Despite worries that foreign “competitors” will surpass economic production in the United States, innovation and entrepreneurship are still important here. For now.
Original Article: “For Now, Innovation and Entrepreneurship Still Holds a High Place in the USA”
This Audio Mises Wire is generously sponsored by Christopher Condon.
The Need to Be Whole: Patriotism and the History of Prejudice
by Wendell Berry
Shoemaker and Company, 2022; x + 513 pp.
Wendell Berry, a poet, novelist, and philosopher well known for his protests against mechanized agriculture and for his defense of the “land ethic,” is not a thinker one would immediately associate with Ludwig von Mises, and indeed, in economic theory the two are far apart. But there is nevertheless a passage in Mises’s Socialism that is central to Berry’s concerns.
The passage I have in mind is this:
When society’s existence is threatened, each individual must risk his best to avoid destruction. Even the prospect of perishing in the attempt can no longer deter him. For there is then no choice between either living on as one formerly lived or sacrificing oneself for one’s country, for society, or for one’s convictions. Rather, must the certainty of death, servitude, or insufferable poverty be set against the chance of returning victorious from the struggle. War carried on pro aris et focis [for hearth and home] demands no sacrifice from the individual. One does not engage in it merely to reap benefits for others, but to preserve one’s own existence.
Berry uses a similar idea to explain and defend the South’s standpoint in the Civil War, but he does not do so in the way one might expect. Far from extolling the virtues of antebellum slavery, he condemns it as a grievous sin. In this connection, he makes an interesting criticism of John C. Calhoun, who deemed manual labor beneath the dignity of gentlemen, fit only for slaves. Berry argues that it was in part the unwillingness of elements among the Southern planter elite to acknowledge the virtue of work that led them to turn away from the Jeffersonian position that slavery is a great evil. In this connection, Berry quotes John Quincy Adams, a great opponent of slavery whom he admires: “I told Calhoun I could not see things in the same light—It is in truth all perverted sentiment—mistaking labor for slavery, and dominion for Freedom” (Adams, quoted on p. 298).
If slavery was wrong, why, then, does Berry defend the South’s position in the Civil War? His answer is that the great bulk of those who fought for the South did so not to entrench slavery but rather to protect their land and homes from invasion: “But from the point of view of the Confederate soldiers, the great fact of the war, once it had begun, was that their country had been, and was going to be invaded. They shared with [Robert E.] Lee a settled determination to defend their homelands and their people” (p. 203).
In arguing in this way, Berry agrees with Murray Rothbard, another thinker not usually coupled with him. Like Berry, Rothbard argues that the Southerners were defending their lands from invasion:
In 1861, the Southern states, believing correctly that their cherished institutions were under grave threat and assault from the federal government, decided to exercise their natural, contractual, and constitutional right to withdraw, to “secede” from that Union. The separate Southern states then exercised their contractual right as sovereign republics to come together in another confederation, the Confederate States of America. If the American Revolutionary War was just, then it follows as the night the day that the Southern cause, the War for Southern Independence, was just, and for the same reason: casting off the “political bonds” that connected the two peoples. In neither case was this decision made for “light or transient causes.” And in both cases, the courageous seceders pledged to each other “their lives, their fortunes, and their sacred honor.”
If it is objected that without the war, the end of slavery might have been indefinitely postponed, Berry admits that he has no easy answer but that he does know that the violence of war exacts tremendous costs. He reminds us that the “crusade” mentality led to later disasters:
[The Civil War] remains popularly credited as the solution, entirely good, of our worst national problem. So successful were we at solving our own great problem that we have generously undertaken to solve international problems and the problems of other nations also by force of war and with the same assurance of our goodness in doing so. If we have a sort of notion of preventability, we are not long detained by it. We appear never to bother with the question of net good. We went to war in Iraq and Afghanistan as if such questions could not be asked, as if no useless war had ever been fought, and in a nationalist confusion of pride, fear, moral certainty, and (never dismissible) the allure of profits in the war industries. (p. 85)
In condemning the stern moralism of the Northern aggressors, Berry again finds himself at one with Rothbard.
