Mid-Course Correction

As erudite, germane, and interesting as Professor McCall’s paper[1] is, to give it the kind of attention we were beginning to give it—almost the degree of scrutiny we've been giving TCATL, where it is cited in a reference note—was becoming intolerable even for our sense of humor. Worse, we digressed unduly from, even obstructing a clear path to, our primary object of criticism, which includes Mr. Ferrara’s representation of the traditional objection to "usury." It bordered on dawdling, so we will therefore cease and desist and resume our march through his historical sketches after Thanksgiving, exerting ourselves to arrive at Part II (i.e., Chapter 3) by New Year’s.

[1] Brian M. McCall, “Unprofitable Lending: Modern Credit Regulation and the Lost Theory of Usury,” Cardozo Law Review 30.2 (2008): 549-615. If any reader wonders what our opinion is of a particular point of Professor McCall’s, we invite him or her to write us about it at anarchristian AT juno DOT com. 

The Eminently Real Free Market (XLVIII): Sketchy Stories (36): The Anti-Interest Apologetic of Brian McCall

We take Mr. Ferrara’s reference notes seriously, for they show what he regards as evidence. We have, for example, seen him quote with uncritical approval from the writings of Kevin Carson, Joel Bakan, Kirkpatrick Sale, Charles Beard, and Amintore Fanfani. (See our labels list in the right column.) His citation of University of Oklahoma College of Law Professor Brian McCall’s “Unprofitable Lending: Modern Credit Regulation and the Lost Theory of Usury,” however, already noted in our previous post, elevates the tone of the discussion somewhat.

Since Mr. Ferrara thanked Professor McCall for illuminating the daily workings of the Fed and (as we shall see later) analyzing the “inside-baseball” dimension of credit-default swaps (the occasion of, if not the key to, the 2008 “meltdown,” according to Mr. Ferrara), we regard the professor as our author’s mentor on matters of finance where expertise is required, and that’s why we examining this monograph.

In it, Professor McCall not only argues for the contemporary relevance of the traditional ban on usury, but also defends it, to the extent of suggesting that the (de jure but not de facto) ban on interest in Islamic countries is a promising development for non-Muslims. We intend not only to show that Professor McCall fails to mention, let alone engage, the (in our opinion, anti-economic) arguments presupposed by usury-ban advocates, but also to undermine the implicit suggestion that Catholics ought to presuppose them as well.

In short, Mr. Ferrara did well—or, at least better than usual—by sourcing his argument in Professor McCall’s paper, but the defects of one leaky bucket cannot be remedied by another.

* * *

Before pinpointing the salient errors and oversights of this six-part study, let’s have before us Professor McCall’s summary:

Part I will briefly present statistical data illustrating the problems in our consumer credit market. . . . Part II outlines the historical approaches to usury that predated the scholastic theory, noting now some of them survive in contemporary debates. . . . Part III presents the essential aspects of the scholastic theory of usury as it developed from the fourth to the sixteenth century. Part IV discusses the scholastic theory’s adaptation to the new commercial environment of the sixteenth century. . . . Part V evaluates the history of scholastic theory and abstracts the essential principles of theory. Part VI makes some general observations regarding the application of these principles to the modern credit system, while noting that the growth of Islamic finance in recent decades shows the feasibility of such a theory interacting with modern economic realities.[1]

I: The Problem of Consumer Credit (552-554)

The explosion of consumer credit and bankruptcies in the twentieth century certainly generated a lot of statistical data, which Professor McCall summarizes, but data can indicate a problem only in the light of a theory. He provides only a series of brute facts, however: this number went up, then that one, then that one, etc.

The nominal quantity of what consumers have borrowed over the last century has increased, but we must remember that they were not borrowing shares of a relatively stable supply of, say, gold or silver. If those consumers were competing with each other to borrow precious metals, they would have rather quickly brought about a monetary shortage, which would in turn have driven up the cost of borrowing, thereby tending to slow its increase.

