In my continuing research for my new book, I read a fascinating book on the history of free banking by Larry Sechrest.  Mr. Sechrest describes how free banking between competitive banks can end the centralist planning cartel known as Federal Reserve System in America. Although the lessons of the failed centralist planners from Eastern European states are available for all to study, it appears these lessons were swept under the rug, especially when monetary policy is the topic of discussion.

Central Banks Control Money Suppy

Why is this? Simply put, the direct power over the money supply is the indirect power over the people. For in modern capitalistic societies, every member uses money to produce, trade, and consume. Thus, when the money supply is surrendered to the State and its cronies, so too is the financial liberty. Thomas Jefferson recognized this fact during the 1809 debates for the re-charter of the Bank Bill, “If the American people ever allow private banks to control issue of their currency, first by inflation, then by deflation, the banks and the corporations will grow up around them, will deprive the people of all property until their children wake up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”

Strangely, Americans spends millions of dollars and endless hours to elect officials that can do little more than follow the counsel of the monetary central planners. Proverbs 22:7 states the politicians subservient condition, “Just as the rich rule the poor, so the borrower is servant to the lender.” Therefore, since one of the keys to great leadership is majoring on the majors, when one understands the Five Laws of Decline, he will quickly realize the power and control surrendered to the centralist planning cartel over the American monetary system is the major of major issues.

In order for this to change, the people must educate themselves on viable alternatives to the current oppressive system. Indeed, the famous political dictum – you cannot beat something with nothing –  is why America has suffered through endless devaluations of its currency to where a 1913 dollar is now worth four cents. As I write this, three words come to mind – unbelievable, unconscionable, and unsustainable. Free banking is the free market alternative to central planning plunder. LIFE Leadership is on a mission to learn truth in an age of growing lies. Here is a portion of Kevin Dowd’s  enlightening foreword to Mr. Sechrest impressive book.

Sincerely,

Orrin Woodward

Free banking is—or at least ought to be—one of the key economic issues of our time. There is mounting evidence that the monetary instability created by the Federal Reserve—persistent and often erratic inflation, the unpredictable shifts of Federal Reserve monetary policy, and the gyrating interest rates that accompany both inflation and the monetary policy that creates it—have inflicted colossal damage on the U.S. economy and on the fabric of American society more generally. Furthermore, much as the United States has suffered, less fortunate countries have suffered far more. Most of us have watched in horror, for example, as Russia has come out of more than seventy years of Communist misery only to slide now into the abyss of hyperinflation. Unlike some disasters, monetary instability is entirely avoidable, but to avoid it, we need to make sure that the monetary system is built on the right foundations—foundations we are very far from having.

On top of these monetary problems, we also observe in the United States how ill-judged attempts to regulate the banking system and protect it from the (grossly exaggerated) danger of runs have spawned a massive apparatus of deposit insurance and regulatory control in the form of the FDIC, the now-bankrupt FSLIC, and a variety of other bureaucracies. These agencies were (ostensibly) set up to protect a banking system that, though weakened by legislative restrictions of various kinds and by misguided Federal Reserve policies in the 1930s, was still relatively strong, and yet they managed to convert that system into a chronic invalid made artificially dependent on the ultimately lethal drug of deposit insurance. In addition to gravely weakening the banking system and destroying much of it in the process, the deposit insurance system also accumulated staggering losses—losses of hundreds of billions of dollars and perhaps more—which it then passed back to the long-suffering federal taxpayer. Politicians and bureaucrats have responded with a series of largely cosmetic reforms that have accomplished virtually nothing and are nowhere near any realistic solution.

Once again, what we need are sound free-banking foundations. We do not have such foundations and are unlikely ever to get them if things continue as they are. Larry Sechrest’s book is therefore a timely contribution to a very important policy debate. It is sad indeed that our political and intellectual leaders have still to learn the most important and most obvious lesson to be drawn from the collapse of communism in the eastern bloc—that central planning does not, and cannot, work. To paraphrase Larry, amidst all the celebration that accompanied the demise of communism and with all that has been written about the problems of central planning, our leaders are still afflicted with the craving to practice it, and they cling to the illusion that though eastern bloc socialism might be dead, they still believe that all is well with central planning in the West. They know that central planning failed in the East, but they learned nothing from that failure, and nowhere is this illusion stronger and more cherished than in the sphere of money and banking.

