Liberty vs. Leviathan

Chronicling Liberty's battle against Leviathan

Mises on the bust

I started reading Socialism by Ludwig von Mises this past spring and am almost finished.   Tonight I came across a passage that’s just too good not to share in its entirety.  Note how prescient Mises was.  Socialism was first published in 1922 so he’s writing sometime before then.  The current ill health of the US economy and how it came to be so gives testimony to the accuracy of his analysis.

First, this from the Introduction by F.A. Hayek, a veteran of WWI as Mises and Röpke were.

Socialism promised to fulfill our hopes for a more rational, more just world.  And then came this book.  Our hopes were dashed.  “Socialism” told us that we had been looking for improvement in the wrong direction.

Now this from a section on inflation.  In the broader discussion Mises is discussing the methods of destructionism, the inevitable destruction of capital that occurs as socialist policies are pursued.  Inflation is but one of the policies.  As you read, think in terms of the decades since the end of WWII, not just the last couple of years.  Think not only of real estate bubbles but of the seventies, Greenspan, dot com bubbles and Y2K bubbles.  (All emphasis is added.)

Inflation is the last word in destructionism. The Bolshevists, with their inimitable gift for rationalizing their resentments and interpreting defeats as victories, have represented their financial policy as an effort to abolish Capitalism by destroying the institution of money. But although inflation does indeed destroy Capitalism, it does not do away with private property. It effects great changes of fortune and income, it destroys the whole finely organized mechanism of production based on division of labour, it can cause a relapse into an economy without trade if the use of metal money or at least of barter trade is not maintained. But it cannot create anything, not even a socialist order of society.

By destroying the basis of reckoning values—the possibility of calculating with a general denominator of prices which, for short periods at least, does not fluctuate too wildly—inflation shakes the system of calculations in terms of money, the most important aid to economic action which thought has evolved. As long as it is kept within certain limits, inflation is an excellent psychological support of an economic policy which lives on the consumption of capital. In the usual, and indeed the only possible, kind of capitalist book-keeping, inflation creates an illusion of profit where in reality there are only losses. As people start off from the nominal sum of the erstwhile cost price, they allow too little for depreciation on fixed capital, and since they take into account the apparent increases in the value of circulating capital as if these increases were real increases of value, they show profits where accounts in a stable currency would reveal losses.[19] This is certainly not a means of abolishing the effects of an evil etatistic policy, of war and revolution; it merely hides them from the eye of the multitude. People talk of profits, they think they are living in a period of economic progress, and finally they even applaud the wise policy which apparently makes everyone richer.

But the moment inflation passes a certain point the picture changes. It begins to promote destructionism, not merely indirectly by disguising the effects of destructionist policy; it becomes in itself one of the most important tools of destructionism. It leads everyone to consume his fortune; it discourages saving, and thereby prevents the formation of fresh capital. It encourages the confiscatory policy of taxation. The depreciation of money raises the monetary expression of commodity values and this, reacting on the book values of changes in capital—which the tax administration regards as increases in income and capital—becomes a new legal justification for confiscation of part of the owners’ fortune. References to the apparently high profits which entrepreneurs can be shown to be making, on a calculation assuming that the value of money remains stable, offers an excellent means of stimulating popular frenzy. In this way, one can easily represent all entrepreneurial activity as profiteering, swindling, and parasitism. And the chaos which follows, the money system collapsing under the avalanche of continuous issues of additional notes, gives a favourable opportunity for completing the work of destruction.

The destructionist policy of interventionism and Socialism has plunged the world into great misery. Politicians are helpless in the face of the crisis they have conjured up. They cannot recommend any way out except more inflation or, as they call it now, reflation. Economic life is to be “cranked up again” by new bank credits (that is, by additional “circulation” credit) as the moderates demand, or by the issue of fresh government paper money, which is the more radical programme.

But increases in the quantity of money and fiduciary media will not enrich the world or build up what destructionism has torn down. Expansion of credit does lead to a boom at first, it is true, but sooner or later this boom is bound to crash and bring about a new depression. Only apparent and temporary relief can be won by tricks of banking and currency. In the long run they must land the nation in profounder catastrophe. For the damage such methods inflict on national well-being is all the heavier, the longer people have managed to deceive themselves with the illusion of prosperity which the continuous creation of credit has conjured up.

Remember, this was Mises published in 1922, not Paul from the 2008 primary season.