The Civil War seems to me to have been, to an extent sufficiently noticeable, a conflict of patriotism, which is to say love for one’s actual country or the land under one’s feet, against nationalism, which is to say allegiance just short of worship to a political idea or ideal and to a government. The difference is well illustrated by the anthems of the two sides: the jaunty “Dixie,” which celebrates the “land where I was born,” versus “The Battle Hymn of the Republic,” a hymn sure enough of a sanctified nationalism, in which the misfortunate Jesus once again shows up in uniform. (p. 250)
In like fashion, Rothbard says:
The Northern war against slavery partook of fanatical millennialist fervor, of a cheerful willingness to uproot institutions, to commit mayhem and mass murder, to plunder and loot and destroy, all in the name of high moral principle and the birth of a perfect world. The Yankee fanatics were veritable [Isabel] Patersonian humanitarians with the guillotine: the Anabaptists, the Jacobins, the Bolsheviks of their era. This fanatical spirit of Northern aggression for an allegedly redeeming cause is summed up in the pseudo-Biblical and truly blasphemous verses of that quintessential Yankee Julia Ward Howe, in her so-called “Battle Hymn of the Republic.”
We have much to learn from Berry’s profound defense of the local and particular against militarism and fanaticism.
Dr. Peter Klein, professor of entrepreneurship at Baylor University and co-author of the new book Why Managers Matter, joins Jeff and Bob to explain the huge disconnect between supply and demand for labor in post-COVID America.
Dr. Klein’s new book Why Managers Matter: Mises.org/HAP378a
Mention the term “deep state” in polite company and most likely no one will want to speak to you the rest of the evening. The deep state is what Wikipedia calls “discredited,” something reeking of conspiracies, false accusations, and the substitution of fantasy for the truth.
After the FBI raided Donald Trump’s home in Florida, Trump alluded to “deep state” actions, which brought predictable ridicule from the mainstream media. Trump was speaking conspiratorially, and if one follows the mainstream media these days, the only conspiracies are on the right. (You know, like the one in which the unarmed, ragtag January 6 rioters nearly overthrew the US government.)
After the recent revelations about how Twitter worked to hide the story of the infamous Hunter Biden laptop, Trump attributed the secrecy to a plot by the “deep state.” However, while the facts of the story really are outrageous, I don’t believe it was as much a secret conspiracy as a case of people being able to engage in certain actions with no political consequences.
Furthermore, journalist Matt Taibbi’s regarding FBI and CIA agents’ outright interference in the 2020 election via Twitter on the pretense that Russian operatives were spreading disinformation has further exposed both the involvement of federal law enforcement agents in partisan activities and the sad fact that those agents need not worry about being held accountable—especially if they are engaged in a “progressive” cause.
One does not have to believe in a single conspiracy (not even about the 9/11 attacks) to understand that there really is what we can call a deep state. Indeed, what we might call the real deep state has nothing to do with conspiracies, secret meetings, and the like. Instead, this deep state operates in the open and in broad daylight, and that makes the deep state narrative an even greater threat than the secret cabal narrative.
When I was a young adult, I read a novel by two anticommunist journalists called The Spike, in which a young, liberal, and crusading journalist uncovers a nest of Soviet agents embedded in the US government. The journalist’s story on the affair, however, is spiked by his employer (a Washington Post–like paper), but the protagonist manages to get the story out elsewhere. The result is that a compromised president is brought down and the federal government is able to ferret out the Soviet agents.
Thus, in a dramatic moment, a motivated journalist and political allies expose the equivalent of the “deep state” and the US government makes a rightward turn. The deep state goes away.
Unfortunately, no novelist can write out our present deep state because that would be a bridge too far. The reason is that our present deep state simply is the executive branch of government, which has been written into our laws and our courts, and this branch has taken over much of the role originally assigned to the judicial wing of government, that of interpreting the laws.
The real power of the modern state is in its civil service, which is composed of employees of all the federal departments and agencies—employees who hardly are neutral ideologically and politically, employees who are protected by civil service laws and by unions. When progressive regimes such as the Biden and Obama administrations occupy the West Wing and Congress, the federal courts become almost irrelevant. The president and his political appointees govern by executive orders, which, not surprisingly, the allegedly neutral government employees enthusiastically support.
