Archive for June, 2012

Why the Supreme Court May Validate “Obamacare”

by Edward Posted: Monday, 6/4/2012

WhyTheSupremeCourtMayValidateObamacare   <== PDF version

The Patient Protection and Affordable Care Act (PPACA) of 2010, known by its slang term “Obamacare”, has been taken under advisement by the Supreme Court as to the constitutionality of one of its provisions.  The law sought to do several things: a) increases coverage of pre-existing conditions; b) permits persons under the age of 26 to remain on their parent’s health plan; c) increases overall federal spending on health care; d) reduces Medicare spending at the federal level; e) expands Medicaid eligibility by increasing the income threshold for qualification; f) establishes “healthcare exchanges” at the state level such that consumer could compare insurance products; g) prohibits annual and lifetime limits on health care insurance coverage; h) raises various taxes on insurers, businesses, medical equipment makers, and individuals; and i) imposes an “individual mandate” requiring everyone to obtain health insurance, or to pay a penalty if they do not.  This last provision is known as the “shared responsibility requirement”.  There are a few other minor provisions as well.

It is clear to all but the most casual thinkers that the first eight provisions cited above will increase the number of people in the health care system, each at a higher cost than before, without a corresponding increase in the number of practitioners.  It will increase costs through increased taxation and regulation such that, although most health insurance will remain privately run in the short term, health care will drift to a single-payer federal system in the long run.  Imagine your medical future determined by your friendly neighborhood Motor Vehicle Bureau.

The one provision that was objected to, and for which many state Attorneys General filed suit, is the question as to whether the federal government can compel a citizen to purchase a health care insurance product.  Their claim is that the “individual mandate” is unconstitutional because it does not fall within a legitimate taxation power granted to Congress, nor does it meet the test of limited government, even with the expanded interpretation of the Commerce Clause.  It is clearly a very bad omen for the people: if this is upheld, there will be no end of demands made on the people to buy things at the government’s dictate.

Unfortunately, it seems to me that the Supreme Court may find a way to justify it within the Constitution, using Social Security as a precedent.  Let us review briefly the original claims of Social Security.  It was set up in 1935 as a way to ensure that the elderly (then defined as age 65) did not fall into deep poverty.  It was partly motivated by the Great Depression and the government’s disastrous response to it.  If you look at your Social Security card, it says that a “Social Security Account has been established for” [your name], followed by the 9-digit number, and a disclaimer that it to be used “for Social Security and Tax Purposes — Not for Identification”.  The Franklin D. Roosevelt administration claimed that the payroll tax “contributions” constituted premiums for “old age insurance”, and would pay out a fixed sum per month upon retirement to keep people out of poverty.  The proceeds of the “contributions” in excess of current-year payouts would be retained in a “Trust Fund” to ensure that there would always be money available for you when your time came to retire.

Now let us tell the truth about it, ignoring the increases in the payroll tax rate, the increases in income liable for the tax, the increase in life expectancy, the growth of payouts, and the decline in the number of people supporting those who are currently retired.  If we restrict ourselves only to the basic provisions, we find the following:

1.  The Social Security Number has become the de facto national ID card for all Americans.

2.  Your Social Security “account” number is not connected in any way with an “old age insurance” policy in the usual sense of an insurance contract.  You are not paying premiums for a policy to insure yourself against poverty.

3.  Your “contributions” are not voluntary like every other contribution: they are mandatory.  You do not get to choose if you want to participate in Social Security or not; it is a “shared obligation”.

4.  There is no “trust fund” with your name or account number on it; your “contributions” are not invested for you to be paid when you are eligible. Your taxes are used to pay those currently retired (pay-as-you-go).   There is no sense of the traditional reward for work and saving as a normal trust fund would operate.  There is nothing held for you in your name, as a usual trust fund would operate.  There is nothing paid to your estate if you die before collecting any benefits, as a normal trust fund would operate.  The excess “contributions” are neither saved nor invested; they are spent on other items the federal government refuses to fund in other ways.