Ceteris paribus, prices of goods and services tend to fall when the demand for money increases. In other words, such an alarming increase in consumer demand for money as Professor McCall documents would predict (or rather retrodict) a corresponding increase in money’s purchasing power over the same period. But that’s not what happened:

 

The Long Goodbye: The Declining Purchasing Power of the Dollar

Again, Professor McCall asserts the existence of a problem, i.e., the increase in consumer borrowing, but shows little interest in its causes. For instance, who have been the lenders over the same period, and how have they been able to satisfy this consumer demand, avoiding shortages? The answer: commercial banks, all of which are statutorily required to belong to a cartel whose central bank, the Federal Reserve, can and does inflate the supply of money virtually at will and then dispenses this “fiat” currency to cartel members.

That is, what the banks have lent so promiscuously is not a scarce commodity like gold or silver, which has to be mined, refined, and coined. No, it is rather a scarce commodity like paper, which grows on trees, so to speak. Fiat currency requires only (a) a secret printing process that distinguishes legal currency from the pieces of paper used in board games and (b) a state-sanctioned monopoly privilege to effect that process. Should someone effect the same material process without enjoying the privilege, the law would deem it “counterfeiting.”

Ironically, Professor McCall cites a Federal Reserve study of the increase in total household debt from 1976 to 2006, but never asks whether the Federal Reserve’s systematic credit expansion, which has been going on now for almost a century, had anything causally to do with the increase in consumer credit that he finds troubling. (553-554 n. 12) Instead, he notes that the dual increase in debt and bankruptcy filings correlates with both a “growing laxity in usury laws” (553) and “legal scholarship calling for new approaches to credit regulation” (554), all of which, if we have correctly interpreted the titles listed in his reference note, treat the symptoms rather than the root cause. (554 n. 21)

To Be Continued

[1] Brian M. McCall, “Unprofitable Lending: Modern Credit Regulation and the Lost Theory of Usury,” Cardozo Law Review 30.2 (2008): 549-615. The quotation is from page 552. Subsequently, and only in this sub-series of posts this paper, parenthetical page references will be to this article.

The Eminently Real Free Market (XLVII): Sketchy Stories (35): The “Usury” Suspects

Sketchy story number 11:

The international credit system: usury unchained by government. (32)

The suggestion is that “usury”—that quaint term for interest charged on a loan—should be chained by an institution known better for the chains it can forge than for its judicious apportioning of risk.

Mr. Ferrara’s reference notes have inspired many posts here, and this one is no exception. In a reference note for the previous story, Mr. Ferrara had thanked University of Oklahoma College of Law Professor Brian McCall for helping him understand the daily workings of the Fed,[1] which insight served TCATL’s rhetorical purposes in ways we cannot discern. Now he cites Professor McCall’s defense of “the lost theory of usury” which, in our opinion, should remain lost.[2] Once again, Mr. Ferrara’s stories function as dress rehearsals for the extended treatment he will give certain topics in later chapters. Our comments will serve a corresponding purpose.

Professor McCall’s 66-page study—which manages to discuss the morality of charging interest apart from that of the cartelization of banks and fractional reserve banking[3]—deserves to be the focus of one or perhaps several posts;  unfortunately it cannot be this one. We merely note that Mr. Ferrara's repeats his usual complaint that there is no free market in credit to the degree that the State is involved, with which Austro-libertarians concur. (But, of course, he cannot refrain from confusingly putting “free” in scare quotes.) There is, he rightly notes,

rather government-supported credit tyranny that has sparked a small but growing consumer revolt in the form of PayPal and other services that are being formed in the hope of circumventing banks and credit card companies. (33)

Now, unless PayPal offers barter services we haven’t yet heard about, it is still functioning as a broker for the exchange of goods and services for Federal Reserve Notes.

Anyway, this week got away from us, and so we postpone our preliminary attempt to do justice to interest until next week.

To Be Continued 

[1] Mr. Ferrara expresses indebtedness to him “for this understanding of how the Fed operates at the level of everyday banking by ordinary customers.” (331 n. 61) That is, he learned that “[a]ll the commercial banks in the Federal Reserve System have accounts with the Fed that are balanced electronically on the Fed’s computers at the end of each business day.” We suspect that he is also indebted to Professor McCall for his defense of the Scholastic hybrid of Scripture, Aristotelian “equality of exchange” nonsense, the economically meaningless distinction between consumer and business loans, nescience about time preference, and the pragmatic significance of Islamic conceptual end-runs around that praxeological reality.

