Digits and Revolution

by Gary North
by Gary North
Recently by Gary North: Kicking the Can While Riding a Tiger

"To see what is in front of one's nose needs a constant struggle."
~ George Orwell

We are seeing the beginning of a social revolution. This revolution will spread to politics. It is happening under our noses.

A revolution involves five crucial elements: (1) a new view of sovereignty; (2) a new view of authority; (3) a new view of law; (4) a new view of sanctions; (5) a new view of the future. Any revolution that does not involve all five is more of a coup than a revolution: a substitution of new rulers for old, not a change in the system.

The battles for the hearts and minds of men are being fought today in all five areas. Points three through five are still up for grabs. These are intensely ethical issues. They are intensely religious. They will not be decided by technology. There is no group and no worldview that has a clear advantage in these three areas. But the outcome of the battle over points one and two is going to be decided in terms of digits: the digits of the Internet and the digits known as money. In both areas, the existing Establishments of the world are under attack. I am convinced they are going to lose.

National governments have controlled the flow of information and the money supply for centuries. But with the advent of digits, the cost of maintaining this control keeps getting higher. The cost of communications keeps falling. Therefore, the cost of maintaining control increases. This is the battle over legitimacy.

The battle over authority is funded on both sides – rulers and ruled – in terms of money. The world's central banks are keeping the banking system going by inflating the money supply. This is now creating a crisis of authority. I think there are two men who represent this battle in the United States: Ron Paul and Ben Bernanke. Obama is a minor character. If McCain had won, he would be a minor character. If the governments lose this battle, this will create a crisis of legitimacy.

Political Revolutions as Capture

Historically, political revolutions have involved a capture of the existing political order. The more centralized the national government was before the revolution, the easier it is to capture power. The classic examples are the French Revolution and the Russian Revolution. France in 1789 was the most centralized nation in Europe. It was the richest country. Its government was bankrupt. It was the hotbed of propaganda and secret societies favoring democracy. Russia in 1917 was involved in a losing war. Its treasury was empty. Its ruler was distant. It was a massive bureaucracy. There was a growing ideological movement for democracy and socialism.

At the heart of every political revolution is an argument for the illegitimacy of the existing civil government. Without this, it's just another movement by another special-interest group – a fringe group too weak to get into the inner circle.

The crucial social revolution in Western history was the result of Christianity. It produced a non-violent political revolution. The church did not call for violence. It simply taught that the emperors were not divine. That was an assault on the Roman Empire's legitimacy. That was why some emperors oversaw the persecution of Christians. But the Christians were correct. The emperors were not divine. Then came proof: Rome went steadily bankrupt, destroying its currency, and was replaced by a new system of faith. The best book on this is Ethelbert Stauffer's Christ and the Caesars (1955).

Philosophy was involved in this social revolution. Law and ethics were involved. Theology was involved. Public ritual was involved. You can read about this in Charles Norris Cochrane's great book, Christianity and Classical Culture (1944). But, at bottom, it was a shift in legitimacy that caused the political revolution. That revolution was successful. Why? Because it was preceded by a social revolution that took three centuries.

No one could see in A.D. 33 that over the next 300 years, the Roman Empire would be replaced. There were revolutionary groups in Palestine and elsewhere. Of what importance was a dead ex-carpenter whose crazy followers said had risen from the dead and ascended into the sky? The correct answer was this: enormous.

Great oaks grow from acorns. Cumulative change eventually breaks the system. Jesus taught this: "And no man putteth new wine into old bottles; else the new wine will burst the bottles, and be spilled, and the bottles shall perish" (Luke 5:37).

We are experiencing a taste of new wine.

Jesus taught through the use of pocketbook parables: money. People understand money – not in theory, but in practice. I shall begin my discussion of the revolution with a discussion of money and alternative money: gold.

The Price of Gold

With gold above $1,100, a lot of public attention is now focused on the dollar. The price of gold has always been considered a vote of confidence or no confidence in the dollar. But it is not just the dollar that has depreciated against gold; almost all other currencies have done so over the last six months.

From the day Nixon ceased allowing the Treasury Department to deliver gold on demand by foreign governments and central banks, a rising price of gold has been regarded by government officials as a vote of no confidence against those officials and their policies. There has always been official hostility to gold, precisely because governments resent the fact that citizens are allowed to issue a vote of no confidence in their policies by purchasing gold. Americans could not legally buy gold bullion until January 1, 1975.

For decades, central bankers have systematically sold gold into the market in order to lower its price. They do not care about the price of any other commodity; they care only about gold. Gordon Brown a decade ago, when he was Chancellor of the Exchequer, sold half of Britain's gold reserves at less than $300 an ounce. By all standards, this was an act of economic stupidity. But Brown has never been criticized effectively in public for what he did. There was no public outrage. The man is now Prime Minister of Great Britain, despite the fact that he cost the British government something in the range of $10 billion.

The war between central bankers and gold is an old war. I have written about this in my ebook, The Gold Wars. It has to do with public perception. Gold's price is not rising because millions of people are attempting to take back control over the banking system. There is no thought by most investors that gold is going to be money anytime soon, or ever. It is merely a commodity which is expected to appreciate in relation to money. Its rising price is a vote of no-confidence in fiat money; it is not a mandate for restructuring the world's markets to function on a gold coin standard. I wish it were.