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Röpke on inflation

Wilhelm Röpke‘s Economics of the Free Society was first published in 1937 in Germany. The English translation that we have was, regrettably, not published until 1963, based on the 9th German edition. Nevertheless, Röpke still has given us ample warning of what may lie ahead if the present administration and the Federal Reserve continue with current economic shenanigans.

Röpke had a front row seat of Germany’s hyperinflation in the ‘20s, Hitler’s rise to power in the ‘30s (he eventually fled Germany for his life) and the rebuilding of Germany in the late ‘40s. We ignore his warning at our own peril.

From a section on inflation in Chapter IV – Money and Credit (all emphasis added)…

Our generation, which recalls the despair caused by the inflations in the post World War I era and which was required to undergo the self-same catastrophes following World War II, needs no instruction concerning the fact that the worst disease with which a monetary system can be afflicted is that kind of inflation which is caused by a deficit of the government budget. The German inflation of the years 1920-23 will always remain as a horrible example of what happens when a government attempts to cover its budget deficits by resorting to the deceitful and irresponsible expedient of the printing press. What in Germany began as “deficit financing” ended in a series of catastrophic price rises which caused the shameless enrichment of some at the cost of the hopeless  impoverishment of others, and in a serious undermining of the whole economic and social structure. But the inflationary creation of money caused by the budget deficits of government need not necessarily lead to the economic and social disorders attendant on an open inflation of the kind that followed World War I. Beginning in 1933, National Socialist Germany demonstrated that a determined government can change an open into a repressed inflation by placing the country in the economic strait jacket of a command economy. Rationing, the imposition of stringent controls on wages, consumption, capital investment, rates of interest, and similar measures aimed at restricting the free use of the increasing amount of purchasing power may succeed in containing for an indefinite period the mounting inflationary pressure on prices, wages, exchange rates, stock prices, etc.

Since Hitler has shown how far and how long a government can neutralize an inflation by means of the command economy, we may well ask ourselves whether from now on there will be any government which will not follow the same road when it disposes of a functioning coercive apparatus. The greater the inflationary pressure the stronger will be the counterpressure of the command economy needed to repress it. By the same token, the command economy must resort to ever more comprehensive and ruthless controls if it is to effectively contain the mounting forces of inflation. This leads logically to the question of whether such a command economy is possible without totalitarian slavery (of which the Third Reich was such a repellent example).

The experience of Germany demands that we consider a little more closely this peculiar phenomenon of repressed inflation. As we have seen, it consists, fundamentally, in the fact that a government first promotes inflation but then seeks to interdict its influence on prices and rates of exchange by imposing the now familiar wartime devices of rationing and fixed prices, together with the requisite enforcement measures.  As inflationary pressures force up prices, costs, and exchange rates, the ever more comprehensive and elaborate apparatus of the command economy seeks to repress this upward movement with the countermeasures of the police state. The repressed inflation can be conceived of, then, as the deliberate maintenance of a system of coercive and fictitious values in which, economically speaking, there is neither rhyme nor reason. Such a system is an inevitable feature of a collectivist economic regime and is to be encountered wherever socialism has gained control of influence (Soviet Union, National Socialist Germany, Austria, Great Britain, Sweden, and some other European countries). Where this repressed inflation leads was shown with tragic incisiveness in the complete disintegration of the German economy, a process which was arrested only by the comprehensive economic and monetary reform which restored a free price system in which actual rather than fictitious supply-demand relationships were reflected (Summer, 1948). The prolongation of a policy of repressed inflation means that all economic values become increasingly fictitious, and this in a twofold sense: (1) stated values correspond less and less to actual scarcity relationships and (2) fewer and fewer transactions are completed on the basis of such values. The distortion of all value relationships which accompany the division of the economy into “official” and “black” markets, and the struggle between the directives of the market and those of the administrative authorities finally lead to chaos, to a situation in which any kind of order, whether of the collectivist or the market economy type, is lacking.

We see, then, that a repressed inflation is worse than an open one because, in the end, money loses not only its function as a medium of exchange and as a measure of value (as happens in the last stages of an open inflation), but also its even more important function as a stimulus to the production and distribution of maximum quantities of goods. Repressed inflation is a road which ends inevitably in chaos and paralysis. The more values are raised by inflation, the more will the authorities feel compelled to use their machinery of compulsion. But the more fictitious the system of compulsory values, the greater will be the economic chaos and the public discontent and the more threadbare either the authority of the government or its claim to be democratic. If the repressed inflation is not stopped in time it will, drawing strength from its own momentum, lead to the dissolution of economic activity and perhaps even of the state itself. This modern economic disease is one of the most serious of all; it is doubly pernicious since it tends to be recognized only when it is in an advanced stage.

