THOMAS E. WOODS JR. Author of “Meltdown”

By JOHN NORTH

GREENVILLE, S.C. — The Ludwig von Mises Institute featured five speakers addressing topics on which they applied analysis and offered answers from the Austrian School of economics to problems in today’s U.S. economy during an all-day seminar on Oct. 3 at The Westin Pinsett hotel downtown.

The seminar, titled “Depression, Monetary Destruction and the Path to Sound Money,” drew 120 attendees from 19 states and Canada.

The speakers include Douglas French, Thomas DiLorenzo, Robert Murphy, Jeffrey Tucker and Thomas E. Woods Jr.

The LvMI, based in Auburn, Ala., bills itself as “advancing the scholarship of liberty in the tradition of the Austrian School,” inspired by Mises (1881-1973). The institute’s stated goal is to “undermine statism in all its forms.”

The economic thought of the Austrian School emphasizes the spontaneous organizing power of the price mechanism or price system. Austrians advocate a laissez-faire approach to the economy.

While today many proponents of the Austrian School are not Austrians, the early ones were — most notably Mises. He is, arguably, the economist who has been most influential on the Libertarian movement in the U.S. and on conservative thinkers, serving as the yin to John Maynard Keynes’ yang. Mises’ masterpiece was “Human Action” (1949).

The first speaker, French, who addressed “Bank Failures: Then and Now,” said that when banks fail now, there is a virtually seamless process where the bank closes normally on Friday, when specialists work over the weekend to reorganize. The bank reopens on Monday under a new name and management.

“The problem is getting the new bank to take over the old loans. They don’t want” them, but they are forced to take them. Thus, behind the apparent smooth-functioning process are fundamental problems.

To cover losses from the often-bad loans from mergers, the surviving banks dip into the FDIC’s loan-sharing fund, which had racked up $300 million in loss-sharing deals, as of early October. In addition, there had been 98 bank failures in 2009 through Oct. 3, compared to just 25 such failures last year. Worse, 416 banks are on the problem list, French said.

As a result of loss-sharing, the FDIC at the end of the second quarter had $10.4 billion, insuring $4.8 trillion in deposits, meaning it then was “nearby broke,” French asserted.

When the FDIC recently admitted that its $10.4 billion was gone, it decided to turn around and borrow $45 billion from the banks, he noted. “All of the banks (in the U.S.) only made $1.6 billion last year, so I’m not sure that plan will work out....
“The FDIC doesn’t have money to cover losses,” he said. “Most of the U.S. banking system is really operating upside down.”

As a result, he said banks are operating off their deposit insurance, as their obligations increase as a result of mergers with failing banks, while their finances have decreased, French said. “Charge-offs and delinquencies are rising. To say the banking crisis is not as bad as the S&L crisis is just not true.”

With $12.1 trillion in assets on June 30 and 25:1 leverage, “if the FDIC takes a minimum of a 5 percent hit, it’s out of capital,” he said.

French added, “The current crisis is 25 times that of the Great Depression.”

Further, he said, “Now there are those who think banks need to lend to get the economy going again, but banks can’t lend because of asset erosion ... Banks don’t have anybody (who is credit-worthy) to lend money to — and they’re losing money on real estate loans, eroding their capital.”

In the last 20 years, there has been a boom for banks on “the riskiest capital structure the world has ever seen — and we’re just getting started” in the bank failure process, French said.

Next, DiLorenzo, an economist at Loyola College in Maryland, addressed “The Founding Fathers of Monetary Destruction.”

He discussed “how politicians are so clever in lying to us and never taking responsibility for their actions.”

As an example, he pointed to Alexander Hamilton, who DiLorenzo said, truly “did betray the American Revolution ... He is credited as the Founding Father of monetary destruction.”

Before the end of the revolution, Hamilton befriended Robert Morris, who made lots of money of the war as a defense contractor, DiLorenzo contended.

Hamilton served as Gen. George Washington’s aide to camp, and after the war, Morris wrote a “glowing” recommendation to make Hamilton head of the central bank of the fledgling nation, he said.

Hamilton and Morris were nationalists, whose main objective was to create a system of mercantilism and big government in America, “just like the one from which the colonists rebelled,” DiLerenzo said, shaking his head at the irony. “In short, the U.S. was to have a banking system resembling the British.”

Hamilton was a nationalist instead of a federalist, which was the desire of most of the colonists and Founding Fathers, he asserted.

Hamilton, who became secretary of the treasury, favored having a permanent president with “a monopoly modeled along the lines of the (future) Soviet Union,” DiLorenzo said.

Hamilton was fond of speaking of the “implied powers of the Constitution,” claiming one needs to “read between the lines” to get the full meaning, while Thomas Jefferson’s position was that “if you read between the lines, there’s just blank space.”

Hamilton, who oversaw the Bank of the United States, which featured an outpouring of cash, resulting in a 72 percent inflation rate and the first of many economic panics in American history, DiLorenzo noted.

He noted that Herbert Hoover “was the first to say that ‘panic’ sounds too extreme — and called it a ‘depression.’ Now we call it a ‘recession.’ Soon we’ll be calling it a ‘cantaloupe.’” The crowd laughed at his hyperbole.

