|
Etica
& Politica / Ethics & Politics, 2003, 2 http://www.units.it/etica/2003_2/HOPPE.htm
Government, Money, and International Politics
1.
Government defined Let me
begin with the definition of government: A government is a compulsory
territorial monopolist of ultimate decision-making (jurisdiction) and,
implied in this, a compulsory territorial monopolist of taxation. That is, a
government is the ultimate arbiter, for the inhabitants of a given territory,
regarding what is just and what is not, and it can determine unilaterally,
i.e., without requiring the consent of those seeking justice or arbitration,
the price that justice-seekers must pay to the government for providing this
service. (1)
Except for some so-called public choice economists such as James Buchanan, it
is obvious that such an extraordinary institution cannot arise “naturally”,
as the outcome of voluntary contractual agreements among individual property
owners. (2)
For no one would agree to a deal that entitled someone else, once and for
all, to determine whether or not one was truly the owner of one’s own
property, and no one would agree to a deal that entitled this monopoly judge
with the power to impose taxes on oneself. Rather, an institution such as
government would normally, and from the outset, be regarded as an
illegitimate and indeed criminal protection racket. And as a protection
racket, this institution would tend to be brought down quickly. It is only
possible for such an institution to survive for any length of time if and
insofar as it succeeds in instilling in the “protected” public a myth, i.e.,
a false yet generally held, and hence effective, belief. In order to make the
public accept, i.e., not to resist, the protection racket, it must be
persuaded that without a monopoly of jurisdiction and taxation (that is, in
what has been called a “state of nature”) constant warfare among individual
property owners would exist. I have called this belief the Hobbesian myth and
identified it as the most powerful and widespread myth of the modern world. (3) It is not
my intention here to further analyze this myth. Rather, I want to analyze and
develop the consequences that follow from the fact that this view is actually
believed, and hence, that a protection racket is regarded as legitimate - as
a government rather than a protection racket. First, if government is
generally held to be necessary for the establishment of internal peace, it
follows that its agents will take advantage of their monopoly: they will
increase taxes and reinterpret the law to their own advantage. The price of
justice will rise and its quality will fall. In other words, government does
indeed have an interest in making peace among its subjects, i.e., in
preventing one subject from warring against and/or robbing another one, but
only in order to rob all of its subjects more successfully itself. However,
instead of concentrating on the internal consequences of government, I want
to concentrate my attention on the external consequences, i.e., on its
foreign rather than domestic policy. In this regard, two observations are of
fundamental importance. On the one hand, by virtue of its power to define and
interpret the law and to tax, every government is faced with the risk of
exit. Its subjects might leave the territory over which the government’s
authority extends in order to avoid taxation and its perversions of law. And
every such exit implies a loss of potential revenue to the government,
whereas any population increase promises potentially higher tax revenues. On the
other hand, at least at the outset many competing governments exist, each not
only faced with the threat of exit but also equipped with the power to tax,
i.e., to externalize the cost of territorial expansion (foreign aggression)
onto its own subject population. Hence, it can be predicted that competing
states will come into conflict with one another. The competition between
governments is different, however, than the competition of private firms. In
any given territory, only one monopolist of jurisdiction and taxation can
exist. Hence, the competition between governments will tend to be violent,
resulting in interstate wars, and eliminative. By means of war, one state
expands its territory at the expense of another, and the number of remaining
states will progressively fall. A tendency toward political centralization is
set in motion which comes to a halt only once a single world government has
been established and the threat of exit is thus eliminated. (4) We can be
even more specific regarding the tendency toward political concentration in
questioning which states will tend to be victorious in interstate warfare.
Victory or defeat depends on many factors, of course, but in the long run,
the decisive factor is the relative amount of economic resources at a
government’s disposal. In taxing and regulating, governments do not
contribute to the creation of economic wealth. Instead, they parasitically
draw on existing wealth. However, governments can influence the amount of existing
wealth negatively. Other things being equal, the lower the tax and regulation
burden imposed by a government on its domestic economy, the larger its
population will tend to grow (on account of internal reasons as well as
immigration factors), and the larger the amount of domestically produced
wealth will be on which it can draw in its conflicts with neighboring
competitors. That is, states which tax and regulate their domestic economies
comparatively little - liberal states - tend to defeat and expand their
territories at the expense of less-liberal ones. This explains, for instance,
why during the nineteenth century Even more
specifically, it explains why the 2.