Here is my concern.  If the federal government can force you to pay a mandatory tax (and call it a “contribution”) to fund non-existent “premiums” on a non-existent “old-age insurance” policy with the surplus stored in a non-existent “trust fund” while claiming that the ubiquitous mandatory tracking number was to be used only for Social Security and tax purposes, it seems to me the Supreme Court can find a way to force you to pay a “contribution” in the interest of “shared responsibility” for an actual health insurance product.  They might even try to distort the meaning of Alexander Hamilton’s words from The Federalist Papers, No. 16:

 “…if it be possible at any rate to construct a federal government capable of regulating the common concerns and preserving the general tranquility … it must carry its agency to the persons of the citizens”.

Hamilton was of course, arguing against one of the pernicious effects of the Articles of Confederation, in which the raising of men and equipment to fight the Revolution depended on the caprice of the states to fulfill their obligations per the Congressional requisitions (which they often failed to do).  It had nothing to do with regulating the private affairs of private persons.

The entire health care law, especially the individual mandate, is a very bad idea, and nothing useful will result from it, but that is not the point.  The point, just as with Social Security, is to get more people dependent on the government.  It will be interesting to see how the Supreme Court acts.

Posted in government powers, U. S. Constitution | No Comments »

The Control and Manipulation of Money, Part 1

by Edward Posted: Saturday, 6/2/2012

TheControlAndManipulationOfMoney_1    <== PDF version

Money only has one purpose: to serve as a common denominator that facilitates transactions.  Under the barter system, in which items are traded directly, a horse could be exchanged for so many bushels of corn.  The difficulty is that the owner of the horse may not actually need as many bushels of corn as the horse will bring; if he trades for more corn than he needs, he has to find some other way to dispose of the excess corn.  The owner of the corn may have difficulty finding someone who has a horse to trade for corn, and may find he cannot obtain the type of horse he needs, but must be satisfied with the one that is offered.  The concept of money solved the barter problem: the owners of the horse and the corn can both sell those items for money to other parties.  The former owner of the horse can then buy as much corn as he needs from the new owner of the corn using money from the sale of the horse; the former owner of the corn can use the money from the sale of his corn to buy the particular horse he needs.  The former owner of the horse may find he money left over for something else.  Money therefore, is simply a method to resolve all transactions into a common medium; it facilitates transactions because every potential transaction can be expressed in terms of the common exchange, that is, by the concept of price.  Price is nothing more than the means to assign a value to an object in terms of money.

The utility of money as a convenient method of exchange is clear enough.  But, what is it that induces the owners of the horse and corn, which are items of true value, to trade those items for money?  The answer is simple: those owners must have confidence that the money has some recognized value.  This is in fact the most important aspect of money: the people must have confidence that they will be able to trade it for what they want; otherwise, no price can be established.  The owners of the horse and corn will exchange them for money only if they know the money obtained can be traded for what they want.

Throughout history, several different forms of money have existed.  The first type is when the money itself was made of some material that was recognized to have universal value. The best form of money had the following attributes: a) not degradable; b) divisible into small amounts; c) permanent (not consumed in transactions or use); d) uniform everywhere; e) easily recognized; f) homogeneous; g) reasonably rare (so only fairly small quantities were required for transactions); and h) reasonably compact.  The combination of these attributes led societies to adopt various metals as the monetary standard, usually silver, gold, and copper.  These three metals also had the properties that only small amounts were added to the supply over time from mining new supplies, and could be alloyed with other metals to improve durability.

