Liberty and Monetary Policy

Happy 116th Independence day! 

Photo Credit

Last May 26, through the invitation of a Facebook friend, Casey Lartigue, I was able to attend a lecture in Seoul sponsored by Friedrich Naumann Foundation. It's about Freedom Barometer in Asia. 

The main lesson I learned from that lecture is the realization that in contemporary discussion, freedom has three components: political freedom, rule of law, and economic freedom. It is also very enlightening for me to realize that there are already 10 variables to assess the freedom status of countries in Asia. Among 17 countries in Asia, Philippines is number 8. Not bad. Japan tops the list and North Korea is at the bottom. 

However, my only regret is that among five variables in economic freedom, FNF dropped, which to me is the most important of all - access to sound money. Anyway, Philippines is not alone when it comes to unsound monetary policy. It is a feature common to all nations of the world.

In commemorating the 116th Independence Day of the Philippines, it is my prayer that increasing number of Filipinos will realize the connection between freedom and sound monetary policy. I think it is none other than our national hero himself who wrote that without economic freedom, independence is incomplete. And to me sound monetary policy is central to the substance of economic freedom. To understand what I mean by this, reading the articles written by Jorg Guido Hulsman and Thorstein Polleit is a good start. 

I hope a day will come if not in my generation, at least in my children's generation that not only the Philippines, but many countries in the world could celebrate their own respective Independence Day under a sound monetary policy. 

Suggested Reading List:

Freedom and Sound Money

The Principle of Sound Money

Returning to Sound Money

Bad News for Our Money

The Curse of Fiat Money

Gold, Peace, and Prosperity

What Has Government Done to Our Money?


Gold and Economic Inequality

Monetary Policy and the Philippine Economy - Biblical Critique of Inflation

This is the 4th and last part of my series in "Monetary Policy and the Philippine Economy". The content will be taken from Gary North's "The Biblical Critique of Inflation". I want to present North's material in four parts: 

• Identifying currency debasement as a concrete call to repentance

• The law commands honest measurement and money

• Consequences of inflation, and

• Multiple indebtedness

Concrete Call to Repentance

North started his critique by citing that unlike today's church leaders, Old Testament prophets confronted both the nation as a whole and their civil governments with a concrete call to repentance. Isaiah 1:22 is an example of such call. In this verse, prophet Isaiah declared that Judah was guilty of economic dishonesty. Currency debasement and deceiving the public about the quality of the products in the market were considered normal and ordinary.

Precious metals such as silver and gold were used as money both nationally and internationally during biblical times. North mentioned that you can find "over 350 references" showing various contexts where silver and gold were used. Example passages include 2 Kings 5: 5 and 2 Kings 12:13.

Honest Measurement and Money 

Since gold and money were used as medium of exchange, honesty in economic transaction was vital. North argued that the law's provision concerning honest weights and measurement was also applicable to honest money. He quoted Daniel-Reps' study to show the importance of honesty in economic transaction: 

"Exactness of weight was important not only for dealings in corn and other goods, but also as a guarantee of the soundness of the currency...The practice of weighing money rather than counting it was still general in the Palestine of Jesus' day, as it was all round the Mediterranean. The scales also served to ensure that the coins were of the true metal and that they had neither been filed nor clipped.; indeed, this inspection was one of the banker's and money-changer's chief tasks" (Gary North, Introduction to Christian Economics, 1973, pp.5-6).

During Isaiah's time, silver and gold coins were not yet in existence. They were used as money in the form of "ingots" (p.6). Exactly, the debasement of ingots with cheaper metals was the offence committed by the people of Judah during the prophet's time. 

For North, that was an act of monetary counterfeiting. He considered it fraudulent, an act of theft, and immoral. He then equated it with the use of legal tender laws. And he contends that not even the government is above the law concerning the use of honest money. North explains why this is so:

"...legal tender laws are immoral; currency debasement is immoral; printed unbacked paper money is immoral. To mix cheap metals with silver or gold and call the result pure gold or pure silver is totally fraudulent. Yet this is what was being done in Isaiah's day" (ibid.).

Such act of monetary dishonesty was not new in Isaiah's time. It happened long time before his day. Proverbs 25:4 clearly identifes the command "to take away the dross from the silver".

Consequences of Inflation

"Currency debasement is the oldest form of monetary inflation" (p.7). North warns about the destructive impacts of monetary inflation on the economy. He quoted four paragraphs from Murray Rothbard's "What Has Government Done to Our Money?". I gleaned twelve destructive consequences of monetary inflation from those paragraphs :

• Gain for counterfeiters

• Losses for late receivers

• Redistribution of wealth in favor of first-comers

• Distortion of business calculation (consumers' demands and operation cost)

• Illusory profits

• Suspension of free market's penalty for inefficient firms and rewards for efficient firms

• Business cycle

• Decline in quality of goods, services, and work

• Popularity of get rich quick scheme

• Penalizing thrift, saving, and lending

• Encouraging debt and spending

• Reduction of standard of living in the name of creating "prosperity"

 See how North concluded Rothbard's analysis:

"Rothbard's analysis indicates why God so opposes monetary inflation, whether practiced directly by the State or simply private fraud which is tacitly sanctioned by the State. Currency debasement is theft. It involves the redistribution of wealth. Those on fixed incomes suffer. The quality of production tends to decilne. Monetary inflation (currency debasement) is a fraudulent, invisible tax, and the Bible prohibits it. The nation which permits monetary inflation to persist, as if it were not a terrible moral evil, will suffer the consequences described by Isaiah and Ezekiel (22:18-22)" (p. 8). 

