Americanly Yours

Promoting Free Markets, Free Trade, and Freedom!

Trayvon Martin Was NOT Killed By The Free Market

April 05, 2012 By: Phred Category: Uncategorized

The premature loss of any human life is tragic. I do not know whether Trayvon Martin death was or was not racially motivated. I do not know whether George Zimmerman killed Trayvon Martin in cold blood or in self defense. In the final analysis Mr. Zimmerman is the only living person who knows exactly what happened that night.

I have my suspicions and I would be willing to share them with you later, but the purpose of this article is not to solve the mystery of what was going through Mr. Zimmerman’s head the night of Mr. Martin’s death; the purpose here is to refute claims that Mr. Martin’s death was somehow caused or enabled by anti-government sentiments. His death is not an example of renegade free market law run wild and this unfortunate incident should not be used as evidence of need for more government restriction on individual liberty.

Rutgers law professor David Troutt recently wrote an editorial in Politico in which he placed the ultimate responsibility for Mr. Martin’s death on “the invisible intersection of racial hatred and hating government,” as well as on “the extremes of privatization.” He further claimed that “hating government allows this to happen. It helps pass laws that put too much power in private hands while penalizing government for performing traditional duties like crime investigation.“

Mr. Troutt is absolutely wrong to condemn privatization and the market for causing the death of Mr. Martin.

First of all, there is not a free market system of private law which dominates in America. The American system, including that in use in Florida is a centralized bureaucratic system of law which is generated through the political system. Law is created by legislators, interpreted by judges, and enforced by an executive branch which includes police officers, justice departments, attorneys general, and so on. Jurors are conscripted from the general public and forced to participate in the legal process. In any given area, one local police department has monopoly jurisdiction over the handling of crimes committed in that area. Competitive policing agencies are non-existent: victims have no say which police department handles their case. The constituent parts of government justice systems are monopolies in which competition is not allowed and the price system cannot properly function. If a person is unhappy with the police or courts in their area, there is nothing that they can do about it short of moving to a different jurisdiction and hoping for better results.

This is a far stretch from a private legal system which is advocated by many libertarians. Under a private legal system, law would be created by competing agencies and would be adhered to voluntarily by individuals who sought protection from the various agencies. In a private legal system, law is not created through “legislation” (at least not in the current usage of the word), law is created contractually, or through the ruling of common law courts and arbitration societies. If an agency creates laws which coercively restrict the freedom of their clients, they will likely lose profits when their clients switch to a competing agency. It is likely that the providers of free-market law would resemble insurance companies, with their global networks, reinsurance contracts, teams of actuaries and underwriters, contracts and peaceful business dealings with competing insurance firms, etc.

It is clear that no such system operates in the United States of America. Mr. Troutt is simply taking the route most preferred by modern academics: blame “capitalism,” the market, deregulation, and radical privatization for all of society’s problems without either defining any of these terms or recognizing that capitalism is not a feature of the American economy.

Mr. Troutt also makes the claim that “laws that abdicate government responsibility in favor of personal ideas of justice often lead to unintended consequences.”

The author’s rhetorical trick has the effect of making the argument that only these types of laws have unintended consequences, while laws which increase government power are magically exempt from the possibility of creating unintended consequences. Furthermore, by making this comment, the author ignores the fact that all government legislation necessarily entails the abdication of individual liberty in favor of increased government power, and that this guarantees unintended consequences as well.

Yes, George Zimmerman was a member of the neighborhood watch program, but that hardly means that the market itself is responsible for his actions. Police officers kill unarmed civilians all the time—and no this fact does not in any way make what happened to Mr. Martin OK–but I suspect that Mr. Troutt has never argued that laws which protect police officers from immediate arrest are examples of bad legislation.

Mr. Zimmerman’s neighborhood watch duties were in the context of a governmental legal system. It was the government, not the market which passed the Stand Your Ground law which Mr. Troutt opposes. It was the government, not the market which released Mr. Zimmerman without charging him with a crime or holding him for questioning.

Troutt argues that “The Sanford police evidently conducted little investigation — relying instead on Zimmerman’s account.” Notice that the failure was not a market failure, but rather a government failure: it was the Sanford Police Department who allegedly botched the investigation, not the Acme Protective Services Corporation or any other privately run firm.

Mr. Troutt has issues with the “Stand Your Ground Law” which grants legal protection to those using deadly force to defend themselves against what they perceive to be a threat on their lives.

