'Golden Fetters' to Handcuffed Investors
by George F. Smith: That
Other Invisible Hand
financial policy of the welfare state requires that there be no
way for the owners of wealth to protect themselves." ~
working paper by Carmen Reinhart and Belen Sbrancia describes
how Western governments in the post-world war economies unloaded
their debts on credulous citizens through a policy of financial
repression. Because it is politically palatable (as opposed
to outright default, hyperinflation, or overt tax increases) some
analysts expect governments to try it again. One part of it
inflation is already well-underway. Financial repression
means savers (investors) will be forced to pay leviathan's debts,
whether they like it or not.
of financial repression vary, but the general scheme is this: Using
its power to violate private property rights, the government makes
the domestic investment community a "captive audience."
With central bank cooperation it mandates low nominal interest rates
along with a higher inflation rate, resulting in negative real interest
rates. The latter transfers wealth from, say, pension funds to the
government, thus liquidating a portion of its debt. Since the bond
holders are "captive," there is no ready remedy for investors
wishing to preserve or grow their wealth. If investors attempt an
alternative such as purchasing physical precious metals, the government
will either restrict those activities or abolish them. One way or
another it will see that it has the "captives" needed
to pay its bills.
paper contains language suggesting the authors have accepted several
monetary fallacies. For example, we read:
It is important
to stress that during the period after WWI the gold standard was
still in place in many countries, which meant that monetary policy
was subordinated to keep a given gold parity. In those cases,
inflation was not a policy variable available to policymakers
in the same way that it was after the adoption of fiat currencies.
gold standard was a straw version of the classical gold standard,
which itself was under government control. Yet it's true, holders
of Federal Reserve Notes could, in theory, swap them for gold coins
prior to Roosevelt's heist in 1933. "Monetary policy"
(inflation) was indeed subordinated to gold, which is why government
got rid of it, and the government-spawned gold-exchange standard
of the 1920s served to set up gold, intentionally or not, to take
the fall when the roof collapsed. As economist Joesph Salerno writes,
of the classical liberal era in 1914 caused the removal from government
central banks of the "golden handcuffs" of the genuine
gold standard. Were these "golden handcuffs" still in
place in the 1920s, central banks would have been rigidly
constrained from inflating their money supplies in the first place
and the business cycle that culminated in the Great Depression
would not have taken place.
scheme began to cave, as it always had, when too many people attempted
to claim their property at the same time. It exposed the essential
fraud of the banking system, though few economists see it that way.
Which is not surprising, given that most of them, directly or indirectly,
at the Fed's trough.
section of the NBER paper, Reinhart and Sbrancia tell us,
I and the suspension of convertibility and international gold
shipments it brought, and, more generally, a variety of restrictions
on cross border transactions were the first blows to the globalization
of capital. Global capital markets recovered partially during
the roaring twenties, but the Great Depression, followed by World
War II, put the final nails in the coffin of laissez faire banking.
This is truly
shameful scholarship. Banking was in no sense "laissez-faire."
The Federal Reserve Act of 1913, establishing a government-enforced
banking cartel, erased the last traces of freedom in banking. As
we read in Wikipedia,
faire] describes an environment in which transactions between
private parties are free from state intervention, including restrictive
regulations, taxes, tariffs and enforced monopolies.
The Fed is
a monopoly money producer established by the state. As such it is
in violation of capitalism's private property foundation, and its
very presence creates distortions in market activities. (See The
Ethics of Money Production, p. 170) It seems that the further
we move away from laissez-faire the more it is blamed for the catastrophes
that follow in interventionism's wake.
NBER paper has great value. The authors (rather tediously) document
how Western governments from 1945-1980 used repressive financial
schemes to pay down their debt relative to GDP. The great appeal
of such schemes is their transparency to the general public, making
them virtually irresistible to today's debt-choked governments.
Time is Different: Eight Centuries of Financial Folly spells
it out this way:
repression, banks are vehicles that allow governments to squeeze
more indirect tax revenue from citizens by monopolizing the entire
savings and payment system. Governments force local residents
to save in banks by giving them few, if any, other options. They
then stuff debt into the banks via reserve requirements and other
devices. This allows the government to finance a part of its debt
at a very low interest rate; financial repression thus constitutes
a form of taxation. Citizens put money into banks because there
are few other safe places for their savings. Governments, in turn,
pass regulations and restrictions to force the banks to relend
the money to fund public debt. (from Prudent Investor Newsletters)
It's an effective
racket, almost as effective as the central banking debt monetization
schemes that brought us to disaster's door in the first place.
with permission from Barbarous
June 8, 2011
F. Smith [send him mail] is
the author of Eyes
of Fire: Thomas Paine and the American Revolution and
Flight of the Barbarous Relic, a novel about a renegade Fed
chairman. Visit his website
and his blog.
© 2011 George F. Smith