Money, Government and International Politics

0:00Let me begin with a definition of a government. A government is a compulsory territorial monopolist of ultimate decision making or of jurisdiction and implied in this, it is a compulsory territorial monopolist of taxation. That is, a government is the ultimate arbiter for the inhabitants of a given territory regarding what is just and what is not and it can determine unilaterally without requiring the consent of those seeking justice or arbitration what the price that justice seekers must pay to the government providing the service is.

0:48Now, based on this definition of government, some very simple predictions can be made. First, it follows that government agents will take advantage of their monopoly, and that means they will increase taxes and reinterpret the law to their own advantage. The price of justice will rise and the quality of justice will fall. However, instead of concentrating on the internal consequences of government, I want to concentrate my attention on external consequences, that is on its foreign rather than its domestic policy.

1:35Policy. In this regard, two observations of fundamental importance. On the one hand, by virtue of its power to define and interpret the law and to tax, every government is faced with the risk of exit, people leaving. Its subjects might leave the territory over which the government's authority extends in order to avoid taxation and its perversion of looting. and every such exit of course implies a loss of potential revenue to the government whereas any population increase promises potentially higher tax revenues. On the other hand, at least at the outset, there exist of course many competing governments each not only faced with a threat of exit but each also equipped with the power to tax.

2:32That is to externalize the cost of territorial expansion or foreign aggression onto its own subject population. They make other people pay for their aggressive activities. Hence, one can predict that competing states will come into conflict with one another. And the competition between governments is different from the competition between private firms. affirms in any given territory only one monopolist of jurisdiction and taxation can exist. Hence, the competition between governments will tend to be violent and resulting in interstate wars and it will be eliminative. That is, by means of war, one state expands its territory at the expense of another and the number of remaining states will progressively fall.

3:30That is to say there is a tendency toward political centralization set in motion which comes to a halt only once a single world government has been established and the threat of exit is thus completely removed. Now we can be even more specific regarding the tendency toward political concentration in questioning which states will tend to be victorious in interstate warfare. Victory and defeat, of course, depend on many factors. But in the long run, the decisive factor is the relative amount of economic resources at a government's disposal in taxing and regulating.

4:15And in taxing and regulating, governments do of course not positively contribute contribute to the creation of economic wealth. Instead, governments always parasitically draw on existing wealth. However, governments can influence the amount of existing wealth negatively, other things being equal, the lower the tax and regulation burden imposed by government on its domestic economy, the larger its population will tend to be, will tend to grow on account of internal reasons as well as on account of immigration taking place. And the larger the amount of domestically produced wealth will be on which a government can draw in its conflict with neighboring countries, the more successful it tends to be in conflicts with its neighbors.

5:13That is to say, states which tax and regulate their domestic economies comparatively little, that is, liberal states in the European sense of liberal, tend to defeat and expand their territories at the expense of less liberal ones. That explains, for instance, why during the 19th century Great Britain became the dominant imperial power and explains why in the 20th century this role has fallen to the United States. Even more specifically, it explains why the United States, which is certainly internally one of the more liberal states, has conducted a highly aggressive foreign policy because the US knew that it could militarily beat any other state Now, let me turn to the next question that is the relationship of government and money.

6:07In this circle, it is hardly necessary to explain in great detail that money is the natural outgrowth of a market economy. Due to the existence of uncertainty in a barter economy, fundamental obstacles to trade exist. Fundamental obstacles to trade exist. Double coincidence of wants are not always present. Double coincidence of wants being, I have what you want and you have what I want. And because of this, direct trade becomes sometimes impossible or extremely difficult. And as a way out of this predicament, men begins to look for especially marketable goods and trades whatever he has to sell for more marketable goods in order to be able to then turn around and acquire with these more marketable goods those things that he really wants.

7:08That is, men begin to demand things to be used neither as consumer nor as producer goods, but simply as facilitators or media of exchange. and other people then copy this practice and sooner or later most people in society use the same good for the same purpose and money that is a commonly used medium of exchange emerges. And as trade becomes worldwide there exists a tendency toward the use of a single worldwide medium of exchange. change. Historically, this is of course the international gold standard. Money then comes into existence as a commodity money. In fact, money is the most easily saleable commodity. It is produced by the market like any other good. There is competition in gold mining and in gold minting. And in addition to genuine money, there exist also money substitutes, that is titles or notes.