The author is correct to oppose laws which grant special protection to some people (ie, Stand Your Ground gives special protection to those who claim self defense), but he is wrong to argue that Stand Your Ground is a market reform. Stand Your Ground is a government intervention which, as pointed out about, inevitably leads to unintended consequences. Ludwig von Mises noted that statists tend to ignore the root cause of these consequences (the intervention itself) and call for further interventions. The process repeats itself as each new wave of interventions leads to worse and worse consequences and further interventions to combat these consequences.

Mr. Troutt’s article is offensive to defenders of freedom because of its implications; an unarmed teen was killed by a member of a neighborhood watch group and Mr. Troutt’s first reaction is to propose restricting freedom. Whether Mr. Zimmerman sought to murder Mr. Martin or whether this was an honest mistake, we do not know whether Mr. Zimmerman had even heard of the Stand Your Ground law before he shot Mr. Martin. We also do not know whether he would have acted any differently had no such law been in place. This makes it highly unlikely that Mr. Martin is dead because of the existence of that law or that repealing that law a few months ago would have saved Mr. Martin’s life.

If Mr. Zimmerman was a cold blooded killer on the prowl, he would have shot Mr. Martin regardless of whether or not Stand Your Ground was in effect. Killers kill people with disregard to the law. Hence the existence of murder even though it remains unlawful.

Conversely, if Mr. Zimmerman shot Mr. Martin in self defense as he claimed, he would have done that regardless of the existence of Stand Your Ground. When people feel that their live is being threatened, they tend to take whatever action the deem to be necessary to save themselves. They certainly do not tend to think about whether an action is legal or illegal before they act to save their own lives.

Under any system of law, there will always be people who commit murders, rapes, and other crimes. This is true of a free market system as well as of a totalitarian system. Those who use events like Mr. Martin’s death to advocate against individual liberty and for greater government control should think hard about what they are doing. Centralized governments have a horrendous track record with regards to human rights including murdering. In the last century alone, well over 100 million people were killed by governments, while the number killed by individuals is a tiny fraction of this number.

It is important to remember that a child is dead. This tragedy was not caused by advocates of the free market or by efforts at privatization. The goal of law is to achieve justice, to the maximum extent humanly possible. The Stand Your Ground law which led to Mr. Zimmerman’s release was a government intervention designed to grant special privileges to those claiming self-defense. If anything, this tragedy was not caused by the free market, but by the lack thereof.

The Non-Aggression Principle

April 14, 2011 By: Phred Category: Uncategorized

If you arent a libertarian, chances are that you have never heard of the non-aggression principle (also referred to as the non-aggression axiom).  Most libertarians base their views about morality and the role of government around the non-aggression principle.

The non-aggression principle is the idea that no matter how disgusting, immoral, or improper you believe an act to be, you have no right to use force to stop someone from committing that act, unless that act itself involves the initiation of force against another person (or person’s property).

The principle is simple and straight forward; it is wrong to initiate force against another person or group of people. This is by no means a passive or pacifist doctrine; it is absolutely permissible to use force in response to force, in order to protect or defend one’s person or property, to enforce a contract, or punish someone for failure to adhere to the terms of a contract.

However, it is not permissible to use force to attack your neighbor, steal another person’s property, or stop someone from using their justly acquired property in a manner that does not aggress upon another individual.

The non-aggression principle has been stated and restated from ancient times to John Locke [“Being all equal and independent, no one ought to harm another in his life, health, liberty, or possessions”] to Ben Harper [“My choice is what I choose to do, and if I’m causing no harm, it shouldnt bother you. Your choice is who you choose to be and if you’re causing no harm, then youre all right with me”].

By applying the non-aggression principle to all aspects of life, a just and coherent philosophy of non-interventionism becomes clear: if no one is being harmed besides those people voluntarily engaged in the act, leave it alone. It is that simple. You dont have to like or respect or engage in prostitution, homosexual relations, religion, or the use of drugs, alcohol, tobacco, etc, but you do not have the right to stop any adult from engaging in any of these acts.

The non-aggression principle is a very important part of the natural rights philosophy.

Every person is the owner of their own body and has the right to do with their body as the see fit.  People can also acquire property by using one of three different methods: homesteading, voluntary exchange, and theft.  Homesteading involves taking unowned resources and improving them, while voluntary exchange involves the unforced transfer of resources from a person (or persons) to another person (or persons).  Both of these two methods are fully consistent with the non-aggression principle–by definition, neither homesteading or voluntary exchange involves the initiation of force.

