Thursday, April 28, 2016

National Industrial Policy

Via  Richard B. McKenzie:

National industrial policy is a rubric for a broad range of proposed economic reforms that emerged as a unified political program in the early eighties. Had they been passed, these reforms would have given government officials additional authority, as well as the necessary fiscal and regulatory powers, to directly alter the country's industrial structure. Proponents of national industrial policies (NIP) across the globe have typically been harsh critics of unfettered markets and of past limited efforts of government to create economic growth simply with macroeconomic (fiscal and monetary) policies...

NIP proponents believed, and some still believe, that many of the country's industrial markets had failed, causing the entire economy to come apart at its industrial seams. Harvard's Robert Reich, a leading exponent of industrial policies in the early eighties, claimed, in The Next American Frontier, that the U.S. economy had been "unraveling" since the sixties. He found "chronic disarray" in the political sphere, which he linked to the "growing unemployment, mounting business failures, and falling productivity" in the economy's industrial sector.

More specifically, NIP proponents claimed the following:

  • The nation is in long-term economic decline, with little hope of a turnaround without greater government involvement in the restructuring of the economy.
  • The country is "deindustrializing," or losing its core industrial base to plant closings and "capital flight." In The Deindustrialization of America economists Barry Bluestone and Bennett Harrison argued that the ongoing process of deindustrialization amounted to a "wide-spread, systematic disinvestment in the nation's productive capacity." Without its "core" industries—steel, textiles, rubber, shoes, and automobiles—the national economy will lose its stature in the world, and workers will lose their better-paying employment opportunities.
  • Major segments of the U.S. economy are uncompetitive in the new global economic order. Many U.S. firms are gradually being destroyed by their own misguided internal policies, by their pursuit of short-term profits, and by foreign competitors that are more successful primarily because of the national industrial policies adopted by their governments. The postwar economic success of Japan was extensively credited to industrial policies orchestrated by its Ministry of International Trade and Industry (MITI). Economist Lester Thurow of MIT, in The Zero-Sum Society, worried that if left alone, "our economy and our institutions will not provide jobs for everyone who wants to work," and that "we have a moral responsibility to guarantee full employment."
  • While acknowledging that his proposed industrial policies would create "a socialized sector of the economy," Thurow maintained that "major investment decisions have become too important to be left to the private market alone.... Japan Inc. needs to be met with U.S.A. Inc." Reich contended that Japan and several European countries were growing relative to the United States because "these countries are organized for economic adaptation.... America is not."

NIP proponents generally believe that government should be directly involved in establishing national industrial goals and in assuring that the goals are achieved.

Wednesday, April 27, 2016


Delivered April 27, 2016, t the Mayflower Hotel in Washington D.C. Transcript is as prepared for delivery---does not include extemporaneous comments.

Thank you for the opportunity to speak to you, and thank you to the Center for the National Interest for honoring me with this invitation.

I would like to talk today about how to develop a new foreign policy direction for our country – one that replaces randomness with purpose, ideology with strategy, and chaos with peace.

It is time to shake the rust off of America’s foreign policy. It's time to invite new voices and new visions into the fold.

The direction I will outline today will also return us to a timeless principle. My foreign policy will always put the interests of the American people, and American security, above all else. That will be the foundation of every decision that I will make.

America First will be the major and overriding theme of my administration.

But to chart our path forward, we must first briefly look back.

We have a lot to be proud of. In the 1940s we saved the world. The Greatest Generation beat back the Nazis and the Japanese Imperialists.

Then we saved the world again, this time from totalitarian Communism. The Cold War lasted for decades, but we won.

Democrats and Republicans working together got Mr. Gorbachev to heed the words of President Reagan when he said: “tear down this wall.”

History will not forget what we did.

Unfortunately, after the Cold War, our foreign policy veered badly off course. We failed to develop a new vision for a new time. In fact, as time went on, our foreign policy began to make less and less sense.

Logic was replaced with foolishness and arrogance, and this led to one foreign policy disaster after another.

We went from mistakes in Iraq to Egypt to Libya, to President Obama’s line in the sand in Syria. Each of these actions have helped to throw the region into chaos, and gave ISIS the space it needs to grow and prosper.

It all began with the dangerous idea that we could make Western democracies out of countries that had no experience or interest in becoming a Western Democracy.

We tore up what institutions they had and then were surprised at what we unleashed. Civil war, religious fanaticism; thousands of American lives, and many trillions of dollars, were lost as a result. The vacuum was created that ISIS would fill. Iran, too, would rush in and fill the void, much to their unjust enrichment.

Our foreign policy is a complete and total disaster.

No vision, no purpose, no direction, no strategy.

Today, I want to identify five main weaknesses in our foreign policy.

First, Our Resources Are Overextended

President Obama has weakened our military by weakening our economy. He’s crippled us with wasteful spending, massive debt, low growth, a huge trade deficit and open borders.

Our manufacturing trade deficit with the world is now approaching $1 trillion a year. We’re rebuilding other countries while weakening our own.

Ending the theft of American jobs will give us the resources we need to rebuild our military and regain our financial independence and strength.

I am the only person running for the Presidency who understands this problem and knows how to fix it.

Secondly, our allies are not paying their fair share.

Our allies must contribute toward the financial, political and human costs of our tremendous security burden. But many of them are simply not doing so. They look at the United States as weak and forgiving and feel no obligation to honor their agreements with us.

In NATO, for instance, only 4 of 28 other member countries, besides America, are spending the minimum required 2% of GDP on defense.

We have spent trillions of dollars over time – on planes, missiles, ships, equipment – building up our military to provide a strong defense for Europe and Asia. The countries we are defending must pay for the cost of this defense – and, if not, the U.S. must be prepared to let these countries defend themselves.

The whole world will be safer if our allies do their part to support our common defense and security.

A Trump Administration will lead a free world that is properly armed and funded.

Thirdly, our friends are beginning to think they can’t depend on us.

We’ve had a president who dislikes our friends and bows to our enemies.

He negotiated a disastrous deal with Iran, and then we watched them ignore its terms, even before the ink was dry.

Iran cannot be allowed to have a nuclear weapon and, under a Trump Administration, will never be allowed to have a nuclear weapon.

All of this without even mentioning the humiliation of the United States with Iran’s treatment of our ten captured sailors.

In negotiation, you must be willing to walk. The Iran deal, like so many of our worst agreements, is the result of not being willing to leave the table. When the other side knows you’re not going to walk, it becomes absolutely impossible to win.

At the same time, your friends need to know that you will stick by the agreements that you have with them.

President Obama gutted our missile defense program, then abandoned our missile defense plans with Poland and the Czech Republic.

He supported the ouster of a friendly regime in Egypt that had a longstanding peace treaty with Israel – and then helped bring the Muslim Brotherhood to power in its place.

Israel, our great friend and the one true Democracy in the Middle East, has been snubbed and criticized by an Administration that lacks moral clarity. Just a few days ago, Vice President Biden again criticized Israel – a force for justice and peace – for acting as an impediment to peace in the region.

President Obama has not been a friend to Israel. He has treated Iran with tender love and care and made it a great power in the Middle East – all at the expense of Israel, our other allies in the region and, critically, the United States.

We’ve picked fights with our oldest friends, and now they’re starting to look elsewhere for help.

Fourth, our rivals no longer respect us.

In fact, they are just as confused as our allies, but an even bigger problem is that they don’t take us seriously any more.

When President Obama landed in Cuba on Air Force One, no leader was there to meet or greet him – perhaps an incident without precedent in the long and prestigious history of Air Force One.

Then, amazingly, the same thing happened in Saudi Arabia -- it's called no respect.

Do you remember when the President made a long and expensive trip to Copenhagen, Denmark to get the Olympics for our country, and, after this unprecedented effort, it was announced that the United States came in fourth place?

He should have known the result before making such an embarrassing commitment.

The list of humiliations goes on and on.

President Obama watches helplessly as North Korea increases its aggression and expands even further with its nuclear reach.

Our president has allowed China to continue its economic assault on American jobs and wealth, refusing to enforce trade rules – or apply the leverage on China necessary to rein in North Korea.

He has even allowed China to steal government secrets with cyber attacks and engage in industrial espionage against the United States and its companies.

We’ve let our rivals and challengers think they can get away with anything.

If President Obama’s goal had been to weaken America, he could not have done a better job.

Finally, America no longer has a clear understanding of our foreign policy goals.

Since the end of the Cold War and the break-up of the Soviet Union, we’ve lacked a coherent foreign policy.

One day we’re bombing Libya and getting rid of a dictator to foster democracy for civilians, the next day we are watching the same civilians suffer while that country falls apart.

We're a humanitarian nation. But the legacy of the Obama-Clinton interventions will be weakness, confusion, and disarray.

