Americanly Yours

Privatizing Police and Fire Departments

admin — Mon, 09 Aug 2010 19:20:56 +0000

One of the main arguments that statists use to justify the existence of centralized government is the need for the provision of protective services. These services tend to include national defense, judicial services, and police and fire departmental services.

Cities and states are facing large budget crises which are forcing these governments to make difficult decisions. Many people are adamantly opposed to cutting any money from the budgets of police and fire departments. Few people stop to think that completely eliminating governmental funding for police and fire departments could result in a large increase in public welfare and safety, while at the same time achieving massive reductions in the size of (or even the eliminations of) local governments.

The argument for government provision of these services takes the name of the “free-rider” effect and is repeated in economics and public administration and policy programs throughout the country. The idea behind this argument is that if I were to purchase services from a fire department, but my neighbors choose not to, the fire department would likely put out a fire at one of their houses to prevent it from spreading to mine. Thus, my neighbors have paid nothing and have received fire protection for free. The supporters of this theory argue that over time, the numbers of “free-riders” would grow until the fire protection company could no longer make a profit and this would leave everyone in the neighborhood without protection from fires. Therefore, to counter the effects of the free-rider problem and to ensure that the neighborhood receives adequate fire protection, a central government must provide this services.

But, it is apparent that this is not a realistic scenario. Businesses are profit seeking enterprises and their owners are extremely unlikely to sit by and allow a free-rider problem to destroy their hard work.

Economists long assumed that there were certain goods which must be provided by the government in order to guarantee their provision in the face of the free-rider problem. One such good is the lighthouse. Economists and public administration professors love using the lighthouse as an example of good that cannot be provided by the free market, and therefore must be provided by the government. After all, lighthouse operators seemingly have no way of capturing revenue for the service that they provide. However, Roland Coase (a future Nobel Prize winning economist) demonstrated in 1974 that most lighthouses have historically been built by private groups and run for profit (and successfully so). While this might seem impossible at first glance, deeper thought on the subject revels how this profit is made. While it is obvious that the lighthouses cannot be profitable on their own, placing a lighthouse near a port and charging an additional port fee for the use of the lighthouse allows the owner of the port to provide the additional service and earn a profit for doing so. This process works in the same manner that McDonald’s is able to give away ketchup and other condiments free of charge by pricing these free products into the costs of their menu items. In short, bundling a necessary but unprofitable service with a profitable service is a great deal for both the customer and the consumer.

If we apply these same principles to the provision of police and fire protection, it becomes clear that these services could be adequately provided in a voluntary manner on the free market.

I must begin by reminding readers that in a free market where individuals are free to enter into voluntary agreements with other individuals as they see fit, there is no way to predict what the actual arrangements will look like. All we can say for sure is that the results of the process of voluntary exchange will accurately reflect the demands of the individuals that make up society. If a good or service is “under-produced” in such a society it is because the people have chosen to use their resources to purchase goods and services which they deem more important than the “under-produced” good or service. Thus if a community in a free society had minimal diets, but had an abundance of technologically advanced electronic products, we can only assume that the individuals in the society seem to prefer (ie, value) advanced electronic products over food.

Bundled Services

A key component to free market provision of police and fire services is insurance companies. Homeowner’s insurance companies are a great vehicle for the bundling of many municipal services, including police and fire protection. Instead of paying the municipal government for the provision of these services, people would likely pay an additional premium to State Farm, Allstate, or whatever other company they use to insure their homes.

It is further likely that rather than every insurance company operating their own fire department, numerous fire departments would emerge throughout the country and in any given geographical region.

Bundling fire protection with homeowners insurance allows fire departments to continue to put out fires at my neighbor’s house (even though he has not purchased fire protection from his insurance company), while still granting me an additional level of services not given to my free-riding neighbor, and thus eliminating (or drastically reducing) the effects of the free-rider problem; one of the most profound effects of a truly free market which recognizes an absolute right to justly acquired private property is that it has the effect of internatlzing externaltites.

One possible model for the private provision of fire protection through homeowners insurance companies is the bundle model which I presented above. Under this model, a fire department would put out any fire in a neighborhood free of charge, regardless of whether or not the homeowner purchased fire protection insurance. At first glance, this may seem to increase, rather than decrease the problems of the free-rider effect, however, bundling fire protection with insurance actually serves to eliminate these problems.

This is true because the insurance company would pay to replace the damages to the home and other property of its customers, but would not do so for those who had failed to pay. Therefore, free-market fire protective services would offer everyone some level of support, but would charge customers extra fees for the service of being “made whole” following the fire. This service is likely to be highly profitable for both the insurance company and potential customers, as the cost of rebuilding a $200,000 home, filled with furniture, computers, televisions, and many other valuable goods is likely to justify spending a little extra money on fire insurance.

Because the insurance company would like to minimize its own risk, it is likely to take steps to prevent the devastating effects of fires. For example, insurance companies could save quite a bit of money by providing homes with complimentary fire extinguishers. Furthermore, just as car insurance companies offer discounts to teen drivers who enroll in higher rated driver’s ed courses, homeowners insurance companies would likely offer discounts to customers who passed fire safety courses.

Private provision of police services could easily work in a very similar manner. In this case, the homeowners’ insurance company would provide police paroling services to a paid customers. Again, the neighbors who did not pay for this service would reap the benefits of this service when the private police squad drove by their home during a patrol. Additionally, if an officer were to see someone breaking into the home of a non-customer, he would do whatever was in his power to stop the crime. There would likely still continue to be a 911 like number for people to call for police assistance, whether or not they were customers.

The bundling mechanism plays an important role in the provision of police services as well. For even though all residents of an area would be provided with a basic level of security regardless of whether or not they paid for the service, paying customers would receive additional premium benefits. It is likely that insurance companies who offered customers policing services as part of an insurance package would bundle these services with other services like a high-tech burglar alarms which instantly alerted the police about intruders. Similarly to the proposed fire protection bundle, insurance companies would offer their customers restitution for the damages caused by criminals. This restitution take place relatively quickly, as insurance companies would need to do so in order to preserve their reputations. Furthermore, this restitution would take place regardless of whether or not the police were able to apprehend and convict the perpetrator of the crimes.

But what of the areas inhabited by the poor which may not be able to afford to purchase any private police protection services? Well, this is certainly an important issue, but there is every reason to believe that the market will provide some level of security to these people. Just as volunteer fire departments are common in this country, there is no reason to believe that in a free market, volunteer police agencies would not spring up to meet the demands of impoverished people. We already see this somewhat, in the form of neighborhood watch programs. It is not hard to imagine that there would be coalitions of off-duty or retired police officers who would volunteer their services for impoverished areas. After all, doctors, lawyers, and other professionals currently do quite a bit of work for the impoverished on a pro-bono basis, and there is no reason to believe that police officers are any different.

Furthermore, homeowners insurance companies themselves might find it in their best interests to offer patrol services in these areas. What better form of advertising could there be for a firm which offered police services than proof that their most basic level of services drastically reduced crime in an impoverished and crime-ridden area? Providing potential and affluent customers with such a demonstration would be an excellent way to generate new business (as well as provide good will). Furthermore, providing such services would have the necessary result of increasing the property values in the affected neighborhoods, giving some of these residents the ability to sell their properties and use those funds to move to a safer area and purchase additional security for their property.

Furthermore, consumers are not likely to subscribe to a police service which forcefully restricts their lifestyles. For example, a marijuana user is unlikely to sign up with a police service which promised to arrest marijuana smokers who were using the drug on their own property. Thus, such a system would necessarily focus on real crimes–crimes against life, liberty, and property. Like all free market reforms, the privatization of policing will have the result of leading to a more prosperous society.

Unfortunately, this idea is not currently politically feasible. Yet, I am confident that as our local, state, and federal budgets continue to spiral out of control and the government faces a populace increasingly hostile to taxes, ideas like this will be brought to the forefront of the public discourse. It is important to lay the theoretical groundwork and describe how the market could provide for basic services like police and fire protection in the absence of governmental provision of such services. An idea must be first be born and then developed before it can be considered feasible. Following that, it must be discussed publicly as a viable alternative. Thus, the purpose of this article was not to suggest a change which I expect will be enacted or even debated in the near future, but rather to demonstrate the feasibility and workability of such a proposal in the hopes that some day soon the citizenry will take the necessary steps to move towards a truly free and voluntary society.

