Piketty Is Wrong: Markets Don’t Concentrate Wealth

The old Marxist apocalyptical fear of ever-rising inequality in capitalist societies is growing. The capitalist elite, it is said, benefit from a dynamic of infinite accumulation of wealth and will be able soon to buy everything and everybody, including the government. This fear of unlimited accumulation of wealth by a few was the main theme of Thomas Piketty’s Capital in the Twenty-First Century, published in French in 2013. For example, Piketty writes:

It would be a serious mistake to neglect the importance of the scarcity principle for understanding the global distribution of wealth in the twenty-first century. To convince oneself of this, it is enough to replace the price of farmland in Ricardo’s model by the price of urban real estate in major world capitals …

To be sure, there exists in principle a quite simple economic mechanism that should restore equilibrium to the process: the mechanism of supply and demand. If the supply of any good is insufficient, and its price is too high, then demand for that good should decrease, which should lead to a decline in its price. In other words, if real estate and oil prices rise, then people should move to the country or take to traveling about by bicycle (or both). Never mind that such adjustments might be unpleasant or complicated; they might also take decades, during which landlords and oil well owners might well accumulate claims on the rest of the population so extensive that they could easily come to own everything that can be owned, including rural real estate and bicycles, once and for all. (Piketty 2013)

Let us put aside the fatuous example involving a bike as a market response to scarcity — that is a negative technological shock despite the fact that we are today in a highly innovative world. Piketty actually believes that a single person or entity owning “everything” can be a possible outcome of free-market capitalism. According to him, if r > g (i.e., if the rate of return on capital is superior to economic growth) there will be an “endless inegalitarian spiral.” If Piketty had read Austrian economists and had mastered the economic calculation debate, he would have noticed that the unhampered market cannot lead to a situation of wealth accumulation where there is only a single individual or cartel owning everything. Indeed, a situation with one big cartel or one owner is equivalent to full socialism and therefore, to a situation where no rational allocation of resources would be possible, as Mises showed in Socialism. It is Rothbard who brilliantly pointed out that calculability is an upward limit to the size of the firm. But this argument can equally be applied to individual ownership concentration. As Rothbard points out:

[T]he free market placed definite limits on the size of the firm, i.e., the limits of calculability on the market. In order to calculate the profits and losses of each branch, a firm must be able to refer its internal operations to external markets for each of the various factors and intermediate products. When any of these external markets disappears, because all are absorbed within the province of a single firm, calculability disappears, and there is no way for the firm rationally to allocate factors to that specific area. The more these limits are encroached upon, the greater and greater will be the sphere of irrationality, and the more difficult it will be to avoid losses. One big cartel would not be able rationally to allocate producers’ goods at all and hence could not avoid severe losses. Consequently, it could never really be established, and, if tried, would quickly break asunder.

Thus, contrary to what Piketty and other egalitarians think, unlimited wealth concentration is technically impossible in a market economy. This is the reason why a “one big cartel” controlling all the economy never appeared on the free market, and this is the reason why wealth concentration will always be limited.

The lack of theoretical rigor in Piketty’s book is striking. Whereas he is supposed to study the dynamics of income inequality in capitalist societies, he barely analyzes the role of entrepreneurship, and, when he does, he gives absolutely no definition of what it is. This lack of rigor enables him to lead an ideological battle against the rich that he considers as being “undeserving.” Similarly, whether it is Piketty or Anthony Atkinson, none of these modern egalitarians mentions the role of division of labor in the distribution of wealth.

We know however that division of labor is a necessary feature of the market economy. Indeed, the very existence of rich capitalists is not a matter of inheritance or undeserved ownership but is the result of the law of comparative advantage. A capitalist is someone who has a comparative advantage at allocating capital and therefore is specialized in this task. On the unhampered market, those who tend to be the wealthiest tend also to be the most efficient men at allocating capital. If their ownership ability is poor, the consumers sanction them. If their ownership ability is good, the consumer will reward them.

Frédéric Bastiat, while on his deathbed in Rome, and despite being severely ill, made it very clear to his friend Prosper Paillottet, that economists should focus primarily on the consumer. The consumer, he said, is the primary source of any economic phenomena. The major flaw of Piketty’s book is that he explains inequality not by starting from consumers’ choice but by starting from capital ownership. Owners, Piketty says, benefit from a rate of return and when this rate is higher than economic growth, it intensifies income inequalities. For Piketty, the rate of return on capital is a mythical stream of income which depends not upon ownership abilities but on how much capital you own. But the distribution of wealth is not as arbitrary as Piketty would like to think. The consumer has the final word in the decision of who must own the factors of production. As Mises in Human Action explained, the wealthy “are not free to spend money which the consumers are not prepared to refund to them in paying more for the product.” On the unhampered market, the rich can accumulate more wealth only if he is efficient to the task of allocating capital, for the benefit of all. We must admit that we see nothing morally wrong about that. Quite the contrary, we applaud it.

Because the economic theory underlying Piketty’s thesis is weak, his explanations do not match with empirical evidence. In fact, Piketty (2015) himself had to admit that he does not “view r > g as the only or even the primary tool for considering changes in income and wealth in the twentieth century, or for forecasting the path of inequality in the twenty-first century.” And indeed, r > g is not a useful tool for the discussion of rising inequality of labor income. But surprisingly, Piketty himself admitted the weakness of his model since the rise of top income shares in the United States over the 1980–2010 period is due for the most part to rising inequality of labor earnings.

We should also highlight that 56 percent of Americans are, during at least one moment of their lives, part of the top 10 percent in incomes (a ratio of 5.6), and 12 percent are in the top 1 percent (a ratio of 12). Therefore, we can conclude that the richer you are, the more volatile is your wealth. This is a valid critique we can address to Thomas Piketty, Atkinson, and many other egalitarians.

Indeed, if wealth is that unstable in the 1 percent, we can then conclude that infinite concentration of wealth is a myth and does not happen in a market economy. On the contrary, capitalist societies are more prone to intergenerational mobility, upward and downward. Therefore, if inequality of income at a particular point of time in capitalist societies can be higher than in more socialistic economies, the market economy might very well offer more equality when we consider the lifelong income disparities between individuals.

More than 100 years ago, a French economist published a book about inequality. Like Thomas Piketty’s Capital in the Twenty-First Century, this book was celebrated in the United States. But unlike Thomas Piketty, Paul Leroy Beaulieu tried to explain in his book Essai sur la Répartition des Richesses (1881) why he thought inequality, without being eradicated, would decrease in capitalist societies. The radical difference of tone between those two books is a good illustration of the intellectual bankruptcy of both the United States and France since the Belle époque. From classical liberalism, we succumbed to the illusion of egalitarianism, and from liberal optimism about the free-market order, we went to egalitarian and socialist pessimism. Today, many inequalities are due to government violent intervention in the market order. And we should therefore wonder, after all, if it is not wiser to listen to Paul Leroy Beaulieu rather than to Thomas Piketty.

Why Gold-Backed Money Doesn’t Bring Booms and Busts

According to popular thinking, not every increase in the supply of money will have an effect on economic activity. For instance, if an increase in supply is matched by a corresponding increase in the demand for money, we are told, then there won’t be any effect on the economy. The increase in the supply of money is neutralized, so to speak, by an increase in the demand for money, or the willingness to hold a greater amount of money than before.

What do we mean by demand for money? And how does this demand differ from demand for goods and services?

Now, demand for a good is not a demand for a particular good, as such, but a demand for the services that the good offers. For instance, individuals’ demand for food is on account of the fact that food provides the necessary elements that sustain an individual’s life and well-being. Demand here means that people want to consume the food in order to secure the necessary elements that sustain life and well-being.

Also, the demand for money arises on account of the services that money provides. However, instead of consuming money, people demand money in order to exchange it for goods and services. With the help of money, various goods become more marketable — they can secure more goods than in the barter economy. What enables this is the fact that money is the most marketable commodity.

Why People Demand Money

Take for instance a baker, John, who produces ten loaves of bread per day and consumes two loaves. The eight loaves he exchanges for various goods such as fruits and vegetables. Observe that John’s ability to secure fruits and vegetables is on account of the fact that he has produced the means to pay for them, which are eight loaves of bread. The baker pays for fruits and vegetables with the bread he has produced. Also note that the aim of his production of bread, apart from having some of it for himself, is to acquire other consumer goods.

Now, an increase in John’s production of bread, let us say from ten loaves to twenty a day, enables him to acquire a greater quantity and a greater variety of goods than before. As a result of the increase in the production of bread, John’s purchasing power has increased. This increase in the purchasing power does not necessarily translate into securing a greater amount of goods and services in the barter economy, however.