[2] Brian M. McCall. “Unprofitable Lending: Modern Credit Regulation and the Lost Theory of Usury,” Cardozo Law Review 30.2 (2008): 549-615. A foretaste of where we'll be going with this:

Calvin's main contribution to the usury question was in having the courage to dump the prohibition altogether.

Murray Rothbard, “The Economics of Calvin and Calvinism.”

A usury law, like any price control, is analogous to placing a limit on a thermometer’s scale. A cap on a thermometer does not reduce the fever of the sick person; it simply keeps people from assessing the true conditions. A usury law creates an illusion of a lower rate of discount than market transactors voluntarily agree upon.

Gary North, Tools of Dominion: The Case Laws of Exodus, 509 n. 14.

There is no surer way to identify a crackpot theory of economics than to examine what the economist’s theory of interest is. If he denies the legitimacy of interest in morally legitimate profit-seeking transactions, he is not an economist; he is a monetary crank. If he denies interest as a theoretically inescapable tool of economic analysis, he is a true crackpot, as nutty as a man who promotes the idea of the possibility of a perpetual motion machine. But he is far more dangerous: legislators do not listen to “scientists” who would propose making illegal all machines except perpetual motion machines. Legislators have on occasion passed usury laws that are based on the idea that interest is illegitimate.

North, Ibid., 509 n. 16.

Note well: Dr. North, an economic historian, aims his epithet “crank” and “crackpot” at economists who, respectively, either morally condemn interest or deny its indispensability to their analysis of human action. (It is hard to do both coherently.) He and Professor McCall differ on the application of the description “morally legitimate profit-seeking transactions.” Dr. North would apply it to consumer loans, while Professor McCall, who is not an economist, but a professor of law, would withhold it from them.  

[3] Professor McCall does mention fractional reserve banking (FRB) as a factor complicating “the law’s” evaluation of the nominal amount of money lent and the nominal amount repaid (Ibid., 609-610). If the latter is greater than the former, the difference may reflect, not necessarily interest, but merely the decrease in purchasing power consequent to the increase in the supply of Federal Reserve Notes, which that same “law” currently commands citizens to honor as “legal tender for all debts, public and private.” The lender may only be estimating how much compensation he is entitled to because of that decrease. Professor McCall does not condemn FRB, however, even though, apart from it or from the even more causally basic credit-expanding cartel of banks known as the Federal Reserve System, it is hard to imagine the origination of the moral hazards that illustrate his moral complaint.

The Eminently Real Free Market (XLVI): Sketchy Stories (34): Ferrara’s Reserve of False Notes: Banking on Ignorance, Insinuation, and Insolence (2)

Mr. Ferrara’s tenth sketchy story is entitled “The Federal Reserve System” (30). In the previous post we showed that his interpretation of the Austrian case against fractional reserve banking as exonerating its capitalist prime movers is without merit. As he pursues this bootless gambit into an area in which Austrian scholars long ago distinguished themselves, he invites the suspicion that the indispensability of the State in the establishment of the relevant moral hazard is not a topic he wishes to pursue. He does this by reprising the worn-out tune that corner-cutting by some market players somehow negates the deeper social ontology of trade, the font of the eminently real free market that ever presses against the confines of statist distortion.

Mr. Ferrara’s insolent tone is undiminished. Whereas before it was “even a scholar of the Mises Institute recognizes that this [fractional reserve banking] capitalist scheme is a fraud. . . .,” now it’s: “Even Rothbard describes it [the Fed] as a “cozy government-big bank partnership, the government-enforced banking cartel, that big bankers had long envisioned.” (32; emphasis not in the original, as the reader by now has grown to expect.)

Yes, big bankers long envisioned it, but they could not effect it without the State. The State is the sine qua non of this vast criminal enterprise. Mr. Ferrara obscures the key causal connection: the bankers could not have achieved their goal of expedient expansion of the money supply without first achieving the intermediary institutional goal of an enforceable cartel. The State is the enforcer.

Private cartels are not self-enforcing and therefore vulnerable to “runs,” that is, demand that cannot be satisfied. That’s why bankers “envisioned” their instrumental relationship to government: it backs their vision with the threat of violence. Yes, the bankers made government its partner, if not also its tool. But they always will endeavor to do that.

Again, what it the great compensating advantage of this territorial monopoly of violence called the State such that we should maintain this moral hazard in business?