People who have been in the gold bug camp for several decades are tempted to believe that their ideological position is about to be justified. They want to believe that the public is finally coming to its senses. They want to believe that people who buy gold are implicit gold bugs, who are ready to pressure the government to set up a gold standard. Unfortunately, there is almost no awareness by the general public about what a gold standard would look like. At best, they imagine that it would be some kind of restraint on the expansion of government currency.

The reality is this: central banks run the economies in every nation, and have for almost a century. Central bankers are not about to surrender sovereignty over money just because a relative handful of investors accumulate gold as an investment. In the case of India, fathers purchase gold jewelry for their daughters' dowries. That constitutes no threat to the existing fiat money order.

Nevertheless, central bankers and politicians resent the fact that the public has the legal right to go into the marketplace and buy a commodity that is traditionally purchased as a way to protect people against the debasement of the nation's currency. Politicians and central bankers understand that when gold rises above traditional levels, the public is made aware of the fact that something is fundamentally wrong with the monetary system. If the monetary system were being managed properly, gold would bump along at a traditional price. But when it leaps upward, the public is alerted to the fact that something has changed in monetary policy. Gold may not be a very good inflation hedge in the near term, but over centuries, it has served as the most reliable single hedge against the debasement of currencies.

We are now seeing a change of perspective on the part of central bankers. When India this month purchased half of the proposed gold sale of the International Monetary Fund, it sent a message to central bankers in the West. India's finance minister actually told the press that he thought Western currencies are bankrupt.

In India, it is politically acceptable for the central bank to accumulate gold, even though gold pays no rate of interest. The fact of the matter is, the U.S. Treasury today pays virtually no interest on 90-day T-bills. So, the Indian central bank had a choice: buy a commodity that is appreciating versus a commodity that is depreciating, neither of which pays any interest. It did not take a rocket scientist to make the correct decision. It is a politically popular decision in India, and the central bank was admitting in full public view that the leaders of the country no longer fully trust the value of the dollar and the other Western currencies.

This was a major event. It was a major event because it was an open acknowledgment by a central bank that now has over quarter of trillion dollars of reserves in foreign currencies that it is no longer going to play the fall guy for the Treasury Departments and central banks of the West. It was an open admission by an Asian central bank against the United States, the European Central Bank, and the Bank of Japan. It was unlikely that the Indian central bank was going to buy Chinese currency under the circumstances. So, in order to announce their doubts about the future purchasing power of Western currencies, the decision-makers in India's central bank decided to make a symbolic public act of defiance. It bought the traditional money which has always been popular in the history of India. It bought $6.7 billion worth of gold. This is chump change for India's central bank.

I grew up in a world in which India was poverty-stricken. The thought of India as a significant player in international markets was unthinkable. India was a basket case. Western foreign aid poured in India just to feed millions of Indians, in addition to far more millions of rats, who consumed at least half of the grain sent to India. The rats lived in the grain warehouses. India's economy was a joke. Yet here we are, a decade after India began to repeal the regulatory nightmare that had been the Indian economy, and is now sitting on top of a quarter trillion dollars worth of foreign debt certificates. The turnabout took place so fast that nobody noticed. The growth of the Chinese economy got all the headlines, but the growth of the Indian economy was also spectacular. In the history of economic affairs, India is second only to China in terms of the speed of economic growth of a large country.

Asia is beginning to break away from the Western alliance. Asian politicians have begun to smell blood in the West. The enormous deficits that the Western industrial nations are running have sent a warning signal to Asian politicians and central bankers. The message is clear: the West is beyond the point of no return. There is no way that Western governments are going to reverse these massive deficits, and there is no way that they're going to be able to pay off these deficits with anything except fiat money.

If the deficits are paid off through inflation, Western buyers will no longer be the source of profitability for exporters in China and India. On the other hand, if Western governments cease to sell their debt to their own central banks, or to foreign central banks, then there is going to be a dramatic rise in interest rates in the West. That is going to create a depression. Again, there is no particular advantage for large Asian nations to build up an export-based economy if the Western economies are going to be facing either mass inflation or else a depression, in which demand for imports from Asia will fall like a stone.

Asian central bankers now have to face reality. If they cling to the old mercantilism, exporting for Western currencies that can be used mainly to buy Western debt issued by Western governments, what is the point? What good does it do to export your country's wealth and exchange for promises that cannot be repaid by the governments that issued the promises?

The decision of the Indian central bank to buy half of the IMF's gold was a public announcement that Asian politicians and central bankers have begun to see the end of the road. They have begun to see that Western buyers of Asian products are not good credit risks any longer. The Indian decision-makers are beginning to sense that they are sitting on top of a pile of IOUs that are not going to be repaid. They have accepted hundreds of billions of dollars worth of IOUs, and these IOUs are payable in the domestic currencies of the nations issued the IOUs. This extension of credit is a loser's game. It has taken Asian politicians and central bankers two decades to figure this out. Now that they are beginning to come to their senses, people who want to hedge against the decline of their own nation's currencies are finding that they might as well get in to the deal. Why leave gold for central bankers to hoard? Why not buy it now, and take advantage of any future price increases?

