Free Trade and the US

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One of the characteristics of the anti-globalisation movement personified by US President Donald Trump is its apparent opposition to free trade. Free trade is not only associated with the globalisation agenda of the liberal elite but is also held responsible for the shipping of jobs and production overseas where cheaper labour and cheaper raw materials can be exploited, leaving at home nothing but crumbling factories and swathes of unemployed workers. Hence a considerable part of Trump’s “America First” programme appears to be devoted to distinctly anti-free trade measures, such as increased protectionism and tax penalties for firms relocating jobs overseas.

What should be the reaction of Austro-libertarians to this phenomenon? Do we not believe that free trade is almost the very essence of freedom and the fountain of prosperity? Should we not oppose any attempt to restrain trade by either tariffs or regulations? On the other hand, what are we to do when such policies are seemingly associated with nothing but destitution and misery for a significant proportion of the population?

For libertarians to simply repeat like a broken tape that trade should be left “free” runs the risk of considering only surface phenomena while failing to examine deeper, underlying problems. In the first place, of course, the association of the globalising movement with free trade is patently false. Those behind this movement are not in favour of genuine free trade; rather, they promote a heavily managed trade environment – one governed by trade agreements, trade deals, and a complex myriad of rules and regulations which favour only large corporations and the politically well connected. Indeed, trade agreements and trade deals are the antithesis of free trade, the latter of which demands a complete absence of the state from any involvement in trade. The terms “free trade agreements” and “free trade deals” are therefore nothing more than meaningless doublethink. A grave mistake that the anti-globalisation movement is likely to make is to confuse political globalisation – the consolidation of and intensified co-operation between states and state institutions, which is a relatively new phenomenon – with economic globalisation, which is private institutions trading peacefully and voluntarily on terms agreed by themselves, a situation which has existed for centuries. Political globalisation should be opposed bitterly while economic globalisation and the expansion of the international division of labour should be promoted. The bigger problem, however, is the fact that free trade today, if it is genuinely free, is carried out in a context where there is a gross, underlying violation of private property rights – in other words where the players who are demanding freedom are benefitting from the curtailment of other people’s freedom. For instance, banks are restrained from being “free” by heavy regulation and oversight because their lending activities have the tendency to blow up bubbles which lead to crippling busts. However, the reason for this tendency is that banks are, simultaneously, legally privileged (by the ability to hold only fractional reserves) and economically privileged (by being the first parties to receive new money that is freshly printed central bank – money which is itself, of course, subject to legal tender laws and of which the central bank is legally privileged as the sole issuer). It would be a travesty for Austro-libertarians to respond to any call for increased bank regulation by pointing out that such regulations are a violation of freedom. While this is true in and of itself, the real problem is clearly the state’s monopoly money and its dissemination through fractional reserve banking. To take another example, entities that are endowed by the state with a monopolistic or quasi-monopolistic privilege are normally able to charge higher prices to their customers and to pay lower prices to their suppliers. If, in response to the resulting “obscene” profits and high prices, the state proposes to regulate the prices of the entity’s products or tax away a significant portion of its profits, Austro-libertarians pointing out the pitfalls of price control and the injustice of taxation would be speaking the truth as far is goes. However, they would be ignoring the bigger, underlying problem which is the entity’s monopoly privilege, and that what is really needed is to rescind this privilege in order to open up the market to genuine competition. Only in this context is the freedom of firms to set prices both legitimate and economically beneficial.

When it comes to free trade, part of the underlying problem that is easy to ignore is that, of course, US workers are burdened by minimum wage laws and employment regulations which, to any employer, makes them relatively more expensive than workers overseas who may not be burdened by such interventions. However, the bigger “macro” problem is the fact that trade today takes place with the exchange of state-issued, paper currency which can be expanded at will, rather than with “sound” money such as gold or silver. The added complication in the case of the United States is that it is, currently, the issuer of the world’s reserve currency. What we will see is that, even without minimum wage laws and employment regulations, this would cause jobs to vanish overseas.