Rothbard had been writing about the malevolent anti-market forces behind the creation of the Fed, many of whom started out as market players, throughout his scholarly life. In a passage from his 1963 America’s Great Depression we see an example of his judicious balancing of factors:

Instead of preventing inflation by prohibiting fractional-reserve banking as fraudulent, governments have uniformly moved in the opposite direction, and have step-by-step removed these free-market checks to bank credit expansion, at the same time putting themselves in a position to direct the inflation. In various ways, they have artificially bolstered public confidence in the banks, encouraged public use of paper and deposits instead of gold (finally outlawing gold), and shepherded all the banks under one roof so that they can all expand together. The main device for accomplishing these aims has been Central Banking, an institution which America finally acquired as the Federal Reserve System in 1913. Central Banking permitted the centralization and absorption of gold into government vaults, greatly enlarging the national base for credit expansion: it also insured uniform action by the banks through basing their reserves on deposit accounts at the Central Bank instead of on gold.[1]

Government vaults.

The government assured Federal Reserve control over the banks by (1) granting to the Federal Reserve System (FRS) a monopoly over note issue; (2) compelling all the existing “national banks” to join the Federal Reserve System, and to keep all their legal reserves as deposits at the Federal Reserve; and (3) fixing the minimum reserve ratio of deposits at the Reserve to bank deposits (money owned by the public).[2]

Rothbard never sought to exonerate the banksters. (And, if any other Austro-libertarian ever did, we would like to know his or her name.) On the contrary, for forty years he named their names.[3] But Mr. Ferrara’s studied failure to address the intrinsic evil of their “main device” is consistent with a desire to exonerate the State. He certainly does not betray awareness of the possibility that government personnel have interests distinct from those of the financial movers and shakers who put them in office, that the fallen human interest in “lording it over others” (Matt. 20:25; 1 Pet. 5:3) is not reducible to an interest in money, but rather the root of which the latter is a flower.

Mr. Ferrara does cite Rothbard’s The Case against the Fed, but only for the description of the Fed as a cozy partnership, not for any of the historical facts he adduced in a sketch of the Jekyll Island conspiracy, all of which are developed and sourced in that book. (Whom does Mr. Ferrara cite for those facts? Nobody.)

As for the operational and structural facts about the Fed that puff up this section, including factoids about the Open Market Committee and another rehearsal of fractional reserve banking covered in the last sketch, these materials bear no obvious relationship to his polemical aim. Only the last paragraph seems to do that, but there is nothing new there:

With the entire money supply and the availability of money and credit in the U.S. economy under the control of a private banking cartel that has made government its partner, and which illegally buys up failing mega-firms to save their principals and shareholders from ruin, the term “free” market is little more than a place-holder for what Austrians wish existed. (32)

May we presume that Mr. Ferrara also wishes to see a totally unhampered market? If he does, then it seems there is only one road to travel, a road he will not take. For if one disapproves of the cozy bizgov partnership, and if the wealthy inevitably seek to control the State (and usually succeed), without which they cannot enforce their cartel and its attendant frauds, then the only logical alternative to abolishing the wealthy is abolishing the State.

What is confusing about that last paragraph, however, is that it follows the one in which we were told that the same “free” market of Austrian pipedreams was saved by Fed (by its creation of dummy corporations with their infamous “credit default swaps” on which most of Mr. Ferrara’s tale of the 2008 meltdown hangs—the focus of a later chapter). Now, what is real cannot be any longer wished for, and what is unreal cannot be saved, yet scare quotes around “free” appear in both places.

That’s not propaganda. That’s just audience-disrespecting carelessness.

[1] Rothbard, America’s Great Depression, Fifth Edition, Auburn, Al: Ludwig von Mises Institute, 2000, 25. Emphasis added.

[2] Op. cit., 26. Emphasis added.

[3] Besides The Case against the Fed, Auburn, AL: Ludwig von Mises Institute, 1994, see his earlier Wall Street, Banks, and American Foreign Policy, Auburn, AL: Ludwig von Mises Institute, 1984

The Eminently Real Free Market (XLV): Sketchy Stories (33): Ferrara’s Reserve of False Notes: Banking on Ignorance, Insinuation, and Insolence (1)

Mr. Ferrara’s ninth sketchy story is entitled “Fractional reserve banking” (29). He joins Austro-libertarians in regarding it as a Ponzi scheme, that is, a fraud perpetuated by bankers against their customers, but does not wish to emphasize that agreement. He prefers to create the arguably slanderous impression that Austrians indict only the government's legitimizing of capitalists who engage in it.