In the world of barter, John may have difficulties to secure by means of bread various goods he wants. It may happen that a vegetable farmer may not want to exchange his vegetables for bread. To overcome this problem John would have to exchange his bread first for some other commodity, which has much wider acceptance than bread. John is now going to exchange his bread for the acceptable commodity and then use that commodity to exchange for goods he really wants.

Note that by exchanging his bread for a more acceptable commodity, John in fact raises his demand for this commodity. Also, note that John’s demand for the acceptable commodity is not to hold it as such but to exchange it for the goods he wants. Again the reason why he demands the acceptable commodity is because he knows that with the help of this commodity he can convert the bread he produced more easily into the goods he wants.

Now let us say that an increase in the production of the acceptable commodity has taken place. As a result of a greater amount of the acceptable commodity relative to the quantities of other goods the unitary price of the acceptable commodity in terms of goods has fallen. All this, however, has nothing to do with the production of goods. The increase in the supply of an acceptable commodity is not going to disrupt the production of goods and services. Obviously if the purchasing power of the commodity were to continue declining then people are likely to replace it with some other more stable commodity.

Historically, in many societies, through a process of selection, people have settled on gold as the most accepted commodity in exchange. Gold has become money.

Real Money versus Money “Out of Thin Air”

Let us now assume that some individual’s demand for money has risen. One way to accommodate this demand is for banks to find willing lenders of money. With the help of the mediation of banks, willing lenders can transfer their gold money to borrowers. Obviously, such a transaction is not harmful to anyone.

Another way to accommodate the demand is, instead of finding willing lenders, the bank can create fictitious money — money unbacked by gold — and lend it out.

Note that the increase in the supply of newly created money is given to some individuals. There must always be a first recipient of the newly created money by the banks.

This money, which was created out of “thin air,” is going to be employed in an exchange for goods and services (i.e., it will set in motion an exchange of nothing for something). The exchange of nothing for something amounts to the diversion of real wealth from wealth to non-wealth generating activities, which masquerades as economic prosperity.

In the process, genuine wealth generators are left with fewer resources at their disposal, which in turn weakens the wealth generators’ ability to grow the economy.

Will More “Demand for Money” Save Us?

Could a corresponding increase in the demand for money prevent the damage that money out of “thin air” inflicts on wealth generators?

Let us say that on account of an increase in the production of goods, the demand for money increases to the same extent as the supply of money out of “thin air.” Recall that people demand money in order to exchange it for goods. Hence at some point the holders of money out of “thin air” will exchange their money for goods. Once this happens an exchange of nothing for something emerges, which undermines wealth generators.

We can thus conclude that irrespective of whether the total demand for money is rising or falling what matters here is that individuals employ money in their transactions. As we have seen, once money out of “thin air” is introduced into the process of exchange, this weakens wealth generators and this in turn undermines potential economic growth. Clearly then, the expansion of money out of “thin air” is always bad news for the economy. Hence, the view that it is harmless to have an increase in money out of “thin air” — if fully “backed by demand”— doesn’t hold water.

In contrast, an increase in the supply of gold money is not going to set an exchange of nothing for something. Also, an increase in the supply of commodity money doesn’t set boom-bust cycles.

We can further infer that it is only the increase in money out of “thin air” that is responsible for the boom-bust cycle menace. This increase sets the boom-bust cycle irrespective of the so-called overall demand for money.

Does Gold Cause Boom-Bust Cycles?

According to most economists however, in an economy with a gold standard, an increase in the supply of gold generates similar distortions that money out of “thin air” does.

This is not the case.

Let us start with a barter economy. John the miner produces ten ounces of gold. The reason he mines gold is he believes there is a market for it. Since people demand it, we know that gold contributes to the well-being of individuals. John exchanges his ten ounces of gold for various goods such as potatoes and tomatoes.

Now people have discovered that gold, apart from being useful in making jewelry, is also useful for some other applications. They now assign a much greater exchange value to gold than before. As a result John the miner could exchange his ten ounces of gold for more potatoes and tomatoes.

Should we condemn this as bad news because John is now diverting more resources to himself?

No, because this is just what happens all the time in the market. As time goes by people assign greater importance to some goods and diminish the importance of some other goods. Some goods are now considered as more important than other goods in supporting people’s life and well-being. Now people have discovered that gold is useful for another use such as to serve as the medium of the exchange. Consequently they lift further the price of gold in terms of tomatoes and potatoes. Gold is now predominantly demanded as a medium of exchange — the demand for other services of gold such as ornaments is now much lower than before.

Let us see what is going to happen if John were to increase the production of gold. The benefit that gold now supplies people is by providing the services of the medium of the exchange. In this sense it is a part of the pool of real wealth and promotes people’s life and well-being. One of the attributes for selecting gold as the medium of exchange is that it is relatively scarce.

This means that a producer of a good who has exchanged this good for gold expects the purchasing power of his effort to be preserved over time by holding gold. If for some reason there is a large increase in the production of gold and this trend were to persist the exchange value of the gold would be subject to a persistent decline versus other goods, all other things being equal. Within such conditions people are likely to abandon gold as the medium of the exchange and look for other commodities to fulfill this role.

As the supply of gold starts to increase its role as the medium of exchange diminishes while the demand for it for some other usages is likely to be retained or increase. So in this sense the increase in the production of gold is not a waste and adds to the pool of real wealth. When John the miner exchanges gold for goods he is engaged in an exchange of something for something. He is exchanging wealth for wealth.

Contrast all this with the printing of gold receipts (i.e., receipts that are not backed 100 percent by gold). This is an act of fraud, which is what inflation is all about, it sets a platform for consumption without making any contribution to the pool of real wealth. Empty certificates set in motion an exchange of nothing for something, which in turn leads to boom-bust cycles. The printing of unbacked-by-gold certificates divert real savings from wealth generating activities to the holders of unbacked certificates. This leads to the so-called economic boom.

The diversion of real savings is done by means of unbacked certificates (i.e., unbacked money). Once the printing of unbacked money slows down or stops all together this stops the flow of real savings to various activities that emerged on the back of unbacked money. As a result, these activities fall apart — an economic bust emerges.

In the case of the increase in the supply of gold no fraud is committed here. The supplier of gold has simply increased the production of a useful commodity. So in this sense we don’t have an exchange of nothing for something. Consequently we also don’t have an emergence of bubble activities. Again the wealth producer on account of the fact that he has produced something useful can exchange it for other goods. He doesn’t require empty money to divert real wealth to himself. Note that a major factor for the emergence of a boom is the injections into the economy of money out of “thin air.” The disappearance of money out of “thin air” is the major cause of an economic bust. The injection of money out of “thin air” generates bubble activities while the disappearance of money out of “thin air” destroys these bubble activities.

On the gold standard — a true gold standard without central bank manipulation — this cannot take place. Consequently on the gold standard, money cannot disappear since gold cannot disappear. We can thus conclude that the gold standard, if not abused, is not conducive of boom-bust cycles.

How to Buy Silver Online

Learn all about how to buy silver online before you actually do it. This article provides advice about the different formats that you can buy silver, from my own experience as a silver enthusiast.

Silver Coins

Buying silver coins is probably the most popular silver investment. Coins, such as American Silver Eagles and Canadian Silver Maple Leafs have always been very popular and considered safe coins to own because the government guarantees the purity of each coin. Personally, I prefer Canadian Maples because they have a higher face value (the dollar value that is actually printed on the coin) than American Eagles, and if I ever find myself in a serious SHTF scenario, where I absolutely must bargain with an idiot to survive, Canadian Maples appear to be worth more.

Silver Rounds

Silver rounds are like silver coins except they are not legal tender. A silver round is simply a coin shaped piece of silver with a value equal to the silver content. Silver rounds are advantageous because they usually carry a smaller premiums than legal-tender silver coins. I’ve never purchased a silver round, but I have nothing against. One way silver rounds are superior to silver coins is that they are usually stamped with weight and purity, but they do not have a dollar face value. I see this as a good thing because dollar denominations a arbitrary, whereas 1oz of fine silver is always one ounce of fine silver. In a SHTF scenario, it would be a lot easier to convince a novice that one ounce of silver is worth $20 because it doesn’t have “ONE DOLLAR” stamped on it.

Silver Bullion Bars

Silver bullion bars are a cheaper way of buying silver and usually have lower premiums than silver coins and silver rounds. The first silver purchase I ever made was a 1kilo bar.