Multiple Indebtedness

Since monetary inflation promotes debt instead of thrift and saving, a corollary economic and monetary phenomenon occurred. North described this as "multiple indebtedness". He got this idea from Exodus 22:25-27.

The passage speaks about the use of interest in lending money and the use of a pledge or collateral. It is this use of collateral where North got this idea of multiple indebtedness. For him, the cloak as pledge serves as a protection for both the creditor and the debtor. The debtor cannot use the same cloak as collateral in multiple loans or transactions. He is confined by his immediate assets. This economic principle prohibits multiple indebtedness. 

1. Fractional Reserve Banking

After laying down the basis for multiple indebtedness, North claimed, "The entire public sphere of civil government rests on the violation of the principle. The whole structure of modern credit is based upon the idea that men should not escape from perpetual debt" (p.11). Particularly, "fractional reserve banking and the limited liability corporation" (ibid.) have violated this economic law. This violation was later organized and designated as "the monetization of debt" (ibid.). Notice how North described this economic phenomenon:

"The central bank of every nation...prints up the money to finance the deficits of the central government, and in return for this fiat currency, the government gives an interest-bearing bond to the bank...From a biblical standpoint, this is utterly corrupt: 'The wicked borroweth and payeth not again' (Psalm 37:21a). The civil authorities do not intend to reduce this debt and repay the principal. They favor perpetual indebtedness. Laws that are transgressed in God's universe will be found to contain their own built-in punishment...Massive national indebtedness is highly dangerous" (ibid.).

Concerning fractional reserve banking, its mechanism is unbelievable. It all starts with a citizen making a deposit either checking or savings account. And from that deposit, fractional reserve can create loans nine times the size of the original deposit. North referenced Wilhelm Roepke saying the same thing about fractional reserve banking as resting "upon the systematic violation of the biblical prohibition on multiple indebtedness" (p. 12). For Roepke, without understanding the mechanism of fractional reserve banking, we cannot understand also "the perils and the problems which currently beset our economic system" (p. 13). 

Fractional reserve banking violates the principle of multiple indebtedness for it indebts itself beyond its immediate assets by loaning money to borrowers. Banks do this for they assume that their creditors will not ask for their money simultaneously. The faulty foundation of this mechanism is exposed when a bank run occurs. 

2. Limited Liability Corporation 

LLC has been in existence for more than a century. North describes this institution as a creature that came out of the economic environment that promotes multiple indebtedness. Or we can also say that with the existence of fractional reserve banking and government intervention, LLC is another form of violation of the principle of multiple indebtedness. North describes three things about this institution. 

First, LLC works as follows: 

"The corporation...is responsible only for the value of its assets. Creditors can collect, in case of coporate bankruptcy, up to the value of the corporation's property, but they cannot gain access to the funds of the legal owners, i.e., the shareholders...Thus, the LLC tends to become a huge, impersonal structure in which effective ownership is separated from management" (p.15).

North's second observation is about the shift in responsibility. Here North relies on Rushdoony's comments:

"...the liability thus shifts responsibility away from the responsible to society at large...with limited liability, a premium is placed on profit irrespective of responsibility. The shareholder is less concerned with buying responsible ownership and more concerned with buying a share in profits. And then, as the state further protects the shareholder against liabilities in his irresponsible pursuit of profits, the shareholder becomes less and less concerned with the responsible and moral management of his company" (pp. 15-16). 

Finally, North identified the influence of government intervention preparing the way for socialism. The limited liability laws are actually one form of government intervention. They destroy personal responsibility before God and before men, they produce subtle people who know how to use bankruptcy laws, and they erode the very foundation of Western civilization. Notice how North explains the connection of limited liability laws to socialism:

"Limited liability laws have produced the era of the huge, impersonal corporations that have produced unquestioned material prosperity, but at the same time these laws are now producing something very foreign to free enterprise...The drift into socialism continues, for it is socialism, above all other systems, which destroys personal responsibility and removes power from ownership..." (pp.17-18). 

Conclusion

At last, after 15 days, I finished my series on "Monetary Policy and the Philippine Economy". So part 1 talks about Dr. Nye's lecture where he identified the economic problems of the country and offered a corresponding solution. Part 2 contains six recent news articles related to monetary inflation written from different perspectives. Part 3 deals with Mises' lecture on inflation. And this last part is about biblical critique of inflation.

In blogging this series, I recognize the existence of gaps. It is just a draft, which needs to be finalized to come up with a lecture format. At its best, this series and other related articles in this blog serve as an introductory overview in the study of monetary inflation.


Part 1 - Dr. Nye's Lecture

Part 2 - Summaries of 6 Related Articles

Part 3- Mises' Lecture

Reference: North, Gary. (1973). An Introduction to Christian Economics. The Craig Press. 

Monetary Policy and Philippine Economy Part 3 - Mises' Lecture

This is my summary of Mises' lecture on inflation with some insertion of content from articles in this blog. I am using the word "inflation" here in its primary sense. You will recall that I already made a distinction in the early part of this series. This distinction is taken from Mises' lecture.

In this summary, I want to share 5 subsidiary topics under inflation: 

1. Two Ways to Solve the Financial Problems of the Government

After Mises clarified the distinction, he shared about two ways the government solves its financial problems. The legitimate way to do it is by taxing the citizens. But since taxing the people is considered not good for political career, another way of addressing the government's financial difficulties was made. This time it is by simply printing paper money.

In directly taxing the people, at least the people are aware about the deduction in their salary and they can adjust their expenses to a new financial situation brought about by new taxes. And another advantage of direct tax compared to simply printing paper money is that the price of goods and services is not affected. The only negative repercussion of such an act is the increase in buying power for the government and less on the part of private citizens. 