Americanly Yours,

Phred Barnet

Please help me promote my site:

Constitution, Shmonstitution!

admin — Mon, 02 Aug 2010 19:18:51 +0000

I have often used the Constitution as one way of justifying my opposition to “laws” passed or proposed by Congress and the President. After all, the US Constitution is touted by many people as the “supreme law of the land.”

But, very few people ever ask why it is the supreme law of the land, or why it even has any power at all, and almost no one asks if it is the supreme law of the land, or if it has any power at all.

In fact, it is the Constitution that calls itself the “supreme Law of the Land.” So if you ask someone why the Constitution is the supreme law of the land, they are likely to respond by telling you that it says so right there in the Constitution. If you were to then respond to that by asking what gives the Constitution the right to declare that it is the supreme law of the land, they are likely to respond by saying that it is the supreme law of the land (or something to that same effect). This is what philosophers call a tautological argument, and what everyone else calls a circular argument.

Is the Constitution the supreme law of the land?

Well, the Constitution was a contract. It was signed by 39 men at the Constitutional Convention (out of the 55 delatates). Following this, the States held their own votes on ratification in which 1071 men voted in favor of adopting the new Constitution. But, all this tells us is that 1,100 men agreed to the Constitutional Contract. What of the 16 delegates who refused to sign the Constitution? What of the hundreds of men who voted against the ratification of the Constitution in their State legislatures. And most importantly, what of the people who were not given the opportunity to vote for or against the Constitution?

Would it be right to assume that the people who explicitly refused to sign a contract should be forced to abide by it?

But, the vast majority of Americans were not allowed to vote at the time of the Constitution. This included children, slaves, women, indentured servants, and (in many States) those who did not own property. They had no say in their local or State governments, and thus no representation in the Constitutional Convention (which—by the way—was authorized by the Congress to amend the Articles of Confederation, not to replace it). The Revolutionary War, which ended less than 5 years before the Constitutional Convention, was fought over the issue of “taxation without representation.” We must ask ourselves if being governed without one’s consent is substantively different than being taxed without one’s consent/representation. And no, these arent just the musings of a lone libertarian. According to recent polling, only 23% of America voters believe that the United States government has the “consent of the governed,” while 62% say that it does not.

Imagine if Verizon offered to provide you with wireless service in exchange for a fee, but for whatever reason, you EXPLICITLY DECLINED to sign the contract (even though most of your neighbors agreed). Could anyone rightfully assume that Verizon would have the right to declare itself your provider? Of course not.

Lysander Spooner brilliantly pointed out that those who support the Constitution often use the right to vote as a method of justifying the legitimacy of the government. A simple examination of these arguments reveals that this argument falls into a severe tautological trap as well. For eaxmple:

If I vote for the winning candidate, I have given my consent to his actions because I have sanctioned his platform. Furthermore, I have given sanction to the Constitution by participating in its institutions.
If I vote against the winning candidate, I have still given my consent to the Constitution because the act of voting implies that I agree to the process outlined in the Constitution and that I would expect the losers of the vote to abide by the results of the vote had my candidate of choice won.
If I choose not to vote, then I have no right to complain about the government because I have declined to participate in a “valid” process which could have yielded different results had I participated.

Thus, whether or not I vote, and whether or not I vote for the winner, I am giving sanction to the Constitution and to the actions of the government. We can easily see how this is a circular argument, akin to the expression “damned if you dont, damned if you do.” You dont have to be a trained philosopher to realize that this argument isnt a sound one.

Lysander Spooner argued that the Constitution actually bound no one. I agree with his logic, but have reached different conclusions. I will argue that the Constitution does not bind very many people, but it does bind those (and only those) who have expliticly agreed to the Contract.

The President, Vice President, and members of Congress all take an oath upon entering office. In doing so, they are explicitly giving their consent to the Constitution and agree to act in accordance to this Constitution.

Thus, the President, Vice President, and Congress are required by law to uphold the Constitution and its provisions, whether or not they like what it says. Failure to do so is a violation of their oath and a violation of the laws of the government that they have explicitly agreed to serve. The President’s oath reads

“I do solemnly swear (or affirm) that I will faithfully execute the Office of President of the United States, and will to the best of my ability, preserve, protect and defend the Constitution of the United States.”

Notice the final clause which demands that the President “preserve, protect and defend the Constitution of the United States.” Thus, the President must use his veto power whenever Congress passes a law that violates the terms of the Constitutional Contract. Failure to do so would be an explicit violation of the President’s oath and grounds for removal from office.

Similarly, the oath of Congressmen reads:

“I do solemnly swear (or affirm) that I will support and defend the Constitution of the United States against all enemies, foreign and domestic; that I will bear true faith and allegiance to the same; that I take this obligation freely, without any mental reservation or purpose of evasion; and that I will well and faithfully discharge the duties of the office on which I am about to enter. So help me God.”

This oath differs in that it requires members of Congress to ” support and defend the Constitution of the United States against all enemies, foreign and domestic; that I will bear true faith and allegiance to the same. [Emphasis added]” This is an important difference, as it not requires Congressmen to defend the Constitution against domestic enemies as well. Thus, every member of Congress has a duty to defend the Constitutional Contract from those who wish to undermine it. This must not only include other members of Congress who are bent on undermining the Constitution, but also must include protecting the Constitution against Presidents who rountiely violate the Constitution and their oath to the Constitution.

But if most members of Congress, as well as the President, Vice President, Cabinet, and most of the executive bureaucracy—the people who have taken an oath to the Constitution and who are thus bound by it—refuse to adhere to the Constitution or to their oath, then why should we, the American people have to abide by the Constitution?

Generations of Congresses and Presidents have routinely violated the Constitution and have trampled on the protections afforded in the 1^st, 2^nd, 4^th, 5^th, 8^th, 9^th, 10^th, 14^th, 15^th, and 21^st amendments. Their actions have rendered many of the above amendments nothing more than “dead letters.” The trampling of the Constitution by the very people who have sworn to protect it is not limited to the Constitutional amendments themselves, but also includes the routine violation of many of the protections contained in the body of the Constitution itself.

I have pointed out that members of Congress and the President have taken oaths requiring adherence to the Constitution. We The People, on the other hand have not. This fact alone leads to the logical conclusion that the Constitution does not apply to those of us who have not declared allegiance to it. And yet, many of those who ahve taken official oaths to the Constitution routinely violate it. Thus, the question must again be asked: if most members of Congress, as well as the President, Vice President, Cabinet, and most of the executive bureaucracy—the people who have taken an oath to the Constitution and who are thus bound by it—refuse to adhere to the Constitution or to their oath, then why should we, the American people have to abide by the Constitution?

In addition to Presidents and the Congress, members of the military take oaths of loyalty to protect and defend the Constitution as well:

“I, [name], do solemnly swear (or affirm) that I will support and defend the Constitution of the United States against all enemies, foreign and domestic [emphasis added]; that I will bear true faith and allegiance to the same; that I take this obligation freely, without any mental reservation or purpose of evasion; and that I will well and faithfully discharge the duties of the office on which I am about to enter. So help me God.”

The military oath not only requires that members of the armed services protect America against foreign invasion, but also requires that these members protect the Constitution from domestic enemies (those who have sworn allegiance to the Constitution but violate it) as well.

But, instead of taking their oaths seriously and defending the Constitution which they have sowrn to protect, Presidents, members of Congress, and members of the military have been much more willing to use their authority to force the American people to live under an unconstitutional (and nonconsensual) government.

I ask again: If the government refuses to abide by the Constitution, why should we?

The answer is that we shouldnt.

How long will we continue to allow Congress to rule over us using a “do as we say, not as we do” logic? The truth is that this has gone on long enough.

But, even if Congress, the President, and everyone else within the goverment followed their oaths perfectly, this would not be reason enough to follow their laws. The above statement stems fromt he simple fact that the vast majority of the American people have never sworn an oath of allegiance to the Constitution. A simple example can be used to understand why we are not bound to the Constitution—even if it is perfectly followed. Imagine that someone declares himself to be the new owner of your car without your permission. This man has no legal or rightful claim to your car, but that doesnt stop him from claiming ownership. However, this man is “nice enough” to allow you to use the car whenever you want. Thus, his “ownership” of your car doesnt interefere with your right to use the car in any way. But, does this mean that you should allow him to get away with the crime of claiming false ownership over your car? Of course not. It is true that while he still “allowed” you to drive your car whenever and wherever you wanted you probably wouldnt rebel against him, but that surely wouldnt meant hat you have accepted his claim of ownership over your car.

