Tuesday, September 19, 2006

The Statist Currency Scam

Democratic states corrupt all vital aspects of society and subvert them for their own ends. In few places is this more true than the monetary system. The statist have a tremendous fear of deflation and do their best to spread that scare into the general population, even though any unbiased economist (i.e. one who doesn't work for the state and does not study how to best support statist goals) will tell you that deflation is the natural state of any currency and was the state of the US dollar before the Fed began mucking around with the economy. Here is a chart that proves it:

You've got your natural process of deflation accompanied by spikes of inflation during wars (1860-1870, 1910-1920 and 1940-1950), which is how it has always been. But then, you get a suspension of the laws of nature- after WW2, the money does not take back value. It keeps losing value! Why? Because of the Federal Reserve's printing presses, colluding with the state and the banks to create booms and busts,

Inflation and deflation are very simple to understand. In a free market without state intervention, productivity goes up continually, and the money supply remains constant. This means that the same amount of money covers a great and greater amount of goods as time goes by. This is the natural deflationary process.

When the state takes over the currency and manipulates it through a central bank, it gains the power to print money for its own purposes (financing war, paying its own debts, whatever). This inflation of the money supply causes a corresponding inflation of prices, but the average citizen still has the same amount of money they had before. So the state, in fact, stole part of every citizen's savings through inflation. It is indirect theft, nothing more- anywhere from 2 to 10% of your money every year is stolen in this way.

In a real free market, this kind of thieving behaviour would be punished by bankrupcy for anyone who issued such a bad currency! They would be decried as incompetent, thieves, crooks on the scale of the Enron scandal. For a currency provider to be unable to control inflation is ridiculous- when all you need to do is stop printing so much money. But of course that wouldn't fulfill the role that the state desires for currency, and therefore simply cannot happen.

That is why we need to replace the current corrupt system with private currencies. The state has zero incentive to give us a sound currency- it already enforces the one it has by force, and has no need for customer satisfaction. A sound currency would not inflate at an obscene pace and make one's savings degrade year after year, which destroys long-term investing. A sound currency would not have interest rates artificially set by an arbitrary authority, creating booms and depressions which are destructive to everyone. The only thing they do right about the currency is making it as hard to counterfeit as possible- after all, they only want their own presses to churn out the Monopoly money, not anyone else's presses, because then it doesn't go in the "right" hands.

The fact is, local currencies already exist. Of course, socialists have distorted the concept and use the concept to force people to buy locally (cultural supremacism rears its ugly head again). It is not the localized nature that concerns us, of course, but rather the potential for competition, and the elimination of unsound currencies- starting with the state's. Local currencies, minus the socialist propaganda, are a sound foundation, but we also need wider currencies for use in large-scale trade.

I mentioned booms and busts as another grave consequence of state control. Through the Central Bank, the state controls more than how much currency it prints, but has a lot of other methods to achieve its goals. Another one is to collude with the banks to offer fractional-reserve banking. Basically, FRB permits banks to loan non-existing money, or more exactly, money counted twice.

Let's assume that the reserve ratio is 5%. This means that 95% of what you put in the bank, believing falsely that it is secure, is in fact being loaned to other people, corporations, or the state- but your bank account will never change. You put a hundred dollars in, and a few days later all the bank has is five dollars, ninety-five of them having been loaned to someone else and appearing on their bank account, but your account still says you have a hundred dollars! So the total amount of money circulating is 195$ - almost half of which is a fiction. And this fictional money is subdivided again, and again, and again... until you get 9 parts of fictional money to 1 part of real money.

Who profits? Certainly not you- you won't see one cent of revenue from those loans made with YOUR money. The big, state-protected banks profit. Public currencies and public central banks are agents of destruction of the economy for the profit of the state and the banks. Abolishing them would be a great step towards having a sound economy.

The main objection to multiple currencies- that it would only create confusion- can equally be applied to the currencies we have around the world today. Shouldn't we, for the sake of simplicity, merge all currencies into one world currency? Anyone with two brain cells would answer that it's a horrible idea, and that if we can't trust politicians to give us sound currency even in the limited competitive market we have today, we can trust them even less to provide a sound world currency. It would be nothing short of economic ruin. And so it is, to a lesser extent, in the countries of the world today.

Also see this Mises.org article: "What If Governments Had Not Destroyed Money?"


doinkicarus said...

Where'd you get the data on the currency? I've been looking for it!

Inflation is a boon for statists everywhere, at the expense of everyone else...

Aaron Kinney said...

That is a really good post Franc. You explain in easy to understand language concepts that are clearly baffling to both the average Joe and even many economists.

The problem with economists is that most of them think that the state, an artificla interest rate, and "reserve notes" are all justified and good. The idiots.

And what the fuck happened to Greenspan? Didnt he used to be an objectivist? Why is he such a tool now? :(

doinkicarus said...

Yeah, Greenspan used to hang out with Raico, Rand, Rothbard --- come to think of it, his last name doesn't start with the right letter...

But in all seriousness, I believe he was a member of that group.