We have made the Middle East more unstable and chaotic than ever before.

We left Christians subject to intense persecution and even genocide.

Our actions in Iraq, Libya and Syria have helped unleash ISIS.

And we’re in a war against radical Islam, but President Obama won’t even name the enemy!

Hillary Clinton also refuses to say the words “radical Islam,” even as she pushes for a massive increase in refugees.

After Secretary Clinton’s failed intervention in Libya, Islamic terrorists in Benghazi took down our consulate and killed our ambassador and three brave Americans. Then, instead of taking charge that night, Hillary Clinton decided to go home and sleep! Incredible.

Clinton blames it all on a video, an excuse that was a total lie. Our Ambassador was murdered and our Secretary of State misled the nation – and by the way, she was not awake to take that call at 3 o'clock in the morning.

And now ISIS is making millions of dollars a week selling Libyan oil.

This will change when I am president.

To all our friends and allies, I say America is going to be strong again. America is going to be a reliable friend and ally again.

We’re going to finally have a coherent foreign policy based upon American interests, and the shared interests of our allies.

We are getting out of the nation-building business, and instead focusing on creating stability in the world.

Our moments of greatest strength came when politics ended at the water’s edge.

We need a new, rational American foreign policy, informed by the best minds and supported by both parties, as well as by our close allies.

This is how we won the Cold War, and it’s how we will win our new and future struggles.

First, we need a long-term plan to halt the spread and reach of radical Islam.

Containing the spread of radical Islam must be a major foreign policy goal of the United States.

Events may require the use of military force. But it’s also a philosophical struggle, like our long struggle in the Cold War.

In this we’re going to be working very closely with our allies in the Muslim world, all of which are at risk from radical Islamic violence.

We should work together with any nation in the region that is threatened by the rise of radical Islam. But this has to be a two-way street – they must also be good to us and remember us and all we are doing for them.

The struggle against radical Islam also takes place in our homeland. There are scores of recent migrants inside our borders charged with terrorism. For every case known to the public, there are dozens more.

We must stop importing extremism through senseless immigration policies.

A pause for reassessment will help us to prevent the next San Bernardino or worse -- all you have to do is look at the World Trade Center and September 11th.

And then there’s ISIS. I have a simple message for them. Their days are numbered. I won’t tell them where and I won’t tell them how. We must as, a nation, be more unpredictable. But they’re going to be gone. And soon.

Secondly, we have to rebuild our military and our economy.

The Russians and Chinese have rapidly expanded their military capability, but look what’s happened to us!

Our nuclear weapons arsenal – our ultimate deterrent – has been allowed to atrophy and is desperately in need of modernization and renewal.

Our active duty armed forces have shrunk from 2 million in 1991 to about 1.3 million today.

The Navy has shrunk from over 500 ships to 272 ships during that time.

The Air Force is about 1/3 smaller than 1991. Pilots are flying B-52s in combat missions today which are older than most people in this room.

And what are we doing about this? President Obama has proposed a 2017 defense budget that, in real dollars, cuts nearly 25% from what we were spending in 2011.

Our military is depleted, and we’re asking our generals and military leaders to worry about global warming.

We will spend what we need to rebuild our military. It is the cheapest investment we can make. We will develop, build and purchase the best equipment known to mankind. Our military dominance must be unquestioned.

But we will look for savings and spend our money wisely. In this time of mounting debt, not one dollar can be wasted.

We are also going to have to change our trade, immigration and economic policies to make our economy strong again – and to put Americans first again. This will ensure that our own workers, right here in America, get the jobs and higher pay that will grow our tax revenue and increase our economic might as a nation.

We need to think smarter about areas where our technological superiority gives us an edge. This includes 3-D printing, artificial intelligence and cyberwarfare.

A great country also takes care of its warriors. Our commitment to them is absolute. A Trump Administration will give our service men and women the best equipment and support in the world when they serve, and the best care in the world when they return as veterans to civilian life.

Finally, we must develop a foreign policy based on American interests.

Businesses do not succeed when they lose sight of their core interests and neither do countries.

Look at what happened in the 1990s. Our embassies in Kenya and Tanzania were attacked and seventeen brave sailors were killed on the USS Cole. And what did we do? It seemed we put more effort into adding China to the World Trade Organization – which has been a disaster for the United States – than into stopping Al Qaeda.

We even had an opportunity to take out Osama Bin Laden, and didn’t do it. And then, we got hit at the World Trade Center and the Pentagon, the worst attack on our country in its history.

Our foreign policy goals must be based on America’s core national security interests, and the following will be my priorities.

In the Middle East, our goals must be to defeat terrorists and promote regional stability, not radical change. We need to be clear-sighted about the groups that will never be anything other than enemies.

And we must only be generous to those that prove they are our friends.

We desire to live peacefully and in friendship with Russia and China. We have serious differences with these two nations, and must regard them with open eyes. But we are not bound to be adversaries. We should seek common ground based on shared interests. Russia, for instance, has also seen the horror of Islamic terrorism.

I believe an easing of tensions and improved relations with Russia – from a position of strength – is possible. Common sense says this cycle of hostility must end. Some say the Russians won’t be reasonable. I intend to find out. If we can’t make a good deal for America, then we will quickly walk from the table.

Fixing our relations with China is another important step towards a prosperous century. China respects strength, and by letting them take advantage of us economically, we have lost all of their respect. We have a massive trade deficit with China, a deficit we must find a way, quickly, to balance.

A strong and smart America is an America that will find a better friend in China. We can both benefit or we can both go our separate ways.

After I am elected President, I will also call for a summit with our NATO allies, and a separate summit with our Asian allies. In these summits, we will not only discuss a rebalancing of financial commitments, but take a fresh look at how we can adopt new strategies for tackling our common challenges.

For instance, we will discuss how we can upgrade NATO’s outdated mission and structure – grown out of the Cold War – to confront our shared challenges, including migration and Islamic terrorism.

I will not hesitate to deploy military force when there is no alternative. But if America fights, it must fight to win. I will never send our finest into battle unless necessary – and will only do so if we have a plan for victory.

Our goal is peace and prosperity, not war and destruction.

The best way to achieve those goals is through a disciplined, deliberate and consistent foreign policy.

With President Obama and Secretary Clinton we’ve had the exact opposite: a reckless, rudderless and aimless foreign policy – one that has blazed a path of destruction in its wake.

After losing thousands of lives and spending trillions of dollars, we are in far worse shape now in the Middle East than ever before.

I challenge anyone to explain the strategic foreign policy vision of Obama-Clinton – it has been a complete and total disaster.

I will also be prepared to deploy America’s economic resources. Financial leverage and sanctions can be very persuasive – but we need to use them selectively and with determination. Our power will be used if others do not play by the rules.

Our friends and enemies must know that if I draw a line in the sand, I will enforce it.

However, unlike other candidates for the presidency, war and aggression will not be my first instinct. You cannot have a foreign policy without diplomacy. A superpower understands that caution and restraint are signs of strength.

Although not in government service, I was totally against the War in Iraq, saying for many years that it would destabilize the Middle East. Sadly, I was correct, and the biggest beneficiary was Iran, who is systematically taking over Iraq and gaining access to their rich oil reserves – something it has wanted to do for decades. And now, to top it all off, we have ISIS.

My goal is to establish a foreign policy that will endure for several generations.

That is why I will also look for talented experts with new approaches, and practical ideas, rather than surrounding myself with those who have perfect resumes but very little to brag about except responsibility for a long history of failed policies and continued losses at war.

Finally, I will work with our allies to reinvigorate Western values and institutions. Instead of trying to spread “universal values” that not everyone shares, we should understand that strengthening and promoting Western civilization and its accomplishments will do more to inspire positive reforms around the world than military interventions.

These are my goals, as president.

I will seek a foreign policy that all Americans, whatever their party, can support, and which our friends and allies will respect and welcome.

The world must know that we do not go abroad in search of enemies, that we are always happy when old enemies become friends, and when old friends become allies.

To achieve these goals, Americans must have confidence in their country and its leadership again.

Many Americans must wonder why our politicians seem more interested in defending the borders of foreign countries than their own.

Americans must know that we are putting the American people first again. On trade, on immigration, on foreign policy – the jobs, incomes and security of the American worker will always be my first priority.

No country has ever prospered that failed to put its own interests first. Both our friends and enemies put their countries above ours and we, while being fair to them, must do the same.

We will no longer surrender this country, or its people, to the false song of globalism.

The nation-state remains the true foundation for happiness and harmony. I am skeptical of international unions that tie us up and bring America down, and will never enter America into any agreement that reduces our ability to control our own affairs.