Much of modern lawmaking is by executive order, with many orders not even having to square with the statutes underlying them, something that has gone on for a long time. For example, when President Franklin Roosevelt seized private gold holdings in 1933, he based his executive order upon the 1917 Trading with the Enemy Act. When President Biden announced student loan forgiveness, he based his order on the 9/11 Heroes Act, stretching that law and its obvious intent to the point that it was unrecognizable.
While not all executive orders have the effect of Executive Order 6102, they nonetheless involve the executive branch of the US government assuming powers that well may violate the Constitution yet are carried out without a worry that any outside agency—including the US Supreme Court—will intervene. (Yes, the courts so far have slapped down Biden’s student loan forgiveness scheme, but the litigation process is not complete, and the courts can be unpredictable.)
One would think that educated Americans would blanch at the prospect of federal agencies making policies independent of congressional or court oversight, but the opposite is true, especially when federal agents pursue progressive policies. For example, when the Supreme Court placed some legal fences around the Environmental Protection Agency’s powers to regulate carbon dioxide emissions, the progressive establishment exploded in anger.
For example, the New York Times, which carries the progressive standard, declared that the court had placed American lives in danger:
Regulatory agencies staffed by experts are the best available mechanism for a representative democracy to make decisions in areas of technical complexity. The E.P.A. is the entity that Congress relies upon to figure out how clean the air should be, and how to get there. Asserting that it lacks the power to perform its basic responsibilities is simply sabotage.
Governance by “experts” has been the progressive mantra for more than a century, the idea being that so-called experts embedded deep in government should be free to make whatever decisions they believe best to govern the rest of us. The assumption of the editors of the NYT is that the “experts” always (or at least usually) know what is best for everyone else and how to achieve those important social and economic ends.
Likewise, the revelations that the FBI and CIA were coercing social media companies to censor anything that contradicted certain progressive narratives coming from Washington, DC, should have been banner headlines everywhere and the lead story on the evening news. Instead, mainstream progressive journalists attacked Matt Taibbi, or like David French, they downplayed the seriousness of what happened and made excuses for federal agents.
(French argued that the only real question was whether federal agents had “violated the First Amendment” and that anything else was not fit for discussion. And, yes, he concluded that those agents probably had not violated the Constitution, missing the more important point that federal agents were trying to influence the outcome of an election.)
We are not speaking of secret conspiracies in which nefarious actions are carried out in the darkness. These things are carried out in daylight, complete with the names of the characters involved, yet people who raise serious questions about the legality of these actions, let alone the question of right and wrong, are praised and encouraged by our institutional gatekeepers.
That is why I say that this version of the deep state is much worse than whatever the authors of The Spike might have believed to exist. The people involved do what they darn well please, all the while claiming they are the soul of democracy, and many Americans seem to either believe them or no longer care.
The federal government’s Bureau of Labor Statistics (BLS) released new price inflation data today, and according to the report, price inflation during the month decelerated slightly, coming in at the lowest year-over-year increase in fifteen months. According to the BLS, Consumer Price Index (CPI) inflation rose 6.5 percent year over year during December, before seasonal adjustment. That’s the twenty-second month in a row of inflation above the Fed’s arbitrary 2-percent inflation target, and it’s fifteen months in a row of price inflation above 6.0 percent.
Month-over-month inflation fell for the first time in five months, with the CPI falling 0.1 percent from November to December.
December’s year-over-year growth rate is down from June’s high of 9.1 percent, which was the highest price inflation rate since 1981. But December’s growth rate still keeps price inflation above growth rates seen in any month during the 1990s, 2000s, or 2010s. December’s increase was the fourteenth-largest increase in forty years.
The ongoing price increases largely reflect price growth in food, energy, transportation, and shelter. Gasoline and used car prices, on the other hand, fell and mitigated the overall CPI increase. Nevertheless, the prices of essentials overall saw big increases in December over the previous year.
