testimonies here.

Classical Liberalism and the Special Interests

“There is no class that could champion liberalism for its own selfish interests to the detriment of the whole of society and the other strata of the population, simply because liberalism serves no special interest….When the liberal comes before the electorate as a candidate for public office and is asked by those whose votes he solicits what he or his party intends to do for them and their group, the only answer he can give is: Liberalism serves everyone, but it serves no special interest.”

–Ludwig von Mises, Liberalism: The Classical Tradition

Hayek on Business Cycles: Part 2

The University of Chicago Press has just published the second volume of Hayek’s collected works on Business Cycles. This volume includes some previously unpublished manuscripts by Hayek.  (Thanks to Madhusudan Raj.)

Prosperity by Mandate

In light of today’s Supreme Court decision upholding Obamacare, this was posted on Facebook:

‎”Health care for everybody, by making it illegal not to have health care. It’s so simple, why didn’t we think of this before?” — Tim Slagle

This actually reminded me of a comic book quote.  In Batman and Son #2 by Grant Morrison, Bruce Wayne says:

“…while we’re at it, let’s make wealth compulsory. It would solve so many of the world’s problems if everyone were a millionaire, don’t you think?”

Also see today’s featured Mises Daily: Why ObamaCare Will Fail: A Reading List

Liberalism and the State

“Liberalism knows no conquests, no annexations; just as it is indifferent towards the state itself, so the problem of the size of the state is unimportant to it.  It forces no one against his will into the structure of the state.”

–Ludwig von Mises, Nation, State, and Economy: Contributions to the Politics and History of Our Time

Property Rights and the Environment

Sandy Ikeda offers a nice summary of Elinor Ostrom’s views in a recent Freeman column. As Sandy notes, Ostrom is famous for documenting, through carefully done case studies, how individuals work together to solve various kinds of externality problems without recourse to formal (state) institutions.

However, Sandy follows Ostrom’s somewhat confusing language in describing these voluntary solutions as “neither the state nor the market.” That is true if one defines “market” narrowly to mean formal property titles to specific parcels priced and exchanged via Coasean bargaining. But surely informal, private agreements — social conventions, relational contracts, customary law, and the like — are also part of the market, broadly defined as social cooperation under private property and the division of labor. Robert Ellickson, Bruce Benson, and others have described many kinds of these informal, private arrangements.

Perhaps it’s useful to distinguish between what Mises called “catallactics” — the analysis of exchange, pricing, formal contracting, etc. — with economic activity more generally, which takes place in non-catallactic settings like the Crusoe economy, the family, the business firm, etc. The arrangements Ostrom describes may be non-catallactic but, as long as they do not involve state intervention, are part of the market order, and consistent with property rights and libertarianism per se.

Misesians in Mordor: Testimonies and Broadcast

Congressional Hearing entitled “Fractional Reserve Banking and the Federal Reserve: The Economic Consequences of High-Powered Money” 
Thursday, June 28, 2012 2:00 PM


Click on each name for each witness’s written testimony.

  • Dr. John Cochran, Emeritus Professor of Economics and Emeritus Dean, School of
    Business, Metropolitan State College of Denver
  • Dr. Joseph Salerno, Professor of Economics, Lubin School of Business, Pace University
  • Dr. Lawrence H. White, Professor of Economics, George Mason University

Click here at the time of the hearing for a live broadcast.

The Hoppean Strategy for Libertarian Secession

“A modern liberal-libertarian strategy of secession should take its cues from the European Middle Ages when, from about the twelfth until well into the seventeenth century (with the emergence of the modern central state), Europe was characterized by the existence of hundreds of free and independent cities, interspersed into a predominantly feudal social structure.  By choosing this model and striving to create a U.S. punctuated by a large and increasing number of territorially disconnected free cities–a multitude of Hong Kongs, Singapores, Monacos, and Liechtensteins strewn out over the entire continent–two otherwise unattainable but central objectives can be accomplished.”

–Hans-Hermann Hoppe, Democracy:  The God That Failed

Misesians in Mordor

Recently Circle Bastiat members Peter Klein and Jeffrey Herbener testified before Ron Paul and other congressmen.

This Thursday, Joseph Salerno and John Cochran will also testify, as well as Lawrence White.

House Subcommittee to Examine Fractional Reserve Banking and High-Powered Money


Congressman Ron Paul, Chairman of the Domestic Monetary Policy and Technology Subcommittee, announced today that the subcommittee will hold a hearing this week to examine fractional reserve banking.