NAFTA, as an example, has been a total disaster for the U.S. and has emptied our states of our manufacturing and our jobs. Never again. Only the reverse will happen. We will keep our jobs and bring in new ones. Their will be consequences for companies that leave the U.S. only to exploit it later.

Under a Trump Administration, no American citizen will ever again feel that their needs come second to the citizens of foreign countries.

I will view the world through the clear lens of American interests.

I will be America’s greatest defender and most loyal champion. We will not apologize for becoming successful again, but will instead embrace the unique heritage that makes us who we are.

The world is most peaceful, and most prosperous, when America is strongest.

America will continually play the role of peacemaker.

We will always help to save lives and, indeed, humanity itself. But to play that role, we must make America strong again.

We must make America respected again. And we must make America great again.

If we do that, perhaps this century can be the most peaceful and prosperous the world has ever known. Thank you.

Führer Principle

Via Ludwig von Mises:

Socialism is a cooperation of people, but a special kind of cooperation. There is one individual, or one group or class of individuals, that gives the direction to all other members of the group for their whole way of cooperation. In a socialist system there is one will that determines everything and all the people, all the members of the system, have to comply with the orders and provisions made by a small group or even by only one individual who is leading the whole organization. In the most elaborated socialist system that the world has known up to now, in the theoretically best elaborated socialist system, the leader was called the Führer. Führer means the head, the guide. Under the Führer principle, one man alone determines where and how the whole system has to work. In this system there is only one will that determines everything. There are no controversies. There is only the leader, the Führer, at the head. The others have to obey and to follow.

This system is very well known. It can be very well and very easily described; but it is a system whose consequences and effects are known to very few people, if to any at all. Under the Führer principle, under the kind of collaboration which we call socialism, under an organized or "planned" society, under this system, there is one central will that determines everything and all the other people have to follow. They have to obey. They are followers. There is certainly under such a system no waste of actions and of powers but this alone doesn’t mean anything. It means only that we have to say that all the other people have no will of their own, no possibility, no opportunity, no power, to influence the direction of the whole system, the direction of the cooperation and collaboration of the people.

Monday, April 25, 2016


Cliometrics sometimes called new economic history, or econometric history, neohistoricals , is the systematic application of economic theory, econometric techniques, and other formal or mathematical methods to the study of history (especially, social and economic history).It is a quantitative (as opposed to qualitative or ethnographic) approach to economic history. The term cliometrics comes from Clio, who was the muse of history, and was originally coined by the mathematical economist Stanley Reiter in 1960.

In October 1993, the Swedish National Bank awarded the Nobel Prize in Economics to Robert William Fogel and Douglass Cecil North "for having renewed research in economic history." The Academy noted that "they were pioneers in the branch of economic history that has been called the 'new economic history,' or cliometrics."

Fogel is often described as the father of modern econometric history

(via Wikipedia)

Rent Seeking

"Rent seeking” is one of the most important insights in the last fifty years of economics and, unfortunately, one of the most inappropriately labeled. Gordon Tullock originated the idea in 1967, and Anne Krueger introduced the label in 1974. The idea is simple but powerful. People are said to seek rents when they try to obtain benefits for themselves through the political arena. They typically do so by getting a subsidy for a good they produce or for being in a particular class of people, by getting a tariff on a good they produce, or by getting a special regulation that hampers their competitors. Elderly people, for example, often seek higher Social Security payments; steel producers often seek restrictions on imports of steel; and licensed electricians and doctors often lobby to keep regulations in place that restrict competition from unlicensed electricians or doctors.

(via David Henderson)

Also see: Loot Seeking

Loot Seeking

A term created by Dr. Walter Block to better identify what up to now has been called "rent seeking."

What is a CFD (Contract for Difference)?

Contracts for difference (CFDs) are one of the world's fastest-growing trading instruments. A contracts for difference creates, as its name suggests, a contract between two parties speculating on the movement of an asset price. The term 'CFD' which stands for 'contract for difference' consists of an agreement (contract) to exchange the difference in value of a particular currency, commodity share or index between the time at which a contract is opened and the time at which it is closed. The contract payout will amount to the difference in the price of the asset between the time the contract is opened and the time it is closed. If the asset rises in price, the buyer receives cash from the seller, and vice versa. There is no restriction on the entry or exit price of a CFD, no time limit is placed on when this exchange happens and no restriction is placed on buying first or selling first. CFDs are traded on leverage to give traders more trading power, flexibility and opportunities.

CFDs are currently (2016 )available in listed [i.e. mini-warrants and ASX CFDs listed on the Australian Securities Exchange] and/or over-the-counter markets in the United Kingdom, Germany (Differenzkontrakte), Switzerland, Italy (Contratti Per Differenza), Singapore, Thailand, South Africa, Australia, Canada, New Zealand, Hong Kong, Sweden, Norway, Belgium, Denmark, Netherlands, France (where they are known as Contrats Financiers pour Différences) and Spain (where they are referred to as as Contratos por Diferencias (CFDs)) and the US (to non-residents only


Sunday, April 24, 2016


By Murray N. Rothbard

Protectionism, often refuted and seemingly abandoned, has returned, and with a vengeance. The Japanese, who bounced back from grievous losses in World War II to astound the world by producing innovative, high-quality products at low prices, are serving as the convenient butt of protectionist propaganda. Memories of wartime myths prove a heady brew, as protectionists warn about this new "Japanese imperialism," even "worse than Pearl Harbor." This "imperialism" turns out to consist of selling Americans wonderful TV sets, autos, microchips, etc., at prices more than competitive with American firms.
Is this "flood" of Japanese products really a menace, to be combated by the U.S. government? Or is the new Japan a godsend to American consumers? In taking our stand on this issue, we should recognize that all government action means coercion, so that calling upon the U.S. government to intervene means urging it to use force and violence to restrain peaceful trade. One trusts that the protectionists are not willing to pursue their logic of force to the ultimate in the form of another Hiroshima and Nagasaki.

Keep Your Eye on the Consumer

As we unravel the tangled web of protectionist argument, we should keep our eye on two essential points: (1) protectionism means force in restraint of trade; and (2) the key is what happens to the consumer. Invariably, we will find that the protectionists are out to cripple, exploit, and impose severe losses not only on foreign consumers but especially on Americans. And since each and every one of us is a consumer, this means that protectionism is out to mulct all of us for the benefit of a specially privileged, subsidized few--and an inefficient few at that: people who cannot make it in a free and unhampered market.
Take, for example, the alleged Japanese menace. All trade is mutually beneficial to both parties--in this case Japanese producers and American consumers--otherwise they would not engage in the exchange. In trying to stop this trade, protectionists are trying to stop American consumers from enjoying high living standards by buying cheap and high-quality Japanese products. Instead, we are to be forced by government to return to the inefficient, higher-priced products we have already rejected. In short, inefficient producers are trying to deprive all of us of products we desire so that we will have to turn to inefficient firms. American consumers are to be plundered.