One of the oldest State-supported capitalist scams is the system of “fractional reserve banking,” a legalized Ponzi scheme that allows banks to treat depositors’ funds as the bank’s own reserve against which it can “lend” out a multiple of the reserve amount, thus literally creating wealth out of nothing. This practice, a foundation of the modern capitalist social order, attained formal legal approval by the State in the English common law via judicial decisions (obtained by bank lawyers) to the effect that a bank deposit is not a bailment—an entrustment of one’s property to another for safekeeping—but rather an “investment” in the bank. (29-30)

Not bad. Of course, a bank really does lend what it creates—and expects the borrower to repay it—so it’s less clear than usual what skepticism his scare quotes are intended to express. And by increasing the quantity of money at a much lower cost than that associated with mining and refining precious metals, the bank does not so much “literally create wealth” as create money substitutes—even if they are only entries on a computerized ledger—that facilitate the transfer of wealth away from their producers to the scamsters (often via the inevitable inflation).

In other words, the fraction implicit in “fractional reserve banking” (FRB) is the numerical relationship of a bank’s deposits to lendable assets. The bank has X, but lends more than X, e.g., X+Y. The fraction is therefore X/X+Y. The bank thereby effectively creates out of thin air more of its chief, if not only, productive asset.

And so the bank risks, not its own money, but rather that of its depositor-customers. The rarely questioned premise of the whole business is that the bank may lend to B the deposited funds of A, regardless of A’s understanding of his property’s exposure to risk. Depositors might, for example, think that they are simply placing valuables in a warehouse for safekeeping, for which bailment the bank reasonably charges them a fee.

What one archives, stores, or warehouses, however, one may retrieve upon demand. That is not so in the case of an investment and, regardless of what they may believe, depositors are indirect co-investors in the borrowers’ enterprises, sound and risky alike. At least that’s what the courts will tell them, should they be naïve enough these days to take their bank to court. For that’s what plaintiffs were told in 19th century courts.

(We both acknowledge and deplore the role played by material beneficiaries of that “judicial finding” in determining court personnel. We suggest, however, that the answer does not lie in the quixotic search for incorruptible personnel as in the demand for a free market in judicial services, which process would tend to weed out corrupt competitors.)

These days, every child knows that his “deposit” is not only warehouse inventory but also someone else’s investment capital. And few children care, for Big Daddy Government says their “deposits” are “insured”—according to the fairy tale in which insurable risk attaches to a conspiracy to commit systematic fraud. And the children believe.

Since some or all of the new loans may not “perform”—especially likely during the “bust” following a central bank-generated “boom”—there might not be enough money to satisfy the demand of the (self-)deluded “depositors,” whereupon the inherent bankruptcy of the banking operation is immediately exposed. It must collapse unless it is bailed out by the cartel of which the insolvent bank is a member.

Exacerbating the exposure of deposits to the risks of investment (sustained by the lullaby of FDIC “insurance”) is the fact that the relationship of deposits to lendable assets is not 1/1, but rather 1/2 or 1/6 or (as in Mr. Ferrara’s text) 1/9. If one makes money charging interest on a loan, one’s ability to profit from lending is limited by how much of other people’s money is on “deposit.”

If, however, one can create money analogously to the way God created light—Fiat lux, as Saint Jerome rendered the Hebrew of Genesis 1:3—then one can break free of that restriction. Fiat currency supplied by the central bank sustains the moral hazard, which virtually no bank resists. Inevitably, they all feel compelled to do more “business,” to decrease the value of the fraction’s “quotient” further and further until the unsustainable character of the scam becomes obvious even to the bank’s most gullible customers.

This cannot be done with gold or any other durable, portable, divisible commodity whose utility as a medium of exchange was discovered, not by bankers, but rather by those actually involved in the exchange of goods and services on the free market. But it can be done by applying ink to paper and substituting the result for money.

And it will almost certainly be done in any society that has repudiated its biblical patrimony, which includes the precept, “Ye shall have honest weights and measures” (Lev. 19:35-36). What reigns in the land is rather: “I will use any standard that I can fool anyone else into accepting and, if I can, get the authority of the State to ratify and reinforce by the threat of violence my designs on the wealth of others.”