When the entire world is trading with “sound” money such as gold the prices of labour in the US and overseas depend upon the relative supply and demand for gold and for labour in each location. In which circumstances could labour be cheaper overseas? (By “cheaper” we mean that wages are lower per unit of production and not per hour. Wages in developed countries are higher per hour because labourers there can produce more in each hour on account of the relatively high amount of capital goods per worker – more tools, machines, factories and so on. Wages in poorer countries may be lower per hour because each worker can produce less per hour, but in equilibrium they would not be lower per unit of production). If labour is cheaper overseas then it means there is a relatively higher supply of money and a relatively lower supply of labour in the US while there is a relatively lower supply of money and a relatively higher supply of labour overseas. Employers therefore divert more of their funds to employing workers overseas in order to take advantage of the lower wages. This, however, is simply the correction of a disequilibrium which will reach its own natural limit. As money leaves the US then money there will become relatively scarcer while the amount of labour will remain the same and so US wages will fall; the new money flowing into countries overseas, on the other hand, will cause wages there to rise. At some point wages both at home and overseas will equalise. Of course, if the reverse happens – that wages are higher overseas than in the US – then the opposite process will occur, with money being drawn out of overseas countries and coming home to the US to bid up wage rates there. All of this is part of the natural process of economising behaviour which seeks to employ resources across the world by directing them to their most highly valued use. Absent any further state interference such as minimum wage laws and onerous employment regulations, all workers, both overseas and at home, will end up employed at the same wage rate (per unit of production).

What happens, however, when we are trading not with “sound” money, such as gold or silver, but, rather, with a paper money which can be issued by the state at will? If the domestic state chooses to expand the supply of money then this will cause an effect similar to that we just outlined. The supply of money at home will increase causing local prices – including wages – to rise. Prices overseas, however, will not yet have risen on account of the fact that the new money has not yet reached there. This process takes places through the complicating factor of the exchange rates between currencies, which is itself, of course, a price and is subject to the same influences. If the US prints more money but the overseas country does not then the first firms to spend the newly printed money on foreign currency will benefit from the old exchange rate and will be able to obtain more foreign currency than they otherwise would have which they can then use for purchasing goods and labour from abroad. Firms will therefore divert more of their spending to importing resources and seeking foreign labour than they would domestic labour. For the majority of countries such printing of currency can have only a very limited effect. If the inflation is a one shot affair then, eventually, increased bidding for foreign currency with the newly printed money will cause the exchange rate to adjust, strengthening foreign currencies and weakening the domestic currency. Fewer units of foreign currency can be bought with the additional supply of domestic currency and so the attractiveness of foreign goods and services diminishes, vanishing entirely when the currencies reach purchasing power parity. Currencies reach a state of purchasing power parity when the exchange rate between currencies and between goods is harmonious. For example, if an apple costs two South African Rands or one US Dollar, then in a state of purchasing power parity one US Dollar would equal two South African Rands. At this point there is no additional benefit from buying goods and services from abroad than there is from buying them at home. If, on the other hand, the inflation is continuous then such continuation comes to be expected. This expectation of inflation will in and of itself cause a much quicker adjustment to the exchange rate than previously, thus nullifying, or at least blunting, the benefits to the recipients of the newly printed money, robbing them of the power to ship jobs and the supply of resources overseas. The only thing that is experienced is domestic price rises. Of course, if the continuous inflation becomes abusive then it sows the seeds of hyperinflation as bigger and bigger doses of inflation are required in order to “cheat” inflationary expectations until the inflation reaches such a degree that such cheating is no longer possible and price rises even begin to exceed the rate of inflation. By this point, needless to say, a country has a lot more to worry about that jobs being shipped overseas. Thus what we can see is that with both “sound” money and independently issued, national paper monies mechanisms exist which prevent a permanent loss of jobs and the sourcing of supplies from overseas.

The situation is different, however, where the issuer of the paper currency happens to be the issuer of the world’s reserve currency. This is the dubiously privileged position in which the US and the US Dollar finds itself today. For when a country is the issuer of the world’s reserve currency the price adjustment mechanisms that we outlined above, which prevent the permanent loss of jobs overseas, are disrupted.