How To Look at Tariffs and Quotas

The best way to look at tariffs or import quotas or other protectionist restraints is to forget about political boundaries. Political boundaries of nations may be important for other reasons, but they have no economic meaning whatever. Suppose, for example, that each of the United States were a separate nation. Then we would hear a lot of protectionist bellyaching that we are now fortunately spared. Think of the howls by high-priced New York or Rhode Island textile manufacturers who would then be complaining about the "unfair," "cheap labor" competition from various low-type "foreigners" from Tennessee or North Carolina, or vice versa.
Fortunately, the absurdity of worrying about the balance of payments is made evident by focusing on inter-state trade. For nobody worries about the balance of payments between New York and New Jersey, or, for that matter, between Manhattan and Brooklyn, because there are no customs officials recording such trade and such balances.
If we think about it, it is clear that a call by New York firms for a tariff against North Carolina is a pure ripoff of New York (as well as North Carolina) consumers, a naked grab for coerced special privilege by less efficient business firms. If the 50 states were separate nations, the protectionists would then be able to use the trappings of patriotism, and distrust of foreigners, to camouflage and get away with their looting the consumers of their own region.
Fortunately, inter-state tariffs are unconstitutional. But even with this clear barrier, and even without being able to wrap themselves in the cloak of nationalism, protectionists have been able to impose inter-state tariffs in another guise. Part of the drive for continuing increases in the federal minimum-wage law is to impose a protectionist devise against lower-wage, lower-labor-cost competition from North Carolina and other southern states against their New England and New York competitors.
During the 1966 Congressional battle over a higher federal minimum wage, for example, the late Senator Jacob Javits (R-NY) freely admitted that one of his main reasons for supporting the bill was to cripple the southern competitors of New York textile firms. Since southern wages are generally lower than in the north, the business firms hardest hit by an increased minimum wage (and the workers struck by unemployment) will be located in the south.
Another way in which interstate trade restrictions have been imposed has been in the fashionable name of "safety." Government-organized state milk cartels in New York, for example, have prevented importation of milk from nearby New Jersey under the patently spurious grounds that the trip across the Hudson would render New Jersey milk "unsafe."
If tariffs and restraints on trade are good for a country, then why not indeed for a state or region? The principle is precisely the same. In America's first great depression, the Panic of 1819, Detroit was a tiny frontier town of only a few hundred people. Yet protectionist cries arose--fortunately not fulfilled--to prohibit all "imports" from outside of Detroit, and citizens were exhorted to buy only Detroit. If this nonsense had been put into effect, general starvation and death would have ended all other economic problems for Detroiters.
So why not restrict and even prohibit trade, i.e., "imports," into a city, or a neighborhood, or even on a block, or, to boil it down to its logical conclusion, to one family? Why shouldn't the Jones family issue a decree that from now on, no member of the family can buy any goods or services produced outside the family house? Starvation would quickly wipe out this ludicrous drive for self-sufficiency.
And yet we must realize that this absurdity is inherent in the logic of protectionism. Standard protectionism is just as preposterous, but the rhetoric of nationalism and national boundaries has been able to obscure this vital fact.
The upshot is that protectionism is not only nonsense, but dangerous nonsense, destructive of all economic prosperity. We are not, if we were ever, a world of self-sufficient farmers. The market economy is one vast latticework throughout the world, in which each individual, each region, each country, produces what he or it is best at, most relatively efficient in, and exchanges that product for the goods and services of others. Without the division of labor and the trade based upon that division, the entire world would starve. Coerced restraints on trade--such as protectionism--cripple, hobble, and destroy trade, the source of life and prosperity. Protectionism is simply a plea that consumers, as well as general prosperity, be hurt so as to confer permanent special privilege upon groups of less efficient producers, at the expense of more competent firms and of consumers. But it is a peculiarly destructive kind of bailout, because it permanently shackles trade under the cloak of patriotism.

The Negative Railroad

Protectionism is also peculiarly destructive because it acts as a coerced and artificial increase in the cost of transportation between regions. One of the great features of the Industrial Revolution, one of the ways in which it brought prosperity to the starving masses, was by reducing drastically the cost of transportation. The development of railroads in the early 19th century, for example, meant that for the first time in the history of the human race, goods could be transported cheaply over land. Before that, water--rivers and oceans--was the only economically viable means of transport. By making land transport accessible and cheap, railroads allowed interregional land transportation to break up expensive inefficient local monopolies. The result was an enormous improvement in living standards for all consumers. And what the protectionists want to do is lay an axe to this wondrous principle of progress.
It is no wonder that Frederic Bastiat, the great French laissez-faire economist of the mid-19th century, called a tariff a "negative railroad." Protectionists are just as economically destructive as if they were physically chopping up railroads, or planes, or ships, and forcing us to revert to the costly transport of the past--mountain trails, rafts, or sailing ships.

"Fair" Trade

Let us now turn to some of the leading protectionist arguments. Take, for example, the standard complaint that while the protectionist "welcomes competition," this competition must be "fair." Whenever someone starts talking about "fair competition" or indeed, about "fairness" in general, it is time to keep a sharp eye on your wallet, for it is about to be picked. For the genuinely "fair" is simply the voluntary terms of exchange, mutually agreed upon by buyer and seller. As most of the medieval scholastics were able to figure out, there is no "just" (or "fair") price outside of the market price.
So what could be "unfair" about the free-market price? One common protectionist charge is that it is "unfair" for an American firm to compete with, say, a Taiwanese firm which needs to pay only one-half the wages of the American competitor. The U.S. government is called upon to step in and "equalize" the wage rates by imposing an equivalent tariff upon the Taiwanese. But does this mean that consumers can never patronize low-cost firms because it is "unfair" for them to have lower costs than inefficient competitors? This is the same argument that would be used by a New York firm trying to cripple its North Carolina competitor.
What the protectionists don't bother to explain is why U.S. wage rates are so much higher than Taiwan. They are not imposed by Providence. Wage rates are high in the U.S. because American employers have bid these rates up. Like all other prices on the market, wage rates are determined by supply and demand, and the increased demand by U.S. employers has bid wages up. What determines this demand? The "marginal productivity" of labor.
The demand for any factor of production, including labor, is constituted by the productivity of that factor, the amount of revenue that the worker, or the pound of cement or acre of land, is expected to bring to the brim. The more productive the factory, the greater the demand by employers, and the higher its price or wage rate. American labor is more costly than Taiwanese because it is far more productive. What makes it productive? To some extent, the comparative qualities of labor, skill, and education. But most of the difference is not due to the personal qualities of the laborers themselves, but to the fact that the American laborer, on the whole, is equipped with more and better capital equipment than his Taiwanese counterparts. The more and better the capital investment per worker, the greater the worker's productivity, and therefore the higher the wage rate.
In short, if the American wage rate is twice that of the Taiwanese, it is because the American laborer is more heavily capitalized, is equipped with more and better tools, and is therefore, on the average, twice as productive. In a sense, I suppose, it is not "fair" for the American worker to make more than the Taiwanese, not because of his personal qualities, but because savers and investors have supplied him with more tools. But a wage rate is determined not just by personal quality but also by relative scarcity, and in the United States the worker is far scarcer compared to capital than he is in Taiwan.
Putting it another way, the fact that American wage rates are on the average twice that of the Taiwanese, does not make the cost of labor in the U.S. twice that of Taiwan. Since U.S. labor is twice as productive, this means that the double wage rate in the U.S. is offset by the double productivity, so that the cost of labor per unit product in the U.S. and Taiwan tends, on the average, to be the same. One of the major protectionist fallacies is to confuse the price of labor (wage rates) with its cost, which also depends on its relative productivity.
Thus, the problem faced by American employers is not really with the "cheap labor" in Taiwan, because "expensive labor" in the U.S. is precisely the result of the bidding for scarce labor by U.S. employers. The problem faced by less efficient U.S. textile or auto firms is not so much cheap labor in Taiwan or Japan, but the fact that other U.S. industries are efficient enough to afford it, because they bid wages that high in the first place.
So, by imposing protective tariffs and quotas to save, bail out, and keep in place less efficient U.S. textile or auto or microchip firms, the protectionists are not only injuring the American consumer. They are also harming efficient U.S. firms and industries, which are prevented from employing resources now locked into incompetent firms, and who could otherwise be able to expand and sell their efficient products at home and abroad.


Another contradictory line of protectionist assault on the free market asserts that the problem is not so much the low costs enjoyed by foreign firms, as the "unfairness" of selling their products "below costs" to American consumers, and thereby engaging in the pernicious and sinful practice of "dumping." By such dumping they are able to exert unfair advantage over American firms who presumably never engage in such practices and make sure that their prices are always high enough to cover costs. But if selling below costs is such a powerful weapon, why isn't it ever pursued by business firms within a country?
Our first response to this charge is, once again, to keep our eye on consumers in general and on American consumers in particular. Why should it be a matter of complaint when consumers so clearly benefit? Suppose, for example, that Sony is willing to injure American competitors by selling TV sets to Americans for a penny apiece. Shouldn't we rejoice at such an absurd policy of suffering severe losses by subsidizing us, the American consumers? And shouldn't our response be: "Come on, Sony, subsidize us some more!" As far as consumers are concerned, the more "dumping" that takes place, the better.
But what of the poor American TV firms, whose sales will suffer so long as Sony is willing to virtually give their sets away? Well, surely, the sensible policy for RCA, Zenith, etc. would be to hold back production and sales until Sony drives itself into bankruptcy. But suppose that the worst happens, and RCA, Zenith, etc. are themselves driven into bankruptcy by the Sony price war? Well, in that case, we the consumers will still be better off, since the plants of the bankrupt firms, which would still be in existence, would be picked up for a song at auction, and the American buyers at auction would be able to enter the TV business and outcompete Sony because they now enjoy far lower capital costs.
For decades, indeed, opponents of the free market have claimed that many businesses gained their powerful status on the market by what is called "predatory price-cutting," that is, by driving their smaller competitors into bankruptcy by selling their goods below cost, and then reaping the reward of their unfair methods by raising their prices and thereby charging "monopoly prices" to the consumers. The claim is that while consumers may gain in the short run by price wars, "dumping," and selling below costs, they lose in the long run from the alleged monopoly. But, as we have seen, economic theory shows that this would be a mug's game, losing money for the "dumping" firms, and never really achieving a monopoly price. And sure enough, historical investigation has not turned up a single case where predatory pricing, when tried, was successful, and there are actually very few cases where it has even been tried.
Another charge claims that Japanese or other foreign firms can afford to engage in dumping because their governments are willing to subsidize their losses. But again, we should still welcome such an absurd policy. If the Japanese government is really willing to waste scarce resources subsidizing American purchases of Sony's, so much the better! Their policy would be just as self-defeating as if the losses were private. There is yet another problem with the charge of "dumping," even when it is made by economists or other alleged "experts" sitting on impartial tariff commissions and government bureaus. There is no way whatever that outside observers, be they economists, businessmen, or other experts, can decide what some other firm's "costs" may be. "Costs" are not objective entities that can be gauged or measured. Costs are subjective to the businessman himself, and they vary continually, depending on the businessman's time horizon or the stage of production or selling process he happens to be dealing with at any given time.
Suppose, for example, a fruit dealer has purchased a case of pears for $20, amounting to $1 a pound. He hopes and expects to sell those pears for $1.50 a pound. But something has happened to the pear market, and he finds it impossible to sell most of the pears at anything near that price. In fact, he finds that he must sell the pears at whatever price he can get before they become overripe. Suppose he finds that he can only sell his stock of pears at 70 cents a pound. The outside observer might say that the fruit dealer has, perhaps "unfairly," sold his pears "below costs," figuring that the dealer's costs were $1 a pound.