Where to Buy Silver Online

Deciding where to buy physical silver coins and silver bars is an important decision.  After deciding what you want to buy, go to my Silver Coin Prices table or Silver Bullion Prices table, find the item you want to buy, and click the arrow at the top of the column to sort by price.  Then, check the gold dealer ratings–indicated by the stars under each dealer’s name–to determine which dealer has the best combination of low prices and a good reputation.  You should consider other criteria such as:

  • The silver dealer’s payment methods, return policy, and buy-back policy.
  • Volume discounts.
  • Reduced pricing for different payment methods. Note that you can find some of this information on my dealer review pages.
  • Shipping costs.

Junk Silver

Junk silver coins, or early US legal tender coins (nickles, dimes and quarters), actually contain silver. In fact, depending on the year and coin, some coins are up to 90% silver. The word, junk, refers to their collectible value, not the silver value. You can buy them by the bag, and they usually consist of early dimes, quarters and half dollars. You can also buy junk silver coins by the roll. 90% silver bags are listed on the Silver Coin Prices table.

Scrap Silver

Scrap silver is another way of accumulating silver. Here you can often get silver at cost price. You do need to know a bit about silver and what price you should pay for scrap. Old broken jewelery is a good source. Sometimes old silver coins can turn up as scrap silver. In this case always check if the coin has any collector value because if it does, it can be a lot higher than the silver content. It pays to do some research into the area if you intend collecting or accumulating scrap silver.

Dollars

  • Morgan (1878–1921) — 90-percent silver
  • Peace (1921–1928 and 1934–1935) — 90-percent silver

Half-Dollars

Quarters

Dimes

Nickels

Personally, I’m not crazy about junk silver because in a SHTF scenario, I think you will have a hard time convincing someone that your 1964 Quarter is actually worth $3.50. I’m not saying it’s not a good store of value; I just prefer to avoid confusion if possible.

Silver Storage

Another way of investing in silver that reduces premiums and saves on shipping costs is by using a system where the silver is purchased on your behalf and stored in a bank vault for you. A drawback of this, however, is that you don’t physically posses the silver yourself, and dishonest warehouses could sell the same silver to multiple people. For this reason, I do not recommend storage; however if you’ve determined silver storage is the best solution for you, here are some reputable places that offer silver storage:

These services let you buy silver in virtually any quantity, from just a gram or two up to as many ounces or grams as you want. This is ideal for an investor because you can implement a regular savings plan that doesn’t break the bank. The silver is stored in a remote bank vault and is audited by an independent third party on a regular basis to ensure that the silver or gold in the vaults exactly matches the record of silver in the clients’ accounts. Most of these brokers also let you collect physical silver, if you choose to do so

Silver Exchange Traded Funds (Silver ETFs)

Silver ETFs are a popular way to buy silver, which I morally oppose. ETFs trade fictional paper silver (similar to paper gold), and without the ETF market, it would be pretty hard to manipulate silver prices as they do today.

Silver Futures, Spot Price, and COMEX

In short, the silver spot price is determined by silver futures, but before we get into that, I want to explain some basic concepts, like:

  • What is a futures contract?
  • Whats are silver futures?
  • How does the COMEX work?

What is a futures contract?

A futures contract is a contract that is traded on a special stock exchange called a futures exchange. You buy or sell an instrument, like silver or gold, at a certain date in the future, at a specified price. Basically, when you buy a futures contract, you´re making bet that something will be worth something at sometime in the future. The advantage of trading futures contracts is that they are purchased on the margin, so it’s possible to make huge profits from a small investment. The disadvantage is that if you lose, you pay the full amount (not on the margin).

If this seems like a crazy way to buy silver, you would be correct because most purchasers of futures contracts never take possession of the underlying asset (silver in this case). We call this type of buyer a speculator. Speculators try to profit from from future price changes. Although speculators are often demonized by the media, they actually provide an important market function and help to hedge against rapid rises and falls in commodity prices.

When people speak of “paper silver” they’re often referring to silver futures contracts. The problem with the gold and silver futures market is that the paper “inventory” exceeds the physical inventory by an alarming amount, providing a mechanism to manipulate gold and silver prices. But that’s a discussion for another article.

Whats are silver futures?

As you may have already guessed, silver futures are simply futures contracts where the commodity is silver. Silver futures contracts can also be called futures contracts, or simply futures, depending on the context.  Futures contracts for silver are usually made in 5,000 troy ounce increments. Silver futures trade on many exchanges around the world. In the US, silver futures are primarily traded on COMEX, an abbreviated name for the former Commodity Exchange, Inc., which is now owned by the CME Group.

All silver futures traded on COMEX must specify 5,000 oz. of 99.9% pure silver (five 1,000 oz. silver bars) made by a COMEX-approved refiner.

When trading futures, traders must follow certain rules, but the only variables that are decided during an auction are:

  • Whether you are buying or selling.
  • Your price. If you’re buying, the “bid” price is the price you’re willing to pay for the contract. If you’re selling, the “ask” price is the price you want for the contract.
  • The quantity of contracts you want to buy/sell.

Price discovery occurs via the auctioning process as buyers and sellers determine what is in their best interests. Later, we’ll discuss how the silver spot price is determined via silver futures pricing agreements.

Spot Trades vs Futures

A spot agreement requires immediate payment (within a few days), and delivery of the silver follows immediately after payment is cleared by the seller. When you buy silver coins or bars from your LCS, it is considered a spot trade. This is why silver dealers use the silver spot price to determine the price of their coins and bars.

Like spot trades, a futures trade is a price agreement in the present. The difference is, however, that payment and delivery occur during a future contract delivery month. The contract reflects the buyer and seller expectations of future silver prices.

How does the COMEX work?

Nearby Contract Months

As a futures contract month approaches in time, it becomes “nearby” and eventually becomes the current delivery month. Contracts with current-month delivery dates cease to be futures and become cash-for-silver transactions.

At the COMEX:

  • The current delivery month ends on the third from the last business day of the calendar month.
  • The next, current delivery month begins on the second to the last business day of the previous calendar month.

The nearby silver futures contract month typically means the closest month when the silver bullion may be delivered and the contract expires.

Active Contract Months

During certain contract months, trading at settlement (TAS) is allowed. This means a trader can liquidate (exit) an open position with an offsetting trade ending the requirement to exchange silver for cash. Because of this option to offset a futures contract without having to deliver physical silver, trade volumes are much higher during active contract months.

At COMEX, the active contract months for silver futures are:

  • March
  • May
  • July
  • September
  • December

In the COMEX, the active contract month is the nearest, but not current, base contract month. For instance, if the current month is May, the active contract month for silver futures is July. During contract months that have very low trading volumes, exchanges discover spot prices from nearby active contract months with higher volumes.

You can see the silver futures chain at Yahoo Finance.

Where’s the silver?

In the US, depositories approved by COMEX store the silver bullion involved in futures trading. As noted earlier, however, the actual physical deposits are much lower than the amount of paper contracts at any given time. It has been reported that at some times, paper silver ounces have exceed physical silver ounces by a ratio of 500 to 1. What do you think would happen to the price of silver if too many traders tried to collect their contracts in physical form?

If you purchase a futures contract and hold onto it until it is completed, you can take delivery of physical silver. However, after the silver leaves  the COMEX network, it must be assayed if you want to sell it on COMEX. Having silver assayed is a certification process that ensures your silver meets COMEX specifications, and of course this costs money.

Should You Buy Silver Futures?

Personally, I would never buy silver futures. First of all, I have a moral objection to trading paper representations of physical commodities that don’t exist; silver futures are the fractional-reserve banking of commodities. Secondly, silver futures require considerable experience and knowledge and even then, they carry a high risk. When they system implodes, you’re better off holding physical silver bullion instead.

Economics in One Lesson

Henry HazlittEconomics in One Lesson, by Henry Hazlitt, is an introduction to free-market economics. It is a great book that you can use to refute many of the most popular economic fallacies that the MSM promotes on a daily basis.

In his writings, Hazlitt gives credit to many great minds, such as Frederic Bastiat and Ludwig von Mises.

The Lesson

“The Lesson” of Economics in One Lesson is that we must examine the immediate effects, as well as the long-term effects of any act or policy, and we must evaluate the consequences of that policy for all groups (not just one group).

The book applies the lesson to twenty-three different scenarios and demonstrates the false nature of many popular ideas. Here’s a summary of each scenario from the book:

The Broken Window

The broken-window fallacy is probably one of the most prevalent misunderstandings in economics today, and it goes something like this: A vandal breaks a store-front window. The baker must replace the window, providing the glazier with business and income. Some would believe (mistakenly) that the crime has an economic bright side because now money must be spent on a new window. But imagine, the baker wanted to buy a new suit, instead of a new window. The result is a loss to the baker, a gain to the glazier and a loss to the tailor: a net loss to the community as a whole. People forget the tailor because his part in the drama is never seen. This illustration was first made by Frederic Bastiat.