When the non-aggression principle is violated, property is acquired in the third method: theft. Physical acts of violence or threats of violence against others are violations of a person’s right to self ownership.

Even if one rejects the doctrine of natural rights in favor of a utilitarian (ie, the common good) view, the non-aggression principle is still important.

Man is a social animal. For the most part, we seek to engage in activities which promote the social benefit. Activities which violate the non-aggression principle tend to disrupt the peace by inviting violent retaliation. For example, if I kill or harm a member of your family (or attempt to do so), you are likely to respond by seeking revenge on me. These types of feuds can spiral out of control and disrupt the peaceful cooperation on which society depends. The best way to keep the peace that is essential to the existence of society, is to adhere to the non-aggression principle.

Thus, whether you subscribe to natural rights theories or whether you support some sort of utilitarian view, it is in the best interests of both individuals and society that people adhere to the non-aggression principle.

As we have seen, violations of the non-aggression principle which are committed by individuals can disrupt the peace. However, violations of the non-aggression principle committed by the government are infinitely more eggregious. This is because the government grants itself the power to do things that no individual could ever be permitted to do.

Only the government (or those under the protection of the government) can confiscate money from people without their permission and give it to other people and call it “public policy.” Government redistribution of wealth and granting of special privileges is aggression because it prevents people from using their own property in a peaceful manner of their choosing.

Only the government can commit mass murder against civilians and call it a “defensive war.” A bombing campaign in a densely populated civilian area which results in civilian deaths is murder; it doesnt matter if the bombing was done by a rogue terrorist or by an Air Force member acting under order from the President. Murder is murder. It doesnt matter who does it.

Only the government can throw human beings in cages which are kept in horrible conditions for the “crime” of recreationally smoking a plant in their own home. Smoking marijuana on your couch does not violate the non-aggression principle; raiding someone’s house and confiscating their marijuana does.

It is essentially impossible for government to act without violating the non-aggression principle. This is because mandatory taxation is coercion, theft, and extortion. All of these acts violate the non-aggression principle. Taking people’s money without their permission is theft. Any business regulation, permit requirement, governmental zoning restriction, anti-drug law, restriction of consensual acts deemed to be “immoral,” etc. are violations of the non-aggression principle because they prevent people from using their justly acquired resources in a peaceful manner of their choosing.

Every government act involves a violation of the non-aggression principle. For, even when government is acting to stop one person from aggressing against another, it is doing so using resources that have been obtained via theft. When you violate the non-aggression principle, your actions may be devastating and cause harm, but they are limited by the amount of damage that one person can cause with whatever resources that you have available to use. However, when the government violates the non-aggression principle, it does so with other people’s money subject only to how much damage it can inflict before enough people get angry enough to either withdraw support or threaten revolution. It also does so under the guise of legality. But intelligent people know that an unjust law is no law at all.

Thus, the only way for government to act without aggressing on the rights of its citizens by violating the non-aggression principle would be for the government to set the exact policies that each individual would choose on their own and rely on truly voluntary donations to do so. In other words, the government’s best option is to do nothing at all.

In the words of the French economist, Anne-Robert-Jacques Turgot:

“The policy to pursue, therefore, is to follow the course of nature, without pretending to direct it. For, in order to direct trade and commerce it would be necessary to be able to have knowledge of all of the variations of needs, interests, and human industry in such detail as is physically impossible to obtain even by the most able, active, and circumstantial government. And even if a government did possess such a multitude of detailed knowledge, the result would be to let things go precisely as they do of themselves, by the sole action of the interests of men prompted by free competition.”

This isnt just the stuff of libertarian philosophers. The rapper Lil’ Jon famously uttered the phrase “Don’t start no shit, it won’t be no shit!”

This concept is remarkably simple: do not initiate the use of force against another person. Respect their right to engage in peaceful activities on their own property in any manner that they see fit.

Americanly Yours,

Phred Barnet

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Taxation Is Theft

June 09, 2010 By: Phred Category: Uncategorized

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

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Private Property Explained

June 08, 2010 By: Phred Category: Uncategorized

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.


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 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.

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.

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

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How To Fix The Banking System

May 24, 2010 By: Phred Category: Uncategorized

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

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