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Juan de Mariana

Lew Rockwell today features The Political Economy of Juan de Mariana, a newly reprinted study of Fr. Juan de Mariana, first published in 1928.  I haven’t read it – yet, nor do I receive anything from the Mises Institute for mentioning it, but I just had to bring attention to it.

While you wait to get a copy read his biography and my summary of his treatise on money.

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Warning from 1817

I read several papers this weekend in preparation for my own paper on Frederic Bastiat. One of them was Joseph Salerno’s, “The Neglect of the French Liberal School in Anglo-American Economics: A Critique of Received Explanations“. In it I came across a name (actually several) I’ve never heard of before, Destutt de Tracy, a Frenchman. Here are a couple of quotes from his A Treatise on Political Economy, translated by Thomas Jefferson in 1817.  You can’t say we weren’t warned.

In a word when your paper [money] is good, it is useless to oblige people to receive it; when bad, it is iniquitous and absurd to force it to be received as good. No solid answer can ever be given to this dilemma. Mirabeau had therefore great reason to utter the celebrated phrase, which he too much forgot afterwards : All paper money is a phrensy [sic – frenzy] of despotism run mad. [Emphasis added]

and this on paper money and banking…

…society finds itself in the full state of paper money, of which we have seen the consequences. It is thus that the *caisse d’escompte produced the assignats in France. It is thus that the bank of London has brought England to the same state in which it is at this moment. It is thus all privileged companies [banks] end : they are radically vicious ; and every thing essentially bad always terminates badly, notwithstanding its transient successes ; [Emphasis added]

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Fasten Your Seatbelts

Inflation is currently running at 341% per annum.  No, I’m not talking about Zimbabwe.  It’s 231 million percent there.  It’s 341% in the good ole USA.  See Gary North’s analysis of why the the Fed is in a panic.

Adjusted Monetary Base

Adjusted Monetary Base

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Bernanke Still a Student

In 1963, Anna Schwartz co-authored with Milton FriedmanA Monetary History of the United States“, in which they made the case that the Great Depression was caused by tight monetary policy. It’s a work that Ben Bernanke often praises in his public speeches, citing the lessons learned from it as a basis for all the recent banking system liquidity infusions.

In an interview published by the Wall Street Journal over the weekend though, Schwartz schools Bernanke in one sentence, reminding us that in regards to today’s crisis “…to assume that the whole problem is inadequate liquidity bypasses the real issue.”

She doesn’t let Alan Greenspan off the hook either, saying that he hasn’t provided “…an adequate kind of response to those who argue that absent accommodative monetary policy, you would not have had this asset-price boom.”

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Party Time Inflation

Read my latest article at the Mises Institute to see how an auction with play money can give us a glimpse into the future.

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Roosevelt Redux?

If you think you’ve protected yourself from the financial turmoil surrounding us by investing in one of the gold ETFs (GLD, IAU), think again.  Steven LaTulippe reminds us that inflation is governmental policy and government will not tolerate anyone escaping their dastartdly deeds:

The reason governments inflate their currency is to surreptitiously confiscate wealth from those individuals who store their wealth in that currency. If too many citizens shield their wealth by investing in gold, they nullify the entire scam. Inflation “works” because citizens are forced – by legal tender laws – to store their wealth in a medium controlled by the government. As a government counterfeits its currency, it sucks wealth from all of those people who hold that currency.

The government cannot tolerate too many of its citizens successfully evading inflationary confiscation. In a worst-case scenario, a headlong rush into gold would destroy the dollar completely as individuals replaced it with gold as a medium of wealth storage and exchange.

This cannot be permitted under any circumstances, since it would undermine the very foundations of our governing elite’s power.

He then paints a scenario where gold could be confiscated once again in Whatcha Gonna Do at LewRockwell.com.

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Fiat Money and Family Values

The podcast of the day at Lew Rockwell’s is an interview with Jörg Guido Hülsmann on fiat money. Dr. Hülsmann delves into the moral hazards and immorality of a fiat currency.

A few years ago he wrote an excellent article on fiat currency and how it affects our culture and spiritual life. He shows that, not only is a fiat currency and the inflation that goes with it bad for business, it also attacks on many different fronts and “…assuredly destroys the family, thus suffocating the earthly flame of Christian morals.”

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