DiLorenzo said Andrew Jackson was a rarity in his savvy management of the U.S. economy. Jackson “recognized that a central bank was institutionalized legal plunder, so he vetoed the central bank.”

He cited a quote by Rep. Ron Paul, R-Texas, in praising Jackson, “‘Well, one good guy in 200 years is not a very good record, is it?’” Paul is a proponent of ending today’s Fed, which controls the American banking system.

“So Jackson was a Jeffersonian” and he oversaw the setup and operation of an independent treasury, which operated from the late 1830s to 1862, a period DiLorenzo said ranks as “arguably the most stable economic system in U.S. history.”

He quipped, “That was all ended by the evil Abe Lincoln, with the 1861 currency acts ... Lincoln was an imbecile in economics, as opposed to Jefferson....

Sarcastically, DiLorenzo said, “Lincoln sagely said if you allow gold and silver to back (paper) money, it will deprive people of everything that makes life worth living.”

Regarding Lincoln’s stance against sound money through a gold standard, DiLorenzo asked, rhetorically, if the Soviet Union’s Josef Stalin “could have said it any better?”

“Hamilton’s plan (of a central bank, now the Fed) was finally achieved by Lincoln — and we’ve lived under this ever since.”

In DiLorenzo’s view, the U.S. “eventually got under this imperialism business, funded by greenbacks,” resulting in the building of the trans-continental railroads, the massacre of the Indians and entanglements in foreign wars. The economist said none of these would have been possible with sound money through a gold standard, which would not have allowed inflation to so easily fund wars and other major spending projects.

The third speaker, Robert P. Murphy addressed “Does (Ben) Bernanke Have an Exit Strategy?” noting, “If you asked me (a year ago) if he (the Fed chairman) has an exit strategy, I’d say, ‘Yes.’ If you asked me today, I’d say, ‘No, he doesn’t even have an entry strategy.’”

After explaining the operations of the Federal Reserve, Murphy said, “The Fed is just fundamentally redistributing resources from everyone else to the elite, who run the banking system ... This typically results in inflation, or at least what the average person thinks inflation means.”

He then turned to “what’s happening now and the reason (why) people haven’t seen disaster strike.” Specifically, Murphy said the U.S. currency reserves have increased a whopping 1,700 percent from $45 billion in August 2008 to $829 billion in August 2009.

“In terms of what the Fed’s doing now, it’s never been done before. It’s crazy.” As for the bulk of what Bernanke and the Fed have injected into the system, “the banks are just sitting on those reserves,” Murphy said.

The banks are not using the reserves because they are uncertain, worrying that the reserves might run out, and they don’t want to pay 0.2 percent on excess reserves. “In a sense, they (the Fed) are bribing banks not to make loans to people.”
The bad news is that “there’s room for things to go up by a multiple of 17, Murphy said. “So, if gas prices are $2, they could go up by 34 percent or 68 cents.

“So what’s the Fed’s exit strategy?” Murphy asked. Six months ago, Bernanke “would say, ‘No problem, many of these programs are self-liquidating.” Thus, “these things on the Fed balance sheet will just naturally shrink right down.

“The problem is, what if when the Fed starts selling things off,” it makes “the price of those securities drop down .. If China gets out, then long-term interest rates could go to 40 percent,” which would be disasterous for the U.S.

“Another issue is, if hundreds of billions of dollars of mortgage-backed securities drop, then the Fed would be insolvent ... and they don’t have an exit strategy.”

Murphy added that, in all of the Fed’s assumptions, “the underlying premise is there is no threat of price inflation because of excess capacity. Of course, you can” have inflation. “I thought we slayed that dragon of Keynsian economics in the 1970s. Inflation – it is possible.”

Tucker, the fourth speaker, addressed “A Brief History of Mises.org,” offering a history of the Web site and institute, noting that the growth of “digital media has been an amazing thing.” It gives the LvMI the opportunity “to liberate all of these (Mises) works for all time, by enabling people to download his works for free from their computers.

Woods, the final speaker and author of the current New York Times best-seller, “Meltdown,” addressed “Smashing Myths and Restoring Sound Money.”

He began his talk by discussing money and its origins, noting that the cavemen bartered for goods, but that was often inconvenient, joking that one would trade a frisbee for a scrambled egg. “Eventually, they found more marketable goods to use.

“Very often, previous metals had certain qualities that made them useful in this context. Mises said money naturally emerges out of barter.”

Woods said that “money always originates as a useful commodity and it eventually becomes money ... How would you know how to do transactions if it didn’t have a common value?”

He noted that , through the years, gold has been “universally used” as money ... “Now, it’s true that we’re using unbacked paper money. Initially, we had a ‘backed’ money system in the U.S. When paper began being used, it was just a money substitute.”

In 1933 and then “definitively” in 1971, the gold backing was taken away, Woods said. “Notice, though, they didn’t start that way.”

He reiterated that “the gold-silver system occurs naturally” among human beings.

In the first 200 years of America’s history, the money supply increased by a factor of 16, Woods said. “In the last 30 years, the money supply increased by a factor of five ... When money is invented out of thin air, the new money goes to friends of the government. They get to buy items with this new money. By the time it trickles down to normal people, inflation sets in and they get ripped off.”