But this is not the case when government decides to print paper money to solve its financial trouble. It is also a tax, but people do not see it for it is done indirectly. And it also does not affect anyone's political career. 

What's detrimental in this form of indirect tax is that since people do not see any reduction in their income, they think that they can still buy the same amount of goods that they previously buy when the quantity of money is not yed increased. They do not realize that the purchasing power of their money has been reduced since the certain consequence of printing more money is price increase. And since prices of goods and services have already increased as a result of additional money, those who receive the same amount of salary when the new money was not yet introduced will suffer. And since most people do not know how their money lost its value, they simply consider it as something natural.

2. The Most Affected Sector in Inflation

The fact is, price increase and the lost of purchasing power are not natural. It is an inescapable outcome of government's act of printing money to address its financial problems. So the financial burden is transferred from the government to the citizens without them knowing it. 

Mises was questioning not how the money is spent but how the money is obtained by the government. Due to the preference of the government to use printed money rather than direct tax, some people will have greater advantage than others. Those who receive the new money earlier are in a better position than those who receive it late. Ron Paul identified the early beneficiaries as the “speculators, bureaucrats, and the special interests favored by the government” (Pillars of Prosperity, 2008, p.110). The sufferers are the laborers and savers. Among them are the teachers and ministers. Mises clearly identified teachers and ministers as the people who would suffer the greatest disadvantages from the increase in money supply. He explained why this is so: 

"As you know, a minister is a very modest person who serves God and must not talk too much about money. Teachers, likewise, are dedicated persons who are supposed to think more about educating the young than about their salaries. Consequently, the teachers and ministers were among those who were most penalized by inflation, for the various schools and churches were the last to realize that they must raise salaries. When the church elders and the school corporations finally discovered that, after all, one should also raise the salaries of those dedicated people, the earlier losses they had suffered still remained" (Economic Policy, 1979, p.61).

Since there are groups who benefit from new printed money, for them, this kind of monetary policy is good. I think this explains why there are people who insist that there's nothing harmful about increasing the money supply. On the other hand, those who are harmed by this policy do not know the connection of the government's action to their financial situation. And besides, the technicalities surrounding this matter is so complicated, as if, it was really made intentional in the first place to hide it from average citizens. 

3. How long shall inflation last? 

The basic flaw of this kind of monetary policy is that it cannot last. The Roman Empire, Han Dynasty, and Germany are used as typical examples to demonstrate the catasthropic end of continually increasing the supply of money. Mises described the situation of Germany in 1923. He stated, "On August 1, 1914, the value of the dollar was four marks...Nine years and three months later, in November 1923, the dollar was pegged at 4.2 trillion marks" (ibid., p.63). In short, German currency collapsed. 

The question is, until when will the government continue this monetary policy? Mises answered: "Probably as long as people are convinced that the government, sooner or later,...will stop printing money..." (ibid. pp.63-64). When people do not believe this anymore, then they will realize that prices will continue to increase. As a response, they will start "buying at any price, causing prices to go up to such heights that the monetary system breaks down" (ibid. p. 64). 

Under inflationary monetary system, becoming a debtor is considered wise. Anyone who understands the system could take advantage of it and could utilize it to attain easy wealth. Another feature of inflationary policy is the perception about the government's power. It is looked upon by the people as all-powerful. People ask the government to take care of them for with an unlimited supply of money, the government can do anything. This kind of government perception is a clear break-away from the past for then it was considered the citizens' duty to support the government, not the other way around. US President Grover Cleveland said, "While it is the duty of the citizens to support the government, it is not the duty of the government to support the citizens" (p.66).

In order to correct the wasteful spending of the government, Mises believed that only a return to the gold standard can do it. He argued that the gold standard is a form of protection from extravagant government. One great advantage of it is that "the quantity of money under the gold standard is independent of the policies of governments and political parties" (p.65). 

4. Labor Unions

After explaining the advantage of gold standard, Mises turned to the labor unions. He considered it as the second power next to the government who influence wage rates. The problem with the wage rate demanded by unions is that it is above the level of wage in free market. As a result laborers are only employed by industries prepared to suffer loss. When businesses can no longer afford losses, they shut down resulting to more unemployment.

Currency devaluation has been the usual response of governments to unemployment. But as both workers and unions realized through time that currency devaluation had reduced the purchasing power of their demanded wages, they made additional demand: wages must go up with price increase. This is known as "indexing"(p.69) and so the unions became index conscious that made currency debasement as solution to unemployment inapplicable.

5. Full Employment

John Maynard Keynes was a strong advocate of currency debasement. In his 1936 book, "General Theory of Employment, Interest and Money", he argued that unemployment is bad and that the only way to solve it is by inflating the currency. Mises described Keynes' strategy as "cheating the workers" (p.70) and this is considered necessary in order to attain full employment. 

For Mises, there is no need to resort to inflating the money supply to achieve full employment. The market should be allowed to operate freely without the interference coming from both the governments and the labor unions. This is the only way to achieve full employment. Mises explained this further:

"...wage rates for every type of labor tend to reach a point at which everybody who wants a job can get one and every employer can hire as many workers as he needs. If there is an increase in the demand for labor, the wage rate will tend to be greater, and if fewer workers are needed, the wage rate will tend to fall" (pp.70-71). 

So the choice should not be between inflating the money supply or unemployment. Full employment can be achieved without increasing the money supply. 

Conclusion: 

Mises concluded his lecture by emphasizing that inflation is a monetary policy and it can be changed. And the only way to change it is for the intellectuals to do their role in shaping public opinion. Once the public are informed about the disastrous results of inflation, Mises was confident that politicians will abandon this monetary policy.