The US Dollar became the world’s reserve currency partly as a legacy of the Bretton Woods gold exchange standard, where the US pyramided the issue of US dollars on gold and the rest of the world pyramided its currencies on the US dollar. Today, however, the US dollar owes it reserve status largely to the petrodollar system – the agreement of oil exporting countries, led by their lynchpin, Saudi Arabia, to price and sell oil in US dollars – and the resulting domination of US based financial networks. The upshot of all of this is that in order the buy oil (which everybody needs) and in order to engage in international commerce pretty much everybody everywhere must buy and hold a significant quantity of US dollar reserves. And as the demand for oil has increased over the past forty years so too has the demand for the US dollar. Thus there has existed a continuously buoyant demand for the holding of US dollars which is sufficient to outstrip the increase in any supply of those US dollars. This buoyancy of demand is also maintained and strengthened by the fact that several countries, most notably China, unit recently pegged their currency to the dollar in order to fuel export driven growth. In other words, they deliberately weakened their own currency by printing more of it to buy dollars, thus pushing up dollar demand and increasing Renminbi supply. Even though China has used most of those dollars to purchase US treasury bonds, thus nullifying the increase in demand for US dollars, it would still be the case that their own currency would emerge weaker (which if, of course, the entire point of the peg). This leads us onto the next problem and one that is most relevant to the recent past – that the reserve currency becomes a “safe haven” asset. The US dollar index, which tracks the value of the dollar against a basket of other currencies, has risen since 2011, particularly as a result of crises in the Eurozone which has served to weaken the world’s second most dominant currency, the Euro. Indeed, against the US dollar, every single major currency is lower than it was five years ago. This is something that US dollar doomsayers are yet to understand. Yes, the dollar is being printed into oblivion, but so too is every other currency; the dollar just happens to be the least rotten apple in the cart.

The effects of all this are that when the Federal Reserve prints fresh, US dollars domestic prices will rise. However, because the dollar is able to maintain its strength on the world stage vis-à-vis other currencies, holders of US dollars find themselves in the continued position of being able to source goods and services cheaper from abroad than they can at home. Indeed, for several decades now the US dollar has effectively been able to buy more than it is really worth. People happily hand over goods and services in exchange for the medium with which they can trade oil and engage in international commerce. Because the US can simply buy what it needs by printing a currency which everyone wants, the result has been to turn it into a giant consumer economy rather than a producer economy – an economy which has no need for jobs. After all, why not just put all of those jobless people on welfare that can be paid for with printed dollars which will buy them Chinese goods? Indeed, in spite of the resilience of the American entrepreneurial spirit, the US is, today, a very difficult place in which to be a producer. According to a ranking by the World Bank, the US was as low as the 51st best place in which to start a business, a paltry 39th best place in which to deal with building permits, ranked only 36th for the ease of obtaining electricity, registering property and for taxes, and 35th for trading across borders. Yet, in full congruence with what we have explained here, the US was, apparently, the second best place in the world in which to obtain credit! Other rankings tell much the same story, with Forbes placing the US at 23rd overall on their list of best places to do business at the end of 2016 – not too bad, you might say, until you realise that is was ranked first just ten years ago.

Needless to say, much of the global monetary situation may now be changing, particularly with moves by China – itself a big consumer of oil – to compete with the petrodollar system and to establish alternative clearing institutions for international commerce that are not reliant upon the US dollar. What we can see from all this, however, is that, on the one hand, to blame free trade for the flight of US jobs overseas is clearly incorrect; yet it is foolish and naïve for Austro-libertarians to defend free trade on the surface when the underlying property rights are far from free. The lesson to be learnt, therefore, is that when confronting issues that threaten our freedom, Austro-libertarians should remember to examine them on the deepest possible level and not simply react to what they see in plain sight.


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Money – the Root of all (Government) Evil?

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In addressing the evil and parasitic nature of the state, libertarians focus on many of the state’s specific characteristics in order to demonstrate its destructive effects upon civilisation – whether it is nationalised industries, market interference, the minimum wage, anti-discrimination and egalitarian pursuits, the business cycle, or whatever, there is a treasure trove of libertarian literature available that explains and elaborates the deleterious effects of these particular state endeavours. However, a less addressed question is which of these areas, if any, are the most important? Which of them amount to mere nuisances that can be circumvented or otherwise put up with and which, if any, of them amount to a significant transfer of wealth and power to the state with seemingly permanent effects? Furthermore, is there any one issue that libertarians should stress above all others if we are to deliver a real and significant puncture to the state’s ever-inflating balloon?

One prime candidate for this title is war and international conflict. With war comes every glittering prize that the state could ever dream of – mass mobilisation of labour and industry towards a common purpose dictated by the state; control of all markets; mass propaganda; control of communications; suspension of free speech and possibly of habeas corpus; and not to mention the bogeyman of the supposed enemy to which to channel the attention and hatred of the average citizen. Indeed Murray Rothbard, relatively in his career, recognised that while libertarians had some very profound things to say about the state’s mismanagement of, for example, the post office, focussing on war was the real key to unravelling the state’s power and oppression of the population.