The governments can break the gold market easily. All they have to do is cease inflating. Or, if this is not enough, they can begin to deflate. They can begin to sell debt certificates that serve as the monetary base. They can let private citizens hold these IOUs. The money paid to the central bank to purchase the government IOUs is then not put back into circulation. The fractional reserve process begins to contract, interest rates begin to go up, the economy moves back to recession and then plummets into depression. This is the price of breaking the gold market. The politicians and central bankers do not want to pay this price.

Central bankers have another way of driving down the price of gold. They can sell any gold reserves held by the central bank. The problem is, India's decision to purchase half of the offering made by the IMF indicates that the beneficiaries of such sales will be foreign central banks. The gold will not enter private markets, so the price of gold will not go down. All that the central bankers of the West will accomplish is to transfer the only really valuable long-term asset that Western central banks hold. This will not accomplish the goal of the Western central banks, namely, to drive down the price of gold in private markets. On the contrary, the decision of the IMF to sell half its gold to India's government drove up the price of gold. It sent a signal to gold investors, namely, that Asian central banks are willing and able to buy gold sold by Western central banks. That put a seeming floor under the price of gold.

I don't think that there is any magical number below which gold cannot and will not fall. But the decision of India's central bank to purchase all that gold did send a message: the bank may buy more gold if it falls below a price in the range of $1,000 an ounce. It may even buy gold at $1,100 an ounce. This has given a sense of confidence to gold investors around the world.

We now see a kind of mini-gold rush around the world. Most people still own no gold. Most hedge funds own no gold. Certainly the major mutual funds do not hold gold. Gold is still considered politically incorrect. As a result, conventional investors and conventional managers of publicly traded and publicly held funds avoid gold. But, at some point, if the price continues upward, these fund managers are going to have to face the threat of withdrawals of money from their funds if they do not compete and offer gold investments of some kind.

Conventional opinion is hostile to gold, but conventional fund managers are willing to buy some gold, if that is what it takes to keep investors in their funds from departing. The average investor does not know about gold coins, or ETFs for gold, or the commodity futures market. He doesn't yet know how to buy gold. He is going to find out when gold continues upward. I think gold is going to continue to move upward.

If bankers begin to lend even 25% of the money they hold as excess reserves with the Federal Reserve, the expansion of M1 is going to create serious inflationary effects. When those effects become obvious to people, they are going to go down to the local pawn shop, or local coin store, and by some coins.

Because of the thinness of the market for gold, a large-scale infusion of funds would drive up its price. Private investors are now competing against Asian central bankers to purchase IMF gold. The IMF will get a good price, which ought to be the IMF's only goal. We are going to see an increasing demand for gold by the general public until such time as it becomes clear that Asian central banks are not going to buy any of the gold that Western central banks or government-supported enterprises will offer on the market.

End the FED

Simultaneously, there is growing political awareness among the far Right fringe, meaning us, that the Federal Reserve for the first time in over 90 years is vulnerable to public criticism.

The resistance of the Federal Reserve to the House's proposed law to mandate an independent audit of the Federal Reserve has sent a message to those people who listened to Ron Paul a year ago, and who have now figured out that the Federal Reserve System is the enemy. The Federal Reserve System has always had enemies, but these enemies were confined to the extreme Right and the extreme Left, and therefore had no political clout. The Federal Reserve System is now front-page news. Its enemies, whether from the right or left, are now in a position to embarrass the FED, calling attention to all sorts of indiscretions, manipulations, and outright chicanery. Federal Reserve officials have never faced this before. This is altogether for the good.

As criticism of the Federal Reserve increases, which it will, Federal Reserve officials will have to justify their policies before Congress and before the public. It's not that Congress is going to set up some sort of independent Treasury that will take over the functions of the Federal Reserve System. That was done in the Jackson administration and Van Buren's administration. We are not going to return to that era. What we are going to see is attention being paid to the specific manipulations by the Federal Reserve System. The FED is going to come under the equivalent of Sherlock Holmes' magnifying glass.

The Federal Reserve System is not prepared to answer questions raised by the public. It has never had to answer these questions in the past, and so it grew arrogant. There is little likelihood that the public is sufficiently well-organized to dismantle the Federal Reserve, but The FED is being embarrassed continually. Bureaucrats resent this. They are poor at deflecting criticism. The FED hired a public relations firm for the first time a year ago. This indicates how much trouble the FED is having with criticism.

For the first time in my lifetime, the Federal Reserve has to defend itself in public. Never before has there been a well-informed audience willing to listen to detailed criticisms of the operations of the Federal Reserve. Ron Paul's candidacy in the 2008 and his new book, End the Fed, have combined with the technology of the Internet to create a growing audience of skeptics regarding the Federal Reserve. This is a tiny movement, and it is not organized in any sense, but it is capable of sending out e-mails with links to articles criticizing the Federal Reserve.

The spread of information is inexpensive today, and the power of YouTube videos is great. The Federal Reserve is not yet in a position to defend itself effectively. I have never seen a video produced by the Federal Reserve System that plausibly explains why the crisis happened in 2008, and that the crisis was not the fault of the Federal Reserve. In fact, I have seen no videos produced by the Federal Reserve. The public relations team is apparently unfamiliar with YouTube. In contrast, there are dozens of effective criticisms of the Federal Reserve that you can get on YouTube and other video sites.