Part 1 - Dr. Nye's Lecture

Part 2 - Summaries of 6 Related Articles

Part 4 - Biblical Critique of Inflation


Source: Mises, Ludwig von. (1979). Economic Policy: Thoughts for Today and Tomorrow. Chicago: Regnery/Gateway, Inc.

Monetary Policy and the Philippine Economy Part 2 - Summaries of 6 Related Articles

As a result of my Google search last July 2, I came up with top 10 links, but after visiting them all, I selected seven. The first link directed me to Dr. Nye's lecture. At this point, I want to share my summaries of the content of the remaining 6 articles.

Among six articles, three are safe; two are more realistic, and; the remaining one is in between. That lone article reminds me of Dr. Nye's lecture except that part where he mentioned that Philippine economy was protected from trouble due to non-engagement.

1. Safe Articles

Vulnerable but the economic fundamentals are sound

The recent shift in macroeconomics due to the announcement made by the Chairman of the Federal Reserve exposed the vulnerability of emerging markets. Gerardo P. Sicat claimed that though the Philippines' vulnerability was exposed as result of massive withdrawal of "hot money" from the PSE, our economic fundamentals remain intact. I think he was happy to see peso depreciation for this would benefit the export industry. However, the reduction of stock price index is bad news for domestic investors.

I just wonder why Sicat was calling for reform if the nation's fundamentals are really sound? What did he mean by reform? We read such need of reform from Dr. Nye's lecture. Do they mean the same thing or is Sicat's idea of reform one of protectionism? If he was referring to protectionism, I cannot understand how come he also advocates economic liberalization, which in fact is something commendable.

Time is so fast

Lilian Karunungan's article from Bloomberg reminds me of PSE's jubilant celebration in 2012. The peso appreciated and also there were videos that circulated around that time claiming that the Philippine economy was positioned for growth for decades. But the celebration was short-lived. After nine months, we witnessed that the so-called growth was nothing but an outcome of temporary parking of "hot money" escaping the impact of American QEs.

Bubbles - Fear and Denial

This time, its the impact of Japan's QE on Asia's economy. Policy makers in Asia were afraid, but the Governor of Bank of Japan considered their action as insignificant. The Governor of the Philippine Central Bank confirmed this. And besides, Kuroda promised to monitor the impact of their monetary policy. The writers mentioned also that other central banks have been doing the same thing such as the Federal Reserve, the Bank of England, and the European Central Bank, as if, by mentioning them, the fear of policy makers in emerging countries is baseless after all.

2. More realistic articles

Danger Zone

After defining QE, Cassandra Ty mentioned that US, UK, and Japan have all adopted this monetary policy. The goal of QE is to stimulate the economy. However, since the economy of the world is interconnected, the consequences of this action cannot be confined within the boundary of the initiating nation. Ty clearly identified that it "would have a spillover effect on the rest of the world" and that in fact a huge quantity of this new created money went into the Philippine stock market. Aside from possible currency war in the future, she saw other dangers of QEs include trade imbalance, inflation, and asset bubble.

Till death do us part

I consider this article from Business Mirror most realistic among the six. The writer mentioned about the IMF-WB annual meeting attended by the members of the Philippine Department of Finance. And then he confidently claimed that the Philippine government is "absolutely clueless" about the nature of global crisis and predicted a dark legacy for the existing administration as one of "economic disaster" unless policy makers would start to understand the situation and make necessary changes.

The writer is highly critical of QE. After mentioning the differences in the responses of Thailand, EU, South Korea, and US to a difficult economic situation, he raised the question about the source of $5 trillion, which the US needs to have a good start. He seemed to imply that through QE, the US could get such amount from the emerging countries.

And then the writer quoted history as his basis that monetary systems using fiat currency all collapsed. He cited the experiences of Roman Empire and China's Han dynasty as his examples. In the end, he issued a warning that unless the Philippine peso will be allowed to appreciate, our economy will crash together with the continuous devaluation of the US dollar.

3. In between article - From unreliable PSE into real economy

"The biggest percentage loss since the Great Recession of 2008 and the biggest points dip in the institution's history", that's how Heydarian described the recent drop in PSE prices. He added that emerging markets "have been under siege" as a result of anticipated QE retreat. So the trend is changing in favor of central economies like US and Japan and against emerging economies such as the Philippines. So the call now is for the reform of economic policy and shift the attention from PSE into the real economy. The writer ended his article by giving credit to previous administration.

Part 1 - Dr. Nye's lecture


Part 3 - Mises' lecture


Part 4 - Biblical Critique of Inflation

Monetary Policy and the Philippine Economy - Dr. John V. C. Nye's Lecture

I am done reading Mises' 4th lecture, inflation, from the book "Economic Policy: Thoughts for Today and Tomorrow". Now, I want to write my own piece combining:

• Dr. Nye's lecture on quantitative easing, 
• Summaries of 6 related articles, 
• Mises' lecture, and 
• Biblical critique of inflation

But before I do that, I want to share first my understanding of three important terms.

Three Important Terms

I accept the technical difference between inflation and quantitative easing. However, I see them as basically similar for they are both monetary policies and their essence is the increase of money supply.

Inflation has two meanings, the primary and secondary. Its primary meaning is historical. The secondary meaning is popular. Its historical meaning is either an increase in money supply or it includes the act of creating new money, which results into the reduction of the purchasing power of the monetary unit and price increase. The popular meaning is simply confined in price increase.

Considering the primary meaning of inflation, quantitative easing is basically referring to one and the same monetary policy. Mises Wiki helps me clarify the confusion in my mind when it defines quantitative easing as "a euphemism for an inflationary strategy of monetary policy pursued by central banks." So the term is actually a vague substitution for something that is considered harsh, and in this case, the act that is considered harsh is the increase in money supply.