The one great attribute of metallic money, if constrained to always operate on the basis of weight, is that it cannot be directly faked.  An ounce of silver is an ounce of silver.  People knew that trading tangible items of value for gold and silver entailed minimal risk because everyone else would be willing to trade that gold and silver for other items of tangible value.  So, metallic coins were invented, and it may be said that this is the type of money in which the medium itself was inherently valuable; i.e., it was a commodity.  This type of coinage worked because those materials were recognized as being of value in their own right.   Metallic coins can be counterfeited by altering the weights, but only if a series of clever ruses are employed [1].  The first of these tricks is that a government assumes a monopoly power of coinage, or appoints certain organizations to have that monopoly power.  That way, only the authorized mint can decide what units of coinage will be created.  The second trick is to define a unit of measure by a name unrelated to the weight of the metal, such as a denier or a shilling.  Hence the basic monetary unit is called by some generic name unrelated to the weight, although it may be originally defined as a certain weight.  The third trick is to reduce the weight of metal in the coins while calling it the same name.  Thus the person with the monopoly over the minting of the coins keeps the difference between the defined weight and the weight actually put into the coins.  The fourth trick is to issue an edict that all the coins bearing the name of the unit are to be regarded as equal in value; the full-weight ones and the light-weight ones alike. Edicts and laws of this type are known as legal tender laws.  It requires the people to pretend that the amount of metal in every coin is the same, since each coin is called by the same name.  Ultimately the smart people (like the governments and their monopoly minters) keep part of the actual money for themselves, while the dumb people (like you and me) must accept the debased coin as if it possessed the full weight as originally defined.   Over time, it took more of the light weight coins to buy the same tangible object, and we say that the light weight coins were “inflated” through debasement compared to their original definition.  A few historical examples of debasement of metallic coinage will serve to illustrate the concept.

The most recognizable silver unit is the English pound.  The pound was defined by King Offa of Mercia in 757 AD as a physical Mercian pound of pure silver that came to be known as the “tower pound”.  It weighed 349.9144 grams, which is equivalent to 5400 troy grains (15.4325 troy grains per gram).  There were 20 shillings to a pound, and 12 pennies to a shilling.  Thus a penny was defined as 1/240th of a “tower pound” and was equivalent to 22.5 troy grains of pure silver.  The pound and shilling were accounting units used to keep track of large amounts of pennies.  Since coins were only needed for small local transactions at that period in history, only pennies were actually minted.  Here is the history of the debasement of the English silver coinage [2, 3]:

757: penny = 22.5 troy grains pure silver

1158: Henry II introduced “sterling” silver at 0.925 pure, which improved the durability of the coin.  There were still 240 pennies to the tower pound (5400 grains); at 0.925 pure, the penny contained 20.812 troy grains pure silver.

1257: 242 pennies per tower pound at 0.925 pure; penny = 20.664 troy grains pure

1300: 243 pennies per tower pound at 0.925 pure; penny = 20.555 troy grains pure

1411: 360 pennies per tower pound at 0.925 pure; penny = 13.875 troy grains pure

1464: 450 pennies per tower pound at 0.925 pure; penny = 11.100 troy grains pure

1526: The tower pound at 349.9144 grams (equal to 5400 troy grains) was replaced by the troy pound at 373.2417 grams, consisting of 5760 troy grains.  The penny was redefined as 540 pennies per troy pound at 0.925 pure (equivalent to 506.3 pennies per tower pound at 0.925 pure); the penny was then 9.866 troy grains pure

1543: 540 pennies per troy pound at 0.833 pure; penny = 8.885 troy grains pure

1544: 540 pennies per tower pound at 0.500 pure; penny = 5.333 troy grains pure

1551: 540 pennies per tower pound at 0.250 pure; penny = 2.666 troy grains pure

In 1552, the coinage was reformed in response to the debasement of the past decade.  The shilling became the normal coinage since the penny was now a small unit, and was defined as 1/60th of a physical pound of pure silver.  The shilling thus consisted of 96 troy grains of pure silver and a penny was therefore 8 troy grains of pure silver.  The physical coin was heavier, since copper and other metals were added for durability.  Here we see the monetary pound debased, now having only 1920 grains of pure silver (since there are still 20 shillings per monetary pound).  In 1601, the penny was defined as 7 and 23/31 (7.7419) troy grains of pure silver; in 1816 it was reduced to 7 and 3/11 (7.2727) troy grains of pure silver.  In 1870, the shilling was defined as 87.27272 troy grains at 0.925 pure, which is 80.7272 troy grains pure; thus a penny was defined as 6.7272 troy grains pure.