The Blessings of Destruction

This broken-window-fallacy-to-the-extreme was made popular after WWII, with the economic resurgence of Germany and Japan. Their new and more efficient plants were outperforming US factories. Nobody would want to have his own property destroyed either in war or in peace. The same is true for a nation. If the new plants were really a clear net advantage, Americans could easily offset it by immediately destroying their old plants and equipment. But it takes capital to do this. The US supplied its former enemies with the capital at a loss to its own investment, through taxation and currency debasement.

Public Works Mean Taxes

The fallacy that government spending provides a net boost to the economy is actually a combination of fallacies. For the sake of this argument, we’ll postpone the matter of deficit spending and inflation, and assume that the public-works spending will be covered, dollar-for-dollar, by taxes. Suppose the government builds a bridge to nowhere. Two fallacies are at work here:

  • The construction of the bridge creates jobs.
  • After completion of the bridge, the nation is wealthier.

The reality is that the taxes collected for the bridge are money that would have otherwise been spent privately, and this expenditure would have created jobs. For every job the bridge “creates”, one is destroyed in the private sector. We do not see the lost jobs because they are not in one place, like the bridge jobs are. The same logic applies to the enhanced national wealth. The bridge is there, but the unbuilt homes and other goods that would have been paid for by the money that was instead wasted on taxes, are not.

Even Paul Kruman falsely believes that wasting money on an alien defense system could save the economy.

Taxes Discourage Production

When government steals takes from A to give to B, its attention is focused on B. It forgets about A, especially about what goes through the mind of A. Why work so hard when a good part of the earnings is taken away? Why invest in something risky when you lose 100% of what you lose, but get only 70% of what you gain? Capital accumulation and production will decrease. Remember: B is a special interest, and A is everybody.

Credit Diverts Production

Government loans, loan guarantees and subsidies do not create credit; they divert it from the more credit-worthy to the less credit-worthy. A subsidy is a tax on a more successful business (A) to support a less successful business (B). Again, B is a special interest, A is everybody. The process is wasteful, since the loan or subsidy is not made to maximize the return on investment, but to achieve some political goal.

The Curse of Machinery.

Another prominent fallacy is the belief that machines and technology cause unemployment. The Luddite rebellion in the early 19th-century England is a great example, where labor unions succeeded in restricting automation and other labor-saving improvements in many cases. The half-truth of the fallacy is evident here: Jobs are destroyed for particular groups in the short term. But overall, the wealth created by using the labor-saving devices generates far more jobs than are lost directly.

Another example is Arkwright’s cotton-spinning machinery in 1760. The use of it was opposed on the ground that it threatened the livelihood of the workers, and the opposition had to be put down by force. Twenty-seven years later, there were over 40 times as many people working in the industry. What happens when jobs are destroyed by a new machine? The employer uses his savings in one or more of three ways:

  • expanding his operations by buying more machines.
  • investing the extra profits in some other industry.
  • spending the extra profits on his own consumption.

The direct effect of this spending is that as many jobs as were destroyed are created.

The net effect to the economy is wealth creation and even more jobs. The job destruction is only short-term and local. In some cases where this effect is major, special relief measures might be taken, but blocking the progress leads to stagnation and poverty. But if we stay focused on the lesson, we remember that we must examine the long-term effects and all groups.

Spread-the-Work Schemes

Similar to the fear of machines, this is the belief that efficiency destroys jobs, and a less efficiency creates jobs. For example, suppose we reduce the work week to 30 hours, but raise the hourly wage to make the total weekly pay the same as before. It would appear as though new jobs are created, and the previously employed have extra time on their hands. But what is not considered is that:

  • The employer must now raise prices and/or cut profits.
  • The stockholders face a loss of the value of their holdings.
  • The employer’s creditors loans are now much more risky.
  • The employer’s customers must pay more and who therefore will buy less.
  • The government loses revenue from the unseen listed above
  • The costs of production are sharply higher.

The least profitable companies go out of business and the least productive workers will lose their jobs. Demand was already saturated, otherwise we wouldn’t be trying to cure an unemployment problem. The result is greater unemployment than before. But such proposals are continuously advanced in the real world. In fact, these measures are proposed regularly in Europe and are often campaign platforms in elections.

Disbanding Troops and Bureaucrats

Assuming expenditures match revenues, and we postpone the discussion of deficit financing. Demobilization releases money to the taxpayers to provide private jobs. These will be wealth-producing, unlike war. The same goes for surplus government workers.

The Fetish of Full Employment

The economic goal of any nation or individual is to get the greatest results with the least amount effort. Production is the end, while employment merely the means. Yet our elected masters do not present full-production bills in congress but full-employment bills. Everywhere the means is erected into the end, and the end itself is forgotten. We can clarify our thinking if we put our attention where it belongs: on policies that maximize production.

Who’s “Protected” by Tariffs?

Adam Smith said, “In every country, it always is and must be the interest of the great body of the people to buy whatever they want of those who sell it cheapest…The proposition is so very manifest that it seems ridiculous to take any pains to prove it; nor could it ever have been called in question, had not the interested sophistry of merchants and manufacturers confounded the common-sense of mankind.” This is as true today as it was then. The central fallacy of protectionism is the negation of The Lesson: to consider special beneficiaries and short-term effects, and to neglect the general and long-term effects of trade restrictions.

Imagine congress is thinking of cutting or abolishing a tariff on sweaters. A sweater company shows that it would be put out of business and its workers thrown out on the street. Congress relents. The company and its employees continue with their contributions to the American economy. What has been overlooked, and who has been harmed?

  • The American consumer, who might have bought a sweater at a lower price and had money left over to spend on other things.
  • The companies that would have sold to that consumer and their workers.
  • The foreign sweater-makers.
  • The American exporters from whom the foreign sweater-makers or their compatriots would have bought goods and services
  • The governments that would lose revenues from the general slowdown of business.

American labor, capital and land are prevented from what they can do more efficiently to what they do less efficiently. Therefore, productivity is reduced, and also real wages. Productivity and wages might rise in the protected industry, but they fall for the overall economy.

The Drive for Exports

Exceeded only by the chronic dread of imports that affects all nations is a chronic yearning for exports. In the long run, imports and exports must equal each other. When we decide to increase our exports, we are in effect also deciding to increase our imports. A typical example of insanity is the belief that the government should make huge loans to foreign countries for the sake of increasing our exports, regardless of whether or not these loans are likely to be repaid. Bad loans made at home, in private commerce, are just that: bad. If this truth is so simple at home, why do people get confused about it when applied to foreign nations? The reason is that the transaction must then be traced mentally through a few more stages. One group may indeed make gains, while the rest of us take the losses. Here we have simply one more example of the error of looking only at the immediate effect of a policy on some special group, and of not having the patience or intelligence to trace the long-term effects of the policy on everyone.

“Parity” Prices

Special interests can think of the most ingenious reasons why they should be the objects of special consideration. Some of their schemes are so wild that disinterested writers do not trouble to expose them. Practicing Goebbels’ technique of the Big Lie, the special interests forge ahead until they’ve fooled enough congressmen (and constituents). Finally, when people realize that the danger of a scheme’s enactment is real, it’s too late. This general history will do as a history of the idea of “parity” prices for agricultural products.

If there is logic in the idea of parity prices, why not extend it to industry and other areas as well. Investigation shows that this would result in high prices for cars, metals, etc. The refusal to universalize the parity principle is evidence that it is not a public-spirited economic plan but merely a device for subsidizing a special interest. When prices go above parity, nobody talks about forcing them down or turning the windfall over to the Treasury. It is a rule that works only one way. At first glance, we only see the farmers and those who sell to them benefit. But when we apply The Lesson, we realize that all other producers, food consumers and other farm products are indirectly harmed. But shouldn’t we make up to the farmer the harm done him by tariff-caused higher prices of industrial goods? Back again to the Lesson. This joint system of tariffs and parity prices means merely that Farmer A and Industrialist B both profit at the expense of Forgotten Man C.

Saving the X Industry

Our aim here is to follow the main results that must follow from trying to save an industry. We are not concerned with non-economic arguments for intervention. We are only concerned with a single argument: if X is allowed to shrink in size or perish through the forces of free-market competition it will pull down the general economy with it, and that if it is artificially kept alive it will help everybody else. Note that tariffs and parity prices, considered above, are special cases of this. There are two ways in general of “saving X.” One is to restrict entry into an allegedly overcrowded field, and the other is to subsidize.