The vast majority of the readers of this article have taken no oath of allegiance to the Constitution or the the US Government (which itself is guilty of repeatedly violating the Constitution). I have never read the words of the oath aloud, I have never signed an oath of loyalty to the United States or to the Constitution. How then can anyone argue that this document binds those of us who have not taken a loyalty oath?

The Constitution itself was nothing more than a well orchastrated coup, designed to centralize the powers of the government into the hands of an elite few. The vast majority of citizens (and all of the slaves held) never had a proper say in the approval of the Constitution. And, as Lysander Spooner pointed out, one cannot sign a contract that binds future generations (wouldnt that be the greatest form of taxation without representation that is possible?). Thus, even if the Constitution somehow did bind all those living under it upon its ratification, it binds no one today but those who have explicitly agreed to it.

The Constitution does not bind those of us who have made no such explicit agreement. Thus, we have no legal or moral obligation to follow the “laws” put forth by Congress, the regulations created by Congress or executive agencies, or the executive orders and decrees made by the president.

I am not advising you to break the law—just because the law doesnt bind us does not mean that the government will not employ the use of men with guns to force you to comply with its laws and regultations. Just as an unarmed person would probably be better off (ie, would have a much better chance of survival) turning his wallet over to an armed robber who demanded the wallet, most people will find it easier to comply with the “laws” of the United States government rather than risk their own death or imprisonment.

But, even as we continue to hand the robber our wallet, this does not mean that we should recognize the legitimacy of the robber who demands tribute and restricts the liberty of so many millions of people. It certainly does not mean that we should be happy to hand the robber our hard earned wealth.

Recognizing the illegitimacy of the Constitution and the United States government is a very important step. The more that people recognize this fact and speak about it, the more obvious it will become to the populace.

A critical mass of Americans is needed to recognize that we do not owe our allegiance to the Constitution. Furthermore, this critical mass needs to realize that the United States government is illegitimate and that it has no moral right to tax, rule, or restrict the liberty of anyone who has not consented to be ruled. Only when the people wake up and realize these facts will we be able to restore our lost liberties.

Americanly Yours,

Phred Barnet

Please help me promote my site:

Book Review: “How An Economy Grows And Why It Crashes,” By Peter Schiff

admin — Sun, 27 Jun 2010 16:29:18 +0000

I recently read Peter and Andrew Schiff’s new book, “How an Economy Grows and Why It Crashes.” I am a big fan of Peter Schiff and was excited about reading this book. Peter Schiff is an economist who is famous for predicting the financial meltdown in advance. Here is a great video of him making predictions in advance of the meltdown. He is even laughed at by the other commentators on CNBC and FOX for implying that there was a housing bubble only months before the market crashed. Well known economists including Ben Stein and Arthur Laffer were among those mocking Schiff. Interestingly enough, the people laughing at him selected Washington Mutual, Bear Stearns, and Merrill Lynch as great stock picks (all of those companies are now out of business).

This book is a simply written, illustrated allegory which details how economies grow and what can cause economic collapse. The book begins with three men who are stranded on an isolated island. The men spend all day fishing just to catch enough fish to barely survive. After a time, one of the men underconsumes and is able to use his savings to increase the number of fish that he catches. From this action, an island economy is born.

The story continues for generations and generations (immigrants eventually come to the island) as the island’s economy continues to develop. I will refrain from giving specific details about the economic expansion so as not to ruin this book.

The chapters contain “Reality Checks” which simply relate the material in the chapter to real life by defining the concepts which are outlined. In these short sections, the Schiffs explain things like underconsumption, productivity, savings, risk, and so on. The “Reality Checks” help readers who may have little or no understanding of economics understand basic economics principles.

At the end of each section is a much more detailed (but still simple and easy to understand) section called “Takeaway.” These sections elaborate on the lessons from the chapter and give further explanation of the underlying economic principles. They greatly enhance the book by providing the reader with a nice overview as well as a great segue to the next chapter. The “Reality Check” and “Takeaway” sections both help move the story along and are features which would be great in other books on economics.

The first 5 chapters of this book are absolutely amazing. The Schiffs do an excellent job of using humor to make reading about economics fun and easy to follow. They explain the causes of a growing economy (and the effects of a growing economy on society) in a manner that is easy for anyone to understand, regardless of their economic background.

In chapter 6, however, things took a slight turn for the worst. In this chapter, the Schiffs explain the foundation of a banking system. I have heard Peter Schiff give speeches on this in the past–his speeches are great and include detailed information on the historical evolution of banking. It is always interesting to hear Schiff speak about this and I wish that he had included more of this information in his book. For some reason or another, the Schiffs do not tell the full story of the evolution of the banking system. This is somewhat perplexing, as he wrote about this quite nicely in his bestselling (and highly recommended by me) book, Crash Proof. I have also seen him give numerous speeches on this subject, all of which were great speeches which gave this full history. The failure to include this can certainly be excused, as the Schiffs’ book was surely intended to be a brief, simple overview of how an economy works.

The “Takeaway” section of chapter 6 was also somewhat perplexing. There was a disconnect between the material in the chapter and the “Takeaway” section which is likely to confuse some readers. In this section, the Schiffs launch an attack on the Federal Reserve system without explaining to the reader exactly how this ties in with the information in the early part of the chapter. While I fully agree with the Schiffs on the Federal Reserve, an uninformed reader might have a little trouble understanding the Schiffs’ early critiques of the Federal Reserve System. To their credit, however, the Schiffs do properly explain this later.

I do want to point out to my reader that this chapter is my only real criticism of the book and that while it is worth pointing out, it does not take much away from what is truly an excellent book.

Following this section, the Schiffs continue to brilliantly explain the evolution of a developing economy into a major economic player. While the time line is a little off (something that the Schiffs warn the readers of in the introduction), the Schiffs paint a largely accurate picture of the history of the American economy and the growth of the American government (especially with regards to its intervention in the economy).

I wont give away the ending, but the economy in the book suffers a fate similar to that of the American economy during the current economic crisis–the title promises to explain how an economy crashes, so I dont think that Im giving anything away. However, the Schiffs looks into the future and offers a glimpse of what the future of the American economy might look like if we do not quickly enact sound monetary policies. Given Peter Schiff’s history of correctly predicting the course of the economy, his prediction is certainly worth taking into account.

My rating:

Strongly recommend: 9/10

Americanly Yours,

Phred Barnet

Please help me promote my site:

Taxation Is Theft

admin — Wed, 09 Jun 2010 18:47:58 +0000

Even most children know that taking things without permission is known as stealing.

There are three methods of acquiring property: homesteading, voluntary exchange, and theft. The first two methods are just, while theft is inherently unjust. Taxation involves taking things without permission and must be classified as theft.

However, before deciding on whether or not taxation should be considered theft, the term “taxation” must be defined. I will define taxation as “a government mandated extraction of resources from individuals and/or groups, paid to support the aims of the government.”

The phrase, “mandatory extraction” is the key to understanding why taxation is theft. A mandatory extraction, by nature, is taken through the use of force or coercion, and not paid voluntarily.

Theft is always theft, regardless of who does the theft, how the theft occurs, and what excuses the thief makes to “justify” the theft. The ONLY exception to this statement is when things are taken as restitution for a prior wrong (for example, if you stole $100 from a person, a court would be justified in taking $100 from you without your permission to repay the victim).

Before I go on, I must address a question that I will surely be asked by many readers: arent taxes special because they are taken by the government in order to provide people with their basic needs?

The answer to this question is a flat NO!

People have certain inalienable rights which should never be violated. It would be wrong of me to kill you, rob you, or physically harm you. Governments are made up of people, and are often created by people to secure their rights. Because governments are made up only of people, governments cannot have any rights that people themselves do not have. It simply does not make sense for this to be untrue. Rights are rights, people are people. Any claims that the government has more rights than anyone else is arguing that some people (the populace) should be considered inferior and subordinate to others (the government).

Taxation involves taking property from people without their consent; taxation is theft.

To quote myself: “If a man with a gun were to demand that unless you pay him 1/3 of your income he would lock you in a cage, he would be guilty of initiating the use of force with the intent of committing theft. It would not matter if the man promised to use this money to pay for a school for your children, for a new highway, or for a missile defense program. Taking things from a person without their permission is, by definition, theft. Silver-tongued rhetoric may be employed to obscure this fact, but it cannot change it.

