Small polities have different advantages. Because of their smallness, they can be more efficient; this allows them to be alert to opportunities. Because of their social tissue, small polities have the advantage of self-regulating through bonding and bridging, i.e. through social capital, rather than through bureaucracy. Social capital increases with its usage and is a resource for implementing novelties based on alertness. The third factor that contributes for small polities being at an advantage is competition – in its economic and political sense. There is a cautious note, however: not all small polities can mobilize these factors.
Is Small still Beautiful? A Swiss Perspective
Switzerland consists of 26 states, which are called cantons. Each canton enjoys ample autonomy, for example in setting its own taxes – all taxes in Switzerland are primarily local and cantonal – or making its own laws. In Appenzell Innerrhoden, for example, there is no law that has not passed a popular vote. Note the distinction: Not laws that have been made by representatives of the people, as it is the case in Germany or France; nor laws that have been tacitly accepted by the people if no referendum is called against them, as it is the case on Switzerland’s national level. In Appenzell Innerrhoden, all laws must be explicitly approved by the people …
“This short paper by Terry L. Anderson (Hoover Institution, Stanford University) will be presented at the Opening Dinner for the III. ECAEF/CEPROM Jacques Rueff Memorial Conference on “Concurrent Currencies: Curse or Cure?”. December 5, 2018 in Monaco. For a detailed program, please visit ceprom-conference-monaco-2018
“The real world is a special case with which economists seldom deal.” This statement always brings a laugh because it is so true. Economists are notorious for making assumptions and drawing conclusions that do not comport with the way the world works. As a result, economic theories result in policy conclusions that often call for government intervention to correct assumed market failures. Famous examples include explanations for why lighthouses would not and could not be built privately and why beehive services would be underprovided privately because orchard owners would free ride on pollination services.
After decades of promoting these conclusions, however, both the fable of the lighthouse and of the bees have been debunked by evidence from the real world. Nobel laureate Ronald Coase showed that lighthouses were built and operated privately through contracts between lighthouse and ship owners, and Steven N.S. Cheung found that apiarist and orchardists contract for pollination services and honey production.
Perhaps there is no better case of economic reasoning leading to unnecessary governmental intervention than the notion that governments must have a monopoly on the provision of money. So the argument goes, without that monopoly Gresham’s law would prevail—bad money would crowd out good money—money would not have a stable value, and multiple forms of money and currency would make transaction costs prohibitive.
Friedrich A. Hayek’s reasoning in his treatise on “denationalization of money” debunked the myth of government monopolization of the money supply. As a result, that myth should be placed in the dustbin along with lighthouses and bees. Because Hayek provides the debunking logic, my goal in this short paper is to provide examples how money and currency evolved on frontiers beyond the reach of government monopolies and to show how those same frontiers provided the backdrop for promoting the money monopolization myth.
Frontier for entrepreneurship
Frontiers, be they geographic or technological, are the domain of entrepreneurs who observe different constraints and act on those observations to produce new institutions, new production techniques, and new products. Cattlemen organized into associations to prevent the tragedy of the commons by closing the range to newcomers, barbed wire was invented to more precisely define and enforcing property rights, and closer monitoring of cattle breeding improved the quality of meat. On the technological frontier, intellectual property is protected through secrecy and contracting, cell phones replace telephones, and computerization of supply chains reduces inventory costs.
Because entrepreneurs are always on the lookout for ways to reduce transaction costs, it is not surprising that the frontier of the American West led to many different forms of money and currency. Here are several examples.
“Wampum clearly had value as a trade item between the various Native peoples before European contact. But it was later on after European settlement of America that wampum began to be used like currency.”
Similarly, other items were used in trade among American Indians. When Lewis and Clark spent the first winter of the Corps of Discovery in the Mandan camps in what is now North Dakota, their blacksmith made trades axes with the Corps’ medallion stamped into them. The axes were traded for food, horses, and other items needed by the expedition. One of the axes traded among Indians, so much so that it preceded the Corps, arriving in the Nez Pearce camps in the Northwest. Clearly the trade axes had intrinsic value, were a store of value, and were readily accepted in trade—all characteristics of money.
“Beaver pelts were central to the early Canadian trade economy. The centrality of the trade was underlined by the Hudson’s Bay Company introduction of the Made Beaver currency, which first standardized prices in terms of coat beaver pelts, and later allowed hunters to keep the value of their pelts in Made Beaver tokens. Other entities, including the North West Company, also issued tokens in exchange for pelts.
A 1733 Standard of Trade for the Fort Albany HBC post outlines the cost of various items in beaver pelts. For example, one beaver pelt could buy either one brass kettle, one and a half pounds of gunpowder, a pair of shoes, two shirts, a blanket, eight knives, two pounds of sugar or a gallon of brandy. Ten to twelve pelts could buy a long gun, while four pelts would purchase a pistol. The HBC produced brass Made Beaver tokens in the 1860s, and continued to exchange pelts for tokens until 1955.”
