by Benjamin Marks, Economics.org.au editor-in-chief
Chris Leithner’s new book, The Evil Princes of Martin Place: The Reserve Bank of Australia, The Global Financial Crisis, and The Threat to Australians’ Liberty and Prosperity (2011), is a slim volume compared with the number of pages of government legislation it deals with, and it has a far more reputable publisher. Indeed, if the government-privileged central bank published it, then, assuming a 15% reserve ratio, which is generous, the book would be (654 pages [book length] / .15 [reserve ratio] = 4360) 4360 pages long, since each page of the genuine product is of undiluted value. Sounds stupid, yet this is exactly how central banking works (see, for example, pp. 69-71). You think this is an exaggeration? No; it is being generous. If government published the book or treated it like it treats money it would also suffer from such lunacies as:
- A ban on reproducing any part of the book unless by a recognised bank (legal tender laws, licensing).
- A ban on accepting a certain number of books and not giving a percentage to government (tax, “protection” money).
- A ban on accepting these books in exchange for certain other books offered in a totally voluntary arrangement (victimless “crimes”).
- Government approval for anyone who can break into your library to lend your copy of the book to people you’d never lend it to yourself and for uses you wouldn’t approve of, largely because the recipients are illiterate, and unlikely to return it in anything like its original condition (fractional reserve banking, you put a deposit in a bank and they treat it as a loan).
- Government encouragement of the thief to continue this fraudulent turning of deposits into loans, even if they are doing so with the full knowledge that, when the owner of the property wants it back, they won’t have it (government bailouts, etc).
Anyway, thankfully, the government did not publish the book. Still, at 654 pages it is exhaustive, but not tiring.
The book is not an obscure treatise about some remote corner of the globe on the significance of a foreign and academic sounding thing like Austrian business cycle theory. Actually, it is. But some things just sound complicated, yet are simple, accessible and even fit for popular consumption. As Leithner points out:
Most Australians rightly dislike banks, but they can’t say exactly why. This book provides more economic, historical, logical and moral grounds than they’ll ever need. (p. 517)
Similarly, most Australians rightly dislike Paul Keating, Peter Costello and John Howard, but can’t say exactly why. Leithner provides more than enough to destroy any reputation of economic competence they might have had. The Evil Princes of Martin Place is a bunker buster for the exposed (although far from unmanned) outposts of their economic beliefs, record and legacy. Leithner shows that the Keating-Howard years were a bubble. From 1991-2007 the quantity of money increased five-fold (M1). That is an annual compound rate of 10.2%. Leithner shows this in frightening graphs (p. 454 and 483, many of the other graphs are frightening too, especially the ones that make Whitlam look good), which deserve a prominent place on the headers of all prosperity- and freedom-conscious websites, along with Hayek’s suggestion in a 1978 letter to The Wall Street Journal, “[C]ould you please print in front of every issue in headline letters the simple truth that INFLATION IS MADE BY GOVERNMENT AND ITS AGENTS: NOBODY ELSE CAN DO ANYTHING ABOUT IT” (quoted on p. 242). Leithner says, “[T]he rates of inflation that have routinely prevailed almost continuously in Australia since 1990 have existed only rarely — i.e., during the First and Second World Wars — in the U.S.” (p. 437). Leithner explains that the result of “counterfeiting that inheres in fractional reserve banking … entails a two-fold process”:
(1) an increase of the total supply of money-substitutes, which decreases the purchasing power of money-substitutes; and (2) a change of the distribution of income and wealth which puts more purchasing power into the counterfeiters’ hands. Not only does the purchasing power of savings (unless it is held purely in the form of genuine money, i.e., gold) decline in absolute terms; adding insult to injury, savers’ wealth shrinks relative to that of counterfeiters’. Fractional reserve banking corrupts not just people’s finances but also their virtues: because debtors gain at the expense of savers, borrowing becomes superficially attractive and living within one’s means becomes pointless. In a fractional reserve mentality, debt becomes the route to riches and saving is for chumps …