Nevertheless, while a permanent and lasting degree of state power and control is enabled by war there is another contender for the top spot. That is the government’s control of money and, specifically, the ability to create an endless supply of paper money distributed to itself and its favoured outlets, as opposed to the rigour and discipline imposed by a “hard money” standard such as gold. Ultimately it is the state’s ability to fund itself that is at the root of all of its other absorption of power and control – even war.

In order to demonstrate this let us look at what the situation would be if government was constrained by a denationalised, “hard” money such as gold. In the first place, government would be wholly reliant upon the tax receipts of its individual citizens for funding and would be unable to resort to extensive deficit spending or inflation. The plainness and visibility of that confiscation places a much lower limit upon the state’s coffers. Put simply, when too much money is taken out of your hands physically you are likely to revolt much sooner. Indeed, in the past, war itself was an expensive operation and battling kings often struggled to raise funds to maintain campaigns. Strategic brilliance was often not accomplished by an all-out destruction of the enemy but, rather, by out-manoeuvring your opponent and preserving for as long as possible expensively-trained soldiers and equipment. In many cases funding had to come from external sources. The genesis of the aristocracy was in those who were rewarded with titles to the conquered land in return for funding the war – in other words the ruler had to parcel out parts of the new territory to those who had helped him grab it. Indeed even the English parliament itself and the Magna Carta­ – famed as the genesis for two cardinal principles of liberty, no taxation without consent and no trial without due process – resulted in part from the reliance of the king upon his relationship with the barons for support and funding. Hard money therefore not only physically restricts the amount the state can spend but has been the indirect cause of the enshrinement of restrictions upon the state’s despotic power.

In more recent times, however, the ability to provide funding from a non-stop printing press has permitted the state to expand its activities without having to account for them through tax receipts. People do not see the money disappearing from their pay packets or from their bank accounts; all they see is the prices they have to pay for goods and services rising and squeezing their purchasing power, a fact that can be easily blamed on greedy businessmen and shareholders. It is possible for a libertarian to be sympathetic with the view that as long as you know how much the government is taking from you then it has a reasonable degree of tolerability. But when government resorts to the smoke and mirrors trick of robbing not the money in your hand but, rather, its purchasing power then it must be opposed emphatically. In comparison to earlier conflicts, the wars of the twentieth century were so prolonged and destructive precisely because government could resort to the printing press. Had they relied solely upon tax receipts “war-weariness” would have set in much sooner among the population and they would have demanded a swift end to hostilities. Hence all of the overreaching effects of the state’s engagement in war flows directly from its ability to control the supply of money. If we wish to end the consequences of war upon the state’s metastasised growth then we need to attack the root of its ability to fund it.

It is true, of course, that there may be something of a chicken and egg story when it comes to war and paper money. Does paper money cause government to engage in war or does war cause government to print paper money? Either way, however, even if government was previously respectful of a hard money standard which it does not abandon until the outbreak of a war, it is this power of printing paper money in and of itself that fuels the extent of its belligerence. And in any case, the ease with which government can suddenly suspend a hard money standard only comes about because they have arrogated to themselves monopolistic control of the operation of money issuance. It would be much harder for government to print un-backed notes and force their acceptance when others are issuing notes fully redeemable in gold. Whatever comes first, however, either the paper money or the war and the growth of the state power, if you wish to prevent the flood then you must turn off the taps.

In more peaceful times hard money also disciplines the citizenry into realising that government is not the fountain of all wealth. The state has grown so much under democracy because, apart from the veneer of legitimacy that popular elections lend to the state, politicians are able to bribe the electorate with endless goodies that they do not believe that they have to pay for. The resulting borrowing and inflation – now reaching an eye-watering level in the West – which does not touch the citizen directly gives the impression of government as an endless stock of resources, the only difficult task being to elect someone who will give them to you rather than worrying about the more trifling matters of production and enterprise. Indeed, public discourse rarely seems to acknowledge the fact of scarcity, usually focussing on single issues and concluding with an explosion of outrage about how government isn’t “doing more” to combat the alleged societal ill. The more difficult question of the expense that we would endure, what should be given up as a result and which goods cannot be brought into being because of the new expenditure diverted to cure the problem complained of is overlooked. To the citizen there is always more money, more resources and more of everything that government can acquire from somewhere other than himself. However, in exactly the same way as a hard money standard would induce “war-weariness” in belligerent times so too would it induce “state-weariness” in peaceful times. People would soon tire of having their pay packets robbed to fund goods for other people; and people would soon realise that many of the things they would otherwise want from government for free simply cannot be afforded and must be worked for by themselves.