Taking something from another person without their permission is always theft and should be condemned as theft. It does not matter what the “reason” or “justification” for this action is. It does not matter who committed this theft, what was stolen, or how many people told the aggressor to act.”

Examples of taxation as theft

Some of the taxes described below are not traditionally thought of as taxes, but they are taxes—they all meet the above definition of being a government mandated extractions for the purposess of supporting the aims of the government.

A government imposed minimum wage law prevents a person (a sovereign owner of him or herself) from selling their labor to a potential buyer at a mutually agreed upon price. This is theft of a laborer’s future earnings.

A government imposed ban on the sale of alcohol on Sunday prevents a person from selling their justly acquired resources to an individual willing to purchase them. This is theft of profits.

A government imposed business regulation prevents a business from using its justly acquired resources in the manner that it sees fit. This is theft as well.

A mandatory income tax, imposed under penalty of imprisonment, enforced by men with guns is theft of the fruits of one’s labor. Stealing one’s labor is called slavery. A mandatory income tax makes the government a middle man in all labor transactions, and allows them to claim ownership of property that they did not justly acquire.

A mandatory property tax, imposed under penalty of imprisonment, enforced by men with guns is, by definition, a violation of property rights, and therefore is theft—no explanation should be necessary to prove this. But… property taxes are fees on products that have already been paid for. They are levied on the owner of a property. A mandatory fee on residents for the continued use of their own house is no different than the government charging a person rent to stay on their own property. Remember, a person who justly acquires property becomes the owner of that property, but if a person has to pay the government rent to occupy their own property, who is the real owner of the property, the homeowner, or the government?

A mandatory sales tax, imposed under penalty of imprisonment, enforced by men with guns is theft as well. A mandatory sales tax makes the government a middle man in all retail transactions, and allows them to claim ownership of property that they did not justly acquire. Sure, they can argue that sales taxes are imposed in order to pay for police, but this does not change the fact that this money was acquired through theft, and not through voluntary means. The mafia also forces businesses to pay a protection fee.

I would love to hear your comments on this article, but please dont post a comment or send me an email that says “taxes are necessary because without them, the government could not provide services.” I have addressed this above: taking money from someone without their persmission and then using that money to buy they something that they may or may not want is still taking something without permission [theft].

Please do not send me a message or post a comment telling me that taxation is “voluntary” and not theft because if I disagree with the taxes, I can move somewhere else. When it comes to taxes, we have three choices: paying a tax, or refusing to pay the tax and being arrested by men with guns and then locked in a cage, or leaving one’s family, friends, and property behind to search for a society that does not employ mandatory taxation. This fact should make it clear that taxation is not voluntary. A person who uses coercion to force another person to give up some of their property under threat of violence is guilty of extortion. Governments can have no rights that people do not have, and are therefore just as guilty of extortion as would be a person who acted in this manner.

Furthermore, the argument that if a person does not want to pay taxes, they can renounce their citizenship and leave the US to avoid taxes is false. The US government does levy a tax on people who give up citizenship:

“Expatriation on or after June 17, 2008, may cause an expatriate to be subject to IRC § 877A, which was enacted as part of the Heroes Earnings Assistance and Relief Tax Act (HEART) Act of 2008. Generally, IRC § 877A imposes income tax on the net unrealized gain on property held by certain U.S. citizens or green card holders who terminate their US residency as if their worldwide property had been sold for its fair market value on the day before the expatriation or residency termination (mark-to-market tax). The Treasury Department and IRS have authority to issue regulations under IRC § 877A so further guidance is expected soon, though it has not been released yet.”

Finally, please do not send me a message or post a comment asking how things like schools, roads, or even national defense could be paid for without mandatory taxation. There exists a long history of voluntary provision of all these goods and services (check out this book for more information).

Furthermore, these items could be provided for through taxation in a purely voluntary manner if people were allowed to exercise their natural right to free association and choose their own government. Under voluntary government, taxation could no longer be considered theft, as those who did not wish to pay a tax could simply drop out of one government and sign a contract with another government.

Economist Walter Block argues that under voluntary government, one would have “the right to stay put, on one’s own property, and either to shift alliance to another political entity, or to set up shop as a sovereign on one’s own account.”

Governmental services can be provided on the free market as can any other service; a government would agree to provide certain services (possibly protection, roads, health care, or whatever) in exchange for a fee from a citizen. Thus, the citizen would be paying a purely voluntary tax.

In contrast to voluntary, contractual government, our government does not allow citizens to withdraw their support from the State. It levies taxes on people without their consent. These non-consensual taxes must be recognized and exposed for what they are: THEFT.

Americanly Yours,

Phred Barnet

Please help me promote my site:

Private Property Explained

admin — Tue, 08 Jun 2010 16:14:22 +0000

Libertarians speak often of private property, but to people not educated in libertarian philosophy, this notion can be confusing and seemingly subjective. In fact, the opposite is true: the concept of private property is objective and quite simple to understand.

Self Ownership

Before understanding man’s ability to own other objects, one must understand man’s ownership of himself (or herself).

Each human being is the sovereign owner of him or herself. While this conclusion seems fairly obvious, we can arrive at it several ways. I will focus on the method used by Murray Rothbard and others below because I think that it is the easiest method for the common person to understand. For a more detailed and completely different approach, take a look at Ludwig von Mises’ “action axiom,” and Hans-Hermann-Hoppe’s “theory of argumentation.” This piece by Gennady Stolyarov II also summarizes the point as well.

One way to prove self-ownership is by assessing three possibilities of who owns a person: that everyone in the world owns fractions of everyone else in the world, that some group of elites own everyone else, or that every person owns him or herself.

The first such possibility is that everybody has an equal claim to ownership over everyone else. Murray Rothbard (page 36) explained that this scenario

“holds that every man should have the right to own his equal quotal share of everyone else. If there are two billion people in the world, then everyone has the right to own one two-billionth of every other person. In the first place, we can state that this ideal rests on an absurdity: proclaiming that every man is entitled to own a part of everyone
else, yet is not entitled to own himself. Secondly, we can picture the viability of such a world: a world in which no man is free to take any action whatever without prior approval or indeed command by everyone else in society. It should be clear that in that sort of. . . world, no one would be able to do anything, and the human race would quickly perish.”

Thus, we are able to reject any notion that people can be co-owners of each other. Seeing that it is impossible for humans to all own equal shares in each other, we must now examine the notion that one group of people owns all of the rest of the people (page 28).

“a certain class of people, A, have the right to own another class, B…. Th[is] alternative implies that while Class A deserves the rights of being human, Class B is in reality subhuman and therefore deserves no such rights. But since they are indeed human beings, th[is] alternative contradicts itself in denying natural human rights to one set of humans. Moreover, as we shall see, allowing Class A to own Class B means that the former is allowed to exploit, and therefore to live parasitically, at the expense of the latter. But this parasitism itself violates the basic economic requirement for life: production and exchange.”

Thus, we are left with our third option, that every human is the sovereign owner of him or herself.

Acquiring Property

Property can be acquired in three different ways–two of the methods are just, while the third is unjust.

Homesteading

The concept of acquiring property through homesteading has a long philosophical tradition. In 1690, John Locke famously wrote (page 71):

“Though the earth and all inferior creatures be common to all men, yet every man has a “property” in his own “person.” This nobody has any right to but himself. The “labour” of his body and the “work” of his hands, we may say, are properly his. Whatsoever, then, he removes out of the state that Nature hath provided and left it in, he hath mixed his labour with it, and joined to it something that is his own, and thereby makes it his property. It being by him removed from the common state nature has placed it in, it has by his labor something added to it that excludes the common right of other men. For this labor being the unquestionable property of the laborer, no man but he can have a right to what that is once joined to…”

Under homesteading, a person who improves or makes use of a natural resource becomes the owner of that resource. For example, if a person landed on an uninhabited island, and picked an apple off of a tree would become the obvious owner of that apple. No one else could rightfully claim ownership to the apple. Similarly, if this man were to cut down several trees on the island and use the lumber to build a home, this home and the land surrounding it would become his property.

