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Tariffs Done Wrong

(This item originally appeared at Forbes.com on April 23, 2025.) Economic Nationalism, done right, could work very well for the United States in coming decades. The most glorious period for US business, before 1913, was a time of high tariffs and controlled immigration. But, it was also a time when there was no Income Tax; and, in this pre-Federal Reserve era, the money was fixed to gold. The result was very good. The United States, at first a promising “emerging market,” ended up a global superpower. The present era of Globalism dates from Bretton Woods Agreement of 1944, passes landmarks such as the North American Free Trade Agreement of 1994, but reached its full expression with the inclusion of China into the World Trade Organization in 2001. This was paralleled by a range of technological developments, empowered by the new Internet, which made long-distance supply chains possible. Although this Globalist trend arguably did benefit the world as a whole, it is not clear at all that it benefited American citizens. Many industries were “hollowed out,” with unemployment, underemployment and depressed wages the first consequence. A weak domestic economy did little to pick up the slack. Supply-chain dependency proved incompatible with a trend toward a more “multipolar” world, where China or Russia’s growing regional authority combined with American exhaustion with its post-WWII role as global policeman. Within this framework, certain Economic Nationalists (such as Pat Buchanan) have argued in favor of an across-the-board flat rate tariff, avoiding the aggravating complexity of different rates for different products from different countries. It is basically the tariff equivalent of a flat-rate retail sales tax, and might be in the range of 10% to 20%. To this might be added some country-specific (but still flat-rate) tariffs, depending on the situation, perhaps 5%-20%. For some reason, we

Understanding Money Mechanics #5: Beginning At The End

Now it is time to say a few words about the book that got me going on these topics: Understanding Money Mechanics (2021), by Robert Murphy. April 13, 2025: Understanding Money Mechanics #4: Fiat MoneyApril 6, 2025: Understanding Money Mechanics #3: Chain of CausationMarch 30, 2025: Understanding Money Mechanics #2: Supply and DemandMarch 23, 2025: Understanding Money Mechanics (2021), by Robert Murphy This is a fine book. It is succinct and plain-spoken, not given to jargon or dogma, or sophistry to score political points. Mostly I agree with its arguments and conclusions. Also, it has some nice charts. Unfortunately, the Austrian Tradition is characterized by oceans of text arguing about generalities and principles. This has been a feature of the “Austrian school” since the 1880s, as it sought to provide an alternative view to the “Historical School” popular at the time. If you read Human Action, by Ludwig von Mises for example, I don’t think there is a single historical example cited, although you can tell that his discussion of general principles was motivated by historical events. Since there are no historical examples, there is also no need to ever provide any kind of real-world data. While there are some advantages to the focus on principles, a methodology which excludes any kind of real-world example, on principle or simply in imitation of people like Mises, is certainly in danger of losing the plot entirely, and drifting off into an imaginary land that doesn’t have much relation to reality. And this, I would say, has characterized the “Austrian school” for about the last century. November 27, 2016: The Tyranny of Prices, Interest and Money 2: The Old Historicism Murphy refers to real-world events, including some historical chapters going back to the beginnings of US history, and later, recent events including the

Understanding Money Mechanics #4: Fiat Money

We’ve been talking about “Understanding Money Mechanics,” by this time only vaguely related to a book by Robert Murphy of the same name. April 6, 2025: Understanding Money Mechanics #3: Chain of CausationMarch 30, 2025: Understanding Money Mechanics #2: Supply and DemandMarch 23, 2025: Understanding Money Mechanics (2021), by Robert Murphy Last time, I talked about the various influences that determine the amount of lending and deposits at banks (which must balance on the Balance Sheet), and their relation to Reserves, and where those Reserves come from. Thus the chain of causation is: Economic Conditions -> Bank Lending and Deposits -> Bank Reserves -> Demand for Silver Coins -> Supply of Silver Coins to meet this Demand. In a simple silver coin system, or actually in any proper system which fixes the value of the currency to silver (or, better yet, gold), the amount of money is determined by the demand for money, with the supply of money automatically adjusting to meet that demand, thus maintaining a stable currency value (stable relative to the benchmark, silver or gold). This is common today in the form of a currency board. I wrote a whole book about this, Gold: The Monetary Polaris. Read Gold: The Monetary Polaris However, that is not the way things are in a floating fiat system, as we have had since 1971. Here, the amount of money (base money) is determined by the whims of the central bank manager. It is not an automatically-adjusting system where supply meets demand, at a stable price. But today’s floating fiat situation (you can hardly call it a “system”) is not quite a situation of complete discretionary abandon either. Typically, there is some kind of mechanism that, in practice, adjusts somehow so that the supply of money does meet the demand, at