"Infant" Industries

Another protectionist fallacy held that the government should provide a temporary protective tariff to aid, or to bring into being, an "infant industry." Then, when the industry was well-established, the government would and should remove the tariff and toss the now "mature" industry into the competitive swim.
The theory is fallacious, and the policy has proved disastrous in practice. For there is no more need for government to protect a new, young, industry from foreign competition than there is to protect it from domestic competition.
In the last few decades, the "infant" plastics, television, and computer industries made out very well without such protection. Any government subsidizing of a new industry will funnel too many resources into that industry as compared to older firms, and will also inaugurate distortions that may persist and render the firm or industry permanently inefficient and vulnerable to competition. As a result, "infant-industry" tariffs have tended to become permanent, regardless of the "maturity" of the industry. The proponents were carried away by a misleading biological analogy to "infants" who need adult care. But a business firm is not a person, young or old.

Older Industries

Indeed, in recent years, older industries that are notoriously inefficient have been using what might be called a "senile-industry" argument for protectionism. Steel, auto, and other outcompeted industries have been complaining that they "need a breathing space" to retool and become competitive with foreign rivals, and that this breather could be provided by several years of tariffs or import quotas. This argument is just as full of holes as the hoary infant-industry approach, except that it will be even more difficult to figure out when the "senile" industry will have become magically rejuvenated. In fact, the steel industry has been inefficient ever since its inception, and its chronological age seems to make no difference. The first protectionist movement in the U.S. was launched in 1820, headed by the Pennsylvania iron (later iron and steel) industry, artificially force-fed by the War of 1812 and already in grave danger from far more efficient foreign competitors.

The Non-Problem of the Balance of Payments

A final set of arguments, or rather alarms, center on the mysteries of the balance of payments. Protectionists focus on the horrors of imports being greater than exports, implying that if market forces continued unchecked, Americans might wind up buying everything from abroad, while selling foreigners nothing, so that American consumers will have engorged themselves to the permanent ruin of American business firms. But if the exports really fell to somewhere near zero, where in the world would Americans still find the money to purchase foreign products? The balance of payments, as we said earlier, is a pseudo-problem created by the existence of customs statistics.
During the day of the gold standard, a deficit in the national balance of payments was a problem, but only because of the nature of the fractional-reserve banking system. If U.S. banks, spurred on by the Fed or previous forms of central banks, inflated money and credit, the American inflation would lead to higher prices in the U.S., and this would discourage exports and encourage imports. The resulting deficit had to be paid for in some way, and during the gold standard era this meant being paid for in gold, the international money. So as bank credit expanded, gold began to flow out of the country, which put the fractional-reserve banks in even shakier shape. To meet the threat to their solvency posed by the gold outflow, the banks eventually were forced to contract credit, precipitating a recession and reversing the balance of payment deficits, thus bringing gold back into the country.
But now, in the fiat-money era, balance of payments deficits are truly meaningless. For gold is no longer a "balancing item." In effect, there is no deficit in the balance of payments. It is true that in the last few years, imports have been greater than exports by $150 billion or so per year. But no gold flowed out of the country. Neither id dollars "leak" out. The alleged "deficit" was paid for by foreigners investing the equivalent amount of money in American dollars: in real estate, capital goods, U.S. securities, and bank accounts.
In effect, in the last couple of years, foreigners have been investing enough of their own funds in dollars to keep the dollar high, enabling us to purchase cheap imports. Instead of worrying and complaining about this development, we should rejoice that foreign investors are willing to finance our cheap imports. The only problem is that this bonanza is already coming to an end, with the dollar becoming cheaper and exports more expensive.
We conclude that the sheaf of protectionist arguments, many plausible at first glance, are really a tissue of egregious fallacies. They betray a complete ignorance of the most basic economic analysis. Indeed, some of the arguments are almost embarrassing replicas of the most ridiculous claims of 17th-century mercantilism: for example, that it is somehow a calamitous problem that the U.S. has a balance of trade deficit, not overall, but merely with one specific country, e.g., Japan.
Must we even relearn the rebuttals of the more sophisticated mercantilists of the 18th century: namely, that balances with individual countries will cancel each other out, and therefore that we should only concern ourselves with the overall balance? (Let alone realize that the overall balance is no problem either.) But we need not reread the economic literature to realize that the impetus for protectionism comes not from preposterous theories, but from the quest for coerced special privilege and restraint of trade at the expense of efficient competitors and consumers.
In the host of special interests using the political process to repress and loot the rest of us, the protectionists are among the most venerable. It is high time that we get them, once and for all, off our backs, and treat them with the righteous indignation they so richly deserve.

The above originally appeared at

Wednesday, April 20, 2016

An Open Letter from Secretary Lew on Changes to the US currency

April 20, 2016

An Open Letter from Secretary Lew:

When I announced last June that a newly redesigned $10 note would feature a woman, I hoped to encourage a national conversation about women in our democracy.  The response has been powerful.  You and your fellow citizens from across the country have made your voices heard through town hall discussions and roundtable conversations, and with more than a million responses via mail and email, and through handwritten notes, tweets, and social media posts.  Thank you for sharing this thoughtful and impassioned feedback.

Over the course of the last 10 months, you put forth hundreds of names of people who have played a pivotal role in our nation’s history.  Many of you proposed that our new currency highlight democracy in action and reflect the diversity of our great nation.  Some of you suggested we skip the redesign of the $10 note, which is the next in line for a security upgrade, and move immediately to redesigning the $20 note.  And others proposed unconventional ideas, such as creating a $25 bill.

I have been inspired by this conversation and today I am excited to announce that for the first time in more than a century, the front of our currency will feature the portrait of a woman—Harriet Tubman on the $20 note.

Since we began this process, we have heard overwhelming encouragement from Americans to look at notes beyond the $10.  Based on this input, I have directed the Bureau of Engraving and Printing to accelerate plans for the redesign of the $20, $10, and $5 notes.  We already have begun work on initial concepts for each note, which will continue this year.  We anticipate that final concept designs for the new $20, $10, and $5 notes will all be unveiled in 2020 in conjunction with the 100th anniversary of the 19th Amendment, which granted women the right to vote.

The decision to put Harriet Tubman on the new $20 was driven by thousands of responses we received from Americans young and old.  I have been particularly struck by the many comments and reactions from children for whom Harriet Tubman is not just a historical figure, but a role model for leadership and participation in our democracy.  You shared your thoughts about her life and her works and how they changed our nation and represented our most cherished values.  Looking back on her life, Tubman once said, “I would fight for liberty so long as my strength lasted.”  And she did fight, for the freedom of slaves and for the right of women to vote.  Her incredible story of courage and commitment to equality embodies the ideals of democracy that our nation celebrates, and we will continue to value her legacy by honoring her on our currency.  The reverse of the new $20 will continue to feature the White House as well as an image of President Andrew Jackson.

As I said when we launched this exciting project: after more than 100 years, we cannot delay, so the next bill to be redesigned must include women, who for too long have been absent from our currency.  The new $10 will honor the story and the heroes of the women’s suffrage movement against the backdrop of the Treasury building.  Treasury’s relationship with the suffrage movement dates back to the March of 1913, when advocates came together on the steps of the Treasury building to demonstrate for a woman’s right to vote, seven years prior to the passage of the 19th Amendment.  The new $10 design will depict that historic march and honor Lucretia Mott, Sojourner Truth, Susan B. Anthony, Elizabeth Cady Stanton, and Alice Paul for their contributions to the suffrage movement.  The front of the new $10 will continue to feature Alexander Hamilton, our nation’s first Treasury Secretary and the architect of our economic system.