Government and money Now let
me turn to the next question: the relationship of government and money. Here
it is hardly necessary to explain in great detail that money is the natural outgrowth
of a market economy. Due to the existence of uncertainty, in barter
fundamental obstacles to trade exist. Double coincidents of wants are not
always present; hence, direct trade becomes impossible. As a way out of this
predicament, man begins to look for especially marketable goods, and trades
whatever he has to sell for more marketable goods in order to be able to then
turn around and acquire with these those things that he really wants. That
is, man begins to demand things to be used neither as consumer nor producer
goods, but as a facilitator (medium) of exchange. Others copy this practice,
and sooner or later most people in society use the same good for the same
purpose. Money, a commonly used medium of exchange emerges. And as trade
becomes world-wide, a tendency toward the use of a single world-wide medium
of exchange comes into existence. Historically, this was the international
gold standard. (6) Money, then,
comes into existence as a commodity money. In fact, money is the most easily
saleable commodity. It is produced by the market, like any other good. There
is competition in gold mining and gold minting; and in addition to genuine
money, there are money substitutes, i.e., titles (notes) to money. This,
then, is the situation with which governments find themselves confronted: a
commodity money such as gold, produced by profit-driven money producers and
entirely outside of the government’s control. Now recall
the definition of government as a monopolist of jurisdiction and taxation,
and assume no more than self-interest for government agents, i.e., that they
as everyone else prefer more over less income. What will be the government’s
position vis-à-vis a market provided money? As should be immediately
clear, it will try to gain monopolistic control over the supply of money, so
as to be able to enrich itself at the expense of its subjects (very much as
it enriches itself at the expense of its subjects by means of taxation). (7) In order
to reach this goal, a government must take three consecutive steps. Indeed,
all governments have taken these steps. Some have done it earlier and others
later, but all of them have done so in the same order. First, a government
monopolizes the minting of gold. No one but the government mint is permitted
to produce gold coins. With this step it becomes possible for the government
to engage in coinclipping, i.e., surreptitiously reducing the gold content of
coins. In recalling and reminting gold coins, and reducing, for example, the
gold content of a coin by 10 percent and increasing the supply of coins by 10
percent, the government essentially accomplishes the same thing as raising
the tax revenue by 10 percent, except, of course, that it is more difficult
to understand the causes and consequences of inflation than it is to
understand the causes and consequences of higher taxes. However, this first
step is still highly unsatisfactory from the point of view of government,
because it cannot engage in this practice repeatedly without some people
eventually realizing what is going on. In the
second step, the government monopolizes the production of money substitutes,
i.e., of paper titles to gold-property. No one except the government bank can
issue banknotes redeemable at par into genuine money. The commercial banks
may only produce checkbook-money (substitutes of money-substitutes). That is,
paper that is convertible at par into government produced paper, which in
turn can be converted into genuine money (gold). With this step it becomes
possible for a government to engage in fractional reserve banking practices.
The government bank creates additional money substitutes out of thin air,
uncovered by genuine money. Or put differently, it creates more titles to
money property than there is money property in existence. (8) By bringing these
titles into circulation it enriches itself at the expense of the general
public. Again: an increase of money substitutes, created practically at zero
cost, of say 10 percent beyond gold coverage has the same effect as a 10
percent tax increase; but taking the course and form of inflation, it is more
difficult to detect than the tax increase. However, even this second step is
unsatisfactory from the point of view of government because eventually the
public will realize what is going on. And once it does, runs on the central
bank will occur. The holders of titles to money will want to have their
titles redeemed into the genuine thing. But since there exist more titles
(notes) than property (gold), the central bank, faced with a run, will either
go bankrupt or suspend specie payment. In the
third step the government goes off the gold standard. The gold deposited in
government vaults is confiscated and the private ownership of gold is
outlawed. Having acquired purchasing power as something else - and more
- than mere pieces of paper, namely as titles to a money commodity
(property), the former money substitutes become money. A pure fiat money
currency takes the place of the former commodity money standard. Finally, or
so it seems, the government has reached complete counterfeiting autonomy and
can print money, out of thin air, and acquire real goods with this paper. The
only task remaining seems to be that of avoiding hyperinflation. In fact,
other problems and obstacles remain in place even then. Before addressing
them, however, a few remarks must be made concerning the question of how the
government can get away with taking the three steps just outlined. It can
only do so if it succeeds in creating a favorable public opinion. In order to
do so it will have to promote a few myths, i.e., make the public believe a
few erroneous but somehow plausible propositions: First, that competition in
money production will lead to fraud by profit-driven capitalists (even though
competition is in fact precisely the means of reducing the likelihood of
fraud, and fraud will actually be more likely if money is produced by a
monopolist). Second, that a commodity money involves substantial resource
costs which could be saved and the resources productively invested if one had
a paper money standard in place (while, in fact, as even such an ardent fan
of paper money as Milton Friedman admitted late in his life, a paper money
standard and the increased financial uncertainty brought about by it
increases the expenditures - and the waste of resources - in activities such
as hedging, financial newsletters, etc., and has actually driven up the price
of demonetized gold, and hence the volume of gold production). (9) And third, that money
is part of social wealth such that more money means greater wealth (while, in
fact, money is not part of social wealth and a larger amount of money
only leads to a falling purchasing power of money, while more money leads to
a redistribution of the existing wealth in society and benefits the early
receivers and spenders of this money at the expense of those receiving and
spending it later). 3.