For example, “food at home”—i.e., grocery bills—was up 10.4 percent in December over the previous year. Energy services were up 15.6 percent. Shelter was up by 7.5 percent.
As of December there is, as of yet, no sign of price growth in shelter slowing down. Last month, shelter prices increased by 7.1 percent, and YoY growth only continued into December having now reached the highest growth rate since July of 1982. Month-over-month growth in shelter costs also remains among the largest we’ve seen in 40 years. In the seasonally adjusted numbers, shelter prices rose 0.8 percent, the highest since June 1982:
Meanwhile, so-called core inflation—CPI growth minus food and energy—has barely fallen from the forty-year high reached in September. In December, year-over-year growth in core inflation was 5.7 percent. That’s down slightly from November’s growth rate of 5.9 percent. September’s year-over-year increase of 6.7 percent was the largest recorded since August 1982. Month-over-month growth in this measure was positive from November to December as well, with prices minus food and energy growing 0.3 percent. Month-to-month growth has been positive in every month since May 2020.
Meanwhile, December was yet another month of declining real wages, and was the twenty-first month in a row during which growth in average hourly earnings failed to keep up with CPI inflation. According to new employment data released last week by the BLS, hourly earnings had increased 4.6 percent in December year, over year, meaning wage growth fell behind inflation:
Many pundits and politicians were quick to claim the slowing CPI inflation numbers show that inflation is “falling.” The Biden Administration, for example, repeatedly uses variations on the words “fall” or “falling” to describe price inflation. Of course, this is only true if one ignores the year-over-year change, and certainly ignores the larger trend in which the CPI is up 15 percent since December of 2019. For those whose wages have increased by 15 percent over the past three years, they may be keeping up (barely) with rising prices. But as for people on fixed incomes? Forget about it. Moreover, ordinary people trying to build up savings are taking a financial beating. Since December 2019, the Dow Jones has gone up 14 percent. Savvy traders are perhaps managing to almost keep up with price inflation. But more mundane investments are very much in the hole, and savings in savings accounts is rapidly losing value. Savers are earning 4 percent on some of the best high-yield accounts, but regular savings accounts are still paying under 1 percent. With price inflation at 6.5 percent, savers are simply losing money. Moreover, retirement accounts and other investments that are heavily invested in Treasurys are losing money. The ten-year bond is at a measly 3.4 percent. For most of 2022—when CPI inflation was coming in from 7 to 9 percent—the ten-year bond was often below 3 percent. In other words, savings and investment funds held by regular people—people who can’t afford the risky process of “chasing yield”—are shrinking.
Nonetheless, some corners of Wall Street are optimistic that even a minor slowing inflation is a very good sign. This isn’t because Wall Street is especially opposed to price inflation, but because Wall Street interprets slowing inflation as a sign the Federal Reserve will soon force down interest rates again if inflation is seen as ebbing. Wall Street has become so addicted to easy money from the Fed now that nearly all economic news is interpreted through the lens of “what will the Fed do next?” (There’s very little actual capitalism going on among the financial classes in America in 2022.)
The slowing in CPI inflation, of course, has been partly due to the fact the Federal Reserve has eased up on quantitative easing and other efforts to force down interest rates. That means less new money entering the economy, but both Wall Street and Washington hate that. Yet, price inflation is bad enough that the Fed worries it could get out of hand, which would lead to political instability. So, even with today’s numbers showing a slight slowing in price inflation, many investors remained unconvinced the Fed is about to turn back to an easy-money regime. After all, as we note above, food, shelter, and energy, are all still rising at brisk rates. Biden was quick to focus on gasoline in his public remarks, but the fact that gasoline has fallen to the non-bargain price of around $3.30 a gallon is hardly a reason to declare inflation pain dead or dying.
What really remains to be seen is how fast the Fed will cave to pressure from the Washington to push interest rates back down so as to keep payments on the national debt manageable. It easy to see why the Federal government needs a return to a low-interest regime. In the third quarter, the Federal government’s current expenditures for interest payments rose by 13.6 percent, year over year, which was the largest since 1960. If that continues, the need to pay interest will force Congress to cut back spending on popular programs like Medicare. Thus, current growth in interest payments—fueled by higher interest rates—is a political problem. After all, Congress and the White House have no plans to scale back deficit spending, and they need government debt at low interest rates to keep the gravy train going at full speed.