Watch almost any western movie and you’ll see scenes of miners paying the bartender for drinks with a “pinch” or “thumb” of gold dust from the miners poke sack. These methods allowed the shopkeeper or bartender to reach into a miners poke sack with his thumb and forefinger or with his thumb to take as much gold dust as he could acquire on his fingers. Not surprisingly, saloon owners preferred hiring “ham-handed” bartenders.
The following stories illustrate the color of this era: “A story is told of one enterprising bartender who would ‘accidentally’ spill small amounts of his pinch on the barroom floor during the course of transferring the gold dust from the poke sack to the cash drawer. Several times during his shift he would step out the back door to a mud hole where he would muddy the soles of his boots. Then he would re-enter the bar and walk back and forth, picking up the spilled gold dust. Next, he would scrape the mud off his boots on a conveniently placed bucket. It was said that on a good Saturday night he could pan out a hundred dollars worth of gold.”
“The first Catholic mass in Virginia City was held on All Saint’s Day, on November 1, 1863. The mass was celebrated by Father Joseph Giorda, a Jesuit priest who was unfamiliar with the cost of goods and services in the area and the value of gold dust used to pay for them. During mass, Father Giorda received contributions of gold dust from the members of the congregation that had gathered. After the mass, he sought to pay the fees of the stable that had housed his team of horses for two days. He was shocked by the $40.00 bill for the horses’ room and board and said that he did not have enough money to pay it. When asked to examine the gold dust that had been donated to him during mass, he was relieved to be informed that his congregants had been quite generous, as the amount of weight of the dust was worth several hundred dollars.”
A far less well known form of currency was script issued by mining and logging companies. Script was essentially a printed IOU issued by the mining company, mostly coal mining, to workers to provide them with a medium of exchange between pay periods. Script was originally printed cards or scraps of paper, evolved into metallic tokens with many of the physical attributes of official coins.
The use of coal company scrip eliminated the need for the coal company to keep a large amount of U. S. currency on hand. Each mine had its own scrip symbols on the tokens, and these tokens could only be used at the local company store.
The transaction costs of coupon scrip eventually encouraged the increased use of metal scrip. This medium became cheaper overall than coupon scrip, in spite of metal’s higher initial costs, largely due to the invention and development of the cash register after 1880.
Script was redeemable for goods or services sold at the company store, making it a form of credit or a demand deposit which would be accounted for by reducing the amount of other currency due to the worker on payday. In many mining camps, scrip circulated more freely than U.S. currency making it the “coin of the realm.”
Because mining camps were so isolated with low population densities and far from commercial centers and because their longevity was uncertain, it was difficult to attract outside investment. This created a lack of infrastructure made up for by the mining companies that were in a better position to estimate demands for goods and services. As a result stores in mining towns were usually owned or run on behalf of the coal companies.
Lyrics to songs claiming a worker “owed my soul to the company store” exemplify criticism of script and hence of this form of private money. A paper by Price Fishback, “Did Coal Miners ‘Owe Their Souls to the Company Store’? Theory and Evidence from the Early 1900s,” however, debunks this myth and illustrates that company stores and the script issued to workers was a very competitive business. The relationship between companies and miners was a contractual one in a competitive environment. As such, the payment package implicitly included payment in script and prices at the company store. Because the script was a form of private money in a competitive world, the company had an incentive to maintain a stable value for the script currency.
Using Hayek’s ideas in the “Denationalization of Money,” let me elaborate on what constitutes a stable value of currency and why private providers—mining companies—would have an incentive to maintain that stability. Stable value implies that a unit of currency can be exchanged for a bundle of goods at the same exchange rate over time. Suppose that a company thought it could increase its profits by raising prices at the company store. This would reduce the value of its script and discourage workers and others from accepting it. In essence this would violate the wage contract. Alternatively, suppose that productivity of workers increased thus increasing the value of their marginal product and their wages. Companies would issue more script, and the demand for goods at the company store would increase putting pressure on store prices, thus reducing the value of the script. To keep the value of currency stable, the company would have to increase the quantity of goods available which it could do because of the increased productive capacity of the company.
The Road to the Fed
So if private money on the frontier was so good, why did it have to give way to nationalization? The same frontier that fostered competitive private money ultimately led to its demise. In particular, the “war of the copper kings” in Butte, Montana—“the richest hill on earth”—pitted William Clark, Marcus Daly, and Augustus Heinze against one another over control of the copper mining industry.
Their “war” engulfed financial giants including J. P. Morgan, a bitter enemy of Copper King Heinze. When the latter ventured into Morgan’s territory—the canyons of New York City—he met his match.