Monetary Imperialism Now back
to the obstacles that still remain in the path of governments wanting to
achieve total counterfeiting autonomy. They become obvious once we introduce
the existence of more than one government into the picture. Let us first
assume that these competing governments are of roughly equal strength as
regards their military power only to return then to the beginning, i.e., the
tendency toward political centralization, imperialism, and ultimately world
government. (10)
Let us
take the example of two countries, France and Italy, and briefly analyze the
situation first for stage two in the process of the destruction of the gold
standard and then for stage three. In stage two, both France and Italy have
monopolized the minting as well as the production of money substitutes. If
the French government now, based on its monopoly in the production of money
substitutes (titles to gold), increases the production of paper Francs beyond
the increase of paper Liras, prices in France will increase relative to
prices in Italy. Consequently, exports from France to Italy will fall, and
imports into France from Italy increase. In order to pay for this increasing
volume of imports, gold will flow out of France and into Italy. Consequently,
the ratio of gold reserves to paper-Francs will fall, increasing the
likelihood of a run on the French central bank. France must now reduce the
supply of paper Francs, and the forementioned imbalance will be reversed.
Thus, as much as each individual government would like to inflate, this
inclination is constrained by the existence of other governments and their
currency. (11)
The
situation is similar in stage three with pure paper currencies in existence
and gold out of the picture. If France now inflates faster than Italy, again
exports from France will decline and imports into France increase. But
instead of an outflow of gold from France to Italy, now the French Franc will
depreciate relative to the Italian Lira, and the trade imbalance will be
reversed in this way. Again, the tendency of each individual government to
engage in inflation is curtailed by the existence of other governments and
the fluctuations in the currency markets. Returning
to my initial remarks, it is necessary to recognize how the remaining
obstacles to counterfeiting autonomy are to be overcome. Let us consider a
world in which the process of political concentration has been effective for
some time. As the result of interstate wars, large and mighty superpowers
exist such as the U.S. and smaller, militarily defeated and dominated
countries such as Germany. In contrast to the situation between two “equal”
countries, France and Italy, monetary relations between the U.S. and Germany
are significantly different and reflect this power difference. (12) In this
case too we can distinguish between two stages of development. Exemplary of
the first one is the system that was established at Bretton Woods. The U.S.
is off the gold standard domestically, but it assumes the responsibility of
redeeming paper dollars into gold (at fixed parity) vis-à-vis the
German central bank, while the German central bank promises to exchange paper
marks into paper dollars (at fixed parity). It would seem that Germany is
still on the gold standard, for marks can be redeemed into dollars and
dollars into gold. De facto, however, matters are completely
different. The German central bank is pressured not to make use of its right
to redeem dollar notes into gold but to use its dollars instead as reserves
on top of which it creates mark notes. I will explain what is now in
existence in the starkest possible terms in order to make the situation as clear
as possible. Now let’s say the U.S. central bank creates $50,000 out of thin
air and uses this money to buy DM 150,000 (assuming an exchange rate of 1:3)
from the German central bank and then turns around and buys, let’s say, a
Mercedes for this price. What does the German bank do with its $50,000? Does
it buy something in the U.S. or insist on redeeming this sum into gold? The
answer is of course, No. Rather, the $50,000 are registered as an increase in
the bank’s dollar reserves, and given this increase, the German bank then
creates an additional DM 150,000 out of thin air, and turns around and buys
itself a new Mercedes, too. Obviously,
the U.S. now has a trade deficit with Germany: imports exceed exports.