Understanding Money Mechanics #3: Chain of Causation

At some point, I’m actually going to talk about Robert Murphy’s book Understanding Money Mechanics. But, not yet. March 30, 2025: Understanding Money Mechanics #2: Supply and DemandMarch 23, 2025: Understanding Money Mechanics (2021), by Robert Murphy So far, we’ve postulated a somewhat hypothetical scenario where all monetary transactions take place with silver coins, but the rest of the credit system (mostly banks but also all bonds, securitized lending, and so forth) is basically the same as we have today. This is to illustrate the difference between Money and Credit, which have been confusingly mixed together basically since the late 19th century. The Money is silver coins, and they are very simple. They are just unchanging coins of silver. The amount of silver in them doesn’t change, but the quantity of silver coins does change, basically rising or falling depending on the aggregate desire of people (we are imagining a place like Britain in the nineteenth century) to hold silver coins. The value of the silver coins is the same as the value of silver everywhere. We are assuming that the coins are not debased or altered in some fashion, and that surrounding regulations and so forth (such as import or export controls on silver) are either nonexistent, or ineffective enough as to be not much different than if they were nonexistent. We are assuming that the value of the silver coins is basically pretty stable, as was the case for many centuries in the past, but not so much after 1870. In the 1870s, silver’s market value was destabilized, for what was I think the first time in human history. Only gold today has the stable value characteristics that both gold and silver once had. So, we are imagining that these silver coins have a reliably (though not perfectly)

Understanding Money Mechanics #2: Supply and Demand

We’ve been talking about Understanding Money Mechanics (2021), by Robert Murphy. Or, maybe I should say we haven’t been talking about it, but the book did inspire me to discuss some issues that I’ve been thinking about discussing for a long time, but hadn’t got around to. March 23, 2025: Understanding Money Mechanics (2021), by Robert Murphy We described a common bank, which looks like this (denominated in kilograms of silver): ASSETSLoans 700kgSecurities (marketable bonds) 200kgReserves (silver coins or deposits at the bank clearinghouse) 100kg LIABILITIESDeposits 900kgShareholders’ equity 100kg This has been the typical makeup of banks literally for centuries. Banks today are actually not much different. How Banks Work Series You could extend the basic principles to credit more broadly, including direct lending, bonds, securitized loans (MBS for example), and so forth. First of all, let’s observe that the balance sheet balances. Assets and Liabilities (and equity) are equal. Thus, borrowing (deposits) and lending (loans and securities) are about equal. What determines the amount of deposits, or lending? Basically, it is supply and demand. It arises from the aggregate decisions of all the people who hold deposits, or borrow, or lend. Let’s look at these people and see what motivates them. Why do people hold deposits in banks? Basically, this is a preference for cash, in this case a convenient money substitute. Or, usually — actually a significant amount of Deposits are time deposits, which are one of the most illiquid of all credit instruments, since you can’t even sell it in the market like a bond. Nevertheless, we will begin our discussion with Demand Deposits. Why do people hold Demand Deposits? There are a number of reasons, which you can figure out pretty readily. Mostly it is because their income and expenditures don’t coincide perfectly, so there has

Understanding Money Mechanics, by Robert Murphy

Understanding Money Mechanics, by Robert Murphy, was published in 2021. It is available at mises.org in free pdf format. “This book provides the intelligent layperson with a concise yet comprehensive overview of the theory, history, and practice of money and banking, with a focus on the United States. Although the author considers himself an Austrian school economist, most of the material in this book is a neutral presentation of historical facts and an objective description of the mechanics of money creation in today’s world.” This is a good short introduction to the book. Although Murphy is certainly in the neighborhood of the “Austrian” camp, he maintains some independence, and recognizes some of the excesses and errors of the Rothbard crew. Nevertheless, the book is characterized by a confusion that certainly goes back to The Theory of Money and Credit (1913), by Ludwig von Mises; and probably well before then, as I don’t think Mises created it. Basically, it is a confusing stew between “money” and “credit.” Although much error and confusion has arisen from this, nevertheless it had some relevance in 1913, because in those days (or actually about fifty years earlier, before the spread of central banks in the late 19th and early 20th centuries), “money” and “credit” was indeed often a confusing stew, mixed together on a single balance sheet of commercial banks. In the United States in the 19th century, for example, many commercial banks issued their own banknotes; and these banknotes were on the same balance sheet as lending and deposits. You could have commercially-issued banknotes (“free banking”) that are separate from lending and deposits, in a separate company with a separate balance sheet, although probably part of the banking group company. I think this would be a good idea going forward. I’ve talked about this

Another Round Of Inflation On Deck

(This item originally appeared at Forbes.com on March 11, 2025.) In our 2022 book Inflation: What It Is, Why It’s Bad, and How To Fix It, we said: When the price of gold rises – in other words, when more money is needed to buy an ounce of gold – that usually means that the dollar’s value has decreased. … Daily price movements may not be significant. But, if the price goes up and stays there for an extended period, or if it fluctuates but the general trend is up, that signals a downturn in the value of the dollar. (p. 100) When we wrote this, it took about $1800 to buy an ounce of gold. Today, it is more like $2900. That implies an $1800/$2900=0.621 or a 38% decline in dollar value over that period. Prices will eventually adjust, over a period of years, to the new, lower value of the currency, with some prices moving faster and some moving slower. “All things being equal” (they never are but it is a good principle), we should expect a $2900/$1800 or 61% rise in prices of goods and services going forward, compared even to the inflation-boosted prices that we have had to get used to in 2022-2024. Compared to prices in 2018, when it took about $1200 to buy an ounce of gold, we should expect a $2900/$1200 or 141% increase in nominal prices. Doesn’t seem like much fun, does it. This is why we say “you can’t devalue yourself to prosperity.” No country ever got rich with a weak currency. They get rich with a stable and reliable currency, which means: a currency of unchanging stable value. You would have to increase your nominal income by 141% just to break even. Maybe more than that, on an after-tax basis. Even

