Blind Robbery! - Philipp Bagus - E-Book

Blind Robbery! E-Book

Bagus Philipp

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Beschreibung

Money does not come from the state! Actually, no one believes that statement. But they should. That is because America, like every other country in the world, has a pure paper money system, in which new money is created out of thin air. Andreas Marquart and Philipp Bagus show you how money arises and why our current money is bad money. You will learn how important good money is for an economy and what influence bad money has on everyone in society. What role does the state, government, and politics play in redistribution in favor of the super-rich? Why is a naive faith in the state anything other than a good strategy for the future for each individual citizen? Anyone who has never really trusted politicians — even if it started out as only a gut feeling — will find confirmation in this book that this gut feeling was right all along. An easy to understand introduction to the question of why money is responsible for so many problems in our society.

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Imprint

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Lists this publication in the Deutsche Nationalbibliographie; detailed bibliographic information is available online at http://dnb.d-nb.de.

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1st edition 2016

© 2016 by FinanzBuch Verlag, an imprint of the Münchner Verlagsgruppe GmbH

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Editing: Sven Thommesen

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Printed in Germany

ISBN Print 978-3-89879-982-9

ISBN E-Book (PDF) 978-3-86248-907-7

ISBN E-Book (EPUB) 978-3-86248-908-4

Further informations are available at

www.finanzbuchverlag.de

We would like to thank our wives, Eva and Petra,

who lovingly supported us in the months

in which this book was written.

Philipp Bagus & Andreas Marquart

For Ludwig von Mises

Contents

Imprint

Acknowledgements

Inscription

Preface

Introduction: Why this book is so explosive

1. Why money does not need the state

2. Who is allowed to create money and who is not

3. Why our current money creates social injustice

4. Why government money ruins us economically

5. How the state exploits you with inflation

6. What inflation does to people

7. What happens when the state intervenes in everything

8. How it will all end

9. Why you have not heard of this before

References

Printed Literature

Internet sources

About the authors

Preface

Why do the topics of money, inflation, and central banking seem so mystifying? Why do otherwise well-informed people, even those who follow economic and financial news, know so little about how money really operates in society? Why don’t we learn anything about money and banking in school? And how does this ignorance leave us vulnerable to political elites and their benefactors in the banking class?

Philipp Bagus and Andreas Marquart have the answers to these questions, and many more, in Blind Robbery! The book provides a superb introduction to the vital subjects of money and banking, in an accessible and highly readable style. Students, business people, and even seasoned academics will benefit from their treatment of the origins of money, the monopolizing role of states and central banks, the true nature of inflation, and the terrible economic harms caused throughout history by the political control of currency.

Perhaps most importantly, Bagus and Marquart address the unholy relationship between politicians and bankers in society today. It’s a complicated subject, one the financial press scarcely considers. The authors, however, use plain language to explain how legislatures and central banks work together to create a rigged game — rigged against savers, investors, retirees, and anyone hoping to build wealth outside the financial casinos. They illustrate not only the disastrous financial consequences of modern banking systems, but also the moral, cultural, and social impact of punishing thrift and rewarding consumption. In doing so, the authors carry forward the important work of Adam Fergusson (When Money Dies) and Jörg Guido Hülsmann (The Ethics of Money Production): societies marked by unchecked monetary expansion inevitably decline in character just as they decline economically.

Throughout the book, the principle and theory behind each argument are presented with admirable clarity. But Blind Robbery! is not a theoretical or academic treatise. On the contrary, it’s a real-world exposition of modern monetary systems — written with an eye toward helping readers protect themselves from the economic and monetary dislocations our politicians seem hell-bent on creating. Readers especially will benefit from the explication of possible endgame scenarios for fiat currencies in Chapter 8.

Blind Robbery! is a fascinating and enjoyable book — albeit a troubling one — for anyone interested in money and banking in the modern era. Even readers already well-versed in the monetary theory of the Austrian school of economics, will enjoy the authors’ fresh approach to the subject. It’s a must read for anyone seeking to understand how states and their central banks undermine real prosperity.

Jeff Deist, President, Mises Institute, Auburn (Alabama, USA) March 2016

Introduction: Why this book is so explosive

“The biggest disaster in human history.”

That is how economist Roland Baader (1940–2012) describes the state’s control over the money supply. This is a bold statement — because almost no one dares to question the state’s monopoly on money creation these days.1

How about you? Have you ever questioned the monetary system we have? No? Do you think that monopolies are bad? Economists usually describe them as leading to waste, inefficiency, and higher prices. So why should it be any different when it comes to money? Is not money that keeps its purchasing power over time something of great value to everyone? Would you let a state monopoly decide what and how much you eat every day? Of course not. But that is exactly what is happening with money!