Criticism of the central bank is criticism of the heart of the Establishment's control. Why? Because no other powerful institution has equal autonomy. No other institution controls the central economic lever in society: money. No other institution has been able to escape public observation, criticism, and reform for as long as the Federal Reserve has. In the last 18 months, an articulate critic of the Federal Reserve, Ron Paul, has been able to attract what appears to be millions of listeners who are aware of the fact that the Federal Reserve System is the enemy of sound money. This is a classic example of what Albert J. Nock referred to as the Remnant. The Internet has provided the Remnant with the ability to find information that had always been blocked in the past. Google and other search engines are enabling them to narrow their focus down to topics that were previously so obscure that almost nobody knew about them. Combine this with e-mail, Facebook, MySpace, and Twitter, and you have the mobilization of the ants against the elephant.

Controlling the Media

Before we can have a political transformation, the public has to think about why the transformation is mandatory. Usually, the elitists are the effective promoters of political transformation. They have controlled the media in the past. They have hired the writers, producers, and the technicians to get across their idea of why a particular reform needs to be implemented. Today, however, low-cost communications technology, especially free videos, has placed in the hands of creative individuals the ability to create public relations havoc for the Establishment. The Establishment does not know what to do about this.

The fact that NBC television is about to be purchased by a cable company is indicative of the transformation. The broadcasting organizations have relied on Federal regulation and Federal laws against rival networks. The Federal Communications Commission has been central for over 80 years in controlling what gets broadcast to the general public on the airwaves. Now the Internet has launched a successful end run around the Federal Communications Commission. Furthermore, satellite radio and television have spread anti-Establishment information. The cable networks have eroded market share of the networks to such a degree that a major network is about to be swallowed up by a cable company. This indicates that the levers of ideological control that the Establishment has relied on for over a century no longer serve as levers. There are too many levers out there today.

For successful political reform to take place, there has to be an articulate leader or group of leaders criticizing the existing system. There also has to be an informed minority, even a small minority, of citizens who have decided that it is time to change the system. What is needed at this point is a crisis.

President Obama's chief administrator, Rahm Emanuel, has said that he doesn't think a government should waste a crisis. Like most Left-wing politicians, he thinks that a crisis offers an opportunity for politicians to centralize control over the public. In the past, this has been the case. But a crisis in the Federal budget, coupled with a rise in unemployment, has created a special kind of national crisis. This crisis enables critics of the government to spread doubts about the wisdom, competence, and morality of the politicians doing the centralizing. This crisis has called into question the entire political system. There is a growing group of citizens who are convinced that the system cannot be reformed, that it must be shut down, and that any further compromise with it will work against them. This is a very small group, but it is growing.

In the past, critics have not been able to communicate with each other on a cost-effective basis. This has kept them from sharing information, and it has kept them from mobilization. This is no longer the case today. We are seeing the development of an unorganized yet connected network of well-informed critics of the existing political and economic system. Half a century ago, F. A. Hayek called this the spontaneous order. We are now seeing the advent of an orderly yet unorganized network of critics of the existing political system.

This undermines the legitimacy of the system. Above all other factors in political life, legitimacy is the central factor. If a social order loses legitimacy in the eyes of those who participate in it, it is only a matter of time until that social order is transformed. It may be transformed from the top by an elite, or it may be transformed by a plague, or it may be transformed by a lost war, or it may be transformed by an economic collapse, but it will be transformed.

The existing American political establishment is facing a crisis of legitimacy. This has not happened in the United States since 1865. The expansion of Federal power that has taken place since the outbreak of the Civil War has been relentless. There has not been a single period in which this process has reversed. In every era, the expansion of Federal power over the economy and over social institutions has been like a ratchet. For a brief period it may not move forward, but it never moves back. This is why we are facing a Federal debt (off-budget and on-budget) in the range of $80 trillion. This is why the Federal deficit is increasing by a trillion dollars a year, meaning the on-budget deficit. The off-budget deficit is probably increasing in the range of seven trillion dollars a year. This is the unfunded Social Security and Medicare budget.

The system is going to break. The ability of Washington to send out checks to everybody to whom it promised checks is going to fail. The checks will not be sent out, or else they will not be for money that will buy much. The Federal government is going to default in some form. I believe that it is likely to default by raising taxes on existing workers and simultaneously cutting benefits to beneficiaries. This may be cuts in the income of existing beneficiaries, of whom I am an obvious case, or it may be a delay of the advent of the benefits to those who been promised the benefits. The retirement age for Social Security may be raised, or perhaps there will be some system of means-testing for Medicare recipients. But, in some form, there is going to be a default.

The Climate of Revolution

The classic situation that precedes a political revolution is when a government has promised benefits to large numbers of people, and then it reneges on the benefits.

For years, things seem to be getting better. The government takes credit for things getting better. Then things then get unprecedentedly worse. This happened immediately before the French Revolution. It happened immediately before the Russian Revolution. It happened a decade before the American Revolution. We forget about this.