  • Restricting entry is unnecessary: if there is not enough business to support all the firms in the industry, the free market will cull the industry back to good health. If the former is enacted anyway, it will divert capital away from its most productive use, thereby lowering the general productivity and standard of living.
  • Subsidies are nothing more than a transfer of wealth or income to the X industry. The great advantage of a subsidy, indeed, from the standpoint of the public, is that it makes this fact so clear. That’s why we more commonly see the issues confused by use of tariffs, price-fixing, forced monopolies etc.

A modern example is the recent bailout of auto industries around the world. For decades, the MSM propaganda outlets have been trying to brainwash the world that cars are evil and cause of all pollution on earth. Yet, when profits fell during the 2008 financial crisis, Obama himself said we had to save the auto industry at all cost. We could have saved the horse-and-buggy industry too, but we didn’t. The arguments are the same.

How the Price System Works

The notion that profits are bad is widespread and contemptible, but we need to see why profits are both necessary and good. The price system is a supply-demand feedback loop. The cost of a product doesn’t determine the price directly. It does so indirectly through profit signals. Profit is the means of communication in a complex market economy. Everything is produced at the expense of forgoing something else. The price system maximizes consumer satisfaction, something far too complex to do by government fiat.

“Stabilizing Commodities”

Government attempts to “stabilize” commodity prices, such as farm products, are a con game. The true goal is to hold prices above market level, but this is never admitted. History shows that the free market is an effective price stabilizer. Commodity-futures speculators help even out the market. Claims that farmers are victims of low prices are false—except for storage costs, which can be borne by the farmers themselves or by speculators, a choice made by the market. Speculators through overoptimism actually subsidize farmers a little, a pattern found also in the gold and oil markets and, of course, in conventional gambling. In these cases, when government intervenes, it always does so to raise prices, and always causes overproduction and, down the line, lower prices and big losses to taxpayers. “Stabilizing” guarantees future instability.

Government Price Fixing

Government price fixing is common in wartime and natural disasters, when some items suddenly become scarce. Holding a price below market level has two consequences:

  • demand goes up, reducing supply.
  • supply is further reduced because the low price discourages production.

These two consequences both lead to shortages. When the shortages become obvious, the government then tries to “fix” the problem it created with rationing, cost-control, subsidies, and universal price-fixing, which causes distortion upon distortion. The end result is a command economy, totalitarian throughout. History shows in most cases, black markets develop. In other words, people become criminals in order to keep things going. As respect for law goes down, corruption and inefficiencies thrive.

Rent control is a form of government price-fixing. It does all of the things noted above, plus a few more. Rent control is supposed to be a temporary measure, enacted because of a housing shortage and the short-term inelasticity of housing supply. Even the latter is not true though. Higher rents would encourage people to be frugal in their use of space, accommodating more people in a time of housing shortage. Rent controls provide no such incentive. Rent control usually turns out to be permanent because of political pressure. The worse it gets, the harder it is to undo.

The result is that housing goes unrepaired because the landlord has no money to repair it. Slums spread and whole areas are abandoned. Government then steps in with “public” housing, replacing landlords with taxpayers. Rent control seems to help some people for a while, but actually harms many over a long period of time.

Minimum Wage Laws

Wages are in fact prices. Unfortunately, a separate word was coined for wages. Minimum-wage laws are like the commodity price-fixing described above, with the same result. If an employer is forced to pay someone more than he is worth, that someone will lose his job.

It is argued that the employer need only raise prices. But what they don’t realize is that customers will find other sources, and demand will drop, and unemployment will increase.

“Enough to Buy Back the Product”

A popular Marx-based argument put forth by labor unions is that a depression will ensue if wages are not high enough to “buy back the product.” What is forgotten is that A’s income is B’s cost. An above-market wage leads to a higher price (or a lower profit) that will make others less able to “buy back the product.” Above-market wages are self-defeating in another way: Two independent studies, one of theory, the other of historical fact, show that each 1% rise of wages above market causes more than 3% increase in unemployment.

The national product is neither created nor bought by manufacturing labor alone; it is bought by everyone. The best wages for labor are not the highest wages, but the wages that permit full production, full employment and the largest sustained payrolls.

The Function of Profits

The hatred of the very word “profit” shown by many people today indicates how little understanding there is of the vital function that profits play in our economy and our lives. Profits actually do not bulk large in our total economy. In good and bad times, corporate profits after taxes have averaged less than 6 percent of the national income. Accounting for inflation would reduce this number even more. Also, non-corporate profits, e.g., a barbershop, are probably lower. If there is no profit in making an item, it is a sign that the labor and capital devoted to its production are misdirected. Profits guide and channel the factors of production so as to apportion the relative output of thousands of different commodities in accordance with demand. No bureaucrat can solve this problem on his own. The other function of profits is to put constant pressure on the head of every competitive business to be more efficient. In good times he does this to increase profits; in normal times, to keep ahead of his competitors; in bad times, just to survive. Profits, tell us not only which goods are most economical to make, but also which are the most economical ways to make them. History shows that profits are the best way of doing this.

The Mirage of Inflation

It is important to question why inflation has been constantly resorted to and why it has had popular appeal in spite of leading so many nations down the path to economic disaster.

  • Many people confuse money with wealth. Real wealth consists in what is produced and consumed. But the verbal ambiguity that confuses money with wealth is so powerful that people fall into the trap again and again.
  • A second group, less naive, would have our government print just enough extra money to fill an alleged “deficiency” or “gap.”
  • Those who know that printing money will debase the currency but who are content with that for a variety of reasons: they wish to favor debtors over creditors, or exporters over importers, or they want to “start industry going again.”

This is what inflation really does: The government prints some money to pay bills that it is unwilling to tax for. The direct recipients of that money will benefit most from the inflation. Their suppliers and vendors will benefit next, and people outside that loop will lose out. If the inflation lasts for a while and then stops, the economy will be much the same as before, except for some distortion away from the balance of a free market. However, some will have gained and some will have lost during the transition. If inflation continues indefinitely, the value of the currency will eventually fall to zero. History shows hyperinflation is the final step.

The value of money is what people think it is and their best guess as to what it will be. So inflation turns out to be merely one more example of our The Lesson. Inflation is a form of taxation. It is probably the worst form of taxation, which usually burdens the poor the most. In fact, it is a flat capital levy, without exemptions. Inflation discourages thrift. Inflation encourages squandering and waste of all kinds. It ends invariably in collapse.

The Assault on Saving

The saving policy that is in the best interests of the individual is also in the best interests of the nation. Bastiat’s example of two brothers, the spendthrift and the saver, who begin equal but do not end up that way, is the best way of seeing this. The spendthrift spends until he is worthless. His spending contributes to the national economy, at least to the luxury goods and services industries. The saver’s expenditures and savings also contribute to the national economy; the savings go directly into building the capital base, and the saver’s net worth continues to increase, so that the process can go on indefinitely. Saving is therefore another form of spending. Moreover, money spent on capital formation does the national economy more long-term good than money spent on consumption.

There are many fallacies concerning saving. Saving for hoarding is confused with saving for investment. Hoarding, which can indeed harm the economy, is actually a tiny part of the economy as a whole. Hoarding tends to increase in troubled times in response to the perceived trouble, not as a cause of it. To blame “excessive saving” for a business decline would be like blaming a fall in the price of apples on the people who refuse to pay more for apples. Another fallacy is to blame the saver for unsettling the economy by disappointing producers’ expectations. A certain amount of saving is taken into account in making estimates of future demands. Sudden changes in savings rate might unsettle the economy and thereby do harm, but all sudden changes in either direction of any economic parameter have this effect.

Lowering interest rates to increase the demand for capital have the natural effect (considered “perverse” by the central planners) of lowering its supply. Furthermore, as capital markets adjust to the presence of inflation, the result is sharply higher interest rates, especially long-term rates. There is no limit to the demand for capital. Capital is used to reduce the cost of production and thereby raise profits. Reluctance to invest capital comes from an assessment of high risk, most commonly made as a result of uncertainties brought about by
fluctuations in the kind and degree of government intervention.

Read The Book: Economics in One Lesson

Along with What Has Government Done to Our Money?, this book is required reading for anyone that wants to understand how economics really work.

If you want to read Economics in One Lesson, by Henry Hazlitt, in its entirety, you can buy it online.

Hidden Secrets of Money: Episode 5

In episode five of the Hidden Secrets of Money series, Mike Maloney explains about the history of money from inside the money museum at the Bundesbank, one of the world’s largest central banks.

I still think episode four is the most powerful and important videos in the Hidden Secrets of Money series so far, but episode five is pretty good.

Complete transcript of Hidden Secrets of Money: Episode 5

The entire world is facing a debt driven disaster the scale of which has never been seen before in human history. The situation is now so severe that we’re left with only two options: default on our debt, or inflate it away. You can already hear people blaming the free markets and even money itself for our problems and to me this is just tragic because we don’t have free markets any more and we certainly don’t use real money. This is the real reason for our problems: Our money itself has been corrupted. It’s not just an issue of economics, this affects your freedom. When this crisis hits, people will be screaming for the government to do something, when it was the government who caused the problems in the first place.