One suspects that part of the reason the illusion is as strong as it is in this area is that even professional economists are by and large still afflicted with the central planning mentality. We do not talk of monetary central planning, of course—we talk of central banking or monetary policy—but the goals are the same even if we prefer to use a less sinister label to describe them. Central banking is central planning. Those of us who support free banking find it odd that despite all the failures of central planning—the failures of central planning in the eastern bloc, the failures of monetary central planning in the West, and other failures besides—so many economists still cling to it and refuse to consider free banking as a serious alternative.

Finally, I am back to work on my book on society and state. The problem with a project like this is: for every paragraph I write, it seems that I need to read 5-10 more books to explain it properly. In any event, I am having a blast and enjoying the process of learning just as much as I enjoy sharing what I have learned here. LIFE Leadership is an entire company of learners who continue to grow themselves on purpose to Have Fun, Make Money, and Make a Difference!

Sincerely,

Orrin Woodward

With all that said, there is still one more price to be paid by the state’s manipulation of  the money supply, namely, the creation of inflationary and deflationary cycles. These cycles can be produced at will by the financial powers-that-be simply by expanding or contracting the money supply within a country. The damage rendered to the entrepreneurs ability to predict in the future is not difficult to perceive. For as economist Israel Kirzner summarized, “Entrepreneurship is the alertness to and foresight of market conditions; it must necessarily precede actions taken in accordance with that alertness.” However, when the money supply is manipulated by the financial elites, the elites gain at the entrepreneurs expense. For instance, if a person had a crystal ball to identify when stock prices would rise and fall, no one would be surprised by his wealth accumulation. Likewise, if a person controlled the money supply of a country he could not only predict the rise and fall of all prices, but also control when the prices did so.  This is the biggest opening for the Five Laws of Decline within modern society and one that needs to be addressed immediately. For it should not be surprising to anyone who understands the FLD, that permitting any group total control of a nation’s money supply is akin to unsupervised access to each citizen’s bank accounts to plunder them at will. In other words, what person couldn’t get wealthy if he had the power to inflate and deflate the money supply on command? Unfortunately, however, the financial elites gain is funded by the entrepreneurs loss. For when the downward cycle dries up the demand for the entrepreneurs products, he is still responsible to pay the full price of bank loans even though his business is now worth cents on the dollar.

The business cycle, in essence, damages the entrepreneurs ability to predict future demand based upon the markets price signals because the price signals are being manipulated by third parties. Accordingly, the state’s inflationary/deflationary cycles, by jamming the true price signals, cause entrepreneurs to make inaccurate market judgements of future demand and prices, resulting in numerous unnecessary business failures. Moreover, however, it isn’t just entrepreneurs that are sheared in this monetary fraud. For anyone investing in stocks, real estate, or simply working a job is damaged by the fluctuating money supply cycles. Interestingly, the business cycle is a modern phenomena, which, not coincidentally, didn’t appear until the state managed to gain control of the nation’s money supply. Hence, in reality, a more accurate name for this modern phenomena would be the state-induced inflationary cycle. For previous to the state capturing society’s money supply, the gold standard forced fiscal responsibility and restraint upon the state by requiring each nation to back its currency with gold upon demand. Indeed, the gold-standard provided a systematic check upon the FLD, causing the financial elites, not surprisingly, to seek ways to undermine this check. Unfortunately, modern nations, over a period of years, freed themselves from the gold-standard restraint, leaving them free to inflate and deflate the money supply at their discretion. Disastrously, as a result, through society surrendering to the state the total control of its money supply, the unchecked FLD has predictably sown its debilitating effects. The financial elites shear society’s unsuspecting sheep while everyone wonders why he or she cannot seem to get ahead.

Losses in Purchasing Power

If the reader is going to study one graph, study the one to the left. It displays the massive damage that the state has done to America’s purchasing power per dollar. This injustice must end as it is a hidden tax upon those who do not understand the unethical actions draining American society of its wealth. Murray Rothbard, as usual, does the best job of describing inflation and money supply issues in his fantastic book Mystery of Banking:

Inflation is a process of subtle expropriation, where the victims understand that prices have gone up but not why this has happened. And the inflation of counterfeiting does not even confer the benefit of adding to the nonmonetary uses of the money commodity. Government is supposed to apprehend counterfeiters and duly break up and punish their operations. But what if government itself turns counterfeiter? In that case, there is no hope of combating this activity by inventing superior detection devices. The difficulty is far greater than that. The governmental counterfeiting process did not really hit its stride until the invention of paper money. . .

Consider the following: Apart from questions of distribution, an increase of consumer goods, or of productive resources, clearly confers a net social benefit. For consumer goods are consumed, used up, in the process of consumption, while capital and natural resources are used up in the process of production. Overall, then, the more consumer goods or capital goods or natural resources the better. But money is uniquely different. For money is never used up, in consumption or production, despite the fact that it is indispensable to the production and exchange of goods. Money is simply transferred from one person’s assets to another.1 Unlike consumer or capital goods, we cannot say that the more money in circulation the better. In fact, since money only performs an exchange function, we can assert with the Ricardians and with Ludwig von Mises that any supply of money will be equally optimal with any other. In short, it doesn’t matter what the money supply may be; every M will be just as good as any other for performing its cash balance exchange function.

The Six Duties of Society (SDS) equals justice for mankind while the Five Laws of Decline (FLD) equals injustice for mankind. The key then, is to ensure political leaders learn from history and not attempt to exploit society which only leads to increased FLD and societal failure. LIFE Leadership applies the same principles of enhancing the SDS while eliminating the FLD in order to build for the longterm. LeaderShift, authored by Oliver DeMille and me, describes some of the principles involved. The remaining principles will be described in my next book And Justice for All: America’s Quest for Concord. Here is a portion from the introduction of the historical case-studies.

Sincerely,

Orrin Woodward

China’s Tank Man

Now that the Six Duties of Society (SDS) and the Five Laws of Decline (FLD) have been described separately and how they interact systematically with one another, it is now time to evaluate how these two systems led to the “rise and fall” of the six selected case-studies. Although any Western society could have been chosen to display “rise and fall” condition caused by the SDS and FLD, the author specifically chose the three classic ancient societies (Greek city-states, Roman Republic, and Roman Empire) to compare with America’s three modern societal experiences (Colonial America, Pre-Civil War Constitution, and Post-Civil War Constitution). For the remarkable correlation between the ancient and modern historical failures isn’t coincidental since human nature responds to the systematic stimulus of the SDS and FLD in foreseeable ways. Furthermore, society’s members consistent responses (both ancient and modern) indicate that, at its core, human nature has not changed. Therefore, it isn’t surprising that people in all ages have reacted positively to the blessings of the SDS and negatively to the curse of the FLD. Indeed, the challenge for today’s political leaders is to anticipate the response of society’s members to their proposed policies, specifically, how it affects the SDS and FLD. Hence, the case-studies are designed to help today’s political leaders learn from past experience, rather than their own. For on one hand, if American leaders continue on the current path, repeating similar FLD errors of the ancients, America will fall from its adverse effects. On the other hand, if today’s leaders will master these concepts, enhancing the SDS while checking the FLD, America can experience a rebirth of liberty, justice, and prosperity unparalleled in the annals of history, restoring the light to America’s city on the hill for the oppressed in all nations.

Moreover, since knowledge is cumulative and each society learned from the previous one, the case-studies will be evaluated in chronological order. Each example will be studied through its rise and fall cycle to determine how it satisfied the SDS and when the FLD were engaged leading to its decline. For just as a structure built upon sinkholes will eventually collapse, common sense teaches us not to rebuild further structures upon the faulty foundation. This, in reality, is the purpose of historical case-studies, namely, to determine the failure modes of previous societies so they are not repeated. Ideally, today leaders need to identify the trustworthy for the untrustworthy aspects of previous foundations to keep the good and revise the bad. Encouragingly, history is an unsentimental revealer of both the good and bad parts of a society’s foundation. For the parts built upon valid principles will withstand the test of time while the invalid aspects will collapse upon its own illogical design. Nonetheless, studying history, without understanding the systematic nature within the SDS and FLD, will lead to misleading conclusions and the proper lessons will remain unlearned and unapplied. For just as one of the definitions of insanity is to continue to do the same thing while expecting a different result, most of the moderns interpretation of historical examples has been insane, merely repeating the systematic failures that caused the failure of its predecessors.

Frederic Bastiat’s The Law is, in my opinion, the shortest, most concise, description of the damage done by government when in turns from its delegated role of ensuring justice into the enforcer of injustice. Bastiat wrote this gem just months before he passed away and is the culmination of decades of practical, theoretical, and classical experiences. In fact, without a firm understanding of principles discussed in The Law, no politician is capable of performing his delegated role. LIFE Leadership continues to separate truth from error in the quest for justice for all.

I have attached just one section of Bastiat’s work along with an example of injustice and government from American history. Notice how he pinpointed the two areas of injustice back in 1850 that would eventually lead to America’s Civil War. Injustice is always punished in the morally-ordered world God created. Indeed, Bastiat played the role of prophet because he understood the underlying principles and knew the God who had created the world.

Sincerely,

Orrin Woodward

The Law

Frederic Bastiat: The Law – As long as it is admitted that the law may be diverted from its true purpose — that it may violate property instead of protecting it — then everyone will want to participate in making the law, either to protect himself against plunder or to use it for plunder. Political questions will always be prejudicial, dominant, and all-absorbing. There will be fighting at the door of the Legislative Palace, and the struggle within will be no less furious. To know this, it is hardly necessary to examine what transpires in the French and English legislatures; merely to understand the issue is to know the answer. Is there any need to offer proof that this odious perversion of the law is a perpetual source of hatred and discord; that it tends to destroy society itself? If such proof is needed, look at the United States [in 1850]. There is no country in the world where the law is kept more within its proper domain: the protection of every person’s liberty and property. As a consequence of this, there appears to be no country in the world where the social order rests on a firmer foundation. But even in the United States, there are two issues — and only two — that have always endangered the public peace. What are these two issues? They are slavery and tariffs. These are the only two issues where, contrary to the general spirit of the republic of the United States, law has assumed the character of a plunderer. Slavery is a violation, by law, of liberty. The protective tariff is a violation, by law, of property. It is a most remarkable fact that this double legal crime — a sorrowful inheritance from the Old World — should be the only issue which can, and perhaps will, lead to the ruin of the Union. It is indeed impossible to imagine, at the very heart of a society, a more astounding fact than this: The law has come to be an instrument of injustice. And if this fact brings terrible consequences to the United States — where the proper purpose of the law has been perverted only in the instances of slavery and tariffs — what must be the consequences in Europe, where the perversion of the law is a principle; a system?

A state enforced monopoly, in other words, is the most effective because it uses the “monopoly of force” to ensure unjust outcomes, activating the Five Laws of Decline (FLD) in its destructive course. Indeed, anytime the state involves itself in the economy, liberty suffers through the the state’s hammer replacing society’s persuasion. For example, President Andrew Jackson, a leader and true student of human nature, dealt with injustice within government when he closed the Second National Bank. He intuitively comprehended the plunderous possibilities of an unchecked FLD and struggled to end the money monopoly’s use of government force as an aid in systematic exploitation. Courageously, his 1832 Bank Veto declared the danger when government unjustly provides monopolies to the few at the expense of the many:

It is to be regretted that the rich and powerful too often bend the acts of government to their selfish purposes. Distinctions in society will always exist under every just government. Equality of talents, of education, or of wealth can not be produced by human institutions. In the full enjoyment of the gifts of Heaven and the fruits of superior industry, economy, and virtue, every man is equally entitled to protection by law; but when the laws undertake to add to these natural and just advantages artificial distinctions, to grant titles, gratuities, and exclusive privileges, to make the rich richer and the potent more powerful, the humble members of society–the farmers, mechanics, and laborers–who have neither the time nor the means of securing like favors to themselves, have a right to complain of the injustice of their Government. There are no necessary evils in government. Its evils exist only in its abuses. If it would confine itself to equal protection, and, as Heaven does its rains, shower its favors alike on the high and the low, the rich and the poor, it would be an unqualified blessing. In the act before me there seems to be a wide and unnecessary departure from these just principles.

Jackson, in his own words, describes the same phenomena as the author does in the preceding chapters, mainly, that government, when confined to internal and external defense, is a blessing to society. Nevertheless, when it transgresses these boundaries and is used by exploiters to reap where they haven’t sown, the Five Laws of Decline (FLD) are engaged and society declines.