“Fractional reserve banking underpins the entire banking system, yet its effects on society are completely ignored,” Paul stated.  “Our financial system consists of vast amounts of credit pyramided on top of very small amounts of real savings—all backstopped by explicit and implicit government guarantees. This poses significant risks to the stability of the economy and monetary system, which ought to give pause to any serious observer of financial markets. Hopefully this hearing will create a greater understanding among the American people about the nature of the banking system, and begin the movement towards serious systematic reform,” Paul continued.  “The American people deserve a financial system that is stable and efficient; one that operates without taxpayer subsidies and bailouts.”

The hearing, entitled “Fractional Reserve Banking and the Federal Reserve: The Economic Consequences of High-Powered Money,” will be held on Thursday, June 28, at 2:00 p.m. in room 2128 of the Rayburn House Office Building.

Witnesses scheduled to testify:

Dr. John Cochran, Emeritus Professor of Economics and Emeritus Dean, School of Business, Metropolitan State College of Denver;

Dr. Joseph Salerno, Professor of Economics, Lubin School of Business, Pace University;

Dr. Lawrence H. White, Professors of Economics, George Mason University.


Austrian Economics in Verse

Some lovely Austro-libertarian poems by Andrew Criscione:

The Subjective Value Theorem


I trade A for B and, see,

This means B is good for me

And if A’s not good for you

You would not be trading, too

And because you trade with me

“Good” exists subjectively

I might value B o’er A

You think just the other way

Read More→

Fed Data Since 1915

Here are some fascinating charts of the Fed’s assets & liabilities since 1915. (Thanks to Aftab Singh.)

Thornton Skyscraper Interview

Mark Thornton discusses his work on skyscrapers and business cycles at the Libertarian Standard.  Also it has recently been reported that China is planning to build the next “world’s tallest skyscraper.”  Uh oh.

A Tribute in German to The Theory of Money and Credit

Thorsten Polleit writes:

On 18 June 2012, I succeeded in placing an article on the centennial publication of Ludwig von Mises’s “Die Theorie des Geldes und der Umlaufsmittel” (“The Theory of Money and Credit”) in the Frankfurter Allgemeine Zeitung (F.A.Z.), one of the more widely read newspapers in the German speaking world. I got quite a good response from readers, with people saying that they want to hear and learn more about what Mises and the Austrians have to say.

In case you read German, here is the article.

Die Lehre vom Geld

Measuring Value and Exchange

“The basis of modern economics is the cognition that it is precisely the disparity in the value attached to the objects exchanged that results in their being exchanged.  People buy and sell only because they appraise the things given up less than those received.  Thus the notion of a measurement of value is vain.  An act of exchange is neither preceded nor accompanied by any process which could be called a measuring of value.”

–Ludwig von Mises, Human Action: A Treatise on Economics

Gitta on Mises and Music

Gitta Serény, Mises’ stepdaughter, who recently passed, is mentioned in several places in Jörg Guido Hülsmann’s biography of Mises.  At one point, for a while, Mises and his wife were desperate to know whether Gitta escaped from Nazi-occupied France.  Here Hülsmann discusses Gitta’s memory of Mises’ love for music.

Mises did not share the Viennese acceptance of Schlamperei when it came to politics, but he did share their passion for music. It would endure throughout his life. His stepdaughter, Gitta Serény recalled her ninety-year-old stepfather sitting next to her at a performance of Strauss’s “Blue Danube” in New York City. The old man’s eyes were shining as he hummed along with the music.

Gitta Serény (1921-2012)

Mises’s step-daughter Gitta Serény, the well-known author, has died at age 91.  Here are details from the Guardian and the NYT.

Schulak and Unterköfler Reviewed in JHET

Good news!  The Austrian School of Economics: A History of Its Ideas, Ambassadors, and Institutions by Eugen-Maria Schulak and Herbert Unterköfler has been reviewed for Cambridge’s Journal of the History of Economic Thought.

Why Classical Liberalism Rejects War

“The liberal critique of the argument in favor of war is fundamentally different from that of the humanitarians.  It starts from the premise that not war, but peace, is the father of all things.  What alone enables mankind to advance and distinguishes man from the animals is social cooperation.  It is labor alone that is productive:  it creates wealth and therewith lays the outward foundations for the inward flowering of man.  War only destroys; it cannot create.  War, carnage, destruction, and devastation we have in common with the predatory beasts of the jungle; constructive labor is our distinctively human characteristic.”

–Ludwig von Mises, Liberalism: The Classical Tradition