Quickies: Self-Defense for the Self-Defense Industry

Apologies for the lack of a post yesterday, Gentle Reader. I won't bore you with the reasons. Suffice it to say that at one point I was moving so fast that I crashed into myself coming around a blind corner.

Anyway, have a gander at the Obamunists' latest assault on our rights:

Gun retailers say the Obama administration is trying to put them out of business with regulations and investigations that bypass Congress and choke off their lines of credit, freeze their assets and prohibit online sales.

Since 2011, regulators have increased scrutiny on banks’ customers. The Federal Deposit Insurance Corp. in 2011 urged banks to better manage the risks of their merchant customers who employ payment processors, such as PayPal, for credit card transactions. The FDIC listed gun retailers as “high risk” along with porn stores and drug paraphernalia shops.

Meanwhile, the Justice Department has launched Operation Choke Point, a credit card fraud probe focusing on banks and payment processors. The threat of enforcement has prompted some banks to cut ties with online gun retailers, even if those companies have valid licenses and good credit histories.

“This administration has very clearly told the banking industry which customers they feel represent ‘reputational risk’ to do business with,” said Peter Weinstock, a lawyer at Hunton & Williams LLP. “So financial institutions are reacting to this extraordinary enforcement arsenal by being ultra-conservative in who they do business with: Any companies that engage in any margin of risk as defined by this administration are being dropped.”

A Justice Department representative said the agency is conducting several investigations that aim to hold accountable banks “who are knowingly assisting fraudulent merchants who harm consumers.”

“We’re committed to ensuring that our efforts to combat fraud do not discourage or inhibit the lawful conduct of these honest merchants,” the Justice Department said in a May 7 blog post.

But gun retailers say their businesses are being targeted in the executive branch’s efforts.

Clever, eh? The law, both statutory and "case law," is more firmly on the side of an individual right to keep and bear arms than it has been since U.S. v. Miller. But the Obamunists are determined to keep us from acquiring guns...rather, any more guns. So they've mounted a flank attack on the firearms industry: they've put intense pressure on the financial industry to deny them service.

These days, you don't have to be a lawbreaker to fear the weight of "the law," if we include the regulatory bureaucracies' power to inflict hardship on a company via onerous mandatory inspections and surrender of corporate records. Few who haven't been personally embroiled in such an inquisition have any idea how disruptive it is to business. For practical purposes, the company under the regulators' microscope must essentially cease to do business until the ordeal should end...and there's no guarantee that the ordeal will ever end.

Banks and credit card processors are the most heavily regulated category of business in these United States. As the dollar continues to deteriorate, ever more purchases are moving into the range where credit cards are the preferred (both by purchasers and vendors) method of payment. That makes payments processing an ideal "choke point" at which to apply strangulation pressure to any disfavored industry.

For firearms manufacturers, a healthy, reliable line of credit is a sine qua non. But of course, that requires a healthy, reliable banking relationship as well.

The C.S.O. is an accountant by trade. As the formation of a bank / payments processor that caters specifically to the firearms industry would seem to be the best response, I asked her what would be involved in creating such a bank. Her answer was, in essence, "Forget it." Regulations are once again the stopper; the federal regulatory authorities would ensure that such an institution would never open for business.

Washington's "assault weapon" is the regulatory bureaucracy: its de facto power to make law, its swelling cadre of armed enforcers, and Congress's unwillingness to rein it in. It has targeted the foundation of Americans' rights: the means we must have to defend them. What, then, must we do?

The Nature Of Money And Currency Part 4: The Emergence Of Banks And Banking

I know, I know: Too many concurrent essay series, Fran! Consciousness of the backlog might have been responsible for yesterday's attack of the Twitching Awfuls. All the same, one must soldier on.

The "Money and Currency" series has attracted a lot of email. To date, we have:

• This discussion of the properties of money and currency;
• This discourse on Gresham's Law and bimetallism;
• This narration of the transition to a fiat dollar.

I was tempted to continue on into the sociopolitical pressures that have propelled the massive inflation of the post-Federal Reserve Act century, but it occurred to me that a discussion of the quintessential financial institution, the bank, really ought to precede further discussion of the commodity with which we transact and (attempt to) save.