Homesteading has its limits–one must improve or change the resource to be considered a just owner of that property. For example, if a man were to simple build a large fence around an area the size of Texas, he could not seriously claim to be the owner of all land inside of the fence. Similarly, if I were to claim ownership of the planet Saturn, I would be ridiculed, and when the time came that humans visited Saturn, my descendants could not expect to collect rent from these astronauts.

Murray Rothbard explains this concept (page 170):

“If Columbus lands on a new continent, is it legitimate for him to proclaim all the new continent his own, or even that sector ‘as far as his eye can see’? Clearly, this would not be the case in the free society that we are postulating. Columbus or Crusoe would have to use the land, to ‘cultivate’ it in some way, before he could be asserted to own it…. If there is more land than can be used by a limited labor supply, then the unused land must simply remain unowned until a first user arrives on the scene. Any attempt to claim a new resource that someone does not use would have to be considered invasive of the property right of whoever the first user will turn out to be.”

Voluntary Exchange

Under voluntary exchange, a person can trade any of their justly acquired resources with another person in exchange for some of that person’s justly acquired resources. For example, the man above who took an apple off of an unowned apple tree could trade his apple with another person for a product of that person’s, as long as the trade was voluntary.

This right also derives from the right of self-ownership. I own myself and I may sell my labor to another person for a wage or a product (I could sell 8 hours per day of my time to an employer for a fixed rate of $10 per hour). At the end of the day, I now own the $80 (meaning that the employer no longer has any claim to this money), which I am able to trade with a different merchant for some of his products.

Thus, any resources which are acquired justly can be traded for any other resources that are acquired justly. In completing such a transaction, original owners must completely give up their right to the property that they have sold.

Theft

Theft is taking things by force (including fraud or threat of violence). Theft is immoral and unjust, and one who acquires resources by theft should not be considered to be the legitimate owner of that resource.

If I were to take $10 from a person without their permission, it is obvious that I have stolen from them. If this person is paid $10 per hour by their employer for their labor, I have effectively stolen an hour of this person’s life.

Similarly, if a food merchant were to market a meal as “non fat,” knowing that the meal contained 10 grams of fat, he would have acquired the money from that trade through fraud. Thus, the person who purchased the meal would have a strong claim against the merchant and should be entitled to receive a refund or some form of compensation.

Additionally, if a man with a gun were to demand that unless you pay him 1/3 of your income he would lock you in a cage, he would be guilty of initiating the use of force with the intent of committing theft. It would not matter if the man promised to use this money to pay for a school for your children, for a new highway, or for a missile defense program. Taking things from a person without their permission is, by definition, theft. Silver-tongued rhetoric may be employed to obscure this fact, but it cannot change it.

People often use majority support as a justification for increases in taxes, large new social programs, war, and government debt because “the people overwhelmingly support them.”

Rothbard (Pages 57-58) shoots this idea down as well.

“even if 90% of the people decided to murder or enslave the, other 10%, this would still be murder and slavery, and would not be voluntary suicide or enslavement on the part of the oppressed minority. Crime is crime, aggression against rights is aggression, no matter how many citizens agree to the oppression. There is nothing sacrosanct about the majority; the lynch mob, too, is the majority in its own domain.”

Unfortunately, our current system does not always respect private property rights. Remember, that property rights are inviolable, and that action taken against a person’s property without their permission is aggression. It is a sad fact that property rights (often including the right to self ownership) are regularly discarded by the very government which was instituted to protect our liberties.

Also, check out this video for a great explanation of private property.

Americanly Yours,

Phred Barnet

Please help me promote my site:

A Goal for Failure – Why Everybody Loses When The Losers Win

admin — Fri, 04 Jun 2010 15:36:17 +0000

My friend Ben sent me an article about this story.

The article is about a new rule for an Ottawa youth soccer league which stipulates that if a team leads by five goals, they automatically lose! The league previously had a “mercy rule” which sought to prevent humiliation by calling the game when a team led by 5 and awarding that team with the victory. There is at least some sense in this type of rule–there is definitely an argument against making kids feeling bad about themselves by allowing a team to lose by 10, 20, or 30 goals.

When I played baseball, there was a sort of mercy rule: no team could score more than 10 runs in an inning. But even so, scoring a lot of runs didnt cause a team to lose–it didnt even cause the game to be called (I remember beating the Spartans 28-3).

But, this new rule is just plain wrong. It uses perverse incentives to send children the wrong message, punishing good teams and rewarding bad teams.

Under this rule, a team that is winning 4-0 is in the lead, but if they score one more goal, they are losers. But, what about that poor child who excitedly charges down the field and scores the fifth goal for the team. By doing what he has been taught by his coach, he has just cost his team their victory. Surely, his friends will give him hell after the game and make him feel bad for scoring.

Even worse: under this rule, a team that was down by 4 goals could easily kick the ball into their OWN goal–AND GIVE THEIR TEAM AN EASY WIN!

This isnt what youth sports are about. Youth sports are about teaching children to work with others, as a team towards a common goal. What kind of message does it send to children to award the team with the fewest points the victory and turn the team with the most points into losers?

We can compare sports to economics in one important regard. Wins and losses are little different from profits and losses. Just as a profit is a signal to a company that it is succeeding and doing things right, a win is a signal to a team that it is succeeding and doing things right. The opposite is true for losses. People take actions that tend to offer them the most rewards; a profitable company will repeat the actions that brought it these profits, and similarly, a victorious team will repeat the actions that made it victorious. I repeat: What kind of message does it send to children to award the team with the fewest points the victory and turn the team with the most points into losers?

Dubbs Galt commented to me about this issue: “Today, the message from the youth sports egalitarians is that winning and losing is everything – only that any drive for winning should be replaced with a feeling of shame for making someone else lose. These bastardizers of morals want everyone to feel the benefits of an unearned effect while completely dismissing its relationship to any real cause.

As a both a former player and coach of youth baseball, I can promise that a day later kids don’t remember that they lost 11-5. But, the lessons you learn from preparing for competition, laying it on the line during the game, and even the lessons you learn from losing badly…..these lessons last a lifetime.”

This rule sends the wrong message. It turns losers into winners and makes winners into losers.

Imagine if a similar rule was used in other sports. A similar rule in baseball might cause a child to get booed by his own teammates after he hit a grand slam (which cost the team the game). A similar rule in basketball could cause a child who mistakenly stepped behind the 3 point to cost his team the game. This is insanity.

I am glad to report that the entire world hasnt gone completely stupid, however. When I spoke with former New Mexico State QB, Carl Scaffidi about this rule, he told me “if I was a coach, I would strive to go 0-20 with 100 goals.”

Americanly Yours,

Phred Barnet

Please help me promote my site:

A Equals A

admin — Thu, 03 Jun 2010 19:12:13 +0000

A equals A. Existence exists. Things are as they are. Truths are true. We have the ability to determine the truth or falsehood of our judgments in relation to the facts of reality.

If the above sentences seem so obviously true, ask yourself why we have found ourselves in this mess. Ask yourself why politicians (Republican as well as Democratic, liberal as well as conservative) continue to push for programs that fly in the face of logic, reason, and ultimately reality.

We fight “wars for peace,” heavily regulate the economy in an effort to increase economic activity, often both heavily subsidize and heavily tax the same product (ie, tobacco), redistribute wealth to promote “economic efficiency,” and so on. Clearly, our leaders have failed to grasp the simple truths contained in the first line of this article.

If our “leaders” have failed, however, it is because We the People have failed by selecting illogical people to act as our overseers.

If we want to see real change in our lifetimes–a change in the right direction, towards individual Liberty and a respect for logic, reason, and ethics, we must make the change in ourselves first.

There are many ways to accomplish this goal in our society, including grassroots political activism, developing workable alternatives to the present system, and education.

Economic activity depends on a division of labor–when people specialize in areas in which they are proficient, society can take on more tasks and advance faster than it could if everyone tried to do everything themselves. Similarly, all of the above methods of achieving Liberty must be employed by those best suited to these tasks.

While all of these methods are important, it is my opinion that education is the most important. Education is the cornerstone of good policy. Education is also “the gift that keeps on giving.” If I educate someone about the fundamentals of economics, he or she can then turn around and use their abilities and new knowledge to educate people they know.

It is simply impossible to achieve a society based on natural law, the principles of self ownership, and respect for private property if people are not educated about these concepts.

Although I dabble in philosophy, my website focuses mainly on economics. But just as we must specialize our labor if we want economic growth and we must specialize in our methods of promoting Liberty if we wish to achieve this goal, we must specialize in educating and informing people about the ideas of Liberty if we wish for our educational efforts to be successful.