If our money is so secure in the hands of the state, then why does it keep losing its purchasing power? You may object that a monetary system controlled by the state is still better than leaving such an important function to the so-called free market. But are you sure? Why is the central bank (the Federal Reserve in the U.S., or the European Central Bank in the eurozone) allowed to create more and more new money? Why does the state allow the commercial bank around the corner from you to create money out of thin air in the form of credit (loans)? Why is your bank allowed to loan out to others money that you have deposited into your checking account? After all, you might need that money again soon! When the money is loaned out (and a large portion of it is loaned out), how can it still be available to you when you want it?

What will happen to you if you print money? One thing is certain: you won’t get past “Go.” You won’t collect $200. But you will go directly to jail! You see, monopolists don’t like competition. They want their monopoly protected.

Based on information from the European Central Bank (ECB), in the eurozone the M2 money supply, which consists of cash, checking deposits, and short-term savings deposits, has doubled since the year the euro was introduced. But if you live in Europe, did the money in your bank account double during that period? No? Did you at least see your income double, then? Again, probably not. Now ask yourself this question: If the money supply in the eurozone doubled, but your bank balances didn’t, then is it not reasonable to conclude that the additional money must have ended up in the accounts of someone else? If that person already had more money than you, then he now has even more. In this case, the person who started out richer than you has become even richer, and relative to him you have become poorer. In the U.S., the M2 money supply has increased at an even faster pace. From 1999 to 2015, M2 almost tripled. Has your American bank account grown three times as large?

But if you expect this book to be a hate-filled rant against the “evil rich” and the CEOs who exploit their poor workers, and who must be forced by law to pay decent wages, or at least a minimum wage, then you would be wrong. Every person — and this includes you — acts from the same motivation. The motivating factor for human action is always the desire to improve one’s own well-being and one’s own situation.2

No one should blame another for seeking to improve his situation by acquiring more money or more wealth. It is just human nature. If this motivation were not part of our nature, we would probably still be living in caves. What is important is which means or tools you use to enrich yourself. Some people are more focused than others in their pursuit of wealth, even to the point of using immoral or even criminal means.3

If you are of the opinion that people are becoming more and more self-centered and ever less willing to help others, then perhaps the real causes are to be found in our monetary system itself. That is to say, in a monetary system that makes possible the creation of a gigantic, debt-financed welfare state. The welfare state destroys the willingness of people to help each other. Instead of helping someone directly and personally, we push the responsibility onto the state, and tell ourselves, “Well, I already paid enough in taxes.”

Do you have the feeling that our society is falling apart? The underlying causes of this are to be found in the nature of our monetary system: this explains why the few profit from the many, why traditional societal bonds continually wear thin, why people become more materialistic and less caring, why the rich get richer and the poor get poorer. This is why we wrote this book: to explain to you why this is so.

And fear not! You do not need to be an economist to be able to understand this. It is probably even an advantage if you have not taken economics classes, since they tend to corrupt your ability to think clearly about economic issues. In any case, what awaits you in this book you would not get in an economics class at a standard government school or university. You just need common sense. We promise.

But let us warn you right now: by the time you have finished this book, you will look upon the world with fresh eyes. So if you think all is right with society and you are happy and content with your life, you can just put this book down right now. Do you really want to read on? Take some time to decide …

Ok. If you are reading this sentence, you have made the decision to join those courageous enough to learn something new. Congratulations! You made the smart choice! Only when enough people know about the perversion and the injustice of our monetary system will there be hope for change. You are our hope. We are counting on you!

After reading this book, you will see many things from a different viewpoint. That is because you will know what constitutes good money, and you will know that our current money is bad money. You will see how important good money is for our economy, and what fateful influence bad money has on income and wealth distribution in a society. You will understand why the state has seized control of the monetary system and why it wants to hold on to that control.

You will learn why bad money always leads to economic downturns and recessions, why banks get into trouble, and why the prices of goods and services always rise.

We will arm you with the knowledge to make you able to tell the difference between good and bad economic theories and teachings. We also offer our book as an antidote to the very popular tome Capital in the Twenty-First Century. This book, written by the French economist Thomas Piketty, generated worldwide buzz and acclaim. According to Piketty’s theory, it is capitalism that is responsible for the increasing inequality in income and wealth. What nonsense!

U.S. President Barack Obama, International Monetary Fund (IMF) boss Christine Lagarde, and even the Pope are said to have read Piketty’s book. If you happen to see one of them, perhaps you could hand them a copy of this book. Otherwise you will be burdened with still more taxes and regulations, which is exactly what Piketty proposes.