There were three main periods of debasement of the English silver coin: a) 757 to 1526 = 769 years, debased by a factor of 2.329; b) 1526 to 1551 = 25 years, debased further by a factor of 3.700; followed by a reform upward in 1552; and then c) from 1552 to 1870 = 318 years, debased further by a factor of 1.189.  All total, it was debased a factor of 3.344 from its original definition (excluding the reduction and reform 1526 – 1552).

The coinage of France has some parallel to that of England, but the debasement thereof was much more rapid [2 – 5].  King Charles I (Charlemagne) (about 800 AD) defined a carolingian pound (livre tournois) to be 489.506 grams, which is by conversion equal to 7554.3 troy grains.  The livre was divided into 20 sou or solidi, and each sou was divided into 12 denier.  Thus a denier is the analog of an English penny in the sense that it is 1/240th of a pound, although it has a different weight (being 31.476 troy grains).  Similar to the case in England, and for the same reason, the French only coined deniers, and relegated sou and livre tournois to mere accounting units until the late medieval era.  It is believed that the French coinage was reasonably stable until the reign of Philip I (1060 – 1108).  The record of the debasement of the French denier from the reign of Philip II Augustus (1180 – 1223) is as follows, given by year and troy grains of pure silver:

800: 31.476; 1200: 6.301; 1226: 5.787; 1291: 4.629; 1301: 3.858; 1321: 3.536; 1351: 2.121; 1361: 2.572; 1390: 2.186; 1411: 1.993; 1426: 1.864; 1446: 1.671; 1456: 1.543; 1488: 1.350; 1512: 1.157; 1541: 0.964; 1561: 0.900; 1573: 0.835; 1580: 0.739; 1602: 0.681; 1615: 0.601; 1636: 0.532; 1643: 0.526; 1651: 0.484; 1676: 0.429; 1701: 0.353; 1726: 0.274; 1759: 0.260; and 1795: 0.289 troy grains pure silver.  During the French Revolution, the livre (i.e., 240 denier) was converted to francs; 80 francs to 81 livre.  The livre was at that time 240 deniers at 0.260 troy grains which comes to 62.4 troy grains; hence a franc was 63.18 troy grains of pure silver.

In the first 400 years of its existence, the French denier was debased a factor of 4.995; for the next 559 years to 1759, was further debased by a factor of 24.23; all total, debased by a factor of 121.051 from its original definition.

The Scottish penny started off about the same as the French denier, but it was debased at a very rapid rate.  By 1600, the Scottish penny was about 0.645 troy grains, that is, about 1/12th the weight of the English penny.

The silver coinage was debased by nearly every nation in Europe, except for the Arabs in Spain, who were very careful to maintain the value of their coins.  Also, the gold coins minted throughout the medieval era generally retained their full weight.  The reason is simple: the gold coins, being of much greater value than silver, were used generally in transactions between great lords or important merchants in international dealings.  Meanwhile, the silver coins were used for local trade.  It was easy for the minters to debase the local coinage used by the dumb local people, since it did not have to be readily converted to any other standard, and the king could simply issue an edict requiring that it be accepted at full face value.  But the gold coin had to maintain its value because the issuing king could not force another nation’s merchants to accept it; it would be accepted only at full weight. Thus the large traders and their associates avoided any losses that would have occurred due to a reduction in the value of the coin.

References:

1.  Murray N. Rothbard, What Has Government Done to Our Money?,Auburn,AL: Ludwig von Mises Institute, 1991

2.  Encyclopedia  Britannica, Vol. 16, pp. 483, 726, 727 (1904)

3.  www.economics.utoronto.ca/munro5/MONEYLEC.htm

4.  www.histoirepassion.eu/spip.php?article36

5.  Henri Pirenne, Economic and Social History of Medieval Europe,London: Routledge & Kegan Paul Ltd., 1936, pp. 108 – 114

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