Audio 2025

“Audio” means the machines that make music from recordings in the home. I’ve been working on a new amplifier, to multi-amp the Bill Woods-designed Yorkville U215s that I have around here. This has been a longstanding ambition. But, that is not done yet. Along the way, I looked around at the current state of affairs in the audio hobby. Audio series Mostly, it hasn’t changed much. There is a lot of gear hype, and still a focus on little shoebox speakers that are very nice if you want something small and convenient that doesn’t cost too much, because you have better things to do than worrying about “audio,” but are not (in my opinion) where you want to focus if you have a little ambition. I don’t bother following the chit-chat much, either in mags or review sites, or at forums like DIYAudio.com, since I already know what I want to do for the next several years. Even in the shoebox-speaker category, I would focus on horn designs. I’ve mentioned that Jonathan Weiss of Oswald’s Mill Audio is a friend of mine going back to the “tube and speaker tasting” days around 2001. More than anyone, he creates what I think of as ambitious audio devices. I was there the first time he hooked up a 300B SET amplifier to his big RCA horns, replacing some kind of EL34 Williamson-type amplifier. (It was a lot better.) Heck, I bought those RCA horns, at least the basshorns, which we lowered out of the Mill with an electric winch. Of course he has gone 10x beyond me since then. I’ve heard some of Jonathan’s designs including the Mini, DeVille and Excelsior, which are all small, and they were astonishing — because of their horns. Meanwhile, Magico released the M9, “only” $750,000 a

Economic Nationalism: The Nation-State

Today we come to one of the core elements of Economic Nationalism, which is not the economics, but the Nationalism. Economic Nationalism series In practice, this leads directly to economics as well. Why are America and Canada the only wealthy countries in all of the Americas? It has something to do with their British heritage, which has led to certain political outcomes, which in turn lead to economic policy. I have put off writing this item for a while, because it is hard to express properly the idea of the Nation, and what it means for human social organization. Here’s a description of Aristotle’s idea of the “philia”: I will have to collect some better and additional examples to this over time, perhaps from the writings of Ibn Khaldun, Arnold Toynbee, or John Glubb. Here is Glubb’s description of the early stages of National success: The characteristics of the Nation are a combination of enough similarity of thought and background (and language, religion and so forth) that a group of people can effectively work together to achieve some kind of positive outcome for the group. Any short reading of the Founders of the United States shows how rare and precarious good government is. Glubb then goes to show why empires (and nations) decline: Here’s the “Tytler Cycle”: Note again that success begins, and is sustained, by “Unity and Deep Moral Groundings.” I am sure that someone else can express these concepts better than I am doing here. Anyway, the result of all this, over a period of many centuries, was the idea of the “Nation-State.” In other words, State boundaries and jurisdictions should be defined by, and separated by, Nations. Against the “Nation State,” we can contrast several other common situations: The Multi-State Nation, such as Germany before 1871. One

A New Era Of Economic Nationalism

(This item originally appeared at Forbes.com on February 13, 2025.) The United States was founded on Free Trade. And, high tariffs.  Free Trade applied between the States. The new Federal Government was given specific powers over Interstate Commerce, to prevent the States from erecting tariff barriers against each other. States were not allowed to establish their own tariffs on foreign trade. The Federal Government applied a uniform tariff throughout the United States. It was one of the principal sources of revenue, in the Nineteenth Century. Domestically, the United States had exceptional economic policy. There were hardly any taxes, and the currency was reliably fixed to gold. Trade was Free between States. With what I’ve called “The Magic Formula” (Low Taxes and Stable Money), the US got rich – even with high tariffs with the rest of the world.  Immigration was highly restricted during the first half of the Nineteenth Century. No significant immigration took place until a burst of Irish immigrants, fleeing the Irish famine and British oppression, in the 1840s. In 1830, 98% of the US population was native-born. Even until 1890, almost all immigration came from Britain, Ireland, Canada, and Germany (England’s medieval ancestors). The tariffs themselves were extremely problematic, however. They invited extreme overcomplexity, with different tariffs for different goods, and even for different countries, with rates that changed suddenly. Every tariff rate became an object of political contention. High tariffs were an object of chronic disagreement between the North and South, which was only exacerbated when the election of Abraham Lincoln resulted in still-higher tariffs. During the Nineteenth Century, the United States ran a persistent current-account deficit with the rest of the world, which basically reflected the desire of foreigners to invest in the booming United States. This arrangement changed with the introduction of the Income Tax in 1913. Now, there was an alternative