Concerning monetary policy, I restated the definition given by Mises Wiki as the manipulation of money supply advocated by both monetarists and Keynesians through central banks to maintain economic growth and limit unemployment. Only the Austrian school criticizes monetary policy for its destructive results such as the redistribution of wealth, business cycle, and other disastrous economic distortions.

After providing the definitions of the above terms, allow me to proceed to Dr. John V. C. Nye's lecture.

Dr. Nye's Lecture

Dr. Nye gave this lecture in January 14, 2011 and it was attended by "BSP officials and representatives from both the public and private sector, e.g., the Senate, the Bureau of Treasury, the Presidential Management Staff, Bankers Association of the Philippines, Chamber of Thrift Banks, Philippine Economic Society, Ayala Life, Citigroup, USAID, IMF, and members of the Press." The title of his lecture is "Why Quantitative Easing was good and should be better...and how the Philippines should benefit from it."

The academic credentials of Dr. Nye is very impressive. He earned his Ph. D. in Economics from Northwestern University. At present, he is "a Professor of Economics at George Mason University and holds the Frederic Bastiat Chair in Political Economy at the Mercatus Center." He is also "a specialist in economic history..." Interestingly, the problem of economic development in the Philippines is included among his existing numerous projects. 

In presenting Dr. Nye's lecture, I would like to reverse the order by enumerating first the problems and solution he identified in Philippine economy before presenting his positive assessment of quantitative easing.

1. The Problems in Philippine Economy

At the outset, he described the Philippines as "bystanders in the global drama of economic maneuvers" (p.8) and this explains why we are not much affected by global economic crisis. In short, we are not really in the game; we are just watching as the global players battle on the ground. So it is not really true that the fundamentals of Philippine economy is sound that's why we do not suffer as other countries do. Dr. Nye described further the Philippine situation as "non-engagement" (p.9) and lacking in integration with regional and world trade. So the outcome of such position will be protection from trouble and at the same time, from wealth. 

Dr. Nye painted the ugliness of the nation's economic situation. He described the country as the exact opposite of China, which has become "more economically liberal and more business friendly..." (ibid.). The other way of saying it, is that the country is hostile to business initiatives and you can see it through interventionist policies.

Dr. Nye identified numerous problems in the economy, which are "mostly self-imposed" (p.8). In his view, even though the Philippines share some of these problems with neighboring countries, our situation is far more serious. And that's why he thinks that the country has "one of the most distressing climates for investment in the region" (p.10). 

Though there are other problematic areas in the economy like unprepared infrastructure for regional expansion and excesive concentration of industry in the NCR, most descriptions of the nation's economic problems are related to policies and regulations. Below are the descriptions of economic problems that Dr. Nye identified: 

• "...bad policy and excessive regulation is a breeding ground for corruption and inefficiency that further damages the economy, producing cynicism and complacency" (p.10). 

• "The PH has a fragmented and poorly integrated economy marked by a dysfunctional state institutions coupled with excessive intervention and regulation" (ibid.). 

• "Current rules also slow down the development of more advanced urban regions to accept workers who would like to move out of the countryside" (ibid.). 

• "...while industry is somewhat productive, it is inefficient and hampered in its further development by excessive regulation and high transaction costs" (ibid.). 

• "Nationalistic rules on ownership and investment limit competition and entrench special interests" (ibid.). 

• "...among these are the constitutional restrictions on foreign ownership and investment in the Philippines coupled to the mix of bureaucratic red tape, complicated taxes, and petty corruption..." (p.11). 

• "A crazy patchwork of subsidies, price controls, and regulations give the illusion of helping the poor, while effectively stiffling the economic progress and enriching the corrupt and the politically well connected" (ibid.). 

• "So many policies in the Philippines seem to be motivated by a nationalism that says it is better to be protectionist and nationalistic even if the end result is greater emigration and lower growth" (ibid.). 

• "Various reciprocity and tax rules have had the effect of driving foreign air carriers away from the PH thus weakening competition and taxing PH travelers, PH business, and incoming tourists. Taxing foreign businesses with outside options does not harm the foreigners but ourselves" (ibid.).

Dr. Nye summarized our nation's problems in one sentence: 

"PH major problems have less to do with macroeconomic or fiscal stability but with a badly distorted micro-economic price situation, poor and unreliable property rights and contracting, a stiflingly legalistic bureaucracy, a slew of policies and institutional constraints that are anti-investment and anti-competitive, and a political economy that favors the worst mix of populism, elite rent-seeking, and high-minded but unproductive nationalism" (p.13).

2. Solution to Philippine Situation 

Philippine situation is not at all hopeless. It is not yet too late for the country to benefit from what is happening right now in global economy. After reading the entire lecture, I discern that Dr. Nye's proposal though taking into consideration his idea that the country can take advantage of quantitative easing, he believed that the real issue lies in reforming "micro-economic policies to make investment more competitive." (p.8). In order to maximize the benefit of what's going on, the Philippines must act faster than its neighboring countries in reforming its regulations if it does not want to be ignored by foreign investors due to the existence of better options. Moreover, investors must be given the assurance that the changes in policies will stay and remain consistent in the future. If these conditions are not met, our country will once again "look back in a few decades at another set of missed opportunities as the gap with our Asian cousin further widens" (p.13).

3. Positive Assessment of Quantitative Easing

I observe that even Dr. Nye is against interventionism, his monetary ideas are far from the Austrian school and reflect the perspective of Milton Friedman. We can see this in his assessment of the causes of the 2008 crisis, Quantitative Easing, the Federal Reserve, the Great Depression in the 1930s, US economic recovery, and inflation.