The American Revolution began in response to relatively mild increases of taxation that were required to pay for British troops in the United States. The French and Indian War (1757–63) had eliminated the threat of the French, so the Americans assumed that they would be the beneficiaries. The British government decided that Americans should pay for the quartering of troops in the colonies, in order to defend the new western borders against any future incursions by the French. The Americans had thought it was going to be no taxes and lots of new land. The British imposed new taxes and restrictions on the westward movement of the population. Then came the Stamp Act of 1765. That was all it took for the beginning of the end of the British Empire in North America. It began to erode the legitimacy of the British Empire in the eyes of North American British citizens. As the legitimacy of the regime declined, the opportunity for Sam Adams, Patrick Henry, and other anti-imperialists made possible the American Revolution.

Revolutions in the past have been through the centralization of power. The one exception to this was the American Revolution, but that exception only lasted for five years: 1783–1788. The Constitution centralized power enormously in comparison to the Articles of Confederation. After 1788, the process of centralization increased relentlessly. There is not a single period in American history from 1789 until this year in which there was any serious reduction of Federal power.

The French Revolution and the Russian Revolution centralized existing hierarchical systems that were already more centralized than other countries in the West.

A political revolution aimed at capturing power in Washington is inherently self-defeating. It will simply add to the existing process of centralization that has gone on since 1789.

A political revolution has to involve the transformation of the legal order. Without a transformation of the legal order, there is no revolution. There is only a coup. It does not pay to run a coup. A revolution favoring freedom must involve something like a return to what existed in the days of the Articles of Confederation. If this is not the direction of the revolution, then it will simply be business as usual.

It is not good enough to reform the Federal Reserve System. The Federal Reserve System must be abolished. This is the proper approach of thinking about the revolution. Ron Paul has written a book called The Revolution. He has also written a book called End the Fed. This is the correct approach. We must not try to strengthen the system, or reform the system, or make the system more efficient. We must abolish the system, agency by agency.

Ultimately, this could mean secession. At the very least, it means decentralization back in the direction of what the Articles of Confederation provided. It is no accident that no high school history textbook or college history textbook has ever devoted much space to the Articles of Confederation. There is virtually no discussion of the details of that document. Almost no one, including people who have Ph.D.'s in early American history, has ever sat down and read the Articles of Confederation, let alone a volume of analysis of the articles. This is because the victors write the history books. The anti-Federalists did not win the state ratifying conventions in 1788. The Federalists won, and they and their heirs have written the history textbooks.

Because globalization has decentralized authority over production and distribution, it has led to a way of unifying individuals across nations. The international division of labor is a result of the development of globalization. With the spread of the free market, we have the possibility of reducing the power of national governments without causing an economic crisis at the local level. The difficulty is this: to reduce the power of the national governments in a period in which the Establishment is attempting to create an international government reduces the ability of locals to resist. So, for any long-term political transformation to be effective, there has got to be a reduction of sovereignty and legitimacy for both the national government and the international government. There has to be a realization that anything that concentrates power at the top is a threat to liberty.

This strategy is not yet understood in conservative circles. It is especially not understood among those traditional conservatives and all neoconservatives who believe the United States government has a moral responsibility to police the world by means of its military. Every time this nation extends the power of the military, it extends the power of the State Department. Anybody who thinks that the United States military should be funded to police the world ought to have a picture on his desk. It would be a picture of Hillary Clinton in a general's uniform. That is what the expansion of military power means. It means a transfer of authority to the State Department. We need images to remind us of this, and I think an image of Hillary Clinton with the general's uniform is just about right. It was bad enough when her husband was Commander-in-Chief.

Ron Paul is the first politician to get a national audience in favor of limited government since Grover Cleveland. Paul is the first politician to offer a systematic, integrated, Constitutional case for shrinking the Federal government. In the 1950s, Sen. Robert A. Taft and Congressman Howard Buffett of Omaha were articulate defenders of a government somewhat like that which is defended by Ron Paul. But Buffett was unknown, and Taft was a compromiser. Taft's voting record always testified against his ideological defense of freedom. Ron Paul's voting record is consistent with his ideology. That was also true of Howard Buffett, but nobody knew who Howard Buffett was. They know who Ron Paul is.

Compared to where Ron Paul was when I worked for him in 1976, this is a whole new ball game. It is a new ball game because of the Internet. Ron Paul and Matt Drudge are the supreme representatives of the threat posed by the Internet to every Establishment on earth. Matt Drudge was able to get a President impeached. Ron Paul was able to get the slogan "End the Fed" in front of hundreds of thousands and maybe millions of Americans. This could not have been possible without the Internet.

In my view, this is the greatest single irony in the history of big government. The Internet was developed by the U.S. Army in order to decentralize communications because of the threat of an atomic attack. It was the expansion of the military that made possible the development of the technological infrastructure which, more than any other invention in the history of man, now poses a threat to every Establishment in the world. This development has enabled the members of hard-core fringe groups to communicate with each other, and to get out the message that they most love: the incompetence and malevolence of the Establishment. It doesn't matter which Establishment we are talking about; every Establishment now has an unorganized but orderly audience dedicated to its overthrow.

Price Competition

Anyone who thinks we have not entered a new era is naïve. The central economic phenomenon today is price competition. Whenever any technological development undercuts the existing cost basis of any established sector of the economy, it poses a threat to that sector. Peter Drucker's rule is this: when a new technology sells for 10% of the old technology, the old technology is doomed. Think "handmade Swiss watches." There is nothing that the defenders of that technology can do to stop the destruction of their industry.