Many societies have faced this dilemma in the past and we can learn what the outcome might be simply by studying what they did and comparing it to what we’re doing today. So while I was in Germany, I decided to stop by one of my favorite museums and take you on a kind of crash course on the history of real money, how it evolved, and the twin dangers that arise when money is corrupted.

I’m here at the Bundesbank Money Museum in Germany and this is one of the best museums I have ever seen. Right at the very beginning of the museum you walk in and it starts with barter, you know originally the first form of currency was livestock… the problem with livestock though like for instance this cow, if I traded this cow to you for something and somebody else wants to trade you something else that has a much lower value you can’t make change! A system that relies on barter is very inefficient because you not only suffer from the problems of divisibility you also rely on the hope that you’ll find someone who has a good or service that you need who wants something that you have at the same place and at the same time. In economics this is called the “coincidence of wants.” Now add the fact that most goods have a shelf life before they perish and you can see why barter systems held mankind back for so long.

So what was it that solved the coincidence of wants and propelled us out of the Stone Age and into space? It was the invention of money. Money is not evil, it is a magnificent tool that allows us to trade our specialized skills and to store our economic energy. Without it we be struggling to feed ourselves each day and our average life span would still be thirty. In episode one we learned that real money has to fulfill certain properties in order to function. But twenty six hundred years after its emergence people still confuse money with currency… even the so-called experts. So they’ve got here some of the things about what money is, the first example here is ‘Money is whatever goes’ So, ‘in earlier cultures commodities such as cattle stones or medals were used as money. Buyers took the value of the goods on trust when making their purchase.

Today too, money is a question of confidence. So, the currency today isn’t money today we’re using currency… that’s the only reason it has any purchasing power whatsoever, it’s because yesterday your experience was that it purchased something so you have faith that it’s going to purchase something tomorrow, otherwise it has no value. Whatever form it takes reliable money has two characteristics: It is genuine, and it is stable. People can rely on its value. Well you know what fiat currency around the planet has maintained its value? They all fall in value so right away you can see the difference, they’re talking about currency here and when they say it’s genuine. I mean what is genuine?

A counterfeiter, somebody that’s running their own printing press in their basement is making genuine notes as far as he’s concerned. They’re genuine counterfeits! These things that just come off a printing press well yeah, it’s a genuine lie from a central bank or government that you’ve got something that’s going to store value for you because it doesn’t over long periods of time… it loses value. Gold banknotes and electronic money (meaning electronic currency) may be stored, divided up or transported. As its material value has declined over time, its genuineness has had to be beyond question.

Well this one says that it’s got to maintain its value and right here they’re contradicting the the next one. The one thing here, gold is the only thing that they’re talking about that has not lost its value. ‘In the past rare goods were used as money. Today central banks must ensure that the supply of money is restricted.’ Well what are they doing all over the planet today? They’re lifting all restrictions on how much currency they are creating… they’re flooding the planet with currency.

The next display shows the usual museum pieces that are described as commodity money cowry shells, representative axes, cocoa beans and the like. While these worked better than barter none of them were actually money because they all had a weakness, one or more properties of money that they couldn’t fulfill. Therefore they are commodity currencies not money. Some of these were widely used right up until the beginning of the 20th century, and there’s some stuff here that I haven’t seen before.

Here’s something very interesting, this brick of tea, its value is in the intrinsic, it’s in the commodity that you’re using, it’s the tea. But this one has a certain fungibility to it, each unit would have the same value and you can make change. You can snap these things apart into units of six, it’s portable it’s not that heavy, this one fulfills quite a few functions and money… I would not imagine that is that durable, and probably doesn’t wear that well.

And now we come to the emergence of real money. Here we have little pieces of metal, just little pieces that have been broken off bars or something that was cast, other little blobs of metal. They were traded as a currency you know they had purchasing power they had an intrinsic value but they still weren’t fungible which means interchangeable… every one of them has a different value, you can see that some of them have a higher silver content, some of them have a higher gold content. These are called electrum, a mixture of gold and silver, naturally-occurring. What you notice is that this is from the 7th century BC and then between the seventh and the sixth century were talking about somewhere between 680 and 630 BC the emergence of true money.

Here we’ve got four coins, the large one is a one-third stater coin, and the other three are one-sixth stater coins. Each unit is interchangeable, it’s now a unit of account you can take so many of these in trade for so many have loaves of bread and you don’t have to break out your little scale and weigh them any longer. With the little chunks of metal you had to weigh every transaction that was going on and you had to weigh whatever your payment was and then take a guess as to what the purity was. Here you have some standards that were set by mints and guaranteed by those mints. These are a unit of account, they’re fungible, every one of them is interchangeable, their portable, they’re durable, in your pocket over long periods of time, they’re divisible you can make change. You can see there’s a one-third stater and one sixth staters. And they’re a store in value over long periods of time. These still have purchasing power today 2,600 years after they were made.

Another thing that I find really interesting is that between maybe 680 BC in the year 300 BC, cultures all around the world, they all gravitated toward gold and silver coinage as money. The entire world sort of decided altogether that gold and silver were money. Why? Because the free markets keep on selecting gold and silver as money because of the properties that they have.

So now we get to the room of real money. This is a vault door and this is where they’ve got all the great examples of the real gold and silver coins so come on in and join me. So here we get to the first display, here’s gold and silver, what they’re using to make money and here we have some very early representations of gold and silver coins. And, I love these displays, they start with coins in Lydia so these coins go back to the very first minting of true coinage. So here we have… starting the 6th century BC, and then it goes up to the 3rd century and then from the 5th to the 11th century and the 13th to the 15th century and these displays just go on and on with the history of real money, gold and silver. And here seventeenth and eighteenth century, here we come to the 19th century and now we’re all the way up to the 20th century here.

And here we come to our first example government issued fiat currency this is a from China this is from 1375 and what’s interesting is I have a chart that compares the value have the paper currency in China compared to silver, and there was a hyper inflation of this currency it wasn’t backed by anything, it wasn’t backed by taxes it wasn’t backed by anything. The Treasury they could just print this and so this went into hyper-inflation because the government was just running its budget by just doing deficit spending by printing.

And then I’m gonna skip to sum of the colonial currency. This is the United States and each one of these currencies is printed by a different state, we’ve got Maryland South Carolina, North Carolina, Connecticut, New York, this one here is particularly interesting it’s printed in the fourteenth year of the reign of King George the third, it’s dated March 25th 1776 so this is just a few months before the Declaration of Independence. it says here ‘Tis death to counterfeit’ This was printed just before we started coming out with the continental dollar which went into hyper-inflation because of pure deficit spending on the Revolutionary War.

And so…this is the wall where real money gets corrupted. This is where it all turns to paper which sometimes is backed by something but it can be a lie, they can print more than they have of the stuff to back it.

As we learned in Episode 2 one of the first things the country does at the outbreak of war is to suspend redemption rights so that their currency is no longer redeemable in gold. This is exactly what Germany did before World War I. After losing the war they suffered through one of the worst hyper-inflations on record when they were burdened with massive reparation payments to France and the Allies. These heavy penalties stifled the German economy and brought it to a standstill leaving the country with the same two choices all indebted nations have faced throughout history: Default on their debt or inflate it away. Defaulting was not a viable option as they were completely impoverished, weakened, and surrounded by armed forces ready to take their land. Since the currency was no longer tied to gold it was decided to light up the printing presses and inflate their way out, paying the debts with new currency created out of thin air. This had drastic consequences, check out some other this Weimar currency. The display starts with one mark that actually purchased something, but soon the notes rise to the thousands, then the millions, then the billions, and finally the trillions. It’s mind-blowing.