Unemployment remains low but for the wrong reasons. Low unemployment rates are not a sign that the economy is doing well.
Original Article: “US Labor Market: Help Wanted!”
This Audio Mises Wire is generously sponsored by Christopher Condon.
The monetary regime in power now—the so-called 2 percent inflation standard—is promising us a “return to normal” after the great pandemic and war inflation of 2021–22. At this time of powerful propaganda—the dismal accompaniment of natural disaster and war—we should be on our guard against such messaging. Even more so when we consider the success of this regime in repudiating blame for the great asset inflation culminating in the global financial crisis of 2008, going on to win widespread applause for the low consumer price inflation and ultimately low unemployment in the subsequent decade.
Readers of Mises Wire doubtless count among their New Year resolutions a determination to resist propaganda, and in the monetary sphere this means a readiness to assess in sober-rational mood a full range of scenarios, albeit focusing on what is most likely. We should retain our skepticism about the popular narrative of a return to a monetary normal which never existed under this regime and is unlikely to dawn anytime soon. But we should not exclude altogether way-out possibilities. After all, 2023 is the one-hundredth anniversary of two extreme monetary episodes, one of dark despair and one of great hope—the one hundredth of the German hyperinflation and the fiftieth of the launch (via a free float) of the hard deutsche mark in defiance of dollar monetary inflation.
According to the present-day Fed-orchestrated narrative, the looming return to normal has two dimensions. First, Consumer Price Index (CPI) inflation in the US will be down to 2 percent as early as late 2023. At this rate it will stay, as it did during the quarter century up until the eve of the pandemic. Second, interest rates will be close to what they were under the US monetary regime’s first decade (say, 1996–2006) rather than at the abnormally low levels of the 2010s.
The average reported outcome of 2 percent CPI inflation during the regime’s first quarter century (until the eve of the pandemic) is not evidence of any intrinsic merit. Quite the contrary, under sound money we should expect there to be episodes of falling prices matched over the long run by episodes of rising prices. The steady 2 percent outcome was evidence of monetary malaise which will most likely mean volatile and overall high CPI inflation in the future (together with a continuing sequence of asset inflations and eventual busts) rather than a resumption of “lowflation.”
During this quarter century there were largely coincidental factors that held down reported CPI inflation, even though the overall setting of monetary policy was strongly inflationary for much of the time. The monetary system under the regime has lacked any solid anchor (a device which restrains money supply and prevents its veering ahead of demand), not least because there has been no functional base to which an anchor could be attached. Instead, top officials have piloted official interest rates ostensibly as prompted by a supereconometric model based on the highly flawed Phillips curve and by versions of the Taylor rule (whose applications require that the officials know the equilibrium real interest rate and the natural rate of unemployment).
In the first decade of the regime, the information technology revolution and related productivity miracle meant that reported CPI inflation remained stable and “low” despite strong monetary inflation reflected in virulent asset inflation. Apparently “normal” interest rates were, in fact, on average well below the level consistent with sound money at a time of economic miracle. Under this regime, interest rates have been anything but normal—if this means in line with an absence of monetary inflation (or deflation). The concept of “normal interest rates” is nonsense for a regime that emits monetary inflation on a continuous but highly uneven path.
We can turn to the decade of the 2010s for further evidence of pervasive abnormality. Underneath the camouflage of the “steady 2 percent inflation” was a resumed monetary inflation. In the early years (say, 2010–13), structural changes had jolted upward the demand for money. These changes included sharply expanded deposit insurance, interest paid on reserve deposits at the Fed, and the downward manipulation of treasury-bond yields by application of the regime’s notorious nonconventional toolbox (including quantitative easing [QE]). On its own this increased demand for money would have borne down on prices of goods and services. Instead increases in money supply and, in particular, the fantastic bulge in monetary base went with a modest rise in consumer prices alongside a virulent asset inflation.