The reverse of the new $5 will depict the historic events that have occurred at the Lincoln Memorial.  In 1939, at a time when Washington’s concert halls were still segregated, world-renowned Opera singer Marian Anderson helped advance civil rights when, with the support of First Lady Eleanor Roosevelt, she performed at the Lincoln Memorial in front of 75,000 people.  And in 1963, Martin Luther King, Jr. delivered his historic “I Have a Dream” speech at the same monument in front of hundreds of thousands.  Honoring these figures will bring to life events at the Lincoln Memorial that helped to shape our history and our democracy.  The front of the new $5 will continue to feature President Lincoln.

Due to security needs, the redesigned $10 note is scheduled to go into circulation next.  I have directed the Bureau of Engraving and Printing to work closely with the Federal Reserve to accelerate work on the new $20 and $5 notes.  Our goal is to have all three new notes go into circulation as quickly as possible, while ensuring that we protect against counterfeiting through effective and sophisticated production.

This process has been much bigger than one square inch on one bill, and along the way, we heard about countless individuals who contributed to our democracy.  Our website,, will highlight many of the names that we heard throughout this process, and help tell some of the many stories that inspired us.  Of course, more work remains to tell the rich and textured history of our country.  But with this decision, our currency will now tell more of our story and reflect the contributions of women as well as men to our great democracy.

Thank you,

Secretary Jacob J. Lew

Read the letter online here.

Monday, April 18, 2016

Primary Dealers List

Primary dealers serve as trading counterparties of the New York Fed in its implementation of monetary policy. This role includes the obligations to: (i) participate consistently in open market operations to carry out U.S. monetary policy pursuant to the direction of the Federal Open Market Committee (FOMC); and (ii) provide the New York Fed's trading desk with market information and analysis helpful in the formulation and implementation of monetary policy. Primary dealers are also required to participate in all auctions of U.S. government debt and to make reasonable markets for the New York Fed when it transacts on behalf of its foreign official account-holders.

As of April 12, 2016:

Bank of Nova Scotia, New York Agency
BMO Capital Markets Corp.
BNP Paribas Securities Corp.
Barclays Capital Inc.
Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Credit Suisse Securities (USA) LLC
Daiwa Capital Markets America Inc.
Deutsche Bank Securities Inc.
Goldman, Sachs & Co.
HSBC Securities (USA) Inc.
Jefferies LLC
J.P. Morgan Securities LLC
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Mizuho Securities USA Inc.
Morgan Stanley & Co. LLC
Nomura Securities International, Inc.
RBC Capital Markets, LLC
RBS Securities Inc.
Societe Generale, New York Branch
TD Securities (USA) LLC
UBS Securities LLC.
Wells Fargo Securities, LLC

What It Takes to Get Into the Top 1%

It took a little less than $370,000 in adjusted gross income in 2010 to make it into the top 1% in terms of income, according to newly released data from the Internal Revenue Service. That's up slightly from the $352,000 the year before.

But on average, the top 1% earned $1.12 million, up from $980,000 the year before.

(via CNN)

Saturday, April 16, 2016

The G20

 The world has come a long way since the spring of 1973, when U.S. Treasury Secretary  George Schultz  met with the finance ministers of France, West Germany, and the United Kingdom in the library of the White House to discuss the international financial system after the collapse of the Bretton Woods agreement on fixed exchange rates. In creating the Library Group, the United States sought a more candid and informal grouping, one less dominated by European countries than the Group of Ten (G10). There were important subsequent efforts to include emerging powers in the discussion, such as the Willard Group, the Group of Thirty-Three (G33), and the creation of the G20 at the ministerial level in September 1999, but the Group of Seven (G7) remained the leading economic policy coordination body. It was not until 2008, when the G20 was raised to the leaders’ level, that the goal of “broaden[ing] the discussions on key economic and financial policy issues among systemically significant economies and promot[ing] cooperation to achieve stable and sustainable world economic growth that benefits all” was achieved.

(via Robert Kahn)

The Library Group

In the spring of 1973, when U.S. Treasury Secretary George Schultz met with the finance ministers of France, West Germany, and the United Kingdom in the library of the White House to discuss the international financial system after the collapse of the Bretton Woods agreement on fixed exchange rates. In creating the Library Group, the United States sought a more candid and informal grouping, one less dominated by European countries than the Group of Ten (G10).

(via Robert Kahn)

Wednesday, April 13, 2016

Keynote Keynote Address Of CFTC Commissioner J. Christopher Giancarlo Before The Cato Institute, Cryptocurrency: The Policy Challenges Of A Decentralized Revolution - “If Allowed To Thrive, Blockchain May Finally Give Regulators Transparency