If all websites promoting Liberty were written and constructed in the same manner and focused on the same topics, we would only reach the same few people. Therefore, it is important and even vital for this movement that different types of educational and informational resources are developed.

With the above in mind, I am pleased to present yall with an exciting new resource. My friend, Dubbs Galt has spent a considerable amount of time developing a great new website.

A=A is a new, comprehensive resource designed to educate people about logic, reason, philosophy, economics, and natural law.

This site has a ton of resources, including information about how we got into this economic crisis, a detailed and comprehensive section on philosophy, a section on the importance of the study of sound economics (based on the study of human action), and a great section full of resources which will allow you to educate yourself. Dubbs is a very talented writer who has the unique ability to break issues down to their core principles, investigate these principles, and then reconstruct the issues themselves.

There is much more to this site than what little I have described and I urge you to check it out. In the coming weeks and months, Dubbs plans to further develop his already excellent site, so I urge you to continue to follow A=A as it develops.

Americanly Yours,

Phred Barnet

Please help me promote my site:

How To Fix The Banking System

admin — Mon, 24 May 2010 22:39:09 +0000

The Federal Reserve still has the ability to put the brakes on any hyperinflation or any further worsening of the economy.

Many of the proposed solutions to this issue will improve the situation now, but create larger problems in the future. However, there are some things that the Federal Reserve can do that will improve the current situation without mortgaging the future to do so.

As I wrote in my previous article, the Federal Reserve requires that banks maintain 10% of all checking deposits on hand. For savings accounts, the reserve requirement is essentially zero (I say essentially because the Federal Reserve requires than banks hold a very small amount of money on hand in order to clear small overnight transactions, but when compared to the trillions of dollars held in savings accounts, this requirement is essentially zero).

Is this reserve requirement too high, too low, or what?

To answer this question, we must first take a brief look at some of the important features of our monetary system [although the information below seems like a lot, I must assure you that it is brief and that numerous books have been written on the subject]. The information below can be found in many sources and I will be happy to provide them for you like.

Money is a medium of exchange. We all know that exchange is necessary in just about every economy, and especially in one as large and developed as ours. Without trade, each person would have to be self sufficient–they would have to grow their own food, make their own shoes and clothing, build their own houses, brew their own beer, and so on.

Trade allows each person to work in the field in which they have the greatest “comparative advantage,” when compared with others. This simply means that people will choose to do the job that they are best at when compared to others. For example, if I can grow 5000 pounds of wheat per day or work as a receptionist and answer 20 calls per day, while you could grow 1000 pounds of wheat per day or work as a receptionist and answer only 10 calls per day, I should seek employment as a wheat farmer and you should seek employment as a receptionist. I might be better at both jobs that you are, but I have the “comparative advantage” in farming and thus should be a farmer.

In an economy with only two goods, exchange is easy–”I will grow wheat for you if you will answer my phones,” but as the economy expands this becomes harder to do. It becomes difficult to make exchanges with someone in a barter economy if both parties do not have the goods that the other party wants. As economist Walter Block explains the situation [page 200]:

“Consider the plight of the person who has in his possession a barrel of pickles which he would like to trade for a chicken. He must find someone who has a chicken and would like to trade it for a barrel of pickles. Imagine how rare a coincidence would have to occur for the desires of each of these people to be met. Such a “double coincidence of wants” is so rare, in fact, that both people would naturally gravitate toward an intermediary, if one were available. For example, the chicken-wanting pickle owner could trade his wares to the middleman for a more marketable commodity (gold) and then use the gold to buy a chicken. If he did, it would no longer be necessary for him to find a chicken-owning pickle wanter. Any chicken owner will do, whether he wants pickles or not. Obviously, the trade is vastly simplified by the advent of the middleman. He makes a double coincidence of wants unnecessary.”

If the government doesnt outlaw competing currencies, competition takes place over which good will be used as the “medium of exchange” until one or a few goods wins out and becomes widely accepted and used. This material serves the same role as a middle man, it connects potential buyers and sellers in an efficient manner and facilitates trade. Historically, from the time of the ancients to the Greeks and Romans, to the later Europeans, to the Chinese, Aztecs, Mayans, and so on, gold and silver have won out and been widely used as currencies.

Originally, banks were little more than storage facilities. After all, if gold or silver is used in every transaction, it probably isnt smart to have all of your gold and silver lying around your house (especially back in the days before alarm systems). People would bring their gold or silver to banks and would receive a receipt detailing the measure of either gold or silver, and often a description of the quality (ie, the receipt would read: 1 oz, 18KT Gold). Over time, the receipts from the more reputable deposit facilities began to be used in everyday transactions. If I held a receipt from a well known bank that promised the holder 1 oz of gold and I needed to purchase a product that cost the equivalent of 1 oz of gold, I might be able to convince the seller of the product to accept my receipt instead of making me go to the bank.

So, through time, these receipts began circulating and were known to be as “good as gold.” Eventually, these receipts began to look more and more like what paper currency looks like today. Here is a picture of some of these notes. The image below is not to scale, but if you click the picture it will take you to the properly scaled image:

Often times, banks would realize that there was little chance that all customers would demand their gold or silver at once. In these cases, banks would issue new currency that wasnt backed up and they would hope that people wouldnt redeem all of their notes at once. Although dishonest and fraudulent, this was generally not a big problem for the economy as a whole–people were usually smart enough to deposit their money in banks that had the reputation of maintaining 100% reserves.

However, the government (governments both inside and outside of the United States) responded to this banking system by doing what it does best–interfering in the arrangements of private individuals. Thus, governments often required that all banks redeem all bank notes, and not just their own notes. This created a “moral hazard” problem because banks essentially had no reason to maintain high reserves. When banks were not required to redeem the notes from other banks, they had an incentive to make sure that they kept high reserves (if they failed to do so, they would go out of business). But, when the government required them to accept all notes, they knew that they could issue as many notes as they wanted and that these notes would be redeemed by other banks throughout the country.

This situation was one of the main causes of several banking crises in the 1800′s, including the Panic of 1819. Furthermore, branch banking was prohibited which meant that banks had a tougher time dealing with the seasonal borrowing demands of their customers (ie, farmers might need to borrow more money during harvesting season and less after they have sold their crops).

And, while the “free banking period” has been described by many economists as the most stable period of banking in American history, what little instability that did exist was due to government intervention. The most important government interventions were the ones mentioned above–the requirement that banks accept the notes of all banks and the prohibition on branch banking.

The government was able to use these problems as a justification for moving the banking system in a new direction. Under this 2nd phase, the government prohibited banks from printing privately issued currency, but still allowed Americans to redeem their government issued bank notes for gold and silver.

This phase continued from the end of the Civil War through the early 1930′s, when President Roosevelt confiscated all gold and silver coins in the economy and changed the redemption rate of gold from around $20/oz to $35/an ounce (imagine losing 40% of the value of your money in one night).

During this third phase, money was still denominated in gold and silver, but could not be redeemed by American citizens. Only foreign citizens and governments could redeem money for gold or silver.

This phase continued for several decades until 1971, when President Nixon removed America from the gold standard completely. He was concerned with the rising costs of the Vietnam War and the entitlement programs of the Great Society, and became convinced that America’s economy would survive just fine off of a gold standard. Not coincidentally, his move was followed by over a decade of record (for America) inflation, double digit unemployment, high interest rates, and general economic decline. In this fourth phase, the American economy has been victim to a large number of economic booms, followed by economic busts, the national debt has soared, the value of the dollar has plumeted (the dollar has lost around 97% of its value, measured against gold since 1971).

To prevent massive rates of inflation and to restore order to the economy, the Federal Reserve must leave behind the policies that they have been following in recent decades. One important step that it can do to achieve this is to announce a schedule for increasing reserve requirements until banks reach a level of 100% reserves.

Why 100% reserves?

Think back to the history of the banking system described above. A bank deposit, whether redeemable for gold or cash is nothing more than an agreement between a bank and a person for the bank to hold some money now and return it later, on demand.

Thus, if I deposit $100 in a bank, the bank owes me $100. That $100 is my property and is only being held by the bank.

Because that $100 is still my property, the bank has no [moral] right to loan out my property to someone else. The Federal Reserve’s fractional reserve banking system exacerbates this problem because if I deposit $100 in a bank, they are only required to keep $10 on hand and can loan out the remaining $90 and thus create money out of thin air. I described this process in detail in my last article, but this can result in $100 turning into nearly $1000.