However, this is a “deficit without tears” (13) because no payment (exports) is being
made for the imported Mercedes, and the dollar does not fall against the
mark. Instead, a system of two-fold exploitation is imposed on the German
public. First, it gets ripped off by the U.S. central bank, then, facilitated
by the first rip-off, it gets ripped off once more by its own central bank.
We can call this system monetary imperialism. But this
first stage of monetary imperialism is still imperfect from the point of view
of the dominant country, the U.S. There may still exist other countries, not
yet fully controlled by the U.S., let’s say France under someone like de
Gaulle, fancying himself to be the president of a mighty military power in
its own right. In this case, the German central bank might be tempted to sell
its dollars to the French bank in exchange for Francs, and the French central
bank in turn might be audacious enough to approach the U.S. with a request
for redemption into gold. But, of course the U.S. does not have the gold or
has insufficient amounts of it. The bluff has been called, and the U.S. is
faced with a bank run. What should be done? The answer depends on the
relative strength of the parties involved. In fact, as we know, given the
superpower status of the U.S. and the insignificant status of France, de
Gaulle’s aspirations notwithstanding, the U.S. simply suspended specie
payment, France essentially did nothing but to accept the fait accompli, and
the world entered stage two of U.S.-managed monetary imperialism. The
second stage is like stage one except that gold no longer plays a role. All
countries are on a pure fiat money standard. The U.S. initiates the process
of inflation, and by using dollars as reserve currency, U.S. inflation is
exported to U.S.-dominated countries, while goods flow into the U.S. in the
same way as described before. Yet a run on the U.S. gold reserves is no
longer possible, of course. Even this system is unsatisfactory, however. In a
world of many countries, and even if the U.S. is a superpower with troops
stationed in well over 100 countries around the globe, this system of
coordinated inflation is bound to crack again and again. On the one hand, a
U.S.-dominated country might suffer more inflation than the U.S., its
currency would depreciate against the dollar, and in order to save
government-connected investors in those countries, the U.S. might be
compelled to engage in expensive bailout operations, i.e., buying up the
falling currency in order to stabilize it. On the other hand (and this is
potentially even more dangerous), a U.S.-dominated country may inflate less
than the U.S., its currency would appreciate against the dollar, and, if this
became a trend, the dollar would lose trust and might be abandoned in favor
of the other, harder currency. As the
final solution in the drive toward monetary imperialism and as a decisive
intermediate step in the drive toward world government, the U.S. has been
working long and hard to establish a U.S.-controlled world central bank
issuing a single, world-wide accepted paper currency. (14) Only then are all
obstacles to government counterfeiting eliminated because then the currency
can no longer rise or fall against any other as no other currencies are left.
The monetary integration currently under way in Europe, the establishment of
a Europe-wide EURO, is an important step in this direction. The EURO will be
more inflationary than the least inflationary of the previously existing
national European currencies, the German mark. And it is easier for the U.S.
central bank to “cooperate” with a single European central bank than with
some fifteen or so different banks. Moreover, whereas these fifteen odd banks
also could (and in fact did) use other reserve currencies besides the dollar,
namely those of other European currencies (notably the German mark), with
these other currencies gone, what else but the dollar can the European bank
use for this purpose? Do not
forget, however, that success in this attempt to establish a world central
bank requires public support, and to secure this support it is necessary to
promote another myth. Indeed, the same myth that is propagated currently in
Europe to establish the EURO. This is the myth that a single currency reduces
transaction costs. There will be no more tedious exchanging of money when you
travel from Germany to Italy, for example. This myth contains an important
half-truth - and this makes it particular dangerous and potentially
effective, because it is indeed true that money more truly serves its purpose
as a medium of exchange the more widely it is used. International trade and
economic calculation is in fact facilitated by the existence of a single
money. Commodity money such as gold, which emerges as the result of markets
and market exchange, has the tendency to become a world-wide used commodity
money as trade expands. (15) Matters
are fundamentally different, however, if this money is a fiat money produced
by a government world central bank. Given the nature of government, we can
safely predict that such a money will be more inflationary and lead to a more
massive redistribution of income and wealth in favor of government and its
favorite supporter-clients at the expense of the general public than anything
seen so far. Indeed, if we are to have a fiat money (rather than a commodity
money), and the only alternative is to have competing national paper
currencies or an international paper money, the choice is clear: As much as
competing and fluctuating paper currencies are dysfunctional as facilitators
of exchange, the former alternative is infinitely better. 4.