The inflation that necessarily results from fractional reserve banking is a “tax” by which the early recipients of counterfeit money expropriate late recipients’ wealth. The tax is particularly insidious because it’s so well hidden. Few people — apparently including banksters and mainstream economists! — understand it (or, if they understand it, certainly don’t draw attention to it); and still less do they discuss its ethical and distributional implications. Obviously, it’s in insiders’ interest to distract outsiders’ attention from the source of the counterfeiting. It’s also in their interest to reverse the order of causality with respect to the cause and consequences of inflation, and thereby further to bamboozle the public. Accordingly, governments and mainstream economists don’t attribute the consequence (rising prices) to its single cause (inflation); instead, they brazenly and diametrically incorrectly insist that rising prices cause inflation! (p. 143)
Talking of Keating, Costello and Howard, they are often considered clever, eloquent and biting speakers. Leithner puts them in their place on this count too. Here are a dozen examples:
[T]he proponents of the state and its regulations become impaled by their own logic. If people are greedy, as they rightly say, then regulation by the state cannot improve matters: it may well, however, worsen them. Regulators, remember, are people, and people are greedy; therefore regulators are greedy. Or is greed restricted to corporations and altruism to public servants? (p. 40)
[A]n employee of a non-money warehouse (say, an art auctioneer or a grain handler) who temporarily “borrows” stored valuables without the depositor’s knowledge, uses them to contract with third parties and attempts to return them before anyone is the wiser is an embezzler, i.e., somebody who fraudulently expropriates the property of others entrusted to his care. And an embezzler is subject to criminal conviction and imprisonment. In sharp contrast, a money warehouse and its employees enjoy a fundamentally different legal position. (p. 127)
“Bank” Is Shorthand for “Bankrupt” (p. 144)
[F]ractional reserve banks are not just exempt from laws that prohibit counterfeiting; they are also immune from laws that ban trading whilst insolvent. (p. 144)
[F]ractional reserve banks do not just defraud by lending deposits: they also counterfeit by lending amounts that vastly exceed their deposits. (p. 199)
[I] cannot regard the words “deposit” and “loan” as synonyms — and the underlying concepts as equivalents. If a bank lends a deposit, then (whether the depositor knows it or not, and whether he likes it or not) from the depositor’s point of view it ceases to be a deposit and becomes a loan. Funds which cannot be instantly redeemed, or which are only partly available after some delay, cease to be voluntary deposits and become forced loans which were no part of the depositors’ intention. (p. 175)
[The logical] impossibility of fractional reserve contracts is categorical. That is, it’s logically inconceivable that a bank and a customer can agree to convert money substitutes (i.e., warehouse receipts, banknotes and demand deposits) into debts. It’s also logically impossible for two people simultaneously to own the same item of property. They may, of course, say or even certify otherwise — just as I may say, certify and sincerely believe that 1 + 1 = 3 or that I own a kangaroo that can speak Finnish or prove the Gauss-Markov Theorem. But what they or I say or certify is objectively false. Just as triangles are different from squares, so too money substitutes (titles to present money) are distinct from debt claims (titles to future goods). To say otherwise doesn’t change reality; it misrepresents it. Hence the constructive fraud. (p. 180)
[P]oliticians are inherently evil and their policies necessarily fail. Without a direct linkage between the subjective value underlying the choices of consumers and the objective prices used by producers and consumers to make economic calculations — without, in short, a free market — waste, corruption and the tyranny of planned chaos inexorably result. No matter what task politicians remove from individuals and arrogate to themselves, they will do it improperly, inefficiently and ineffectively. They are a disgrace to all that is good and true, and their activities constitute an unreformable axis of plunder. (p. 252)
Gosplan, the Soviet Union’s central planning agency, set targets for the production of steel, cement and myriad other goods and services; Western central banks set targets for the Overnight Cash Rate and the Consumer Price Index. The chaotic consequences of central plans, Soviet and Western, necessarily reverberate throughout the economy … It’s quite comical: people who claim they “believe in the free market” blindly and unthinkingly affirm central banking and its relentless interventions into the market. Elementary logic completely escapes them: if you reject central planning in general, then you must also reject specific aspects like the central planning of money. If you abhor attempted price-fixing, then you must abhor the attempt to fix the Overnight Cash Rate. (pp. 254-55)