My bank receipt entitles me to withdraw the $100 that I deposited, but there are 9 other people who now have receipts entitling them to withdraw that same money. Thus is because there is now $100 in cash and $1000 in deposits. But this system is inherently immoral, after all, how can it be possible that 10 people own a legal title to the same property.

It is difficult to create an analogy that fits this situation because this practice itself seems like it just cannot be true. Imagine that you go out of town on a long vacation and drop your car off the airport’s long term parking lot. Pretend for the sake of this example that this lot is a valet lot and that you have handed the keys off to an attendant. The attendant realizes that you will not be back for several months and decides to rent the car out to a friend for the next month. This is immoral because the attendant has sold the rights to something that he does not own, but it is likely not to cause a problem as long as you dont come home early. But, suppose you do come home earlier than expected to deal with an unexpected problem. You will discover that the right to use your car is now being claimed by another person. This clearly creates a problem, afterall, two people cannot both fully own the same property.

Banks act in a similar manner, however, their game is much less honest and much more problematic. They essentially act as attendants who lend out your car to 9 other people (instead of just one) and hope that everyone’s schedules align just right so that no one will discover the fraud that has taken place. The creation of new money by banks leads to price inflation and bubbles in the economy at first, but always ends in an economic downturn and bank failures.

As economist Hans-Hermann Hoppe wrote: “Two individuals cannot be the exclusive owner of one and the same thing at the same time… This is an immutable principle; it is a law of action and nature that no contract can change or invalidate. Rather, any contractual agreement that involves presenting two different individuals as simultaneous owners of the same thing is.. objectively false and thus fradulent. Yet this is precisely what a fractional-reserve agreement between bank and customer involves.”

This system functions fine as long as Americans use debit cards rather than cash, but even a small increase in the demand for cash (as opposed to debit cards) can cause bank failures.

It is this artificial creation of money which causes temporary economic booms (whether it be in the form of a housing bubble, a dot com bubble, or something else), but these booms are inevitably followed by a bursting of the bubble and widespread economic chaos. This current economic crisis is the result of a rapid expansion of the money supply, low interest rates, and government intervention into the housing sector.

Requiring banks to maintain a 100% reserve requirement would tighten credit and would make it harder for banks to make poor investments. Thus, bubbles dont emerge and they dont burst. The economy functions much more smoothly and banks forced to respect the property rights of their customers.

However, banks cannot currently be required to hold 100% reserves without causing a lot of people to lose a lot of their hard earned money. But, this doesnt mean that we cannot begin the transition.

Currently, banks are “only” required to maintain a total of $67.041 billion. Because there are no reserve requirements for savings accounts and a 10% reserve requirement on checking deposits, this means that there is around $670.41 billion held in checking accounts. There is just over $1.05 trillion held by banks in “excess reserves,” meaning that there is a total of $1117.436 in reserves. Thus, it would be no problem for the Federal Reserve to require that banks hold 100% reserves for checking deposits. Banks would still hold around $400 billion in excess reserves and banks would no longer be able to create a situation where multiple people own titles to the same money.

But doing so could cause other problems. There would still be a disparity between required reserves for checking accounts and savings accounts. Banks could get around this problem by urging customers to move their checking deposits into savings accounts. So, any solution to this problem must require that checking accounts and savings accounts be subject to the same reserve requirements.

If we were to begin the process by requiring that banks hold 20% of both checking and savings deposits, the situation would be much better. There is currently $5.0455 trillion held in American savings accounts. Thus, a 20% requirement would mean that banks would need to hold $1.0091 trillion. If we add 20% of checking accounts [$134.082 billion], we are left with a requirement of $1,143,182,000,000 which puts us just under the amount of money actually held in reserves by American banks. If banks are given several weeks or even a month to meet these new requirements, they would easily be able to do so by restricting their lending.

In order to get to a 100% reserve requirement, it would actually be acceptable for the government/Federal Reserve to print additional money, as long as it did not expand the money supply beyond what was necessary to get to 100% reserves. The reason for this is that there is a great deal of money that is in the economy but that is not in print. Recall from above that a $100 deposit can easily become nearly $1000, but only $100 in cash actually exists. If we are to require 100% reserves and still prevent bank failures and people losing their deposits, it would be acceptable for the government to print the additional $900 created in the above example and send it to the banks. This would mean nothing more than the government printing money that was already in existence on the ledgers of banks, and will make the transition to 100% reserve banking much smoother and quicker.

Would a 100% reserve requirement stifle economic growth?

If banks are required to maintain 100% reserves, it is clear that they will loan out less money. While this is true, it does not mean that economic growth will be stifled.

Banks will still be able to make loans under a 100% reserve requirement. These loans would be made from funds deposited in CDs. CDs are a form of time deposit bank accounts in which a customer will deposit funds in an account for a specified time at a specified interest rate. For example, a customer might deposit $100 in 1 year CD at a 5% APR. During this period, the customer is not allowed to access their funds. After the year, the customer would receive $105 and they would be allowed to roll the funds over into another CD or withdraw their funds. The banks would be able to pay this sum by loaning that $100 out to a borrower at a rate higher than 5%.

Thus, banks would still be allowed to loan out funds and borrowers would still be able to receive loans to purchase houses, expand their businesses, or for any other purpose. Loans would be made without banks arbitrarily creating new money. Bank failures would no longer be a threat because banks would be required to maintain 100% reserves. Interest rates would adjust naturally and would reflect the market prices for agreements between bank customers, banks, and borrowers, with banks essentially serving as middlemen between lenders (depositors) and borrowers.

Sound Money

Maintaining a 100% reserve is a great first step, but it should not be seen as the last. The banking system must be integrated with the Federal Reserve’s supply of gold. This would return us to the days when money was actually money (a medium of exchange that had value to people) and not just numbers printed on paper. It would return us to a stable banking system and we would see the return of stable and slightly falling prices (which was the norm from 1800-1913).

The first thing that we need to do is figure out what the new total money supply would be if there were 100% reserves. If we add the $5.0455 trillion held in savings accounts and the $670.41 billion held in checking accounts, we come to the total of $5.71591 trillion.

The Federal Reserve currently holds 261.5 million oz of gold. Strangely, they value this gold at $42.22 per oz, even though the current market value of gold is around $1,200 per oz.

In order to readjust the value of gold relative to the dollar, we must divide the $5.71951 trillion by the 261.5 million oz of gold. After doing so, we find that gold would need to be pegged at the new price of $21,871.93 per oz (as of Monday, May 24, 2010).

This change in the price of gold would not cause problems in the economy or even cause a massive price inflation. It would essentially mean multiplying the price of everything the same number, meaning that all wages, prices, and costs would move together and would do so only one time. This is the case if and only if banks are required to maintain 100% reserves.

If we multiply everyone’s income, wealth, and the prices they pay for goods and services by 18, then no one is made any better or worse off by this intervention. But, what we have done is stabilize the banking system in order to ensure that everyone actually has a claim to their own funds. This would be far better than the current system, in which multiple people hold claims to the same money. It would also prevent the Federal Reserve and other banks from engaging in monetary inflation which can lead to price inflation, the boom and bust business cycle, and a destabilized economy.

Then What?

Following these measures, the Federal Reserve and its member banks must guarantee that customers may redeem their money for its equivalent value in gold. This move is common sense: if we are to return to sound money and to a gold standard, we must ensure that money is redeemable in gold. This would essentially make paper money equivalent to a ticket which can be exchanged for gold at any time.

After this is done, Congress, the Federal Reserve, and the Treasury Department must take the necessary steps to allow competing currencies. While gold has historically been the commodity chosen to serve as the medium of exchange, other metals including copper and silver have been used as well. The government must allow banks to issue their own currencies which can be denominated in which ever manner the issuing banks/mints choose.

It will be up to retail stores, businesses, and individuals to decide which currencies they will accept as payment for their services. The differences in currencies will undoubtedly be smoothed out by banks issuing debit cards which allow merchants to accept payments in the currency of their choice, despite the fact that the person paying for the services may be paying in a different currency. If this sounds unfeasible, think about what happens when you go out of the country and make purchases: you pay for goods in a foreign country using your debit or credit card, the foreign merchant gets paid in his local currency, you pay in American dollars, and the bank facilitates the transaction. The same process could occur at merchants within the United States with little difficulty.