Conclusions The
course of human history is ultimately determined by ideas, whether they be
true or false. There is no natural law that causes government, interstate
war, imperialism, and finally world government. Nor is there a natural law
stating that a market-provided commodity money such as gold will be destroyed
eventually and replaced by government produced fiat (paper) money. These
events and tendencies only occur and prevail if and as long as a majority of
the public holds certain beliefs. (16) In particular, the public must
believe in the above mentioned Hobbesian myth and the myth that money
constitutes part of social wealth (such that more money implies more wealth).
Once the public has grasped that government is a protection racket and a
warmonger (rather than a protector and peacemaker), and that a central bank
and government paper money are simply the government’s Department of
Money-Counterfeiting and the instruments for continual redistribution of
income and wealth in favor of the government and its friends, not only will
we be spared the nightmare of world government and world paper money but we
may actually see the restoration of the gold standard and the withering away
of the state as a moral and economic perversity. Notes(1) See
further on this Murray N. Rothbard, The Ethics of Liberty (New York:
New York University Press, 1998). (2) For the
contrary view see James Buchanan & Gordon Tullock, The Calculus of
Consent (Ann Arbor: University of Michigan Press, 1962), p. 19; for a
critique of this view see Murray N. Rothbard, “Buchanan and Tullock’s Calculus
of Consent” and “The Myth of Neutral Taxation”, both in: Rothbard, The
Logic of Action, Vol. 2 (Aldershot, UK: Edward Elgar, 1997); Hans-Hermann
Hoppe, “Fallacies of the Public Goods Theory and the Production of Security”,
Journal of Libertarian Studies, Vol. 9, no.1, 1989. (3) See
Hans-Hermann Hoppe, “The Private Production of Defense”, Journal of
Libertarian Studies, Vol. 14, no. 1, 1999. (4) See
further Hans-Hermann Hoppe, “Marxist and Austrian Class Analysis”, Journal
of Libertarian Studies, Vol. 9, no. 2, 1990. (5) See
further Hans-Hermann Hoppe, “Small is Beautiful and Efficient: The Case for
Secession”, Telos, No. 107, Spring 1996. (6) See
further Carl Menger, Principles of Economics (New York: New York
University Press, 1976); Ludwig von Mises, The Theory of Money and Credit
(Indianapolis: Liberty Fund, 1980). (7) See
further Murray N. Rothbard, What Has Government Done to Our Money?
(Auburn, Al.: Ludwig von Mises Institute, 1990); idem, The Case Against
the Fed (Auburn, Al.: Ludwig von Mises Institute, 1994); Hans-Hermann
Hoppe, “How is Fiat Money Possible? - or, The Devolution of Money and
Credit”, Review of Austrian Economics, Vol. 7, no. 2, 1994. (8) On the
fraudulent character of fractional reserve banking see Hans-Hermann Hoppe,
Guido Huelsmann, Walter Block, “Against Fiduciary Media”, Quarterly
Journal of Austrian Economics, Vol. 1, no. 1, 1998 . (9) See
Milton Friedman, “The Resource Costs of Irredeemable Paper Money”, Journal
of Political Economy (1986). (10) See
further Hans-Hermann Hoppe, “Banking, Nation States, and International
Politics”, Review of Austrian Economics, Vol. 4, 1989; Guido
Huelsmann, “Political Unification: A Generalized Progression Theorem”, Journal
of Libertarian Studies, Vol. 13, no. 1, 1997. (11) The
same limitation regarding the issue of “fiduciary media” (money substitutes
not covered by money) applies also to a system of so-called “free banking”.
See Ludwig von Mises, Human Action. A Treatise on Economics (Auburn,
Al.: Ludwig von Mises Institute, 1998), ch. XVII. (12) See
Robert A. Mundell, “International Monetary Options”, Cato Journal,
Vol. 3, no. 1, 1983. (13) See
further Jacques Rueff, Balance of Payments: Proposals for the Resolution
of the Most Pressing World Economic Problem of Our Time (New York:
Macmillan, 1967); idem, The Monetary Sin of the West (New York:
Macmillan, 1972). (14) See
further Murray N. Rothbard, Wall Street, Banks, and American Foreign
Policy (Burlingame, Ca.: Center for Libertarian Studies, 1995); idem, A
History of Money in the United States (Auburn, Al.: Ludwig von Mises
Institute, 2003). (15) See
further Murray N. Rothbard, The Case for a 100 Percent Gold Dollar
(Auburn, Al.: Ludwig von Mises Institute, 1991). (16) See
further Ludwig von Mises, Theory and History. An Interpretation of Social
and Economic Evolution (Auburn, Al.: Ludwig von Mises Institute, 1985). |