Then when a new recession threatened amidst the sharp economic slowdown and brief asset deflation of late 2014 and early 2015 in the wake of the first China bust, the Fed administered a new dose of monetary inflation (aborting plans for rate rises from zero and quantitative tightening) which reached its crescendo in 2016, an election year, under Chair Yellen (in office since early 2014).
Finally, amid concerns that continued low interest rates and prospective big business tax cuts could cause consumer price inflation to accelerate, a hawkish turn emerged during 2017–18. But this did not last long as evidence accumulated that the US economy was indeed suffering from a form of sclerosis, a side effect of all the monetary drugging of the previous two decades and the associated buildup of malinvestment and monopoly capitalism.
The bottom line here is that any of the regime’s reputation for achieving a stable monetary norm, as evidenced by stable, low CPI inflation during the prepandemic, prewar era, is derived from the tale “The Emperor’s New Clothes.” Normal for this regime is virulent monetary inflation. The likelihood of coincidental factors causing this to be consistent with low-reported CPI inflation in the future is small at best. The regime’s promised land of a “return to normal,” whether expressed in levels of inflation or interest rates, is a chimera.
Yes, in the scenario now dominant in the marketplace, CPI inflation falls far this year. Supporting factors include some supply side adjustments, slowed or even negative money supply growth, and (less mentioned if at all) bolstered demand for money in real terms by the state of economic uncertainty and pessimism. But there would be no reversal of the giant cumulative price gains of 2020–22, meaning a permanent real loss in money’s purchasing power.
Beyond this inflation decline during 2023, anything is possible in the actual unanchored monetary system, with a strong tilt in likelihood toward new upward price spirals. There is just so much scope for officials to artfully use inflation forecasts so that they can steer policy rates to fit with a strong political current. In any case, there are plenty of mistakes to be made when monetary conditions are determined by the piloting of rates rather than a set of mechanisms in a well-anchored system to constrain the growth of money supply in a meaningful way.
What about the unlikely scenario of hope? That might include the passage of a bill in the House with some cross-aisle support to ban the future use of the Fed’s toxic toolbox (the key instruments here being QE, interest on reserves, and zero-rate policy). And the scenario of despair? Let’s call this the continuation of high inflation, perhaps after a brief cyclical dip. Perhaps that scenario of despair has a greater chance of starting first in Europe than the US, given the further monetary inflation dose which occurred there in response to the gas famine of the Russian war.
[This article originally appeared in the January 4 edition of Lewrockwell.com.]
The culprit responsible for the Wall Street crash of 1929 and the Great Depression can be easily identified—the government.
To protect fractional reserve banking and generate a buyer for its debt, the US government created the Federal Reserve System in 1913 and put it in charge of the money supply. From July 1921 to July 1929, the Federal Reserve inflated the money supply by 62 percent, resulting in the crash in late October. The US government, following an aggressive “do something” program for the first time in American history, intervened in numerous ways throughout the 1930s—first under Herbert Hoover, then more heavily under Franklin D. Roosevelt. The result was not an easing of pain or an acceleration of recovery but a deepening of the Great Depression, as Robert Higgs explains in detail.
The preceding is not, of course, the generally accepted explanation. In conventional discourse, one of the main culprits behind the Depression—or at least responsible for exacerbating it—was the international community’s adherence to a gold standard. Economist Barry Eichengreen popularized this view. The Wikipedia entry for Eichengreen includes Ben Bernanke’s summary of Eichengreen’s thesis:
The proximate cause of the world depression was a structurally flawed and poorly managed international gold standard. . . . For a variety of reasons, including among others a desire of the Federal Reserve to curb the US stock market boom, monetary policy in several major countries turned contractionary in the late 1920’s—a contraction that was transmitted worldwide by the gold standard.
Why would a contractionary monetary policy be harmful? Because fractional reserve banking is a house of cards, and such policy risked toppling it. When inflation is exposed and the gold is not there, bankers do the Jimmy Stewart scramble. In Bernanke’s words, “what was initially a mild deflationary process began to snowball when the banking and currency crises of 1931 instigated an international ‘scramble for gold.’”