This is taking place daily in the field of communications. The newspapers are dying. The TV networks are dying. All of this is taking place because of the cost reductions involved in telecommunications by the Internet. There is nothing that the Establishment can do about this. It can try to regulate it. If the FCC does, Congress will get a firestorm of opposition. The ability of members of the Internet to get out communications to other participants about a looming Federal regulation is so great that the opponents can shut down Congress. They can organize call-in campaigns that literally will make it impossible for anyone else to phone Congress. They can flood Congress with e-mails. They can terrorize Congress.

There is no possible way today for any bureaucracy in Washington to fundamentally reverse the development of the Internet. Politically, it would be suicidal for any politician to take a stand against the expansion of influence of the Internet. Joe Lewis was right: they can run, but they can't hide.

There are very few areas left in American society today in which the Left is dominant in a field which has not been subject to tremendous competitive pressure by the Internet. One of these is higher education. The Left still controls the universities. Another is the production of movies. The barriers to entry here are very great. There are financial barriers. There are barriers associated with particular skills of production. There are barriers to distribution. But all these barriers will fall.

The enormous effect of price competition on technology is going to enable outsiders to do an end run around Hollywood and the theater system. This is already being done by DVDs. With the rise of YouTube and similar organization such as Netflix, the movie theaters are going to be limited to date night for teenagers. The movie theaters will not be crucial to the distribution of profitable movies.

We are on the cusp of a political transformation. The technology is on our side. The communications system is on our side. Articulate and even inarticulate critics of the existing political system have the ability to spread their message of discontent as never before in the history of man. The fundamental political fact of our era is an escalating crisis in legitimacy for the Establishment.

As the crisis of the economy becomes more obvious to more people, and as it becomes obvious that the government and the central bank are unable to reverse the effects of the previous Keynesian policies, the public is going to withdraw legitimacy from the central government.

There will be two competing strains of opinion, as there always are. One group will call for centralization. It will appeal to the fears of the general public about the immediate economic crisis. The public will respond to these fears. But, at the same time, there will be discontent with these proposed solutions by a growing minority of citizens who do not respond as citizens traditionally have responded, namely, to call for even more centralization. This is the great conflict politically in our time. This conflict is going to increase.

There is going to be a push for centralization nationally, as the crisis unfolds, and there will be resistance as never before. We are seeing already an attempt by the elite to expand their program, inaugurated no later than 1919, to create a one-world government. The failure of national governments to foresee the crisis in the economy in 2007 is being used as justification for the expansion of international power over the economy.

This appeal is beginning to lose steam. Even if there is additional power granted to these government agencies on an international level, the ability of these agencies to impose negative sanctions against countries that refuse to cooperate is limited. There is no method for imposing sanctions at the international level which will enable the internationalists to complete the centralization of the world economy. They waited too long. The new economy has developed without them. The growth of trade, the free flow of capital, and above all, the free flow of information have all combined to create a system of political defense that will not tolerate interference by unelected bureaucrats 5,000 miles away. The bureaucrats may think they can get away with this, but they will not get away with it. They do not have the level of control over communications comparable to what they had in 1945. They are never going to get it back.

If we take seriously the Austrian theory of the trade cycle, we know what lies ahead. There will be escalating monetary inflation, followed by escalating price inflation leading to hyperinflation, or else there will be a stabilization of money. If there is a stabilization of money, interest rates will rise, the Federal government will become essentially bankrupt, and the economy will fall into a depression.

In either case, whether hyperinflation or depression and a bankrupt Federal government, the division of labor is going to shrink. Our net worth is going to fall. Our productivity is going to fall. Our income is going to fall. But all of this is the price that must be paid for what is really important, namely, the removal of legitimacy from national governments around the world. What is required for anything resembling decentralization or even secession is a crisis that is beyond the ability of the central governments of the world to overcome. The crisis has got to be painful enough to remind the general population that the central government cannot be trusted to fix anything. The central government has got to lose its ability to influence the economy. This is what is going to happen. It is already happening. What happened in the second half of 2008 is indicative of just how close the central government came to losing control over the entire banking system and the economy.

The Plan

No one has a comprehensive plan to reform the system. This is a good thing. The system is too complex. The whole idea of Hayek's spontaneous order is that no central-planning agency can assemble the information necessary to plan. No system of sanctions could enforce it anyway.

Who would be able to impose such a liberating plan without coercion? Let me give you an example I have used in the past. In the early 1970s, the man who was the Superintendent of Public Instruction for the state of Arizona was able to get a course in the free market made mandatory in all public high schools. He was a friend of Leonard Read, who headed the Foundation for Economic Education. He called Read to tell them about the good news about the new course. Immediately, Read responded: "I see. You have implemented a compulsory course in freedom." That was all he had to say. That was all anybody has to say. We do not need a compulsory course in freedom in America's public schools. What we need is the complete de-funding of America's public schools.

We need to do what Andrew Jackson did with the Second Bank of the United States. He simply refused to recharter it. He pulled the government's money out of it. He let it compete in a free market. Within a few years, it was bankrupt. This is what we need to do with Federal Reserve System. This is what we need to do with the Department of Energy, the Department of Education, the Department of Health and Human Services, and about everything else in Washington. We do not need to reform them; we need to stop funding them. We need to pull the plug.