Bernard Madoff’s Ponzi scheme was private, and so when the U.S. economy melted down, not only did he no longer have new “investors,” i.e., dupes, parading into his office, but also he also could not meet the demand of the old dupes standing in another line demanding the return of the money they entrusted to him. As he was not a dues-paying member of the banking cartel, however, there was no one to bail him out. Although one notes that financial regulators, whose powers many want to expand these days, either couldn’t or wouldn’t catch Madoff in the act.

And now for the snottily expressed slander:

Even a scholar of the Mises Institute recognizes that this capitalist scheme is a fraud involving a deliberate effort to create confusion in consumers’ minds between strict money titles to deposited funds and mere bank IOUs. In typical Austrian fashion, however, the same scholar blames “government” as “one of the most important driving forces for the establishment of fractional-reserve banking,” even as he also admits that the fractional-reserve fraud “is not necessarily the result of government activity” and that in some instances in the long history of this abuse “bankers themselves took control of the government or even set up their own,” and that “this tendency seems to be very strong in the United States.” To say the least. (30; needless to say, emphasis not in the original.)

The scholar (no scare quotes this time, but in the next sentence Mr. Ferrara exudes more than a whiff of sarcasm when he repeats that descriptor) is Jörg Guido Hülsmann, whom we mentioned in a footnote in a post from last May.[1] Imagine that: “even” Professor Hülsmann, the author of The Ethics of Money Production, would recognize fraud when he sees it! This “recognition” is hardly undermined by his claim, patently supported by scholarship, that government was “one of the most important driving forces for the establishment of fractional-reserve banking.” The establishment of the fraud, that is, its institutionalization, requires more than greed. It requires the threat of violence against anyone who would dare compete with the fraudulent operation and thereby potentially put it out of business.[2]

The occurrence of sin must precede its institutionalization. And so there will be Bernie Madoffs until Doomsday. The question is whether FRB—a Ponzi scheme that makes Mr. Madoff’s look like cookie-jar pilfering by comparison—could be institutionalized without State coercion. As Professor Hülsmann wrote in The Ethics of Production, the State, although not the source of the fraud or “falsification” (which is the wicked heart of fallen man), but it certainly is its great facilitator and multiplier:

. . . the legalization of false money certificates, though harmful, is virtually insignificant from a quantitative point of view, at least in comparison to the inflationary impact of legal monopolies and legal tender laws. Nevertheless this privilege is fundamental because it is the foundation of all other monetary privileges. It would seem impossible, for example, to establish legal tender laws in favor of some debased coin, or of some fractional-reserve banknote, if the latter are per se illegal. And thus it follows that the moral case for all other monetary privileges depends on the morality of legalized falsifications.[3]

In the 2003 paper of Professor Hülsmann’s cited by Mr. Ferrara, the author, far from overlooking the factor of greed, institutionally contextualizes that cardinal sin’s effective range:

Government was one of the most important driving forces for the establishment of fractional-reserve banking. Government’s nature is to live parasitically off the property of other people. Because it coerces its subjects into supporting it, it does not act responsibly, constantly adjusting its expenses to available income, but instead always relies on the possibility of squeezing a little more out of the taxpayer’s pockets. Because of this unique source of income, government always has been a preferred debtor, receiving additional credits at levels of indebtedness that would exclude further credits for any private individual or group. Not surprisingly, therefore, in all of recorded history, government households have been a disastrous mess of rampant deficits. Especially in modern, democratic times, government income is never sufficient to satisfy the whims and greed of those who happen to be for a couple of years at the helm of the state. When governments try to cover these deficits by increased taxation, a direct confrontation with their subjects is unavoidable. Because no government likes to provoke such resistance, governments again and again have sought to cover their deficits by fraudulent means. In this endeavor, inflation traditionally has been one of the favorite means of cover-up.[4]

In other words, while “private” frauds like Mr. Madoff’s was limited by their subordinate and dependent function within the financial system, “public” frauds like the Federal Reserve System, which owns the ball and the court, so to speak, will compound fraud upon fraud until circumstances beyond the control of its human operators crash the system.