You will also learn about the state, government, and politics here. If you have faith in the competence of the state, then it is highly likely that you will lose that faith. And if you have never trusted politicians, you will see your belief confirmed and vindicated here.

And when you have finished reading you will be able to understand why bad money is at the core of what is wrong with our society, even extending down to the most basic societal unit — the family. This connection is not immediately recognized because of a tangled web of state interventions, but it exists just the same.

State interventions cover up the true causes of harmful developments in the economy and society, like the application of many layers of paint. Reading this book will allow you to strip away all the layers of paint, and in the end you will be able to recognize, see, and understand the unvarnished truth.

We hope that you enjoy this book.

Philipp Bagus, Andreas Marquart

July 2015

1 In this book, the word “state” will be used to refer to government at whatever level is being discussed, usually the national level.

2 No one has researched and described the theory of human action better than Ludwig von Mises (1881–1973) in his work Human Action: A Treatise on Economics. Mises was the most important economist of the 20th century and the most prominent thinker in the Austrian school of economics. In this book, you will learn more about Mises and about the theory of the Austrian school.

3 In this context, the truly ruthless and malicious are those who use the monetary system itself (the monopoly on money creation) to enrich themselves at the expense of the public. This will be discussed in more detail later.

1. Why money does not need the state

“The people will miss those resources in the future that they ate up over the decades.”

- Roland Baader

Right from the outset, we would like to clear up a widely held misconception: money was not invented by any one person in particular, and it certainly did not appear as the result of some government decree. Most people know that money is very important, and they believe that it is right and good that the government controls it. Wrong!

Forget for a moment our current monetary system, which we described in the introduction as bad money. Instead, let’s begin at the beginning. First, using a simple story, we would like to explain to you how money originally arose. The origin of money illustrates its true nature and shows us what good money is. And when you understand the nature of money, you are ahead of most economists, not to mention most of our politicians.

Imagine a society without money. How would trade among people take place? Let’s take a trip back in time to a small imaginary city. How far back, we’ll leave to your imagination.

Imagine that you live in a small city and you are a shoemaker. You make the best shoes in the area. Unfortunately you don’t have any other talents. Neither you nor your wife can bake bread well. You also don’t have any room to keep farm animals. Your children and your wife are widely admired for the shoes they wear. But you can’t eat shoes, and thus, from time to time, your wife has to go out and procure foodstuffs. But because money does not yet exist and you only have shoes to offer in trade, your wife is forced to find a farmer who — by chance — needs shoes and is willing to exchange a bag of potatoes or a ham for a pair of shoes. This may work once or twice, but at some point, the farmer does not need any more shoes; his shoe closet is full. When your wife comes by again to exchange shoes for food, the farmer will politely decline her offer.

Let us stop for a moment. Did you notice that we used the word “exchange”? People need a “means of exchange.” Our simple example would get more complicated if we included additional professions: a butcher, a blacksmith, a bricklayer. (But notice: no banker! He is not needed here.) How much more could all these people — we will call them market participants — benefit from one another, if they had a means of exchange so that they would not always have to be on the lookout for someone who right then is in need of what they have to offer (whether a pair of shoes, or some dental work, or a plough)? Did you perhaps think to yourself how great it is that we don’t have these practical problems, since we have money that is supplied to us by a generous state? If so, we would like to free you from this misapprehension and continue with the rest of our story.

The people in our small city like to adorn themselves with jewelry, particularly gold and silver. It is a long tradition that the men give their wives gifts of gold at every opportunity, when a child is born, when there is a birthday, and at anniversaries.

The women in the city love these presents, but they also know how long their men have to work and how much of their goods or services they have to hand over to the goldsmith to obtain a ring, an earring, or a necklace. But gold is not just a status symbol. Its aesthetic qualities are also indisputable. Gold shines so nicely. Don’t you agree? For that reason, in our society, everyone views gold jewelry as something valuable. It is valued.

In the meantime, in order to find someone who will exchange potatoes for shoes your wife has again walked so much that she has blisters on her feet — despite her good shoes. She has noticed that small pieces of gold are greatly desired. Pieces of gold are often traded, and people are willing to exchange them for any number of other goods. Or expressed a different way: Gold is a very marketable good. It can be exchanged at a favorable rate almost any time. So why not trade the shoes for pieces of gold? One day, your wife gets a bright new idea. Instead of trying to exchange shoes directly for potatoes, she could first trade the shoes for gold and then seek out a potato seller willing to accept her newly acquired gold. Thus, your wife needs, instead of one exchange (shoes for potatoes), two exchange transactions (shoes for gold, then gold for potatoes), but in doing so she could gain valuable time and thereby obtain the desired potatoes with less trouble and effort. Now, perhaps the attempt fails and she is unable to find anyone who will exchange gold for shoes or potatoes for gold. But your wife risks it.