What can we do? This: vote no on every local bond issue. I can legally do this, and I always do. I always have. That is the attitude we must have with every budget in Washington. People want to know what my plan would accomplish. My plan is for everybody to keep a larger percentage of his income than he does today. It may not be a very sophisticated plan, but given the spontaneous order of the free market, it is sufficient to enable individuals to regain their freedom.

I do not think all conservative organizations could or should get together to hammer out a plan, even if they wanted to. I don't think they should want to. Let each group focus on its most hated boondoggle in Washington, and then persuade as many people as possible for the boondoggle to be shut down. I believe in the division of labor. I believe in the specialization of the means of production. Let each group target a boondoggle and do everything it can to get the funding cut. That's my program for reform.

To do this, we have to begin to develop alternatives that can be used to substitute for the shutdown of each government boondoggle. We can't expect to beat something with nothing. Our job is to criticize existing system, but it is also to encourage the development of privately funded alternatives.

I believe we should shut down the public schools. I also believe that we should have competing curriculum materials on the Internet, some of them offered free of charge, to enable parents to teach their children enough, so that the children, by about the age of eight, can teach themselves what they need all the way through university. I really do believe in the division of labor. I really do believe in decentralization. I really do believe that maturity involves self-government. I therefore believe that the best high school and college curriculum that can be designed would be a Web-based curriculum adopted by individual students who teach themselves. This is coming, and there is nothing the public schools can do about it.

States are now beginning to offer homeschool courses to parents. There is a required curriculum, but the curriculum is delivered for free in the mail. The parents are not required to send their kids into the prison systems known as the public schools. This is an admission by the teachers' union and by the state's Department of Education that parents are capable of teaching their children, just so long as they use a state-sanctioned curriculum.

This is a surrender of monumental proportions. This is the exact opposite of what the public school bureaucracy has taught since the 1830s. Always before, the public school bureaucrats said it is mandatory that students be instructed by a tax-funded bureaucrat who has gone through a particular curriculum in a monopolistic, government-licensed institution of higher learning. Now states have begun to abandon this. In principle the old position is gone. They are now saying that if the parent is willing to use the curriculum materials approved by the state, the parent can legally keep the children at home. The parent can legally keep the children out of the environment of the public school system.

This is the beginning of the end for the public schools. All we need now is for better curriculum materials offered free of charge that parents can see lead to better results than the bureaucratic, state-approved materials that are being used in the public schools. It will be easy to beat something with something much better. If we use price competition, which means offering materials free of charge by way of the Web, we can tailor curriculum materials to whatever audience we are interested in persuading. Dozens and dozens of groups, even hundreds of groups, will be able to develop curriculum materials and offer them free of charge, or close to it, to parents around the country and around the world.

If the child is not required to go into the building that the bureaucrats have controlled since the 1830s, then the education game is all but over. The change in the rules has permanently tilted the game in favor of Web-based education. All the hoopla about the benefits of being taught by state-trained, state-approved, salaried bureaucrats is in principle over. The charter school system, now being extended into households, is an admission of defeat by the public school Establishment. This surrender may look innocuous to some of them, but it is the biggest defeat that I have seen for the public schools in my lifetime. It is a self-inflicted wound.

The Two Crises

We are seeing the crisis of legitimacy at exactly the time that we are seeing a crisis of the economic system. The main justification for the expansion of government power has not been the spread of democracy, or the spread of the American way of life, but rather the predictable expansion of the economy year after year. Economic growth has been the holy grail of every Keynesian government in the world. It has also been the holy grail of every socialist government in the world. This goal is now being called into question by the fiscal and monetary policies that the Keynesians have imposed on the public, all in the name of higher per capita income. The unemployment rate keeps going up. This is the soft underbelly of every incumbent government.

We do not know what is going to come out on the far side of this crisis. We only know the crisis is going to accelerate. Central government planning is going to be called into question. The legitimacy of the central economic institution of modern America, the Federal Reserve System, is being called into question publicly now by millions of people. This is a symbol of how far down the road we are to the breakdown of the existing political order. It will not be pleasant. There will be costs borne by all. It would be nice to believe that the breakdown will be as bloodless as the overthrow of the communist regime in Russia in 1991. But the Russians had lived through a rotten economy for 70 years. We have not.

If we look at the things that really matter to us, we need to look at how we spend our time. Most of the time that we spend is in our families or at work. Our entertainment is delivered to us digitally into our homes. It is essentially free. It costs us time, but it does not cost is very much money. Digits are cheap and getting cheaper. Digits are consuming more and more of our time.

That which is most important to us in our lives is getting less expensive. If we can shrink the government, thereby recovering the confiscated wealth that has been taken away from us, we will be able to lead more productive lives. We don't need to get rich; we need governments to get poorer. As this realization begins to spread over the next 20 or 30 years, the legitimacy of central governments will be called into question as never before.

Consider education. This takes lots of time when we are young. It should take time all our lives. Our educational materials are now delivered for free or close to it. Books, videos, workbooks, and every other kind of educational material are available at very low prices are even free on the Web. So, this constitutes another two or three hours a day of our lives.