Dr. Nye recognized three separate causes of the 2008 global crisis. He did not see the prior increase in the money supply as the primary cause of the crisis. In fact, for him, the greatest mistake of the chairman of Federal Reserve was the hesitation to provide bigger dosage of quantitative easing. He believed that inadequacy of "monetary expansion can make a bad economy much, much worse" (p.1) and "...real crises can be created or worsened by inadequate monetary policy" (p.2). He was actually proposing "...more easing and something that would surpass what had already been tried" (p.3). He is convinced that "...all the evidence is that QE2 was helpful not harmful but that it was inadequate and will require still more intervention" (p.6). Furthermore, he thinks "...that the Fed still has many effective instruments at its disposal..." (ibid.).

The monetary view of Dr. Nye is consistent to Friedmanian analysis of the Great Depression in the 1930's. The major problem then was insufficient liquidity. And also in his view, "...the only policy in the 1930s that helped the recovery was Roosevelt's abandonment of the Gold Standard in 1934" (p.4).

Moreover, for Dr. Nye, US economy has already experienced "notable recovery". He based his idea of recovery on the improved performance of the stock market, rising price levels, and higher GDP.

And finally, his assessment of inflation is also contrary to Austrian analysis. He does not like high inflation, but considers low inflation as an "evidence that we need more not less monetary expansion" (p.6).

4. Personal Comment

Dr. Ron Paul, schooled in Austrian school, diasgrees with Dr. Nye's monetary view. Dr. Nye's interpretation as to the three separate causes of 2008 crisis ignores the critical role of the Fed. For him, the real estate bubble, banking crisis, and macroeconomic collapse had no connection with each other and he failed to see their connection to the action of the Federal Reserve.

In Dr. Paul's congressional report, “The U. S. Dollar and the World Economy” dated September 6, 2001, he argued that the Fed has the primary responsibility for the 2008 crisis and real estate bubble in particular. According to him, it all started with Federal Reserve credit expansion to the tune of $3.2 trillion (Pillars of Prosperity, 2008, p.219). Here is my summary of that connection:

"It all started with Federal Reserve credit expansion. Huge size of the credit went into real estate, stirred up by the '$3.2 trillion of debt maintained by the GSEs' (p. 219). The GSEs by the way, was composed of Fannie Mae, Freddie Mac, and the Federal Home Loan Bank. The GSEs received a special treatment through low interest rates and the Federal Reserve monetizing them 'just as if they were U. S. Treasury bills' (p. 220). This action of the Federal Reserve sent an attractive message to foreign central banks causing these banks to purchase great quantity of GSEs."

Ron Paul also contradicted Dr. Nye's idea about quantitative easing. In September 14, 2012, Dr. Paul asserts, “Any further quantitative easing from the Fed, in whatever form, will only make our next economic crash that much more serious.”

These are just two examples where Ron Paul as representative of the Austrian school differed from Dr. Nye's monetary perspective.

However, regardless of Dr. Nye's positive assessment of quantitative easing, which Austrian economists consider erroneous, still he did not believe that quantitative easing as far as the Philippine economy is concerned would greatly benefit the country without consistent adjustment in micro-economic regulations. QE does not create growth and has little effect on local economy. For him, even increase in tax revenues is incapable to improve the economy without regulatory reforms. He saw the primary function of monetary policy as "a means to smooth out short term fluctuations and provide the proper background conditions to support development" (p.8). He added, "The purpose of monetary policy should be to allow the real economy to perform better" (ibid.).

Part 2 - Summaries of 6 Related Articles

Part 3 - Mises' Lecture

Part 4 - Biblical Critique of Inflation

Monetary Policy

Restating the meaning of monetary policy taken from Mises' Wiki, I understand it as the manipulation of money supply advocated by both the monetarist and Keynesian school of economics through central banking to maintain economic growth and limit unemployment. Only the Austrian school criticizes monetary policy for its destructive results on the economy such as redistribution of wealth, business cycle and other disastrous economic distortions. In this article, I want to explore further this idea of monetary policy as seen in US economy. To accomplish this goal, I glean relevant ideas  from four US Congressional Records in the past taken from Ron Paul's book, The Pillars of Prosperity. 

The Foolishness of Existing Monetary Policy

In December 1, 1982, then US Congressman Ron Paul described the American monetary policy as foolish. It was so because of the reliance to centralized monetary planning, which only strategy to boost the economy was to increase the money supply. This made the stock market that time soar. For Dr. Paul, that was just a temporary economic relief resulted from additional paper money together with the manipulation of interest rates. The American monetary policy was foolish for the decision makers ignored long-term results such as economic stagnation, higher rates of unemployment, soaring interest rates and runaway inflation. 

Above is the description of US monetary policy 31 years ago. The Fed is still committed to such folly. Since such folly is presented as wisdom by professional economists through mainstream media, no wonder almost all countries in the world are following the American example. 

After 15 Years

Fifteen years after that 1982 US Congressional Record, the US was still persistent in its foolish monetary policy. In March 5, 1997, the US House of Representatives recorded Ron Paul's exchange of ideas with Allan Greenspan about the conduct of monetary policy. Each shared their point of view about CPI and currency debasement. For Dr. Paul, CPI discussion was a diversion from the real issue. He identified that currency debasement was the real issue that would have the following results: higher price of goods, malinvestment, distorted interest rates, higher deficits, benefits for few and economic suffering for many. 

The content of the Congressional Record after three months and that's July 22 was just a repetition of the previous one. The only relevant material I found was the identification of those who benefit and those who suffer from currency debasement. So those who benefit are the early users of credit and they include people who borrow, the bankers, the big business and the government. Those who suffer are the middle class, the late users of credit and the little guy. 