The Federal Reserve and Congress have the ability to stop hyperinflation, further banking failures, the business cycle, and other economic disruptions. However, their ability to do so depends on the implementation of the above policies. We must return to a situation where each dollar was only owned by one person. It is just not feasible to have a situation where two individuals have the same legal claim to ownership over the same property. We must return to sound money, backed by a commodity which itself is valued by individuals. We must end the legal monopoly status of Federal Reserve notes and allow individuals to accept payments and pay for goods and services with the currency of their choice. Failure to do so could have consequences dire enough to make the current economic crisis look like a drop in the bucket.

Americanly Yours,

Phred Barnet

Please help me promote my site:

How An Economic Recovery Could Become An Economic Catastrophe

admin — Fri, 21 May 2010 13:22:56 +0000

My friend, Jim Davidson sent me this chart yesterday.

Ok, clearly the chart above indicates that something unprecedented and drastic has been happening in our banking system for the past two years. But you are likely asking “what does this mean?”

The United States’ banking system is a fractional reserve system, meaning that banks are not required to hold 100% of the money deposited. Currently, the reserve requirement (the percentage of deposits that banks are required to maintain) is 10% for checking accounts. Thus, if you were to deposit $100 of your money into a checking account, the bank would legally be required to keep $10 and could lend out $90 to those borrowing money from the bank. Any amount they kept on hand above $10 would be considered “excess reserves.”

For those interested, the data used to make the above graph can be found here. A quick glance at either the data or the graph shows that for most of the past 50 years, banks have maintained reserves at levels very close to the levels mandated by the Federal Reserve. On August 1st, 2008, banks maintained excess reserves of $1.875 billion. One month later, excess reserves shot up to $59.482 billion. On October 1st, excess reserves equaled $267.159 billion, reaching $558.821 billion on November 1st, and $767.332 billion on December 1st. On April 1st, 2010 (the last date for which data is available), excess reserves totaled just over $1.05 TRILLION, or around 1000 times higher than they were 20 months earlier!

You are likely still asking what all this means.

Well…

What this means is that banks are keeping reserves on hand above and beyond the ratios required by the Federal Reserve. Banks are likely doing this for several reasons:

1) The banks know that many of they loans they initiated over the past several years are likely to default. These loans were purchased by these banks using the cheap credit made available by increases in the money supply and low interest rates. Thus, banks are keeping the “excess” capital on hand so that they can pay the interest on the money that they borrowed to make these faulty loans–even if there is a large number of loan defaults.

2) This ties in with the reason above, but these banks are worried about the consequences of asking for another large bailout from American taxpayers. The government bailed out these banks a year and a half ago, despite widespread public opposition and used the rationale that doing so would save the economy. However, since this bailout, the economy has only worsened. The banks know that it is unlikely that the American people would be as willing to allow their government to hand rich bankers taxpayer money again.

OK, so the banks arent lending right now, but what does this mean?

There is another major reason why the banks arent lending: we are in the midst of a pretty serious recession. No one knows how long it will last, and my guess is that no one really knows just how bad it is right now. With the exception of the Austrian Economists, not too many economists out there even say this crisis coming–much less lasting this long.

With so many people unemployed, so many businesses failing, and so few businesses expanding (or new businesses being opened), there just isnt a massive demand for loans. This gives banks another reason to continue to hold “excess” reserves.

But, the economy is slowly starting to pick up. As this happens, banks will begin to loan out more money and will eventually start to lower their reserves until they reach levels of excess reserves near the historical rate (in other words, near zero). In fact, it is already happening: On February 1st, excess reserves were $1.162 trillion, on March 1st, excess reserves were $1.120 trillion, and on April 1st, excess reserves were $1.05 trillion. In other words, banks decreased their excess reserves by about 9.6% between February 1st and March 1st.

As the economy recovers and banks make additional loans, this will increase the supply of money in the economy. An artificial increase in the supply of money is, simply put, not good. When there is more money in the economy chasing after similar amounts of goods and services, the result can be nothing else but an increase in prices (relative to what prices would have been without the increase in the money supply).

The effects of the increases in lending brought about by an economic recovery will increase the money supply by much much more than $1 trillion. As mentioned above, under our fractional reserve system, banks are only required to hold 10% of checking deposits and are able to lend out the remaining 90% to borrowers. However, the process doesnt stop there: if you deposit $100, the bank holds $10 and loans out $90 to someone else. When that person deposits their money in a checking account, their bank is then able to loan out $81 while only holding $9, and so on. As this process continues, banks effectively create (out of thin air) over 9 times the money that is held in their vaults and your $100 becomes nearly $1000 in the economy:

Thus measure of money supply is known as the M2 money supply. Thus, if banks return to their historical activities and maintain reserves at a level just above the reserve requirement rate, the result could be an increase in the M2 money supply of around $10 trillion. Currently, the total M2 money supply is just over $8.4 trillion, thus if banks start to lend out their excess reserves, the M2 money supply will more than double.

The implications of this are quite sobering. If the economy does not improve and continues to muddle along, things will be bad. Unemployment will remain high or possibly even creep higher, the stock market will continue to drop, people will continue to suffer and so on.

However, if the economy shows marked improvement and begins to accelerate, things will be much worse. At first, this might seem counter intuitive, but we must remember to take the above information into account. When the economy improves, banks will start to lend out their “excess” reserves. Because of the fractional reserve nature of the United States’ banking system, each dollar that banks hold in excess reserves has the potential to become nearly $10 when loaned out.

At first, this will make it look like the economy is growing at a very fast rate. After all, the newly created money is being spent by lenders to purchase things that werent being purchased before. The increased demand for these goods raises their prices (and initially the profits of the businesses selling these goods). This may result in a rise in wages for the employees in that sector of the economy. However, when monetary inflation occurs at a rate as high as the rates we are likely to see, this phenomena spreads throughout the whole economy. Thus, prices and wages will generally rise throughout the economy.

Anyone who thinks that this is a good thing is fundamentally wrong. We often are presented with the argument that increasing the money supply increases incomes and is necessary because without such increases “there wouldnt be enough money to go around.” As economist Tom Woods wrote in his best selling book, Meltdown, “It is to misconceive the nature and purpose of money completely to think its supply needs to expand in order to allow more transactions to take place.” In fact, in a system with a stable money supply, “prices fall over time and the value of money rises.” The reason for this is that “as output increases, the monetary unit simply gains in purchasing power.”

Monetary inflation (and the resulting price inflation) does not mean greater standards of living–the opposite is true. What monetary inflation does do is destabilize the economy, increase the inequality of wealth distribution, and make society less better off than it would be under a stable monetary system.

Just ask the citizens of Zimbabwe if the massive increase in their nation’s money supply have made them better off. In 1980, each Zimbabwe dollar was worth $1.59. After 30 years of constantly increasing the money supply, their economy is in shambles, and their money is worth less than the paper it is printed on. “In March 2007 Zimbabwe’s inflation rate passed 50% a month, a good threshold for defining “hyperinflation” and equal to 12,875% a year. Since then, it’s gotten much worse.” In late 2008, their price inflation rate reached the incomprehensible rate of “80 billion percent a month. That means around 6.5 quindecillion novemdecillion percent a year–or 65 followed by 107 zeros. To get a handle on it, realize that it’s equivalent to inflation of 98% a day. Prices double every 24.7 hours.”

Well then, if the argument that printing new money makes everyone in the economy better off has even a slight grain of truth in it, then Zimbabwe must be among the richest country in the world! After all, Zimbabwe is following the economic philosophy of the “brilliant” John Maynard Keynes and his disciples who have argued that increases in the money supply bring about prosperity by accelerating spending. Everyone knows that this is not the case, however. Zimbabwe is among the poorest nations in the entire world and recorded a 94% unemployment rate last January.

Does this same fate await America? Lets just say that something like this is possible. The Federal Reserve has been printing money for too long and has accelerated these practices in recent years and months. With a low reserve rate of only 10%, the Federal Reserve is just asking for trouble; when the economy recovers, things have the potential to spiral out of control quickly and result in a massive and destructive hyperinflation.

Yes, this can be slowed or even stopped. But, before you get your hopes up, ask yourself if the US government has ever learned from its mistakes or the mistakes of others.

Americanly Yours,

Phred Barnet

Please help me promote my site: