From Fiat Money to Corporate Welfare

September/​October 2014 • Policy Report

In their latest book, Money: How the Destruction of the Dollar Threatens the Global Economy — and What We Can Do about It, coauthors STEVE FORBES and Elizabeth Ames argue that government has become a bloated Leviathan due to the country’s discretionary fiat money system. Forbes, chairman of Forbes Media, argued for returning to a stable‐​valued dollar at a Cato Book Forum on June 19.

Money is incredibly critical. If a country doesn’t get its money right, everything else is undermined. You can get it right on taxes, on spending, and on regulation — but if you don’t get the money right, it’ll all be for naught. Those who believe in strong government tend to shroud monetary policy in complex equations and mystifying jargon. They want us to assume that it’s beyond our comprehension — that we mere mortals cannot possibly understand the intricate science behind monetary policy. One of the reasons we wrote this book is that money is actually amazingly simple.

Simply put, money makes transactions easier. It measures value, just like clocks measure time, scales measure weight, and rulers measure length. But in order to properly fulfill its role in the economy, money must be stable — just like any other unit of measure. Imagine if the Federal Reserve treated clocks the way it treats the dollar. We would have 60 minutes in an hour one day, 48 the next, 82 after that. You’d need hedges, derivatives, and futures just to figure out how many hours you’re working.

What gives money its value is trust. When that trust is undermined, it makes it difficult for buyers and sellers to communicate. Just think of money as a claim on products and services that already exist, just like a coat check in a restaurant. The ticket itself has no intrinsic value. It’s a claim on a coat.

The same is true of money. What would happen if a restaurant claimed that by printing more coat check tickets, it could create more coats? The same rationale is used to justify printing money, under the auspices of stimulating the economy.

Since the United States abandoned the gold‐​linked dollar over four decades ago, its policy establishment has slid into a dangerous ignorance of fundamental monetary principles. The bureaucrats who set policy today know less about money than their predecessors did 100 years ago when the First World War erupted. Americans and the rest of the world are now paying the price. Today’s system of fluctuating fiat money — whereby government manipulates the value of the dollar — has been behind the biggest economic failures of recent decades, including the recent financial panic and subsequent Great Recession. These vastly misguided monetary policies are now setting the stage for a new economic and social catastrophe.

In “The End of History?” an article that went viral in 1989, FRANCIS FUKUYAMA argued that the death of communism signaled the triumph of the West. Fukuyama, a senior fellow at Stanford University’s Freeman Spogli Institute, offered a retrospective of his ideas at a Cato Institute Conference on June 6.

Back in the mid‐​1980s, I was living in southern California working at the RAND Corporation. These were the heady days of Mikhail Gorbachev. I had recently written a dissertation on Soviet foreign policy and was working on a project looking at Soviet politics when, sometime in 1988, I came across a speech by Gorbachev in which he declared that the essence of socialism is competition. Almost immediately, I got one of my political theory friends on the phone and said that if that was Gorbachev’s message, then this is the end of history.

The single way I would explain my idea is as follows: the notion that history is directional is accepted by very many people. We may complain about the idea of progress, but we fundamentally believe in it. We believe that there is something like modernization and development — and the question is where does the arrow of that historical process lead?

For 150 years prior to 1989, most progressive intellectuals around the world believed that it pointed to some form of communism. What I regarded myself as arguing back in that period was something much simpler: that history was directional, that there was indeed a process of modernization, but it didn’t look like we would ever get to communism. We would stop at the penultimate station on that train, which was a bourgeois liberal democracy and a market economy. And that was the appropriate end of history.

This idea originally comes from G. W. F. Hegel, a 19th‐​century German philosopher, who in The Phenomenology of Spirit talks about the culmination of history. While Marx believed that history would end in communism, Hegel asserted that the culmination would be a constitutional state, a liberal democracy. Years later, the French‐​Russian philosopher Alexandre Kojève, who was perhaps Hegel’s greatest 20th‐​century interpreter, made the remarkable assertion that this idea was essentially correct. History, he said, had ended in the year 1806. It ended with the Battle of Jena during the Napoleonic Wars, in which Napoleon defeated the Prussian army and brought his enemy to its knees.

What did this mean? According to Kojève, Hegel believed that the principles of liberty and equality — which had emerged from the French Revolution — had now been discovered and implemented in the most advanced countries. These principles represented the end point of human ideological evolution. In short, there were no other forms of social and political organization that were superior to liberalism. Liberal societies were free from the “contradictions” that characterized earlier forms of social organization and would therefore bring the historical dialectic to a close.

On June 27, famed political activist RALPH NADER discussed his book Unstoppable, in which he calls for an alliance of principled libertarians, conservatives, and progressives against a corrupt and overreaching Washington establishment.

It’s been quite clear to me for many years that power structures believe in dividing and ruling. If policymakers can distract a ttention from the areas where different groups agree — and focus on where they disagree — they can take that strategy of divide and rule to an institutional foundation.

The right and left often do disagree interminably on issues such as reproductive rights, gun control, school prayer, a balanced budget, and so on. But for all the distinctions between red states and blue states, there are numerous areas of agreement among conservatives, liberals, and libertarians that are fundamental.

For purposes of space, my book is limited to 24 significant areas where public opinion across the spectrum converges — from the opposition to eminent domain for corporations and the Empire’s unconstitutional wars, to support for civil liberties, community‐​owned businesses, and reform of the war on drugs, freedom‐​of‐​information requests, and ending “too big to fail.” There are many more areas beyond these. But the phenomenon that binds the left and right through each of these issues is the struggle against crony capitalism.

The alliance between big business and big government has been a critical problem at least since Franklin Delano Roosevelt told Congress in 1938 that “when government is controlled by private economic power, that is fascism.” It’s corporate welfare. I use the term “corporate” to distinguish it from the type of capitalism that we associate with small business, which forces losers in the marketplace to go to bankruptcy court. Increasingly, we are seeing big businesses that aren’t succeeding in the marketplace going to Washington.

The question then becomes: How do we harness large majoritarian, left‐​right public opinion operationally so that it becomes more coherent and visible? It’s important first to consider concrete ideas on an issueby‐ issue basis, because it’s at a high level of abstraction where we see the most disagreement among voters. Political power brokers realize that if they can get people fighting each other, they will root themselves in immovable positions at abstract levels of general philosophy. But when you bring it down to the community level — where people work and raise their families — the reality begins to weaken the ideological abstract rigidity that might otherwise prevent people from working together. The key is to identify the areas of convergence, then look for coverage by the press, recognition from pollsters, and adoption by local, state, and national politicians. In the process, these issues become part of the public discourse.

The convergence of the left and the right is likely to be the only political realignment that can get things done in this country over the next 12 years. I want to end by saying that it’s very easy to elicit disagreement. But now we have to focus on recognizing where we agree and turning that into operational change for our country.

At a conference cohosted with the Mercatus Center on July 17, RICHARD KOVACEVICH, chairman emeritus of Wells Fargo & Company, discussed the future of financial regulation in a post‐​Dodd‐​Frank world.

At what may eventually entail more than 25,000 pages of rules, the Dodd‐​Frank Act represents the largest banking regulation increase in history. It was created and passed, not with sound judgment of what really caused the financial crisis, but as a political response to the understandable outrage of Americans by the ill‐​conceived creation of the Troubled Asset Relief Program (TARP). This program was one of the worst decisions in U.S. economic history. It intensified the financial crisis — rather than solving it — and created the impression that Wall Street was bailed out while Main Street wasn’t.

Without TARP, there would not have been a Dodd‐​Frank bill as we now know it, nor the demonizing and vilifying of the entire banking industry. Only 20 institutions perpetrated this crisis and all of them should be punished, perhaps even criminally. Half of these institutions were investment banks. Half were savings and loans. None were mainstream commercial banks. So why are 6,000 banks being punished for something they didn’t do?

Why isn’t the focus on reforming those regulators who had the power to stop these 20 perpetrators and who completely failed to do their job? What about Congress admitting its role in allowing Fannie Mae and Freddie Mac to provide the financial support that caused subprime mortgages to grow from a 5 percent market share of the mortgage market to about 50 percent at the peak of the crisis? This never would have occurred without government agencies purchasing or insuring about 70 percent of all subprime mortgages.

I personally warned leaders in Congress in face‐​to‐​face meetings, in annual reports, and in speeches of the eventual collapse of Fannie and Freddie for over 20 years. Similarly, I warned bank regulators that subprime mortgages were worse than toxic waste two years before the crisis started. So did many others. Neither Congress nor regulators heeded such advice. Was demonizing the entire banking industry a coordinated effort to deflect where the blame should be placed?

Today the management of commercial banks spend most all of their time and resources on compliance, regulatory changes, and litigation for something they didn’t do. Regulators blame bank board members for improper oversight of management. Really?

There are upwards of 100 regulators at large banks. Those regulators have an average of over 15 years of experience in the financial services industry and work full time at these banks. Bank directors have roughly 12 members, who spend about a day a month on bank business, and who are not experts in the financial services industry. If they were, they would not be considered independent. So who is more responsible for insufficient oversight of bank management: 100 full time regulators or about 12 one‐​day‐​a‐​month bank directors?

Mainstream commercial banks have been making loans to lower income consumers and those with credit blemishes on their records for decades. They were not among the 20 institutions that perpetrated this crisis. They did not originate loans to subprime borrowers who could never pay them back as the S&Ls did; nor did they buy and insure them as Fannie and Freddie did; nor did they package, sell, and distribute them as investment bankers did; nor did they rate them AAA as rating agencies did.

As a result of these mistakes, our economy is growing at its slowest recovery pace in history, unemployment continues to be high, our labor participation rate is at an alltime low, and our budget deficits are the highest in history. Americans have lost confidence in our leaders, in themselves, and in our free enterprise system — a system that has created the greatest wealth of any nation in history.

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