Mises Institute: The Property-Based Social Order Is Being Destroyed by Central Banks

The Mises Institute has the article The Property-Based Social Order Is Being Destroyed by Central Banks

Readers of the Mises Wire are no doubt familiar with the negative consequences of central banking and the inflationary capacity of fiat currency and how such a system drives malinvestment and leads to boom-bust cycles. Not only does the business cycle lead to the misallocation of resources from their natural ends of the structure of production, but it also drives resources into financialization, rather than the “real” economy. This financialization, which has been taking place since at least the First World War, has served, over time, to structurally undermine the morality of property in the eyes of the general public. As the increased popularity of socialism, at least in rhetorical terms, among the youth indicates this “evaporation” of property may reach a critical mass within the not-too-distant future.

The Social Effects of Financialization

In his book The Present Age, sociologist Robert Nisbet traces the origin of financialization to the First World War and the decision to finance the war via credit, rather than taxation. He argues that the other negative social effects of the war, combined with the flush of cash and credit into the system drastically altered American’s traditional propensity to save and instead to spend. These changed habits led to the “roaring twenties” where instead of acquiring wealth through hard work and thrift and a focus on producing goods and services, Americans turned to financial means of acquiring wealth. 

This began what Nisbet calls the “evaporation of property” where ownership of hard tangible goods has evolved into the “soft” ownership of highly liquid and mobile forms of property such as stocks. This concept of evaporating property originated in the work of Joseph Schumpeter, an economist and contemporary of Mises in Austria (though not a member of the Austrian school) who identified and explained this phenomenon in his classic work Capitalism, Socialism and Democracy.1 Schumpeter criticizes the shareholder mechanism of ownership for separating legal ownership from those responsibilities and actions that are traditionally associated with it. He argues that the owners of publicly traded firms are comprised of three groups of people: the salaried executives and managers, the large shareholders, and the small shareholders, and that “no element of those three groups … takes the attitude” that is generally meant by the word property. The employees, he states, often do not identify with the shareholding interests, and the large shareholders, even if they behave how financial theory predicts, are “at one remove from both the functions and attitudes of an owner.” Schumpeter considers small shareholders to be the least tied to ownership, saying that they often care little and if anything are mobilized by others for “their nuisance value.” He goes on to say that in the end, small shareholders end up feeling ill used and “almost regularly drift into an attitude hostile to ‘their’ corporations, to big business in general and, particularly when things look bad, to the capitalist order as such.”

For Schumpeter, the heart of the problem is that “the capitalist process, by substituting a mere parcel of shares for the walls and machines of a factory, takes the life out of the idea of property” and that “this evaporation of what we may term the material substance of property—affects not only the attitude of the holders but also that of the workmen and the public in general. Dematerialized, defunctionalized and absentee ownership does not impress and call forth the moral allegiance as the vital form of property did.”

Easy Money vs. Private Property 

Nisbet laments that this highly liquid form of property leads to economic perversity where “more and more capitalism tends to ‘exalt the monetary unit’ over the type of property that theoretically alone gives the monetary unit its value.” Nisbet takes especial issue with slick operators who seem to believe “that by raiding a decently run corporation, artificially jacking up its price on the stock market through the use of high-yield credit, including junk bonds, they are in consequence improving the management of the corporation.” 

The sad fate of the once iconic Toys “R” Us is one such example. When Toys “R” Us filed for bankruptcy several years ago, some thirty thousand people lost their jobs. The surface argument is that the brick-and-mortar retailer simply couldn’t keep up with the new online world and was losing out to the Amazons and the Walmarts. However, when examined closer, the case can be made that the company’s doom was sealed when it was purchased by a consortium of private equity firms in the mid-2000s. Thanks to the abundance of credit facilitated by the Fed’s loose monetary policy the firms actually only fronted 20 percent of the buyout, with the rest being borrowed. After the acquisition, the firms then saddled Toys “R” Us with the debt used to purchase them in the first place, adding over $5 billion in debt to the $1.86 billion the company held before the deal. By 2007, 97 percent of the company’s operating profits were being consumed to pay interest expenses. The firms also charged the company hundreds of millions of dollars in fees and The Atlantic reports that “according to one estimate, the money KKR and Bain partners earned from those fees more than covered the firms’ losses in the deal.” Who knows how Toys “R” Us would have fared without being saddled with $5 billion in debt. Perhaps it would have had the flexibility to innovate, or perhaps it would have failed, but in the end it didn’t have a chance to find out.

Were Nisbet alive, he would not have been surprised by such an event in the slightest. Loose money leads to loose morals and loose people who see no problem in such a scheme that demonstrates very little actual economic value being produced. 

Rather than exercising the responsibilities typically associated with property and ownership, these private equity firms treated Toys “R” Us worse than a rented mule and in doing so created loads of anticapitalist sentiment. One can’t help but think of Bruce Springstein’s 2012 song “Death to My Hometown,” in which he attacks such firms by lamenting that even though no “shells ripped the evening sky” or “blood soaked the ground” and “no armies stormed the shores for which we’d die” “marauders raided in the night” and “just as sure as the hand of God they brought death to my hometown.” Springstein concludes with a warning to “be ready for when they come for they’ll be returning sure as the rising sun.”

A people that comes to view the capitalist class as rampaging Huns in suits who “ate the flesh of everything they’ve found” is not a people that will be living under a market system for much longer. And when one looks at what happened to Toys “R” Us and similar firms, how the stock market was booming in the midst of the covid lockdown disaster, or how, as Ryan McMaken recently pointed out, GDP is expected to go through the roof even though the true unemployment rate is dismal, it is not hard to understand why people have such hostile opinions of capitalism.