In typical propagandistic fashion, Mr. Ferrara describes Professor Hülsmann’s specification of the indispensable role of government in the legal establishment of this particular fraud as an “admission,” as though against ideological interest. After all, did Professor Hülsmann not write that FRB “is not necessarily the result of government activity” and that “bankers themselves took control of the government or even set up their own”?

Yes, he did, but Professor Hülsmann also immediately appended that nasty little adversative conjunction, “but,” so inconvenient to the propagandist who thinks nothing of suppressing it. Let’s put those two snippets in their correct order and in context:

The relationship between government and banking, however, is not a one-sided affair. It was not always a preexisting government that transformed honest bankers into frauds issuing “money titles” on a fractional-reserve basis. Often it was the bankers who succumbed to the temptation of a fraudulent business practice with obvious material advantages for the perpetrator. Looking back on the history of fractional-reserve banking, Mises stressed that “Banknotes became fiduciary media within the operation of the unhampered market economy. The begetter of credit expansion was the banker, not the authority.” Only later did these bankers seek a closer cooperation with government to protect their interests against honest competitors and against agitation regarding false money titles. This cooperation then invigorated the government, extending its size and scope of activities beyond what they would have been without fraudulent banking. In city-states and other communities with plebiscitarian or democratic forms of government, which facilitate political takeovers, the bankers themselves took control of the government or even set up their own. Whether the bankers reinforced cooperation with government, took it over, or set up their own, the same basic scheme of political cover-up was used: the initial violation of property rights (fraudulent banking) was covered up with increased political involvement and cooperation.

In short, fraudulent banking is not necessarily the result of government activity, but sometimes is an instance of the spontaneous emergence or reinforcement of government.[5]

In short, the State may not be the originator but is certainly the great facilitator and aggravator of the moral hazard, ultimately enabling its own further engorgement at the expense of its subjects. This causal story, fully borne out by the facts, provokes the perfectly legitimate question, and not only for anarcho-capitalists, as to whether such an institution does, on balance, more harm than good.

And what about that reference to bankers taking over governments, especially American governments? It’s nice that Mr. Ferrara concurs with Professor Hülsmann, but why did he suppress the Austrian scholar’s other, non-American, historical example?

This tendency [of capitalists to dominate governments] seems to be very strong in the United States. Another example is republican Florence, which the Medici family came to dominate in the fifteenth and sixteenth centuries. The house of Medici had purely commercial origins in the Medici merchant company, which “after the manner of these organisations from the time of their origin represented a combination of trade and banking.”[6]

Ah, yes, the Medicis. Those pious Florentines certainly didn't resist the ring of power, did they! They gifted not only Europe with bankers, but also the Church with four popes, some of whom ran Rome as they did Florence. And all this during the height of Christendom of Distributist romance. But that’s all right. At least they didn’t enclose the commons or build factories. They just subsidized Renaissance porn![7]

[1] “Jörg Guido Hülsmann, Professor of Economics, University of Angers (France), author of Mises: The Last Knight of Liberalism and the equally magisterial The Ethics of Money Production, who confessed: ‘Once a pagan interventionist, I first saw the truths of libertarian political theory, and eventually I started to realize that the light of these truths was but a reflection of the encompassing and eternal light that radiates from God through His Son and the Holy Spirit. This realization has been a slow process and I could not say now when and where it will end.’”

[2] Try using gold to pay debts in accord with Article I, Section 10 of the U.S. Constitution, in contempt of “federal reserve notes,” and in defiance of legal tender laws, and then see what happens when your experiment comes to the attention of the Treasury Department.

[3] Jörg Guido Hülsmann,The Ethics of Money Production, 112.

[4] Jörg Guido Hülsmann, “Has Fractional Reserve Banking Really Passed the Market Test?,” The Independent Review, v. VII, n. 3, Winter 2003, 417-418. Emphasis added.

[5] Hülsmann, “Has Fractional Reserve Banking Really Passed the Market Test?,” op. cit., 418.

[6] loc. cit., n. 12. Hülsmann cites Ferdinand Schevill, The Medici. New York: Harper, 1949, 58.

[7] See Lynn Hunt, The Invention of Pornography: 1500-1800, MIT Press, 83, 86, 91, 95, 203. See also the Wiki article on that ribald recipient of Medici largesse, Pietro Aretino.