The state has embedded its protection of fractional reserve banks so deeply within its legislation and regulations — in other words, it has extended such enormous privileges to these banks for such a long time — that virtually nobody now recognises bankers for what they have long been: massively feather-bedded white-collar wharfies. Here’s a simple question for mainstream economists: if (as you rightly say) cartels are undesirable, then why is a cartel of fractional reserve banks, enforced by a central bank, not objectionable? (p. 517)
[I]t is highly improbable that the combination of a pure gold standard and a 100% reserve for deposits has ever resulted in a prolonged rise of prices. The historical record is telling: in no year from 1492 to the present has the total supply of gold increased by more than 5%. (p. 552)
In Australia there is an evil party (the Australian Labor Party) and a stupid party (the Liberal-National party coalition). Quite often, and these days rather routinely, these two parties unite and do things that are both stupid and evil. They have the hide to call this “bipartisanship.” Hence despite all the noise, few matter of principle separate Kevin Rudd and Malcolm Turnbull. Each emphatically agrees that no sparrow may fall from the trees without the knowledge and consent of the state. The differences are about rhetoric, degree and method — not about the alleged necessity of all-encompassing government intervention. (pp. 637-38, n. 21, see also p. 589, n. 12)
I’d like to see Keating, Costello and Howard respond to that. Leithner has left them speechless.
The Evil Princes of Martin Place shows that the Global Financial Crisis is not over and that everything government has done to save us from it has only made it worse. Leithner introduces his book as follows:
This book answers two simple questions. What caused the “Global Financial Crisis” (GFC) that erupted in mid-2007 (and whose associated worldwide recession … is still in its infancy)? What will be the consequences of the actions undertaken by governments to combat it? I show that the more things change, the more they stay the same: the GFC is merely the latest in a long series of economic and financial crises that have punctuated the history of the past 250 or so years. Like its predecessors, three of which we will analyse in detail, poor policies — in particular, the existence of legal tender laws, fractional reserve banking and central banking — are the GFC’s ultimate causes. The intervention of government, in other words — and not the free market — causes financial and economic crises. Accordingly the eradication of crises necessitates the repeal of pernicious legislation and the abolition of damaging policies. (p. 2)
The Evil Princes of Martin Place is the book that Garnaut, Gittins and the rest are scared to touch. It will be interesting to see whether Australia’s self-proclaimed leading free market think tanks give it the respect and attention it deserves.
Leithner is so well-read and references so many articles that he even mentions one of mine. He says, “The high inflation of the Keating-Howard Era did not go completely unremarked in Australia’s mainstream media.” One of the two articles he mentions is described thus:
Frank Shostak (“RBA Policy ‘Causes Inflation,’” The Weekend Australian, 21-22 April [2007, inside cover of business section]) was much more accurate. He “has a warning for investors. The Reserve Bank’s monetary policy is ‘out of control’ and that means inflation is heading up, interest rates are set to rise and the share market is only being supported by excessive money supply.” (p. 452)
That interview with Shostak was initiated and conducted by myself. During my short stint at The Australian, I constantly pestered everyone there, including especially editor-in-chief Chris Mitchell, business/economics editor Michael Stutchbury and opinion editor Tom Switzer. I pestered them so much that I wouldn’t be surprised (much) if they remember me. The kind of stories I was allowed to cover were the road toll, the Easter Show and fashion at the races. Eventually, I was told that if I could find someone who was respectable (unlike myself), then they would publish the same ideas as were contained in the dozens of beautifully constructed, accessible and biting columns I kept chucking at them to be rejected. Hence the Shostak interview, which was not even more biting for a multitude of reasons outside my control, but which I was still happy with (it is available online here; the print edition had a large photo of Shostak — his photo is less likely to offend than more of his words). My insistent behaviour meant that this was the last thing I wrote for The Australian. I mention this back-story — other than to celebrate that someone actually read, liked and referenced something I wrote (albeit on page 452 of a self-published book by an already-convinced author) — to communicate that it shouldn’t really count as an example of the mainstream media taking notice, as Leithner understandably claims.