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Before people began to think about borrowing or saving in organized terms, they worried about protecting their accumulated precious metals. It was unwise to keep significant quantities of gold or silver in "casual" storage, especially in locales where there was a possibility of incursion by a raider band. Thus there arose interest in the safekeeping of one's store of value.

The local jeweler provided a solution. His trade required that he keep such stocks, and of course that he keep them safe from predation. If he had excess storage capacity, he might be persuaded to rent it to you, for a modest fee. You and he would agree on the fee, on how much metal he would store for you, on how long he would store it, and on how the deal was to be recorded; you would hand over your gold and silver; he would lock it away; and off you'd both go to your proper concerns. Thus were born two of the ubiquitous features of commercial societies: banking and bookkeeping.

But a jeweler who made banking into a significant side business would eventually contemplate the possibilities of having so much of other people's money in his hands. Why should it just sit there, taking up space and doing nothing? Especially as others were aware of it, an uncomfortable situation that increased the probability of an attack on the jeweler's vault. Better to "put it to work," simultaneously reducing the vault's attractiveness as a target and earning something from otherwise inert assets.

If the jeweler could be certain of holding X ounces of gold for Y days, he could lend it out, at interest, for Y-1 days -- assuming it would be paid back, of course. The creditworthiness of the prospective borrower had to be assured to a high degree of confidence, for a loan not repaid by the borrower must perforce be repaid to the depositors out of the jeweler's own funds. However, the usage fee for the borrowed funds, or usury, could help to protect the jeweler/banker: enough borrowers at a sufficiently high usury would return a sufficient profit margin to prevent a small number of bad loans from bankrupting the jeweler/banker.

Note in particular all the following:

• The jeweler/banker could not lend for a longer term than the term agreed upon with his depositors;
• He had to accept that his judgment of borrowers would occasionally be wrong, resulting in a "bad loan" that would not be repaid;
• The usury had to be set high enough to compensate for that inevitability;
• However, it could not be set too high, because:
  • That would discourage borrowing by creditworthy clients;
  • Competitive forces -- i.e., other jeweler/bankers -- would reduce his lending volume and thus his profits.

As jeweler/bankers mastered the intricacies of their new trade and gradually abandoned their jewelry businesses, thus was born the financial industry of today, albeit in a very early and simplified form.

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Profit is a seductive thing; profit accrued from others' assets is perhaps the most powerful of all. Bankers soon began to look for ways to increase the volume of their lending businesses beyond what the above prototype made possible. One constraint upon a bank's actions was the volume of its deposits. Should those increase, so also could the bank's lending, and therefore its profits.

The Law of Supply and Demand suggested that lowering the fees charged to depositors would stimulate a greater volume of deposits. Eventually, the cleverer bankers realized that rather than charge depositors a fee, they could pay usury to depositors, as long as the rate was sufficiently below the rate they could charge borrowers, and still increase their profits. By implication, this transformed the bank from a paid sentry into a borrower, a point that's reflected in bankers' accounting practice of treating cash on hand as a debit.

Many other changes arose with time. Some of them were ordinary and harmless; others have been unbelievably pernicious. Possibly the worst of all is the trend to "borrow short" but "lend long:" in modern practice, to allow on-demand withdrawals by depositors while committing to loans of many years' duration, while keeping only a small fraction of depositors' funds on hand in the practice called fractional-reserve banking. That practice, and depositors' uneasy awareness of it, are what make possible the greatly feared bank run.

At the core of modern banking practices is reliance upon interbanking: the aggregation of financial institutions into a league of mutual protection, originally against runs but, as the practice of fractional-reserve banking proliferated, against panics as well. Ultimately, bankers realized that no matter how many of them banded together to protect one another from such things, it was always possible in a fractional-reserve system for a few undisciplined banks -- sometimes known as wildcat banks, to create the preconditions for a panic that would bring the lot of them tumbling down.

One sensible response to the possibility of a run was to demand security for a loan: either real estate of demonstrated value or a chattel: a valuable item of movable property. Such security could be demanded in satisfaction of a loan the borrower could not repay. However, the intent was more to "keep the borrower honest" than to provide for genuine protection for the bank, as no bank wants to be in the business of selling tangibles. Over time, secured loans became a progressively smaller part of a bank's lending volume -- this was one of the unintended consequences of interbanking -- and threats to the system proliferated once more.

More anon.