8:16This, then, is a situation with which governments originally find themselves confronted. A commodity money such as gold produced by profit-driven money producers and entirely outside of the control of government. Now recall the definition of government as a monopolist of jurisdiction and taxation and assume no more than self-interest for government agents. agents, that is, that they as everyone else prefer more over less. What will be a government's position vis-a-vis a market provided money? It should be immediately clear. It will be trying to gain monopolistic control over the supply of money so as to be able to enrich itself at the expense of its subjects, very much as it enriches itself at the expense of its subjects by means of taxation.

9:14In order to reach this goal, the government must take three consecutive steps, and indeed all governments have taken these steps. Some have done it earlier and others have done it later, but all of them have done them in the same order. First, a government monopolizes the minting of gold. No one but the government mint is permitted to produce gold coins. With this step, it becomes possible for government to engage in coin clipping. That is surreptitiously reducing the gold content of coins. In recalling and reminting gold coins and reducing, for example, the gold content of each coin by 10% and increasing the supply of coins by 10%, The government essentially accomplishes the same thing as raising the tax revenue by 10%, except, of course, that it is more difficult to understand what is going on.

10:15However, this first step is still highly unsatisfactory from the point of view of government, Because it cannot engage in this practice repeatedly without some people realizing what is really going on. In the second step, the government monopolizes the production of money substitutes that is titles to money. No one except the government bank can issue bank notes that are redeemable at par into genuine money. The commercial banks may produce checkbook money, or substitutes of substitutes, that is paper that is convertible at par into government produced paper, which in turn can be converted into genuine money, that is gold.

11:06Now with this step it becomes possible for the government to engage in fractional reserve banking practices. The government bank creates additional money substitutes out of thin air, uncovered by genuine money. Well put differently, it creates more titles to money property than there is money property in existence. By bringing these titles into circulation, it enriches itself at the expense of the general public. Again, an increase of money substitutes created practically at zero cost of say 10% beyond gold coverage has the same effect as a 10% tax increase. But taking the course and form of inflation, it is more difficult to detect than the tax increase is to detect.

11:56However, even this second step is unsatisfactory from the point of view of government because eventually the public will realize again what is going on and once it does, runs on the central bank will occur. The holders of the title to money will want to have their titles redeemed into the genuine thing. But since there exist more titles or notes than there exists property that is gold, the central bank faced with a run will either go bankrupt or suspend species payment. In the third step, the government goes off the gold standard. The gold deposited in government vaults is confiscated and the private ownership of gold is outlawed.

12:45Having acquired purchasing power as something else and more than mere pieces of paper, namely as titles to money, to genuine money, the former money substitutes become now money running on its own. A pure fiat money system takes the place of the former commodity money system. Finally, or so it seems, the government has reached complete counterfeiting autonomy and can print money out of thin air and acquire real goods with this paper. The only task remaining seems to be that of avoiding hyperinflation. In fact, other problems and obstacles remain in place even then.

13:33but before addressing them I want to make a few remarks that must be made concerning the question of how the government can get away with taking the three steps that I just outlined. It can only do so if it succeeds in creating a favorable public opinion and in order to do so it will have to promote a few myths. That is, make the public believe a few erroneous but somehow plausible propositions. First, that competition in money production will tend to fraud by profit-driven capitalists, even though we all know that competition is in fact precisely one of the most powerful means of reducing the likelihood of fraud and fraud will actually become more likely are more likely if money is produced by a monopolist.

14:27Second, they will have to promote the myth that a commodity money involves substantial resource costs which could be saved and the resources could be productively invested if one had a paper money standard in place. While in fact as even such an ardent fan of paper money as Milton Friedman had to admit late in his life A paper money standard and the increased financial uncertainty brought about by it increases the expenditure and the waste of resources in activities such as hedging, financial newsletters and has actually driven up the price of demonetized gold and hence the volume of gold production.

15:15And third, they must promote the myth that money is part of social wealth, such that more money means greater wealth. While in fact, of course, money is not part of social wealth and a larger amount of money only leads to a falling purchasing power of money, while more money leads to a redistribution of existing wealth in society and benefits the earlier receivers Receivers and Spenders of this money at the expense of those receiving and spending it later. If an increase in the money supply could make societies rich, we would not be able to explain why there is still one poor country and indeed why there is still one poor individual on earth because every one horse country can of course print money, paper money in any How much time do I still have?