You’ll notice that I’m laughing a little bit as we move through the museum but I’m not laughing at the people, I’m laughing at the stupidity of central banks, and of governments, and how we never seem to learn from history. OK, this is an example of different currencies used during the hyper-inflation and they call some of it inflation money and emergency money. This is interesting, they figured the way out of hyper-inflation was to print more! So, ‘In 1923 the value of money fell by fifty percent or more per day.’ That means prices are doubling every day, it’s falling by fifty percent. ‘Nearly everyone spent their money as quickly as possible on bread, shares and other safe assets.’ Well I don’t consider shares safe assets, actually the stock market did not keep up with the inflation. ‘However, this rapid circulation only served to stoke inflation even further.’ That’s the function of velocity of money it’s just a when velocity picks up it’s just like expanding the quantity, it has the same effect. ‘At the end, even 144 printing companies working for the Reichsbank could not keep up with the demand for banknotes. Emergency money issued by cities, local authorities, as well as banks and other enterprises started being circulated.’ So everybody was issuing currency to add to the currency that the government was printing like crazy! ‘Although bank notes with face values of trillions of marks were issued the vast demand for money…’ that’s not correct, ‘The vast demand for currency led to a paper shortage. Printers used anything that could be found including wool wood and silk.’ So so here’s some examples of wood, wool and silk currencies over here. So this is a great example of how even here, in a museum of what they call ‘money’… this is the Bundesbank, one of the world’s great central banks, (if you can call any central bank great) They don’t understand the difference between money and currency! They’re calling all of this ‘money’ and it has nothing to do with money, it was a promise to pay money at one point, and then it was a broken promise.

People have faith in these government created currencies and it allows governments to basically rob their own people. The government erased the debts that they had left over from World War I by just hyper inflating the currency and basically that transfers all the wealth of the middle class to the government. The government inflated away the debts but they also inflated away the prosperity of their entire population.

When we were in Germany we got a chance to shoot in front of the Bundestag, which used to be called the Reichstag, and it felt… it’s very very significant in that…out of monetary crisis you very often see the political landscape change dramatically. It’s the middle class of a country that defines the country with their vote they’re the largest sector of any country, about 70 percent. And a currency crisis like a hyperinflation wipes out and impoverishes the middle class, and they become filled with fear, and it’s very easy for somebody to come in and prey on that fear… and dictators arise out of hyper-inflation, and this is one of my greatest fears as far as the United States goes. I think that we all have to be very very careful and very watchful for what happens in the future.

A few years ago I was interviewing Congressman Ron Paul and he said, ‘I think that there’s going to be a financial collapse before they come around to thinking seriously about monetary policy, but the real thing we have to worry about is not the loss of our wealth, it’s the rise of a dictator, it’s the loss of our freedom.’ And what’s interesting is that the rise of Hitler, there were two times where he played on the public’s fear, he could never have come to power had there not been a hyper inflation back in 1923. Just one week before the end of that hyper-inflation that’s when Hitler made his first big public appearance. Playing to the public fear Hitler and his storm troopers took over a beer hall called the Burgerbraukeller that seats around 3,000 people and he took the stage by gunpoint, and to this literally captive audience he gave a speech that would change the world. Because of the hyperinflation the audience had been recently impoverished, their wealth had been stolen by the government running the printing presses, and so they’re all scared. He offers them a scapegoat and tells them he’s got the way out. He became very popular after that and the very next day the people that we’re listening to him followed him in an attempt to overthrow the government. He was arrested, tried and convicted of high treason, and served time.

While he was in jail he was provided with a private secretary, Rudolf Hess and he actually wrote about half ‘Mein Kampf’ while serving time. But once the economy started to recover Hitler lost that leverage, that power, he could no longer play on the fear of the public, once the economic situation had changed. By the middle of the Roaring Twenties he had become a joke. The Nazi Party had gone to less than two percent of the vote, then along came the Great Depression, and Hitler seized this opportunity again. He was the first politician to actually campaign by aircraft hitting multiple cities in a single day and the Nazi Party went from two percent of the vote to the second largest party in Germany. So playing on the public’s fear Hitler was able to take away the rights and Germans, all these guaranteed rights in Weimar Constitution private property rights, the right to assemble, public assembly, the right to privacy in the mail, the telephone system, he’d just took away all their rights and seized power. So this is some of the things that we have to be concerned about and be very mindful of… Economic crisis very often leads to the rise of a dictator.

Yeah the fact that this was just seventy to eighty years ago, basically there are still people alive today that experienced this, but enough of them have died off to where the warnings fall on deaf ears.

Berlin is a great example of another massive danger to individual freedom that economic crisis can bring: the swing from capitalism to collectivism. After world war two the city was basically divided in half: the West being capitalist and the East communist. Germany was reunified in 1990 but even this short period of separation showed the vastly different levels of prosperity that the two systems achieved.

So this is the famous Checkpoint Charlie and what’s interesting is how quickly an economy can heal. Just twenty years ago you would have seen a tremendous difference between the East and the West you’d have one side that has tall buildings and is much more industrialized and new and then one side that was that’s very old and gray. It was one of the best examples of what a state-run society does to an economy. How the more the public relies on government, the worse the general economy gets. What happens you know in capitalism you have the greatest disparity between the poorest and the richest individuals and there’s a backlash against that and you see this happening in waves and cycles, this cycle that goes from capitalism to collectivism. Here, the example, I mean you had this line going right through a city and one side of the city that was very poor and the other side prosperous by comparison. Now when we go toward collectivism, they want to eliminate this great disparity between the poorest in the richest individuals, but what happens is it that they don’t raise the standard of living for the poor up here, they drag the whole economy down so that everybody ends up living down here… except for the people that are in running the government.

Collectivism is a danger because we’ve proven time and time again that it doesn’t work. The evidence is in. If you look at history it’s clear that maximum prosperity can only be achieved through individual freedom, free markets and sound money. You’d think that we would learn from history, but I’m going to show you a few more displays from the museum that prove conclusively we haven’t.

And this is where we are today, this is a sheet of Fifty Euro notes and these just come out at printing press bam bam bam bam bam just like those notes did! And the entire world today is sort of- every central bank across the planet is creating currency like crazy right now, to- I think we’re going into deflation so they’re trying to stave off deflation right now, by printing their way out of it.

So here we’ve got some examples of the technology that governments around the world are putting into their counterfeit currency so that the public can’t counterfeit the currency that the governments are now counterfeiting. So you’ve got all these holograms and watermarks and different threads and different types of the paper, and then here’s this big old printing plate where they pop these things out a mile a minute, and right now they are hyper inflating the base money around the world – the paper money. We’re going into a deflation of the credit money – that voodoo hocus-pocus currency that the banks just type into the computers, that’s starting to collapse where this stuff is expanding.

So we learned in episode 4 that modern currency creation is a complete scam, but a whole lot of people had trouble believing that it could be true. The European Central Bank has this awesome display that shows you exactly how it’s done and it’s basically the same as our episode 4, so here’s a quick recap thanks to the ECB.

Basically the central bank and the Treasury swap IOUs, the central bank writes a check and the Treasury issues a Treasury bond which is an IOU and that creates currency, and then somebody is paid, it gets deposited into a bank account and a thousand marks – they withhold 10 percent so right here they’re already telling you that his bank account is a lie, he deposited 1000 in it, they only withhold 100 in case he wants some of that and then they loan out 900 which then she buys something from this guy he deposits the nine hundred they borrow ninety percent of that and leave just 10 percent on deposit for him and the result is that it expands, every 1000 ends up creating 10,000, or every one dollar creates ten dollars. You know they’ve got the result here – it’s all sort of a voodoo hocus-pocus scheme.

One of the great things that I’ve noticed here is that throughout the museum they keep on proving the point that even though this is the Bundesbank museum… they prove the point that fiat currencies that come off of a printing press, eventually go to zero, that they’re really worthless. This says, ‘The ideal goal of all monetary systems was to ensure that money is trustworthy and kept in short supply. Metal-based currencies restrict the money supply because metal deposits are naturally limited. However, during the industrial revolution in the nineteenth century the rapidly growing economy needed a means of payment which could adapt flexibly to this growth.’ Baloney! You can have a fixed currency supply and when you have economic growth it means that the currency gains in purchasing power.

‘In the 20th century uncovered currencies [meaning un-backed currencies] have been the norm. In principle the money stock could grow unchecked. This is why central banks must ensure that the money stock is in line with economic growth.’ Yeah, right!

So here we’ve got my buddy Milton. Actually Milton was a sort of semi-free market economist, he won the Nobel Prize, so he’s considered the Dean of the Chicago School of monetary thought, which are ‘Monetarists’ – they believe that we should have a Federal Reserve and it should expand and contract we currency supply to achieve a stable prices. One of the problems with Keynesians and Monetarists and so on is that they think you should expand it and contract it but they never contract it! They just, you know Keynesian: You’re supposed to spend when the economy is bad the government’s supposed to spend and stimulate and then withdraw currency from circulation to keep us from going into a bubble caused by the expansion of credit and the spending that they did during the bad portion in the economy so they take this rubber band and they stretch it and is supposed to come back, but they never do that, they just keep on stretching it to infinity! And here we are right now, where we are in the world is that that rubber band is about to snap with every currency on the planet.

And so I’m in instability, and deflation, inflation let me see maybe I’ll cause a hyperinflation… Uh! It just went off the inflation scale I guess I did cause a hyper-inflation… oops! And now the whole thing is collapsing!