With Heinze’s bank on the brink of failure, the privately managed New York Clearing House, controlled by Morgan, refused to bail him out. The failure of Heinze’s bank started the Banking Panic of 1907. The panic led Congress to appoint the National Monetary Commission, which recommended creation of the Federal Reserve System in 1913 as a lender of last resort and firmly ensconced governmental monopolization of the money supply.
As the saying goes, “the rest is history” regarding the potential for monetary competition. Just as the mining camps of the American West unleashed the entrepreneurial spirit to “invent” new forms of money and currency, the modern-day electronic frontier can unleash entrepreneurial cyber-currencies. The challenge, as it was in the American West, will be whether cyber-entrepreneurs can answer Hayek’s call for “denationalization of money” by out-maneuvering government regulators.
*Terry L. Anderson is a native of Montana (USA), and received his PhD degree in economics from the University of Washington. In 1972 he began his teaching career at Montana State University, where he won several teaching awards. Anderson is one of the founders and the former executive director of PERC (Property and Environment Research Center), a think tank in Bozeman, Montana. He currently serves as a Senior Fellow at the Hoover Institution, Stanford University. Anderson’s extensive work and unique research focus helped launch the idea of free-market environmentalism and has prompted public debate over the proper role of governments in managing natural resources and the environment. Anderson’s research, has also focused on Native American economies and culture. He is the author and/or editor of numerous academic essays and thirty-seven books, among them several award winning publications. Only a few can be mentioned here, Free Market Environmentalism, The Not So Wild, Wild West: Property Rights on the Frontier, Self-Determination: The Other Path for Native Americans (2006), Tapping Water Markets (2012 or his most recent book Unlocking the Wealth of Indian Nations (2016).
The days when political lines could be drawn in terms of where one stood on the environment are over. Everybody wants cleaner air, open spaces, vibrant wildlife, and lusher vegetation. The question is, how do we get there: through more regulation, or through free-market solutions? To seek answers, The Epoch Times spoke to Terry Anderson*, a senior fellow at the Hoover Institution and one of the country’s foremost experts on free-market environmentalism, at the Gottfried von Haberler Conference in Liechtenstein on May 19, 2017.
The Epoch Times:People equate environmental protection with regulation. You say the market can also find solutions. How?
Terry Anderson: The original regulations came from some pretty serious problems. The Clean Water Act in the United States was passed when rivers were burning. The Clean Air Act was passed when children couldn’t go outside because of the smog in Los Angeles. The Endangered Species Act was passed when the bald eagle was nearly extinct. These were low hanging fruit; we picked the worst sources of pollution, where people were dumping poison into the rivers and air. We also said, “Don’t shoot bald eagles,” and this was relatively easy to do.
Now we are looking at higher fruits that are harder to get through the political process. I see free-market environmentalism as having two prongs: one is a healthy economy that allows you to achieve the higher hanging fruit, and the second is getting the incentives right.
The Epoch Times:Why is having a good economy important? Doesn’t more business harm the environment?
Mr. Anderson: Wealth is created by productivity, by humans generating capital. The more productive you are, the fewer resources you need. The more capital you have, the more you can use it on the environment.
If you ask people in the developing world to save wildlife, it’s very low on their priority list. They may care about the air quality in their home if they are burning dung and maybe they would prefer to have natural gas. They care about the water quality in the river where they get their drinking water. They want to have those basic needs met first.
The Epoch Times:What about the incentives?
Mr. Anderson: Political solutions and regulations don’t depend on incentives other than the threat of punishment. If we find positive incentives through markets, we can solve the more difficult problems, even for the developing world. One example is wildlife in Africa. If you tell local people, “Save elephants because they are magnificent animals,” and the elephant just trampled over their crop, they won’t be very enamored with this argument.
But one successful program implemented in Zimbabwe is called CAMPFIRE (Communal Areas Management Programme for Indigenous Resources). It gives communities control over their wildlife without central planning. They can market hunting; they can market ecotourism. Then they see elephants as a source of revenue, and they start to treat them differently.
They distribute the profits from hunting, as well as the meat of the hunted elephants, among the people. And there are jobs for the people along the way. Because the elephant has value to the community, poaching went to zero in those places. The live elephants are worth enough that the last thing the village wants is another person coming to kill the elephant just to sell the ivory on the black market.
A game warden told me: “We don’t kill poachers the first time, we just beat them up and send them back. But the second time they come, we will kill them.” The elephant becomes so valuable that the local people have an incentive to have more elephants around. Fewer of them are killed, and the ones alive are treated better.
Also, it’s not just hunting, it’s eco-safaris too. That’s a solution that’s hard to get through regulation. We have regulations about poaching, and they mostly don’t work.
