My last post was syndicated at BallounPost.com. A commenter left this comment in reply. My response follows.

WWI
World War One was caused by the subset of powerful nations (note: nations, not corporations or businesses or individual shop owners) creating what George Washington called “entangling alliances” such that when the Duke of Sarajevo was assassinated and two nations went to war, the rest of Europe had obligated themselves to fight along side their primary, secondary, tertiary allies. That was the cause of WWI; it is well-known and undisputed.

If one is impliedly asserting that WWI was perpetuated by companies who profited by the war machine, then yes, this happened. War is impossible without production, and either nations own the means of production (communism) or purchase from those who do have the means of production (corporatism).

The question is, with respect to the latter, is this a fault of the free market, that war could enable people to profit off of weaponization? I would argue that it is antithetical to the free market, because war is impossible without government initiation, intervention and involvement. That is to say, because the government defines and causes war and has a national monopoly over its cause, continuation and end, any company willing to do business with the government to profit off of the evil that is war is engaging not in a free market but in corporatism (also known as mercantilism). In fact, the war market wouldn’t exist without government action, so to even consider participation in it a pock against the free market is a reduction to absurdity.

Corporatism/mercantilism are the reliance by businesses on the protection of the government against their own competitors given them an unfair advantage. These companies become the bullies in the schoolyard, precisely because they are all members of a gang of bullies, the leader of which is the biggest, baddest bully in the yard, namely the government. If the little guy attempts to do business in a such a way that contravenes the protectionism of the government, they are either taxed to unprofitability, taxed into a lack of competitiveness, or prosecuted for bogus “laws” that “protect the American/Canadian people.”

WWII
World War Two was caused by the underhanded greedy tactics of the victor governments in WWI. Because they created such harsh reparations for Germany (the loser), and because Germany’s economy was tied to the rules of European central banks (i.e. the government), they eventually encountered such overwhelming inflation that it was easy for a strongman to rise to power to give the Germans hope in a stronger Germany, because they were weakened and humiliated. Along came the blame of the scapegoat, the Jews, and then the world was embroiled in conflict once again.

The reason that Germany had such high inflation was because the central banks were manipulating the DM to ensure profitablity to their constituent creditors, the governments of Europe. That is, they would lend out money to German banks at high rates of interest, which would force the banks to lend out to the German people at higher rates of interest, so that the other European powers would be repaid their reparations. What the German government should have done was reject the central banking scheme set up for them, but alas, people starved.

If the assertion is that companies profited by WWII, then yes, that is true. The same arguments apply. IBM was especially immoral, as it was selling war materiel to both the American and German governments simultaneously. But, again, this is not an example of the free market, but rather an example of corporatism.

Labor Strikes
What the commenter is subtly doing is creating a strawman “free market” by conflating government-intervention in private affairs and then blaming the rest of the free market (wherever that may be) for the ills of a few bad actors who were reliant upon the Bully for help. When the RCMP gunned down picketers, that was quintessentially the company relying on government intervention rather than solving the striking/picketing themselves. That is not the free market, that is crying home to mama for help. When Henry Ford machine gunned protesters, were they attacking and/or destroying his private property, or were they acting peacefully on his property or were they not even on his property at all? If the former, then the workers were in trespass. If the latter two, then he was a murderer. If the latter and he wasn’t prosecuted, then we have yet another example of government assistance, i.e. corporatism, rather than the free market.

The Current Day
The global financial meltdown is being caused by exactly two things, which have nothing to do with corporate greed. It is caused by government control and manipulation of the monetary supply via central banks and the use of fiat currency and fractional reserve banking.

Fiat currency is an ill which the Framers of the American Constitution strictly prohibited when they required that all money be coined in gold or silver. Why? Because once the government is able to issue paper money, detached from anything of intrinsic value, it can manipulate the total money supply by printing or burning it and by moving the interest rate. Why is this bad? This is bad, because the free market isn’t able to correctly value the goods and services it is selling, and because it always encourages price inflation.

Incidentally, WWI was used as an excuse by Professor Woodrow Wilson to allow the creation of a central bank (for the third time in American history) to control and manipulate the monetary supply of this country, which was the root cause of the Great Depression and a root cause of the economic crisis now. Definitely not a matter of free marketeering gone wrong, either. In fact, the USD has been devalued 96% since 1917.

In an attempt to control inflation, central banks (i.e. governments) attempt to tweak the interest rates, usually lowering them, such that more “money” is released into the market, because banks, who receive the currency from bigger banks, in order to remain competitive with each other (banking is the most non-free market industry), loan money out at rates which are lower and lower, making money easier to get for consumers and businesses. When it is easier for them to get money, they devalue what they have.

Or in other words, if I can get $400,000 at a lower interest rate and a monthly repayment of X whereas a year ago I could only take a loan for $300,000 with the same repayment of X, I don’t actually have more purchasing power, because everyone else has the same new purchasing power. When I go to bid on a house, instead of maybe bidding the actual intrinsic value of $300,000, I’ll bid $400,000 to ensure that I get the house, because the other buyers are able to do the same. In effect, I have overvalued the house versus the value with respect to the monetary supply a year ago.

This effect has continued in recent history since 1998 (but really began in 1917) and we have met the end. The entire market has realized that most assets are overvalued and is correcting for it. Such a huge, national / global bubble is impossible without government intervention and manipulation of the monetary supply.

In fact, without central banks, without fiat currencies, there is never such a thing as a national bubble. In a truly free market, bubbles are region or industry-specific, and the market solves their problems quickly and with relatively little pain. I recommend Edward Chancellor’s book, Devil Take the Hindmost: A History of Financial Speculation, because it discusses many historical bubbles (such as the Dutch Tulip Bubble) and how they were caused.

Fractional reserve banking simply exacerbates the problems of fiat currency central banking, because it allows banks to lend out money they don’t actually have. Fractional reserve banking is sanctioned and allowed by the government. That is, if I have $10,000,000 in my vault, I can lend out another $90,000,000 on paper. Simplifying the math, that means that 90% of the wealth in the United States is paper wealth, false wealth and it means the entire system is by definition, insolvent. In a truly free market, banks that lent on a fractional reserve basis might be able to get away with it, but eventually they would get caught by a bank run. Some people would lose their money, which would be tragic, but the market would greatly reward honest banks who lent out only at a 1:1 ratio.

Banks have been failing, because the manipulation of the fiat currency has run its course in terms of its effectiveness. Ben Bernanke, chairman of the Federal Reserve, has all but admitted he does not know what the Fed can do anymore to preserve the economy. This is because the market here in the U.S. has finally come to realize that all assets are overvalued by some large percentage. Because all of our secured transactions are based on collateral which is now devalued, many people (businesses and consumers) are either unable or rationally unwilling to repay their debts at the same rates, because they simply do not have the wealth or revenue to bank it up.

Because banks lend out at a 9:1 ratio, a reduction of loan repayments by even just 11% is catastrophic to their own “solvency” under the FDIC/FED-sanctioned system. That is why banks are failing so rapidly.

The economy is suffering malaise because of large, coordinated government intervention for more than a century, and the market finally realizes there is less value in it than we thought. Of course, the correct “patriotic” solution is not to spend more money to “save” our economy, but let it correct itself. Else, the U.S. and the rest of the world will run headlong into a bleaker future.