Food has fallen as a percentage of expenditures in our budgets since about 1800. I think food costs are going to go up, but I don't think they're going to be anything like 50% of our budgets.

We have transportation costs, but these are fairly minimal in the United States. In any case, as we become more digital in our communications and production system, the need for transportation will be restricted, except for trucks on the highways, and except for trains. When Warren Buffett purchased the entire railroad, he pointed to the future. General Motors went bankrupt. Buffett did not buy General Motors.

When we think about how we spend our lives, most of our expenditures are fairly low, except for shelter. Even here, housing prices have been dropping. Rents have been dropping. This is as it should be.

This is why we are going to see the decline of the state. Jacques Barzun is correct in his book, From Dawn to Decadence (2000). Martin van Creveld is correct in his book, The Rise and Decline of the State (1999). The central governments of the world have overpromised on what they can deliver. As those promises fail to materialize, we will see the rise of a revolutionary situation. The thwarting of the revolution of rising political expectations is going to create a political revolution. My hope is that it will not create a revolution of central government reform. My goal is not to reform the FED; my goal is to end the FED.

To withhold legitimacy from the central government means extending legitimacy to local governments. Yet, in terms of the amount of time we spend studying local government, we care little about local government. Yet local government must keep order. This is especially true of local law enforcement. How can we fund it if Washington goes belly-up? Simple. If we can convince parents to shut down the public schools, we can fund everything we need at the local government level. In fact, we can all get tax reductions.

The great enemies of our liberty are the Federal Reserve System, the Internal Revenue Service, and above all, the local public school system. Nothing else is a greater threat to our liberty today than the local public school system, because the local public school system uses textbooks produced by the New York City liberal Establishment. It always has. My goal is not to reform the public school system. My goal is to de-fund the public school system. We don't need the reform of the major institutions of this country. We simply need to quit paying for them. This is the message that we must do our best to communicate to anyone we think is going to be receptive.

Years ago, my friend Robert Thoburn, the entrepreneur who developed Fairfax Christian School, was standing in line at the Post Office at Christmas time. The line was very long. He turned somebody next to him and said it would sure be better if the system were run by the government. He got an incredulous look; then that person smiled. Thirty years ago, that seemed like a fruitless observation. Yet, as it has turned out, we could lose the Post Office tomorrow and barely feel it. We don't use first-class mail to communicate any longer. We use the Internet. We use Federal Express and UPS and other delivery systems to deliver anything really important that we have to send. The Post Office in effect has gone senile.

We don't sense that it's gone. Yet the reality is this: we have replaced something with things that are better. Therefore, at some point, we will see the Post Office either go out of business or become simply a forgotten memory. Yet the Post Office is part of the Constitutional system. The Post Office has always been a way for the government to control the flow of information. As Robert Nisbet said in an autobiographical essay, in the year he was born, 1913, the only contact that the average American had with the Federal government was the Post Office. How much contact do you have with the Postal Service today? It delivers mostly junk mail to you. We ought to think of the U.S. Postal Service not as snail mail but as junk mail. It is the junk mail service for the junk mail industry. Even this is subsidized. It gets cheaper rates.

We have seen the demise of the Post Office operationally over the last ten years, yet we have paid almost no attention to this. There has not been a revolution in our thinking about the Post Office. There has simply been a kind of forgetfulness. We haven't paid much attention to the fact that we don't need it anymore. This has not taken any kind of an organized political movement.

The Post Office is sacrosanct. It is untouchable. But now it is simply ignored. This is the best way to have a revolution. Create a free-market alternative to a particular government institution, and then refuse to use the boondoggle anymore. At some point, we can simply vote to de-fund it. We can privatize it. Nobody will care, because hardly anybody is using the system any longer.

Here is my slogan for political reform: Replacement, not capture; then de-funding.

Let us take this slogan and begin to apply it to all the government institutions that we deal with on a regular basis. Apply it especially to the Federal government.

We are seeing the creation of a new economy in which we really do not need the Federal government, except for welfare services for the aged. It is going to go bust because of these welfare services. So, the primary objective that we ought to have is to create alternatives to the welfare system. We don't need to call for the shutting down of a particular government agency tomorrow, although in principle that would be the best way. But that would be an overnight political revolution, and I really don't believe in overnight political revolutions.

Overnight political revolutions always centralize power. That is what Frederick Engels taught, and that is what I believe. What I believe is best for the country is a quiet social revolution, which is marked by a shift of reliance away from all government money toward free-market and charitable funding. We will simply walk away from the system. When enough people walk away from the system, and the rest of them lose their shirts when the system goes belly-up, we will be in a position to have a real revolution, one in favor of freedom.

This revolution will be one of decentralization and some form of operational secession. I don't think states are actually going to break away from the union. I believe that the governors and mayors are not going to bother to get Federal grants, because the money is either not available or won't buy anything. When we get to that stage, we will be prepared for a new period of liberty. That day is coming. The government has shot his wad, and the Federal Reserve, in shooting whatever wad it has left, is going to debase the currency.

The transformation is taking place right under our noses. As George Orwell said, it is a constant struggle to see what is happening under our noses.

November 27, 2009

Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2009 Gary North

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