The Epoch Times:What about the United States?
Mr. Anderson: Leaving water in the streams and rivers, for example, is good for the fish and the birds and other wildlife. But there is a trade-off between leaving the water in the rivers and using some of it for farming. In Montana, people say the state should tell people how much water they use for farming. But if one party wants to keep water in the stream for fishing, instead of forcing the farmer not to use water for irrigation, they can make a deal with the farmer and buy the water from him.
This is putting your money where your mouth is. If you have to pay for the water you want to preserve, you are going to be much more careful with the quantities and places you choose. There is a group in Oregon called The Freshwater Trust, and they purchase water from farmers to create habitats for salmon to spawn.
They purchase the water, leave it in the stream, and count the fish, and if it doesn’t work, they don’t buy the water anymore and they move to another stream.
The people out there who care about the salmon have better information about the salmon, [which allows them] to make the right decision. The farmer who sells the water has some idea how much it would be worth if it was still used for crops. Bureaucrats who pass laws mandating this or that have none of that information and no skin in the game.
Markets encourage cooperation. Unlike a lawsuit, you can’t strike a deal if you don’t cooperate. So the environmentalists operate as “enviropreneurs” and search for these win-win solutions. Some people say, “We should not have to pay for this; the elephants should just be saved.” Yes, that should be, but you have to be more realistic and say, “This is our starting point. The regulation doesn’t work, so let’s look for a better solution.”
*Terry L. Anderson has been a senior fellow at the Hoover Institution since 1998 and is currently the John and Jean DeNault Senior Fellow. He is the past president of the Property and Environment Research Center in Bozeman, MT, and a Professor Emeritus at Montana State University where he won many teaching awards during his 25 year career. Anderson is one of the founders of “free market environmentalism,” the idea of using markets and property rights to solve environmental problems, and in 2015 published the third edition of his co-authored book by that title. He is author or editor of 39 books, including most recently, Unlocking the Wealth of Indian Nations (2016), exploring the institutional underpinnings of American Indian reservation economies.
In June 2016, Switzerland held a referendum on whether to introduce a guaranteed basic income (GBI) for all. Under such a system, governments regularly pay out a sum that would cover subsistence to each individual over the course of their entire lives. It was argued that since work was increasingly automated, fewer jobs were available. The measure was rejected by more than 75 percent of voters, despite a strong turnout from the proposal’s supporters.
Billionaire and Microsoft founder Bill Gates made a similar argument to that of the Swiss proposal’s supporters when he suggested the introduction of an income tax on robots, like that on employee wages. Proceeds of this tax would be used to provide a basic income for all to compensate for job losses and to ease inequality.
In January 2017, the European Parliament’s legal affairs committee adopted a report on the consequences of the rise of robots and artificial intelligence. The report recommends that the member states adopt a guaranteed basic income for all, to compensate for the loss of jobs due to new technologies.
Sending the wrong message
It is no wonder that liberal Switzerland rejected GBI, since the values of self-responsibility and personal freedom are very strong in its civil society. Government is kept small and is considered a service provider. It is surprising, however, that Bill Gates, who with Microsoft spearheaded innovation and increased productivity in processes, is advocating measures such as GBI.
GBI will not only discourage innovation, but also send the wrong message concerning the work ethic. Certain parts of society might use this benefit to avoid education and work. It could create a new class of long-term government parasites. Living off public subsidies instead of on personal achievements deprives people of a good part of their dignity and sense of responsibility.
GBI will need financing, and it would result in increased taxes on the new means of production. Taxing robots, as proposed, will mean curbing innovation and, in consequence, reducing prosperity, especially for people with lower incomes.
In a post on LinkedIn, entrepreneur and author Anurag Harsh made a convincing case that we need not fear innovation; that robots will still need human guidance and that new jobs will be created. He quoted Henry Ford as saying, “If I had asked people what they wanted, they would have said faster horses.”
“Pursuing protectionism is like locking oneself in a dark room,” said China’s President Xi Jinping. “Wind and rain may be kept outside, but so is light and air.” Mr. Xi’s words of warning were directed at the new president of the United States. Meanwhile in Washington, Donald Trump erected new barriers to free trade. Why does Communist China seem to embrace free trade while the capitalist U.S. resorts to protectionism? The answer is simple. In both countries trade, or its absence, is just an instrument of politics. China’s approach to trade is best described as mercantilism. Its government allows for some economic freedom within its borders.
However, it pushes and regulates exports and curbs imports. The more the country exports, the more money it accumulates and the more power it has.
China does allow for some internal trade. But it has a set of “strategic industries” that are ring-fenced by regulation. This regulation makes it almost impossible for foreigners to supply, invest or acquire any stake in them. Also, a large network of state-owned enterprises operates independently from China’s free-trading commitments …