Similarly, all this financialization has made it much more difficult for people to preserve their wealth against inflation and to save and invest in the traditional manners. Instead, people are driven into the stock market. As Jörg Guido Hülsmann notes in his book The Ethics of Money Production, people “must invest their money into the financial markets, lest its purchasing power evaporate under their noses.” He goes on to note that while such a thing may be good for financial brokers, it is not good for the average citizen who is incentivized into debt due to chronic inflation, pushed into a state of financial dependency, and now at the mercy of the financial winds.

The GameStop saga is example of this idea in action. Flush with cash from government “stimulus,” numerous average joes have taken up day trading and pumped the price of a stock into the stratosphere that is in no way connected to reality. The first wave of “meme investors” soon learned that the financial system is not exactly friendly to their method, as the actions of brokers like Robinhood quickly demonstrated. In the long run the reality is that most day traders will lose money and when that happens there is little doubt that their small foray into “financial capitalism” will leave these small investors with the attitude that Schumpeter predicted: hostile to the company they supposedly own and to the capitalist system in general. 

Misplaced Hostility Toward the Marketplace

Hostility towards capitalism seems to be growing everywhere one looks. It is not surprising that envy fueled leftists despise capitalism, but on the political right more and more populists have taken to bashing capitalism and the “market fundamentalists” who are supposedly running the GOP. Yet, populist conservatives have so far seemingly failed to notice the way in which the Federal Reserve and our inflationary fiat currency have contributed to all of the social problems and ills that they are greatly concerned with. Perhaps such populists can be given a pass for not being familiar with Hülsmann’s work on the cultural consequences of fiat money, but what is perplexing is that midcentury authors who conservative populists are more familiar with, such as Robert Nisbet and Wilhelm Röpke, wrote at length about the scourge of inflation and its negative social consequences and yet the issue still raises nary a peep out of the likes of Tucker Carlson and Sohrab Ahmari.

While such a situation is distressing, those within the Austrian tradition should see an opportunity here to harness the populist energies that seem to be growing larger by the day and to reveal to the aggrieved masses that the true target of their wrath should be the state and central banking system. Had Bruce Springsteen had access to a sound economic education he would have been singing at Ron Paul rallies, rather than at those of Bernie Sanders. The task of ensuring the next Springstein is lambasting the Federal Reserve and not capitalism itself begins now.

1.All quotes from Joseph A. Schumpeter, Capitalism, Socialism and Democracy, 3d ed. (New York: Harper Perennial Modern Thought, 2008), pp. 141–42.

AIER: FedCoin Revisited

A US physical coin, not a digital currency

This article at the American Institute for Economic Research talks about a new push for government-controlled, central bank digital currency to more easily track the income and tax liabilities of end users – FedCoin Revisited.

The Federal Reserve is thinking about issuing a central bank digital currency (CBDC). The International Business Times reports that the Fed “would be open to collaborating with private business on the creation of a digital currency but emphasized that they were not yet making any commitments.” Talk of a so-called FedCoin appeared to have quelled. But it is now back in full force.

To some, the idea of a FedCoin seems obvious. They see no reason for the Fed to forego adopting 21st century monetary technology. And, certainly, there are a number of benefits, such as lower transaction costs of electronic transfers and helping to execute instant payments (such as in the FedNow project). However, a CBDC also carries risks that must be weighed against the benefits.

One’s view on FedCoin is often related to his or her view on cash. If she thinks cash is good, she is likely to oppose FedCoin. If he thinks cash is bad, he is likely to see FedCoin as an improvement on the status quo. Indeed, some see the introduction of FedCoin as an important step in the direction of a completely cashless economy.

Advocates of moving towards a cashless economy argue that making all payments electronic would help to fight tax evasion and crime. If the move were required, however, it would harm those preferring to use cash for legal transactions as well.

Many people place a high value on anonymity. For some, it’s personal. They don’t want others to know what they are doing. For some, it’s political. They worry about the degradation of institutions, as private information might be used for political ends. The threat of obtaining and revealing private information might silence opposition and undermine the democratic process.

A cashless economy might also lead to policy changes. In order to foster spending during a recession or an economic downturn, the Fed might tax money demand with negative interest rates. If holding cash is an option, then depositors can withdraw their deposits and avoid the negative interest rate. But, if cash is not an option, then consumers are stuck paying interest on their FedCoin holdings. Since they cannot avoid the negative interest rate, consumers would rather spend their money than see their bank balances go down.

In addition to the issues related to one’s view on cash, FedCoin might also undermine financial intermediation. By offering FedCoin, the central bank might crowd out commercial banks.

A checking account at Bank of America is guaranteed by the Federal Deposit Insurance Corporation up to the max of $250,000. An account at the Fed is a liability of the government. If both offer the same payment services, why would one opt for the riskier commercial bank account?

Many will see little cause for concern with depositors having access to safer accounts. But that’s because they don’t think much about banking. Banks attract deposits with payment services and interest payments. They then funnel those funds to productive investment ventures. Financial intermediation makes us more productive, thereby raising the standard of living. As the World Bank reports, private credit to GDP high-income countries is “more than 4 times the average ratio in low-income countries.”

If would-be depositors hold FedCoin instead, the corresponding funds will have to be intermediated by the Fed. At best, the Fed would just auction off funds to private financial institutions. But recent events suggest the Fed might be inclined to allocate credit.

My concerns with FedCoin, and other CBDCs, are admittedly speculative. We don’t know whether the Fed would take steps to eliminate cash or impose negative rates on FedCoin balances. We don’t know how it would go about intermediating funds. But such speculations should make one thing clear: there are risks. At the least, we should develop strong institutional checks before permitting the Fed to plow ahead.