IMF and the Asian Crisis

After two previous banking committee hearings, another hearing was made one year later. This happened in February 24, 1998. I find the discussion on the role of IMF and the impact of US monetary policy on Asian crisis very important. 

For Dr. Paul, the real mission of the IMF is not to help the poor of developing countries, but to assist multinational banks and corprorations. The record of the IMF proved this point particularly in relation to the impact of IMF's structural adjustment programs in Africa and Latin America. Instead of economic development, what Ron Paul saw was an increase in poverty, major cutbacks in health and education and increase in unemployment. 

After dealing with the failure of IMF, Dr. Paul raised the issue about the connection of Asian crisis to US domestic monetary policy. From this we can see that the consequence of the foolishness of American monetary policy is not only limited on their shores. Countries in Southeast Asia were also affected. Ron Paul explained this connection:

"...we certainly do export a lot of our currency. More than 60 percent ends up in foreign hands. And it serves a great benefit to us because it is like a free loan...so we get to export our inflation...So again, we get to export our inflation, and the detriment is the consequence of what we are seeing in Southeast Asia" (Pillars of Prosperity, 2008, p. 180).

Source: Paul, Ron. (2008). Pillars of Prosperity: Free Markets, Honest Money, Private Property. Auburn, Alabama: Ludwig von Mises Institute.

Political Freedom and Monetary Policy 2

The present article intends to share about a US Congressional Record, "Paper Money and Tyranny" and to use the paper to reflect on Philippine situation. Though written in September 5, 2003, I see that its content remains relevant after 10 years. 

Personal Observation in Social Network

Allow me to share first a personal observation in my involvement in some politically inclined Facebook groups. Cynicism is widespread. Debate concentrating on political personalities is still very strong, which to me is a major distraction. Most Filipino netizens advocate bigger government. Discussion on economic and monetary policies is almost absent. 

I still believe in social change. Changing people's understanding about the basic role of the government is a good start. Focusing on economic and monetary policies instead of personalities will lead to a fresh understanding of Philippine reality. 

Unfortunately, not many Filipinos today see the connection between our pressing economic problems and the absence of sound monetary policy. Furthermore, the discussion about political freedom and monetary policy is also largely missing. 

The above scenario is understandable. The kind of economic perspective that is prevalent today fails to provide the necessary "lens" to see beyond the similarities of ultimate messages propagated by intellectuals coming from both the progressives and the "conservatives". In order to see beyond the mainstream conversation, a different approach to the study of economics is necessary. Both the Austrian school and libertarian philosophy provide such needed lens. 

Introducing the Importance of Studying Economics

Ludwig von Mises, considered as a prominent personality in the Austrian school, argues that the study of "alternative" (real) economics is the primary civic duty of any responsible citizen (Human Action, 1998, p.874). Fulfilling this duty will enlighten the minds of the citizens about the pressing issues of today both nationally and globally. In fact, ignorance of this duty is the reason for the perpetuation of existing economic situation. But it is sad to say that for most Filipinos, the only civic duty they know is during time of political campaign and election.

Dr. Ron Paul believes in the importance that his mentor placed on the study of economics. In this Congressional Record, we will see how the libertarian Congressman expounded the meaning of money in relation to threefold issues - morality, politics and economics. I will just mention the moral and economic issues and skip the political issue for its content is directly applicable to American setting. 

Money as a Moral Issue

Ron Paul wrote, "When money was sound, civilizations were found to be more prosperous and freedom thrived. The less free a society becomes, the greater the likelihood its money is being debased and the economic well-being of its citizens diminished." (Pillars of Prosperity, 2008, p.235). Based on this quotation, we can reflect on Philippine situation. Our economic situation is obvious. What is not obvious is the connection of our economic situation to existing monetary policy. 

For Dr. Paul, the existing monetary system not only of the US but of the entire world can be appropriately qualified as "legal plunder". Printing of paper money, which in reality is the real meaning of inflation "is nothing more than a sinister and evil form of hidden taxation." (p.240). The Congressman further elaborates the nature of this plunder:

"This system of legalized plunder allows one group to benefit at the expense of another. An actual transfer of wealth goes from the poor and the middle class to those in privileged financial positions...The high cost of living and loss of jobs hits one segment of society, while in the early stages of inflation, the business class actually benefits from the easy credit. An astute stock investor or home builder can make millions in the boom phase of the business cycle, while the poor and those dependent on fixed incomes can't keep up with the rising cost of living." (p. 239).

If the analysis of Ron Paul is correct, do we now wonder why most Filipinos are poor? Popular rhetoric that we hear about the plight of the poor is usually blamed on big corporations. Most Filipinos fail to see the role of the government and monetary policy. 

Money as an Economic Issue

Under this section, you will read the reason why the economic situation of the world is in a bad shape and the results of existing monetary system. Pinciples of sound money are not taught in schools and that is why many sincere politicians, bureaucrats and bankers strongly support the existing system for it is the only system they know. The outcomes of current monetary system include the following:

• Inflation
• Speculation
• Excessive debts
• Malinvestment
• Unemployment
• Protectionism
• Impoverishment of the middle class
• Short-term benefits for politicians, bankers and special interest groups
• And finally, collapse of monetary system 

I encounter not a few remarks from Filipinos in social network saying that the issues surrounding the Federal Reserve, the status of the USD and other similar issues are purely American and have nothing to do with Philippine situation. This kind of mindset is due to the absence of understanding of the impact of US monetary policy on global economy. I suspect that most Filipinos do not see the significance of a very important date on global economy. August 15, 1971 was the day when President Nixon refused to honor the Bretton Woods and removed the last connection to sound money. Since that day, the entire world has been flooded by paper money, which in 2003 the libertarian physician foresaw that the world has seen "the beginning of the end of that system...tough times are ahead...for world economy." (p.246).