Let us assume that your wife is successful. She obtains the potatoes faster and cheaper by means of an indirect exchange using gold as the intermediate good (medium of exchange). The innovation was successful! From now on, your wife will use this system of exchange for all her undertakings. She will demand gold pieces to be used in exchange. But it is not just your wife who will change her behavior; others will imitate her. Due to the increased demand from market participants, the marketability of gold increases.

This happens because, at her next get-together over coffee, your wife will explain to her friends about her successful “gold-for-potatoes” exchange. As chance has it, a farmer’s wife is in attendance. She also has a story to tell. Her husband used the gold that he received from your wife together with some gold from her jewelry case to acquire a new plow from the local smith. The transaction was much easier than usual, since the smith was happy to take the gold. Normally, the smith has such an overabundance of potatoes and hams from exchanges with farmers that he cannot consume all of it before it goes bad, and thus he had no interest in making more plows for farmers.

Word of the new way to exchange goods and services spreads around our small city. More and more, people use gold as an intermediate good rather than exchange goods they have directly for goods they want. Through this, the demand for gold rises and gold becomes more marketable. In other words, it gets more liquid. It becomes a better means of exchange the more market participants demand it and use it — this is a self-reinforcing process. People notice that everyone benefits. They can cooperate more easily, and the division of labor is promoted. Everyone is suddenly relieved of the need to do all the work themselves: each person can concentrate on his or her specific talents instead of spending precious time searching for specific items to exchange.

Everyone can more easily benefit from the abilities of others. Previously, this only took place when someone else required exactly the good or service that another person was ready to offer at the time. With the use of indirect trade, the division of labor can now expand considerably, to the well-being of all.

The monetary system is thus important because the manipulation of it can have a dramatic effect on people’s lives and wealth, and because — as Germany’s hyperinflation in the Weimar Republic in the 1920s demonstrated — if the monetary system collapses, it is a certainty that the rest of society will also be shaken to its core. Without the use of money, our highly complex economy with its sophisticated division of labor could not be maintained. The division of labor allows for enormous productivity, which in turn allows us to feed a world population of some seven billion people. Without the use of money, most of the current trade in goods and services could not take place, the division of labor would collapse, and people would be forced to attempt to produce everything they needed themselves. The loss of productivity and well-being would be unimaginable. Without a functioning money, the majority of the current population would likely die of hunger and disease. The emergence of money, i.e., a generally acceptable means of exchange, allowed us to establish a complex division of labor and helped the rise of wealthy societies. Stated another way: without money, there can be no civilization.

We should celebrate as heroes those who contributed to the adoption of some goods as money. Yes, exactly. Your imaginary wife is a hero. Can we agree that in our small mythical city, money has arisen? And did you notice that no state was involved, that no government enacted a law that made gold money? Money arose spontaneously in the market place because the market participants who wanted to engage in commerce noticed how useful this was for them. They did not even consciously intend to create money.

Rather, with a monetary good as their means of exchange, they were able to achieve their personal goals better. And because everyone used the same means of exchange — gold — this good became more useful.

Money thus has a main function as a medium of exchange. But it also has other functions, such it is also a store of value and can be used as a unit of account.4 Money can only fulfill its function of holding purchasing power and transporting it into the future if its value is stable. This is because, between the time when your wife sells the shoes for gold, and the time at which you use the gold for purchases, months may go by. Your wife decided in favor of accepting gold pieces in trade because she assumed that they would retain their value during the time in-between transactions. Marketability and value retention go hand in hand. Gold was often used in trade because it was a good store of value. And its frequent use in trade made its value more stable.

A monetary order that arises naturally, that is, without intervention by a state or government, is referred to as a market monetary system. It arises without any state coercion. The market participants agree voluntarily on the use of certain goods as money, or on multiple goods used side by side. In history, many different goods have been used for this purpose, but eventually market participants tended to settle on gold, silver, or copper. You may have seen old coins in museums, created long before the birth of Christ. If paper money had been in use at the time, the passage of time would have caused most of it to crumple to dust by now. And if there were any paper notes still around, they would only have historical value for collectors. Old coins at least have the value of the metal in them!

What is the reason people throughout history have repeatedly chosen precious metals as money? (Provided no one forced them to use state-issued money.)