While I’m correcting Leithner, a comment on his use of Mencken. It is important to read Mencken first-hand. One of the reasons it is important is that it prevents using incorrect referencing details (as occurs on p. 297 and p. 570). Another reason it is important is that you actually learn something about politics and about the possibility of being a passionate and eloquent libertarian without getting all romantic and clichéd about the prospects for reform, as Leithner is when he ends the book with the following call for triumphant complacency: “because evidence, logic and morality are on our side, eventually we will win” (p. 579). That sentiment goes against what Benjamin Anderson said on the many warnings given about the inflation leading up the Great Depression which Leithner quotes on pp. 366-67. It would be much better to end the book with that Benjamin Anderson passage or this one from Andrew Dickson White, Fiat Money Inflation in France (New York: D. Appleton-Century Company, 1933), pp. 5-7:
It would be a great mistake to suppose that the statesmen of France, or the French people, were ignorant of the dangers in issuing irredeemable paper money. No matter how skillfully the bright side of such a currency was exhibited, all thoughtful men in France remembered its dark side. They knew too well, from that ruinous experience, seventy years before, in John Law’s time, the difficulties and dangers of a currency not well based and controlled. They had then learned how easy it is to issue it; how difficult it is to check its overissue; how seductively it leads to the absorption of the means of the workingmen and men of small fortunes; how heavily it falls on all those living on fixed incomes, salaries or wages; how securely it creates on the ruins of the prosperity of all men of meagre means a class of debauched speculators, the most injurious class that a nation can harbor, — more injurious, indeed, than professional criminals whom the law recognizes and can throttle; how it stimulates overproduction at first and leaves every industry flaccid afterward; how it breaks down thrift and develops political and social immorality. All this France had been thoroughly taught by experience. Many then living had felt the result of such an experiment — the issues of paper money under John Law … and there were then sitting in the National Assembly of France many who owed the poverty of their families to those issues of paper. Hardly a man in the country who had not heard those who issued it cursed as the authors of the most frightful catastrophe France had then experienced …
It was no mere attempt at theatrical display, but a natural impulse, which led a thoughtful statesman, during the debate, to hold up a piece of that old paper money and to declare that it was stained with the blood and tears of their fathers …
And it would also be a mistake to suppose that the National Assembly, which discussed this matter, was composed of mere wild revolutionists; no inference could be more wide of the fact. Whatever may have been the character of the men who legislated for France afterward, no thoughtful student of history can deny, despite all the arguments and sneers of reactionary statesmen and historians, that few more keen-sighted legislative bodies have ever met than this first French Constitutional Assembly. In it were such men as Sieyès, Bailly, Necker, Mirabeau, Talleyrand, DuPont de Nemours and a multitude of others who, in various sciences and in the political world, had already shown and were destined afterward to show themselves among the strongest and shrewdest men that Europe has yet seen …
Oratory prevailed over science and experience. In April, 1790, came the final decree to issue four hundred millions of livres in paper money.
That would make for a far more powerful (and probable) ending.
And now for a big criticism: why is this book not available free online? Leithner claims to be inspired by Lew Rockwell into seeing that “traditional” book publishing is not the way to go (p. ii), so why has he gone against Rockwell in not making it available online? One of the many benefits of having a PDF version of the book is that it is easier to search for key terms. This would be especially helpful given the fact that the book’s index appears to get everything wrong. Having said that, and despite the dozens of (luckily inconsequential — although I admit taking a few seconds to work out who “Geoff Whitlam” [p. 499] was) typos, the publisher deserves great credit for making this work available. I look forward to reading more from the publisher in the future. They produce better content than the combined total output of Oxford, Cambridge and Harvard University Presses.
In conclusion, buy the book.
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