Good morning, ladies and gentlemen. Thank you for your warm welcome.
Before I begin, let me say that my remarks reflect my own views and do not necessarily constitute the views of the Commodity Futures Trading Commission (CFTC or Commission), my fellow CFTC commissioners or the CFTC staff.
It is a pleasure to be here with you today for this important discussion of the policy implications of crypto-currencies, one of the more fascinating developments arising from the current revolution in exponential digital technologies.
Notwithstanding today’s broad topic, my remarks this morning will not be directed broadly to crypto-currencies. Rather, I want to focus specifically on a key foundational technology that underlies the crypto-currency, Bitcoin. That is the technology of distributed ledgers often referred to as the “blockchain,” an emerging technology that may have enormous implications for the capital and hedging markets overseen by the CFTC and other regulators.
Lack of Counterparty Credit Risk Transparency During the Financial Crisis
To begin, I want to take you back for a moment to September 2008. That was a perilous time in global financial markets. An enormous U.S. housing bubble had burst triggering a cascading global credit crisis. Concern was rife about imminent investment and commercial bank failure.
I was on Wall Street, serving as a senior executive of one of the world’s major trading platforms for credit default swaps (CDS), then the epicenter of systemic risk. Panic was in the air and tension was on our broking floor trying to maintain orderly markets. I remember a call from a U.S. bank regulator asking about CDS trading exposure of several major banks, including Lehman Brothers. In fact, trading conditions were deteriorating by the hour. It was clear that the regulator had little means, short of telephone calls, to read all the danger signals that the CDS markets were broadcasting.
Now, let’s fast forward to today. It is seven and a half years after the financial crisis and global regulators still do not have full visibility into the swaps trading portfolios of major financial institutions.
It is not for lack of hard work and effort. One of the key market reforms agreed upon following the financial crisis was the reporting of swaps transactions to regulators and central data repositories. My agency, the CFTC, started that initiative in 2011 and has pursued it ever since. Yet, CFTC data still does not provide a complete picture of global swaps trading. In part, it is because global regulators have not harmonized global reporting protocols and data fields across international jurisdictions. It is also because of the practical impossibility of a single national regulator collecting sufficient quality data for both cleared and uncleared swaps to recreate a real-time ledger of the highly complex, global swaps trading portfolios of all market participants.
Fortunately, emerging distributed ledger technology, what I will call “DLT” or “blockchain,” may address this crucial need. That is what I want to talk about this morning.
The Promise of Distributed Ledger Technology
The Bank of England recently dubbed DLT the “first attempt at an Internet of Finance.1 It has the potential to link networks of legal recordkeeping the same way the Internet connects networks of data and information, increasing settlement efficiency and speed, reducing transaction costs and broadening market access.
The potential applications of DLT are being widely imagined and explored and promise benefits to market participants, consumers and governments alike. DLT could allow for the confirmation and ownership transfer of virtually anything from hockey tickets and magazine subscriptions to auto repair warranties, airline loyalty rewards and apartment leases. It could empower better and more verifiable voting systems, whether for proxies by corporate shareholders, customer satisfaction surveys or voting for political candidates.
DLT is likely to have a broad impact on global financial markets in payments, banking, securities settlement, title recording, cyber security and trade reporting and analysis.2 It may make possible new “smart” securities and derivatives that can value themselves in real-time, report themselves to data repositories, automatically calculate and perform margin payments and even terminate themselves in the event of counterparty default.3
As I have noted before, however, this transformation will not come without consequences, including a greatly disruptive impact on the human capital that supports the recordkeeping and transaction processing of contemporary financial markets.4 A recent report by Citigroup forecasts that retail banking automation including blockchain could spur a 30 percent decline in banking jobs across the U.S. and Europe over the next decade, the equivalent of eliminating nearly 2 million jobs.5
Still, in the wake of the 2008 financial crisis, the potential benefits of DLT are enormous for both financial services firms and the regulators who oversee them. For market participants, DLT may manage the enormous operational, transactional and capital complexity brought about by the legion of disparate mandates, regulations and capital requirements promulgated unceasingly by regulators here and abroad.6 In fact, one study estimates that DLT could eventually allow financial institutions to save as much as $20 billion in infrastructure and operational costs each year.7 Another study reportedly estimates that blockchain could cut trading settlement costs by a third, or $16 billion a year, and cut capital requirements by $120 billion.8
For regulators, the potential of blockchain is equally valuable. In February, the U.S. Government Accountability Office issued a report9 that U.S. regulation of financial markets has not meaningfully improved since its issuance of a comprehensive study more than seven years ago that concluded that the U.S. financial regulatory system is generally “ill-suited to meet the nation’s needs in the 21st century” because of its high level of complexity and overlap.10 The current report finds that the U.S. financial regulatory framework leads to inconsistencies, among other things, in the oversight by different regulators of securities and derivatives market participants and banking and depository institutions.11 Against these inconsistencies, DLT offers the promise in allowing U.S. government overseers to transcend the fragmented regulatory structure by providing reference to a single, verified record of all financial transactions across regulated markets.
In 2008, prudential regulators had to call around to brokerage firms like mine searching for market confirmation of Lehman’s distress. What a difference it would have made if regulators had access then to a “golden record” of the real-time ledgers of all regulated trading participants, rather than trying to assemble piecemeal data to recreate complex, individual trading portfolios. I believe that, if regulators in 2008 could have viewed a real-time distributed ledger, and, perhaps, been able to utilize modern cognitive computing capabilities, they may have been able to recognize anomalies in market-wide trade activity and diverging counterparty exposures indicating heightened risk of bank failure. It would certainly have allowed for far prompter, better-informed, and more calibrated regulatory intervention instead of the disorganized response that unfortunately ensued.
Moreover, had Lehman still failed, records powered by DLT and held by trading counterparties (and available to regulators) would have accurately shown Lehman’s open positions across asset classes. Imagine if, instead of requiring countless legal actions spanning eight years, we could have known all of Lehman’s exposures within minutes of its bankruptcy filing. Accelerated settlement of open positions and accounts could have taken weeks, not years.
It is, therefore, not surprising that DLT has sparked an incredible amount of interest within the financial industry – regulators and regulatees alike. Not a week goes by without several news articles, opinions and reports discussing the potential benefits and challenges of the technology. Billions of dollars are being invested in dozens of new ventures and innovations.12
Last week, seven firms announced the successful test of DLT to record on a shared network a month’s worth of trades in the multi-trillion dollar single-name CDS market.13 The test was organized by the Depository Trust & Clearing Corp. (DTCC) and included Bank of America, Credit Suisse, J.P. Morgan, Citigroup, financial service provider, Markit, and blockchain technology developer, Axoni.14 The test included smart contracts and demonstrated the potential real-time transparency benefits to regulators.15 Tests like this one prove there is merit to the promise of potential DLT applications. Similarly promising projects are underway.16 A few weeks ago, DTCC said it has started working with Digital Asset Holdings to determine whether short-term lending arrangements between dealers known as repos could be settled using blockchain.17
Adoption of the “Do No Harm” Regulatory Model
DLT development is clearly moving rapidly, certainly faster than underlying legal and regulatory frameworks.  Rules regarding DLT are currently unwritten and likely years away, leaving the industry with little clarity.18
Investment in DLT faces the danger that when regulation does come, it will come from a dozen different directions with different restrictions stifling crucial technological development before it reaches fruition.
Fortunately, there is a good model for the healthy development of DLT – the “first, do no harm” approach to the early Internet. Two decades ago, as the Internet was entering a phase of rapid growth and expansion, a Republican Congress and the Clinton administration established these foundational principles: the Internet was to progress through human social interaction; voluntary contractual relations and free markets; and governments and regulators were not to harm the Internet’s continuing evolution.19
This simple approach is well-recognized as the enlightened regulatory underpinning of the Internet that brought about such profound changes to human society. During the almost 20 years of “do no harm” regulation, a massive amount of investment was made in the Internet’s infrastructure. It yielded a rapid expansion in access that supported swift deployment and mass adoption of Internet-based technologies. Internet-based innovations have revolutionized nearly every aspect of American life, from telecommunications to commerce, transportation and research and development. This robust Internet economy has created jobs, increased productivity and fostered innovation and consumer choice.
“Do no harm” was unquestionably the right approach to development of the Internet. Similarly, “do no harm” is the right approach for DLT.
I recently called on the CFTC and its domestic and overseas counterparts to join an international consensus to avoid impeding essential DLT innovation by protracted rule uncertainty or uncoordinated actions.20
I believe regulators and policy makers have a choice: we can either follow a path that burdens the industry with multiple onerous regulatory schemes or one where we come together and set forth uniform principles in an effort to encourage DLT investment and innovation. I favor the latter approach.
I believe that innovators and investors should not have to seek government’s permission, only its forbearance, to develop DLT. Government must foster a regulatory environment conducive to the technological innovation needed to address the increased operational complexity and capital consumption of modern financial market regulation.
Once again, the private sector must lead. Regulators must avoid impeding innovation and investment. Instead, they must provide a predictable, consistent and straightforward legal environment. Protracted regulatory uncertainty or an uncoordinated regulatory approach must be avoided, as should rigid application of existing rules designed for a bygone technological era.21
Need for Global Regulatory Coordination
As they did with the Internet, U.S. and foreign regulators must coordinate to create a principles-based approach for DLT oversight in order to provide the flexibility, certainty and harmonization necessary for the technology to flourish.