This game of inflation and deflation has never worked, right now we’re on the precipice of the whole system collapsing and just like the game, our monetary system will reset. This is where the twin dangers we learned about may rear their ugly heads so it’s up to all of us to learn from history.

I mentioned earlier that it was the invention of money that allowed humans to prosper and rise out of the Stone Age, but money is only part of the equation. What use is money if you don’t have freedom?

So what’s going to happen? Will we default or inflate our way out of the mess we’re in? Since 2005 I’ve been stating publicly and I also wrote in my book that I believe we’re headed toward a series of events involving a short term deflation, followed by a big inflation or hyperinflation. If you really want to learn how this inflation might affect you and your family join me at HiddenSecretsOfMoney.com for this episode’s exclusive presentation. It’s a special video that shows where I believe we are on this economic roller coaster ride and how I think it’ll play out.

So for now what can you do? 1 – share this video on social media and subscribe to our YouTube channel. 2 – Educate yourself by watching the rest of this series, and 3 – Take action to protect yourself and your family. Learn what you can do at HiddenSecretsOfMoney.com I’ll see you there.

Should I buy half million or a million? Let me see how much, this is not gonna travel well in the suitcase…but it would be good to have a million euros wouldn’t it? Tough decision, so okay I’m gonna buy a quarter million Euros so here’s 50 Euros for your quarter-million and uhh- yeah, and I get change back! It’s about 8 euros to buy a quarter million Euros. OK Okay and what’s interesting is these are going to eventually be in here. And it won’t be too long before these end up like this. Oh, and we get some a chocolate gold coins! Danke.

So that’s our tour of one of the best monetary museums I’ve seen so far, but what amazes me is that they still just don’t get it!

Hidden Secrets of Money: 4 Episodes

Here’s a playlist featuring all four episodes in the Hidden Secrets of Money series by Mike Maloney. Episode one is important if you’re not familiar with Mike Maloney and you  plan on following him, but if you don’t have time to watch the entire series, watch episode 4; It’s a real eye-opener for the uninitiated.

Hidden Secrets of Money Episode 1 – Currency vs. Money

In this video, Mike talks about the difference between currency (the dollar) and money (gold). This is one of the most important lessons you will ever learn, and will pave the way for future episodes.

Hidden Secrets of Money Episode 2 – Seven Stages of Empire

Mike explains where and why currency became money. He also explains one of the most predictable long-term economic cycles: the Seven Stages Of Empire. Then he explains where we are now in the last 140 years of our own monetary history.

Hidden Secrets of Money Episode 3 – From Dollar Crisis To Golden Opportunity

Mike talks about the Death Of The Dollar Standard and explains what you can do about it.

Hidden Secrets of Money Episode 4 – The Biggest Scam In The History Of Mankind (In 7 Easy Steps)

As I mentioned already, if you only have time to watch one of the videos in this series, this is the one. In this video–the only one that lives up to the “hidden secrets” in my opinion–Mike explains how money is created out of debt, and how paying off debt would cause the entire system to collapse. He shows how the entire fiat banking system is a fraud, the cause of inflation and much much more. Pass this one on to your friends that need to take the red pill.

The Morality of Gold and Silver

Right and WrongMany people talk about gold and silver as investments or hedges against inflation, but to me, it’s not just about protecting wealth or making making a profit; it’s about promoting the concept of sound money, which is morally correct.

If everyone used sound money (gold and silver), governments would be forced to use sound money too, and their purses would be restrained by economic reality. For example, if the Federal Reserve wasn’t able to create trillions of dollars out of thin air, the government would have a hard time funding illegal wars that most people oppose. Likewise, the government wouldn’t be able to fund wars at home (TSA, Homeland Security, police militarization etc.) because they would have to raise money for these operations with real money, instead of borrowing from future generations and taxing us with inflation.  Imagine if Obama addressed the nation and asked everyone to pay an additional ounce of gold this month, so we could be sexually assaulted by the TSA at the airport. Imagine if he asked for three more ounces of gold, so he he could invade another turd-world country that has not attacked America.  Imagine if he asked for two more ounces, so Homeland Security could purchase billions of rounds of ammunition to use for who-knows-what.  Imagine if he asked for another ounce of gold to fund a massive database so the government could spy on you. He would be laughed out of office.

The reality of sound money would not only restrain governments; it would also restrain banks. Do you think banks would make high-risk investments and bad loans, like they do today, if they used gold and silver, instead of fiat funny money? Not likely. If real money was at stake, they would be much more careful with it. But there is no accountability in today’s system because the banks know they can always leverage more paper money. And even if their imaginary system crashes, they can always count on the government to bail them out.

Hidden Inflation: Energy Efficient Light Bulbs

Potato Chip Inflation
Potato Chip Inflation – 2 oz less for your family

Food and energy are things everyone needs that are highly susceptible to inflation, which is why both are excluded from core inflation statistics (PCE) that are routinely presented by the MSM.  Inflation does not always mean prices go up however.  Sometimes, producers can give you less product for the same amount of money, giving the perception that prices have not changed.  We don’t notice we’re getting less for our dollar because the bag of chips is the same size as it always has been, but there are actually less chips in the bag.  While some tricks to hide inflation are obvious, such as smaller packaging (or small contents in the packaging), others are more deceptive and sinister.  The push to ban incandescent light bulbs is the deceptive sort, where politicians use environmental concerns to hide the price inflation of electricity.

Almost in unison, governments around  the globe have begun limiting or phasing out incandescent light bulbs in favor of energy efficient light bulbs. When this sort of legislation began, fluorescent light bulbs (CFLs) where the only mass-market option, and they continue to dominate more expensive LED bulbs.  The environmental argument is that we have to reduce energy consumption to save the planet from global warming.  But ask yourself: how does the planet benefit from the countless numbers of fluorescent bulbs, which contain mercury vapor, being broken and dumped in land fills? In fact, each CFL contains as much as 5 milligrams of mercury, a toxin which eats brain cells non-stop and cannot be removed from the body.

While researching this article, I found a number of government-funded sources claiming that we shouldn’t worry about mercury vapor from CFLs.  For example, Nation Geographic tries to blow it off as a non-issue.  In contrast, this video from the University of Calgary Faculty of Medicine Dept. of Physiology and Biophysics which shows how mercury causes brain neuron degeneration:

The mechanism of hiding inflation in energy efficient light bulbs

The real reason governments want to ban incandescent light bulbs in favor of toxic, mercury-filled CFLs is to hide increases in energy prices.  By forcing people to use less electricity, energy companies can charge more, while providing less.  Like the half-empty potato-chip bag, the total amount of your electric bill remains the same, but you’ve consumed less electricity.

Compact fluorescent light bulbs (CFLs) contain mercury.
Compact fluorescent light bulbs (CFLs) contain mercury.

Countries that have legislation to phase out or ban incandescent light bulbs include:

  • China
  • India
  • Philippines
  • Malaysia
  • Israel
  • The entire European Union
  • United States *
  • Canada
  • Cuba
  • Australia
  • New Zealand
  • Argentina
  • Brazil
  • Venezuela

How many of these countries are in a race to devalue their currencies?  Which ones have populations suffering from inflation that the government pretends doesn’t exist?

 

* In the US, you might think this is new legislation from Obama, but in fact George W. Bush signed the Energy Independence and Security Act (EISA) into law December 19, 2007. The EISA creates a de facto ban on incandescent  bulbs by requiring unrealistic, or unobtainable, efficiency standards for standard bulbs.

Stefan Molyneux and G. Edward Griffin on Central Banking and Financial Collapse

Here’s a great video featuring Stefan Molyneux and G. Edward Griffin discussing:

  • the basics of central banking.
  • historical examples of honest banking.
  • theft via inflation.
  • how fractional-reserve banking enables war.
  • false patriotism.
  • predictions on when the current system will collapse.

Stefan Molyneux

Stefan MolyneuxIf you’ve never heard of Stefan Molyneux, he is an anarcho-capitalist philosopher who promotes voluntaryism and believes that the best way to liberate society is to raise our children with love and respect and teach them the true meaning of liberty. I’ve been following Stefan Molyneux for a couple years now, and I really like his philosophies on life, freedom and economics.

G. Edward Griffin

G. Edward GriffinG. Edward Griffin is a film producer, author, and political lecturer, best known as the author of The Creature from Jekyll Island, which explains, among other things, how the Federal Reserve was founded and the causes of wars, boom-bust cycles, inflation, depression, prosperity.  I’ve seen G. Edward Griffin in a few videos, but haven’t followed him as closely as I’ve followed Stefan Molyneux.  However, after seeing this video, I think I’m going to start following him more closely.