Let us turn next to the whole problem of the business cycle. Although panics existed before the advent of modern central banking many of these occurred precisely because hard money rules were casually abandoned, with issuing institutions expanding the volume of credit beyond the stock of monetary gold and government happily stepping in and relieving them of the obligation to redeem their notes in specie. But whatever the characteristics of pre-central banking business cycles it is undeniable that they reached a depth, severity and prolongation in the twentieth century that was not seen before. There are two reasons for this. First, government’s enhanced control over the supply of money induces a more serious degree of malinvestment than would otherwise be the case where the supply of money is checked by the stock of redeemable gold. In both of the biggest collapses of the last one hundred years – 1929 and 2008 – credit expansion ran for the best part of a decade or more. The longer the false signals towards entrepreneurs are continued the more they will borrow and invest in unsustainable capital projects and the further those projects go the more difficult they will be to unwind. When the bust finally comes, therefore, the situation is far more serious than it otherwise would have been. This brings about the second factor – that it lends credibility to the argument that the government should step in and “do something” to combat the malaise. The reason why the Great Depression endured for years (and why we are still enduring the current one) is not because of the initial collapse – it is because government did everything it could to maintain the existing structure of production, wages and prices. Fittingly enough President Hoover often invoked the language of war in describing the threat of the downturn and the culmination of this in the New Deal – the complete cartelisation of industry and agriculture into a fascistic economy – was achieved by the resurrection of World War One era departments and programmes. It is supremely ironic that government-caused depressions give rise to ever more invasive government intrusions, an irony that turns truly into tragedy when we consider that what followed the Great Depression was the carnage and destruction of World War II. With the current belligerence of the US in provoking tension with Russia and China another war is something that cannot be ruled out as a result of the present crisis; and we all know how destructive war is to freedom.

What we can see therefore is that government control of money is a prime contender for the top spot of issues that libertarians should consider as the most serious when combatting threats to liberty. If this should be doubted then one has to question why the mystery of central banking and its ability to pull the monetary strings from a shady, secretive outlet has been a political non-issue for decades. Politicians only bring into debate the relatively “easy” problems that do not upset the apple cart. While they are keen to oust their immediate, political opponents they never provide the public with any serious choice that would restrict the power and growth of government as a whole. At least democracy – another cause of government growth and legitimacy – gets praised and lauded from time to time, if only ever to justify the government’s military crusades against foreign tyrants. But before the last few years central banking and monopoly issuance of money was hardly even mentioned – not even to give it a blessing. It seems as though government is fine with brainwashing its citizens into embracing the justice of elections by voting but it is far too scared to even make them aware of its power over money. Although this is now beginning to change and there is a greater enquiry into and scrutiny of the US Federal Reserve (not least because of ex-Congressman Ron Paul’s emphasis of the issue) the acceptance of and absence of discussion of these evil institutions has pervaded for too long. This is where government would be truly and irredeemably hurt. It could enact as many reams of invasive and destructive legislation as it liked, yet they would be of zero threat if government was starved of funding to enforce them.

It is appropriate to end with the words of Ludwig von Mises who recognised everything we have been saying here in his first major treatise on the subject of money:

Defense of the individual’s liberty against the encroachment of tyrannical governments is the essential theme of the history of Western civilization. The characteristic feature of the Occident is its peoples’ pursuit of liberty, a concern unknown to Orientals. All the marvellous achievements of Western civilization are fruits grown on the tree of liberty.

It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights. The demand for constitutional guarantees and for bills of rights was a reaction against arbitrary rule and the non-observance of old customs by kings. The postulate of sound money was first brought up as a response to the princely practice of debasing the coinage. It was later carefully elaborated and perfected in the age which—through the experience of the American continental currency, the paper money of the French Revolution and the British restriction period—had learned what a government can do to a nation’s currency system.

[…]

Thus the sound-money principle has two aspects. It is affirmative in approving the market’s choice of a commonly used medium of exchange. It is negative in obstructing the government’s propensity to meddle with the currency system.

The sound-money principle was derived not so much from the Classical economists’ analysis of the market phenomena as from their interpretation of historical experience. It was an experience that could be perceived by a much larger public than the narrow circles of those conversant with economic theory. Hence the sound-money idea became one of the most popular points of the liberal program. Friends and foes of liberalism considered it one of the essential postulates of a liberal policy1.

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1 Ludwig von Mises, The Theory of Money and Credit, p 414.