The Financial Stability Board (FSB) and the International Organization of Securities Commissions or “IOSCO” have recently turned their attention to financial technology innovations, including DLT.22 I was encouraged to read that FSB Chairman Mark Carney recognizes that regulation should not stifle emerging innovation.23 I similarly understand that IOSCO is working on international policies to drive innovation without undermining confidence in markets.24
Noteworthy is the recent white paper of the Office of the Comptroller of the Currency (OCC), entitled “Supporting Responsible Innovation in the Federal Banking System”.25 In its paper, the OCC offers its support for innovation in the financial services industry that it views as “consistent with safety and soundness, compliant with applicable laws and regulations, and protective of consumer’s rights.”26 It emphasizes the need to “support responsible innovation” and business cultures “receptive to responsible innovation.”27
IOSCO Chairman, Greg Medcraft, has said that issues around DLT must be dealt with at the multilateral level, not by individual countries.28 I agree. Regulation of DLT must indeed be coordinated on a multilateral level based on the principle of “do no harm.” Just as many financial services firms are joining together in broad DLT consortiums, regulators must do the same. The FSB and IOSCO have important roles to play in coordinating DLT regulation. These organizations should put forth a set of simple governing principles flexible enough to accommodate the issues and concerns of different national regulators. Such principles would create a regulatory environment that encourages the development of DLT, just as U.S. policymakers’ 1990s framework fostered the exponential growth of the Internet.
Without such a “do no harm” approach, financial services and technology firms will be left trying to navigate a complex regulatory environment, where multiple agencies have their own rule frameworks, concerns and issues.29 Some of the issues are anti-money laundering, know-your-customer requirements, privacy and security and dispute resolution.30
It is therefore critical for regulators to come together to adopt a principles-based approach to DLT regulation that is flexible enough so innovators do not fear unwitting infractions of an uncertain regulatory environment. Some regulators have already openly acknowledged the need for light-touch oversight. Masamichi Kono, Vice Minister for International Affairs at the Japan Financial Services Agency, stated that regulators must take a “pragmatic and flexible approach” to regulation of new technologies so not to stifle innovation.31 Similarly, the UK’s Financial Conduct Authority (FCA) has committed to regulatory forbearance on DLT development for the foreseeable future in an effort to give innovators “space” to develop and improve the technology.32 The FCA is even going one step further and engaging in discussions with the industry to determine whether DLT could meet the FCA’s own needs.33
I have no doubt that the FCA’s intention to give DLT innovators “space” to innovate will be good for DLT research and development. I also suspect that it will be very good for London’s burgeoning FinTech industry and job creation in the United Kingdom.34
Yesterday in London, a senior representative of Her Majesty’s Treasury announced that the United Kingdom will establish an “industry-led panel” that will set an overarching strategy for the British FinTech industry.35 She went on to say, “[t]he [UK] government wants to ensure the UK continues to be the best place in the world to be a FinTech company.”36
It is unfortunate that we do not hear similarly strong voices on this side of the Atlantic. U.S. lawmakers concerned about the rapid loss of jobs in the U.S. financial service industry, especially in the New York City area where job losses are pronounced,37 should similarly look to provide “space” to U.S. DLT innovation and entrepreneurship and the well-paying jobs that will surely follow.
American global leadership in technological innovation of the Internet was built hand-in-hand with regulators’ enlightened, “do no harm” approach. The same opportunity for technology leadership is present today – if we have the good sense to seize it.
Practical Steps to “Do No Harm”
While international regulatory coordination and the adoption of a principles-based approach are important, each regulatory agency can take steps now to ensure that its existing rules do not inhibit DLT development and adoption.
For the CFTC, one example comes to mind – recordkeeping rule 1.31.38 Rule 1.31 requires all books and records to be kept in their original form or native file format.39 Such records must be produced in a form specified by any representative of the Commission.40 Rule 1.31 also has requirements for certain records to be stored in either micrographic media or electronic storage media and other related conditions.41
As I have previously stated, the CFTC should revisit this rule and make it technologically neutral such that it can accommodate DLT and other innovations that promote efficiency, accuracy and security in recordkeeping.42The CFTC should also examine and, as necessary, revise other rules that may inhibit DLT innovation. Other regulators should similarly examine their recordkeeping and other rules.
In conclusion, I note that when the Internet developed in the mid-1990s, none of us could have imagined its capabilities that we take for granted today.
Fortunately, policymakers had the foresight to create a “do no harm” regulatory environment that served as a catalyst rather than a choke point for innovation. Thanks to their forethought and restraint, Internet-based applications have revolutionized nearly every aspect of human life, created millions of jobs and increased productivity and consumer choice.
Policymakers must show that same forethought and restraint now.
Today, I repeat my call for my agency, the CFTC, and other U.S. and overseas policymakers and regulatory counterparts to repeat that broad-minded approach.
I look forward to working with my fellow CFTC commissioners, U.S. lawmakers and other financial services regulators here and abroad to develop a “do no harm” framework from which to launch a new era of innovation in distributed ledger technology – for the good of our markets, the jobs they support and the people they serve.
Thank you for your time and attention.
1 Robleh Ali et al., Bank of England, Innovations in Payment Technologies and the Emergence of Digital Currencies 11 (2014),;see also Tomas Hirst, The Bank of England Just Said It Thinks Bitcoin Could Be Huge, Business Insider, Sept. 11, 2014,
2 See, e.g., Larry Greenemeier, Can't Touch This: New Encryption Scheme Targets Transaction Tampering, Scientific American, May 22, 2015,
3 See Massimo Morini & Robert Sams, Smart Derivatives Can Cure XVA Headaches, Risk Magazine, Aug. 27, 2015,; see also Jeffrey Maxim, UBS Bank Is Experimenting with “Smart-Bonds” Using the Bitcoin Blockchain, Bitcoin Magazine, June 12, 2015,; see also Pete Harris, UBS Exploring Smart Bonds on Block Chain, Block Chain Inside Out, June 15, 2015, generally Galen Stops, Blockchain: Getting Beyond the Buzz, Profit & Loss, Aug.–Sept. 2015, at 20,
4 See Guest Lecture of Commissioner J. Christopher Giancarlo, Harvard Law School, Fidelity Guest Lecture Series on International Finance (Dec. 1, 2015),
5 Telis Demos, Citi: Technology Could Cost Two Million Bank Employees Their Jobs, The Wall Street Journal, Mar. 30, 2016,
6 See, e.g., Oversight of Dodd-Frank Act Implementation, U.S. House Financial Services Committee, (last visited Mar. 2, 2016).
7 Santander InnoVentures, Oliver Wyman & Anthemis Group, The Fintech Paper 2.0: Rebooting Financial Services 15 (2015),
8 Telis Demos, Bitcoin’s Blockchain Technology Proves Itself in Wall Street Test, Apr. 7, 2016, The Wall Street Journal,
9 See Financial Regulation: Complex and Fragmented Structure Could be Streamlined to Improve Effectiveness, Government Accountability Office, Feb. 2016,
10 Id.
11 Id.
12 See Blockchain & Bitcoin 2016: A Survey of Global Leaders, Magister Advisors, (last visited Mar. 24, 2016);see also Kim S. Nash, Blockchain: Catalyst for Massive Change Across Industries, The Wall Street Journal, Feb. 2, 2016, (citing figure published by Magister Advisors).
13 Demos, supra, note 8.
14 Id.
15 Press Release, Successful Blockchain Test Completed by Axoni, DTCC, Markit, and Multi-Bank Working Group, DTCC, Apr. 6, 2016,
16 Jemima Kelly, Three Banks Join R3 Blockchain Consortium Taking Total to 25, Reuters, Oct. 28, 2015,
17 Press Release, DTCC and Digital Asset to Develop Distributed Ledger Solution to Drive Improvements in Repo Clearing, DTCC, Mar. 29, 2016,
18 Benjamin Elliott et al., Banks Testing Blockchain Need Clarity on Regulations, TabbForum, Feb. 26, 2016.
19 The Telecommunications Act of 1996 (See Telecommunications Act of 1996 (Pub. L. No. 104-104, 110 Stat. 56 (1996))) and the ensuing Clinton administration “Framework for Global Electronic Commerce” (See Clinton administration, Framework for Global Electronic Commerce, established a simple and sensible framework: 1) the private sector should play the leading role in innovation, development and financing; and 2) governments and regulators should “do no harm” by avoiding undue restrictions, supporting a predictable, consistent and simple legal environment and respecting the “bottom-up” nature of the technology and its deployment in a global marketplace.
20 See Special Address of CFTC Commissioner J. Christopher Giancarlo Before the Depository Trust & Clearing Corporation 2016 Blockchain Symposium, Mar. 29, 2016,
21 Henry Engler, Blockchain Faces Maze of Regulatory Complexities, Questions and Challenges, Thomson Reuters, Feb. 23, 2016,
22 Caroline Binham, Financial Stability Board Adds Fintech to List of Worries, Financial Times, Feb. 27, 2016; Huw Jones, Global Regulators May Propose Rules for Fintech: FSB’s Carney, Reuters, Feb. 27, 2016; Greg Medcraft, Blockchain: How We Can Harness the Benefits of this New Technology While Mitigating the Risks, MarketVoice, at 23, Jan. 2016.
23 Binham, supra note 22; Jones, supra note 22.
24 Medcraft, supra note 22.
25 Supporting Responsible Innovation in the Federal Banking System: An OCC Perspective, Office of the Comptroller of the Currency, Mar. 2016, available at
26 Id.
27 Considering the OCC’s emphasis on “responsible innovation,” one thoughtful commentator notes that “A regulatory mindset that regards the failure to innovate as an indicator of a legal violation ultimately will discourage the very innovations [praised by Comptroller of the Currency Thomas Curry], since restrictions and punishment tend not to engender creativity. It is inevitable that bank regulators are cautious. Even so, a regulator’s inclination to say “no” to innovation by punishing failed innovation is likely to give the less regulated a strong competitive advantage.” Steven Lofchie, Commentary, OCC Summarizes Latest Developments of Its Innovation Initiative, Cadwalader Cabinet, Mar. 31, 2016,
28 Medcraft, supra note 22.
29 Engler, supra note 21.
30 Id.
31 Masamichi Kono, Japan Financial Services Agency, How Can Regulators Do Better The Next Time?, CFTC International Regulators’ Meeting, Boca Raton, FL, at 5-6, Mar. 15, 2016.
32 Daniel Palmer, U.K. Financial Regulator Vows to Give Blockchain “Space” to Grow, CoinDesk, Feb. 23, 2016,
33 Id. Blockchain may provide many benefits to regulators as well, such as improving audit trail and surveillance capabilities. A light-touch approach in regulating the blockchain will allow these benefits to be realized. See Mike Ross, Blockchain Plus Smart Contracts Equals Boon for Regulators, TabbForum, Feb. 29, 2016.
34 Through “Project Innovate,” the FCA works with businesses to introduce innovative financial products and services to the market and to help them understand the regulatory framework. The FCA plans to expand Project Innovate by implementing a regulatory sandbox that furthers UK-based financial technology development. This regulatory sandbox would include a “safe space” where businesses could test innovative products, services, business models and delivery mechanisms without immediately incurring all the normal regulatory consequences of pilot activities. See FCA Project Innovate, Sandbox,
35 Silvia Scioilli Borrelli, UK Government Pledges to Back Fintech Industry, Politico, Apr. 11, 2016.
36 Id.
37 Portia Crowe, Wall Street Jobs are Leaving New York, Business Insider, Feb. 10, 2016,
38 17 C.F.R. § 1.31 (2015).
39 Id. § 1.31(a)(1).
40 Id. § 1.31(a)(2).
41 Id. § 1.31(b).
42 See Special Address of CFTC Commissioner J. Christopher Giancarlo Before the Depository Trust & Clearing Corporation 2016 Blockchain Symposium, Mar. 29, 2016,