Going back in time, when we look at commodity money we find that in the beginning goods used for this purpose were simply regular trade goods (commodities). And because these goods were frequently traded, just as in our story, they suddenly became money or commodity money, entirely without the involvement of any government or state authority.

But what characterizes this money (which we will call good money)? While market participants may have started out using grain or fish for this purpose, why did they tend over time to gravitate towards the use of gold or silver? Very simply: precious metals are rare, divisible, homogenous, cheap to transport and store, non-perishable, relatively easy to recognize and very long lasting. They are constantly in high demand and — above all — cannot easily be duplicated or falsified. (The famous bite into the gold coin we all know from western films.)

In an economy in which there is good money — we will assume it is gold — the quantity of money will only increase when new gold is found. And getting gold out of the ground can only be done with great time and effort. The greatest advantage of gold is that the amount people have dug up since the beginning of time is enormous in relation to the annual production of new gold. In contrast to other goods such as wheat, the yearly gold production is not consumed, rather it accumulates continually. In the past 150 years, the worldwide quantity of mined gold has grown by about 2% per year on average. That is not a lot, and this growth rate has been fairly constant.

What is not constant is the rate at which the available quantity of money in our current money system is growing. After the introduction of the euro, there were years in which, according to the European Central Bank, the M3 money supply grew by 12%! In the U.S., M3 growth was even higher, reaching 17% in 2008. The M3 money supply is the broadest one; it includes — in addition to cash and demand deposits — longer term time deposits and money market funds. That such high rates of growth are not good for the purchasing power of money, i.e., of your money, you can imagine. We will return to this topic in a later chapter.

As you may already suspect, if there is such a thing as good money, then there is also bad money.

Let us listen to someone who ought to know a lot about money, because he is the president of the German Bundesbank (the German central bank), Dr. Jens Weidmann. In a speech he gave in September 2012, which drew a lot of attention, he said:

“The money that we carry in the form of bank notes and coins [he meant the euro — comment by the authors] has nothing to do anymore with commodity money. There has been no direct connection to gold since the U.S. dollar lost its link to gold in 1971. In short: Modern money is not backed by any physical asset anymore. Bank notes are printed paper — those knowledgeable among you know that in the case of the euro, it is cotton, while coins are formed metal. That bank notes and coins are accepted as a means of payment in daily life is partly due to the fact that they are the solelegalmeans of payment. In the end, the acceptance of paper money primarily is based on the population trusting that they will be able to make purchases later with the paper money that they have.”

You read it yourself: “… has nothing to do anymore with commodity money … not backed by any physical asset anymore … based on the trust of the population.”

Interesting, isn’t it? The president of the German central bank admits that there are no physical assets behind our money and that the value of our money is solely based on trust.

Many Germans remember the fall of 2008, when the Hypo Real Estate Bank was threatened with bankruptcy. People began to lose trust in the monetary system and were withdrawing money from their bank accounts. German Chancellor Angela Merkel and her finance minister at the time, Peer Steinbrück, felt obliged to make a promise to the German people that their savings were safe. Merkel said at the time, “We say to savers, your deposits are safe.”

What kind of money is this that politicians have to make such promises guaranteeing its value? The answer is simple: bad money. And you can answer the following question yourself without hesitation: do you believe that good money or commodity money is dependent on the guarantees of politicians? We say no.

The money that we use today is bad money and is not based on a voluntary agreement among people. Our monetary system is a pure paper money system. In fact, all currencies worldwide are now pure paper currencies. The last link money had to gold was cut in 1971 when the American president, Richard Nixon, suspended the convertibility of dollars into gold for foreign central banks. (At the time, the exchange value of the dollar was 35 U.S. dollars to an ounce of gold.) Due to increasing indebtedness by the U.S. government, caused to a large extent by the war in Vietnam, mistrust in the dollar grew, and as a result more and more gold was being withdrawn from the vaults of the U.S. central bank. To prevent this, the U.S. government felt it had no alternative other than to suspend the convertibility of the dollar.

As another option to try to regain lost trust in the currency, the government could have tried to reduce spending. But states and governments really dislike fiscal discipline. They greatly prefer distributing money that is not theirs (collected through taxes) to having to tell recipients of government funds that those benefits will have to be reduced!

But back to our topic: today, the state has monetary sovereignty, a monopoly on the creation of money. And monopolies are bad for the consumer, but not for the monopolist. For any other product, consumers would complain about the monopoly position of the producer. But no one does when it comes to money! Why is that? Have you ever asked yourself why the government is responsible for our money? Probably not.