16:10Now very quickly back to the obstacles that still remain in the path of government wanting to achieve total counterfeiting autonomy. These obstacles become obvious once we introduce the existence of more than one government in existence. Now returning to my initial remarks regarding the tendency toward political centralization, Let us consider a world in which the process of political concentration has been effective for some time. As a result of interstate wars, large and mighty superpowers exist, such as the United States, and smaller, militarily defeated and dominated countries such as Germany, for instance. Monetary relations between the United States and Germany reflect this power difference.

17:00Two stages can be distinguished in this regard. Exemplary of the first stage is the system that was established at Bretton Woods after World War II. The United States is off the gold standard domestically, but it assumes the responsibility of redeeming paper dollars into gold at a fixed parity vis-a-vis the German Central Bank. while the German Central Bank promises to exchange paper marks into paper dollars at some fixed parity. It would seem now that Germany is still on the gold standard for marks can be redeemed into dollars and dollars into gold. De facto, however, matters are completely different.

17:46The German Central Bank is pressured not to make use of its right to redeem dollar notes into gold into gold, but to use its dollars instead as reserves on top of which it creates more mark notes. I will try to explain this, what is now in existence in the starkest possible terms and slightly simplified version in order to make clear what I have in mind, what I understand by monetary imperialism. Let's say the United States Central Bank creates $50,000 out of thin air and uses this money to buy Deutschmarks or so and assuming a rate of 1 to 3, so they get 150,000 Deutschmarks from the German Central Bank and then turn around and buy, let's say, a Mercedes for this price.

18:45And what does the German Central Bank do with its $50,000? Does it buy something in the United States or insist on redeeming this sum into gold? And the answer is, of course, no. Rather, the $50,000 that the German Central Bank has received are registered now as an increase in the bank's dollar reserves. And given this increase, the German bank then creates an additional 150,000 day mark on top of it, out of thin air, and then it turns around and buys itself a new Mercedes also. So obviously, the United States now has a trade deficit with Germany. Imports exceed exports.

19:32However, this is, as Jacques Rouef, a French economist, once termed it, this is a deficit without tiers, because no payments, that is, no exports, need to be made for the imported Mercedes for Americans, and the dollar does not fall in value against the mark. Instead, a system of twofold exploitation is imposed on the German public. First, it gets ripped off by the United States Central Bank, and then facilitated by this first rip-off, it gets ripped off once more by its own Central Bank. And this, of course, we can call monetary imperialism.

20:18But the first stage of monetary imperialism is still imperfect from the point of view of the dominant country, namely the US, Because there may exist still other countries not yet fully controlled by the United States. Let's say France under someone like Charles de Gaulle who fancied himself to be the president of a mighty military power in its own right. So the French Central Bank might be audacious enough to approach the United States with a request for redemption into gold. But of course the United States does not have the gold or has insufficient amounts of it. The bluff has been called and the United States is faced with a bank run. What should be done? The answer depends, of course, on the relative strength of the parties involved.

21:07In fact, as we all know, given the superpower status of the United States and the insignificant status of France, the gold's aspirations at that time notwithstanding, the United States simply suspended species payment. France essentially did nothing but had to accept the whole thing as a fait accompli and the world entered stage two of a U.S. managed monetary imperialism. In the second stage, it's like the first one except that gold plays no longer any role. All countries are now on pure fiat money standards. The United States initiates the process of inflation and by using dollars as reserve currency, the U.S. inflation is exported to U.S. dominated countries while goods flow into the United States in the same way as I described it before.

22:04Yet a run on US gold reserves is of course no longer possible because nobody is on the gold standard anymore. Even if this system is unsatisfactory, even this system however is still unsatisfactory. In a world of many countries and even if the United States is a superpower with troops stationed in well over 100 countries around the globe, Because this system of coordinated inflation is still bound to crack again and again. So as a final solution in the drive toward monetary imperialism and a decisive intermediate step in the drive toward world government, the U.S. has been working long and hard to establish something like a U.S. controlled world central bank issuing a single worldwide accepted paper currency.

22:56Because only then are all obstacles to government counterfeiting eliminated because then this currency being the only one can of course not fall against other currencies because there are no other currencies left over. The monetary integration that is underway in Europe, that is the establishment of the Euro, is an important step in this direction. The Euro will be, for instance, more inflationary and has been more inflationary than the least inflationary of the previously existing national European currencies that is the German Mark. And it is easier for the United States Central Bank to cooperate with a single European Central Bank than with some 15 or so different central banks.

23:47But then, hopefully, all of this, that is the drive toward a world central bank dominated by the United States, might fall apart with the emergence of another superpower, like China, which might eventually be able to offer another and far better currency than the dollar is. Thank you very much.