Today, there are mainstream economists who are now seeing what Dr. Paul saw 10 years ago. Many influential personalities are presently joining the voice of the libertarian politician in sounding the alarm. 

The Strength of US Dollar

If it is really true that the USD is in critical situation today as Dr. Paul describes, why is it that the predicted collapse of USD is not happening and there are some indications that it's actually strengthening? Ron Paul mentioned 5 other factors that influence the value of USD aside from continuous printing:

• The strength of American economy
• Political stability
• Military power
• The benefit of USD as world reserve currency
• And weakness of other nations' economies and currencies

The first two are now under serious threats; the third factor though remains intact is now also seriously questioned; the fourth factor is now being challenged by the yuan; and I think only the last factor remains strong for other nations are also inflating their money supply. And Japan is the most notorious example.

Conclusion

Ron Paul is worried that nations would still not be able to identify the real source of the crisis as what happened in the 1930s. Central banking and fiat money escaped public scrutiny. Instead, free market capitalism was blamed. In the mind of Ron Paul there is no doubt that "the business cycle, the stagflation, the recessions, the depressions, and the inflations are not a result of capitalism and sound money, but rather are a direct result of paper money and a central bank that is incapable of managing it." (p. 245).

Dr. Paul could not see any way to avoid the approaching crisis. One way to minimize the difficulty is by repealing all legal tender laws. This is the way to limit the power of the government. To me, this appears to say that no solution is coming for I doubt if any nation would follow Dr. Paul's proposal. 

Reference: Paul, Ron. (2008). Pillars of Prosperity: Free Markets, Honest Money, Private Property. Auburn, Alabama: Ludwig von Mises Institute.

Political Freedom and Monetary Policy

For Ron Paul, the retired libertarian US Congressman, the choice between political freedom and tyranny is closely associated to monetary policy. In other words, no matter how nations imagine that they are free but if their monetary system tells otherwise, in reality their present situation is heading towards tyranny and will get even worse not until the primary cause has been removed. 

I found this argument while reading "Five Myths of the Gold Standard" (Pillars of Prosperity, 2008, pp.122-128), a testimony made by Ron Paul before the subcommittee on mines and mining in October 2, 1980. In this testimony, he demolished five tales surrounding the gold standard. Allow me to enumerate them with corresponding refutation based on my understanding of Ron Paul's testimony:

Tale # 1 - The supply of gold is insufficient.

This is a scare tactic used by those who reject the gold standard. This kind of incident can only happen if someone manipulates the gold supply. The tale is simply untrue for it violates basic economic principles concerning price of any commodity. The increase in price will always guarantee the continuous supply of that commodity.

Tale # 2 - Both Soviet Union and South Africa not only would greatly profit in a gold standard, but they could even take the US economy under hostage for they are the world's primary gold producers.

There is no way that both Soviet Union and South Africa could hostage US economy in a gold standard. It is also not true that their profit will increase compared to what has been happening since 1980 due to inflationary monetary policy, which is the real threat to US economy with its "politically-printed paper money and a fractional gold reserve" (p.224). The present monetary system is the one causing fear and panic among the people. Therefore, a return to gold standard will actually accomplish three things - giving stability to gold price, an end to inflation and elimination of fear and panic.

Tale # 3 - It would cause a depression.

A return to gold standard will cause depression only if it is done improperly. I understand this improper return to gold standard in two ways - not taking into consideration the total quantity of printed USD and government interference in setting up an artificial price for gold. Besides, even a return to gold standard is just part and parcel of an entire sound monetary system. With it, there must also be an end to budget deficit, printing of paper money together with tax cuts and reduction of regulations.

Tale # 4 - It will cause inflation.

Whether your understanding of inflation is the popular one, still this tale is baseless. For Ron Paul, the gold standard instead of resulting to inflation as the myth makers assert is in reality the way to solve it. He said, "...the gold standard does promise a way out of our current inflationary impasse. Rather than causing inflation, the gold standard has historically been a bulwark against inflation."

Tale # 5 - The gold standard is prone to "undesirable speculative influences". 

The speculative influences is said to be connected to the fact that gold as commodity is used in jewelry. Here we find the vast difference a sound economic theory makes in seeing tales like this. Mainstream economists see speculation where there is none and they don't see "undesirable speculative influences" that happens daily related to USD. For an Austrian economist like Ron Paul, it is the other way around. What's happening daily in the USD is real speculation and the fact that gold is a commodity safeguards it from those speculative influences. So the gold standard is actually providing us the remedy from those baseless fears.

There is no better way to finally silence this myth than giving a full paragraph from the book:

"A gold standard would eliminate all speculation about the political motivations of the monetary authorities in governing the supply of money. The great virtue of the gold standard is that it removes discretionary power over the money supply from any one agency, thus ending the most fertile source of speculation. A gold standard puts the power of the monetary system into the hands of its people and takes it away from the politicians and the bankers, thus removing a potential vehicle for establishing a tyranny." (p. 127). 

In closing his testimony, Ron Paul issued a challenge: "Shall we have gold and political freedom or shall we have paper and political tyranny?" (p. 128) It is our hope that increasing number of people not only in the US but also in the Philippines as well as other parts of the world will see the relevance of this question. 

Reference: Paul, Ron. (2008). Pillars of Prosperity: Free Markets, Honest Money, Private Property. Auburn, Alabama: Ludwig von Mises Institute.