The classical gold standard that operated throughout the West from the 1870s to 1914 was in fact a fiat gold standard—meaning it operated at the pleasure of the state. When the state was not pleased with the gold standard’s operation, gold convertibility was suspended to allow banks to break their promise to redeem paper currency and deposits in gold coins on demand.
But even under the auspices of the state, the classical gold standard kept a lid on inflation. Gold was money, and national currencies were named after certain weights of gold; a dollar was the name for one-twentieth of an ounce of gold for example. A dollar was not backed by gold because a dollar was not money. A dollar was a conditional substitute for the real thing. The only thing governments and their central banks could directly inflate was their currencies, but if governments and their central banks inflated their currencies too much, they would lose gold to countries that inflated less. In other words, they could not stay on the classical gold standard and print a lot of money.
With the arrival of World War I, the belligerent governments ordered their central banks to stop redeeming their currencies in gold. The gold standard would not permit a long war; unlike currencies, gold could not be created on demand. By inflating their currencies, governments not only killed millions of people but also the classical gold standard. As I’ve said previously, “Sound money had to die before men could die in such large numbers.”
After the war, the inflated money supplies and price levels presented governments with a choice: return to the classical gold standard at lower exchange rates or return to the pars existing before the war. Britain, in an attempt to reestablish London as the world’s financial center, chose to go back to its prewar par of $4.86. To make this work, monetary concessions were required from other countries—especially the United States.
At the Genoa Conference of 1922, with the architecture of the monetary order firmly in the governments’ hands, representatives from thirty-four countries met to discuss what to do about money. The problem was obvious. When governments had needed money the most (to engage in war), gold had let them down. Gold had proved exceedingly unpatriotic. On the other hand, paper money, like the “girl from Oklahoma,” could not say no. Paper money saluted whatever plans the government devised. The problem, therefore, was not too much paper; it was too little gold.
Gold’s scarcity was now its fatal flaw. But the economists in charge of its fate were not ready to announce that the money people had been using for twenty-five hundred years had suddenly become dangerous to their economic well-being. So gold was given a small supporting role, but its name was displayed prominently on the marquee of the economists’ new scheme, the gold exchange standard. Here was the deal they cut:
The United States would stay on the classical gold standard. This meant people could exchange $20.67 in currency and coin at the Treasury for a one-ounce gold coin. The gross inconvenience was intentional.Britain would redeem pounds in gold and US dollars while other nations would pyramid their currencies on pounds.Britain would redeem pounds only in large gold bars. Gold was thereby removed from the hands of ordinary citizens allowing a greater degree of monetary inflation.Britain also pressured other countries to remain at overvalued parities.
To summarize, the US pyramided on gold; Britain, on dollars; and other European countries, on pounds. When Britain inflated, other countries inflated on top of pounds instead of redeeming them for gold. Britain also induced the US to inflate to keep Britain from losing its stock of dollars and gold to the US.
This international inflationary arrangement brought gold along for the ride to give it the appearance of stability and prestige. When the arrangement collapsed, as it was bound to do, gold served as the scapegoat.
Keynesians and other monetary scientists claim to have a smoking gun.
In this chart, taken from a paper by Barry Eichengreen and reproduced by Robert Murphy, the output for each country is set to one hundred. Subsequent measures are a percentage of deviation from the 1929 benchmark.
The chart reflects the order in which countries went off gold. Japan was first; then Britain, Germany, the US, and finally France went off gold. The chart superficially appears to support the connection between prosperity and an irredeemable currency. But look closer. In Germany and the US, industrial output experienced a significant rebound from 1932 to 1933. The US did not “go off gold” until almost mid-1933, yet industrial output was already rising in 1932.
As Murphy notes, whatever the discrepancies in the chart, it allegedly shows the beneficial effects of devaluation over time. Yet the Great Depression lasted well beyond 1937, with double-digit unemployment rates persisting throughout the 1930s.
Previous depressions had ended in two or three years and without the confiscation of people’s gold. Why did gold suddenly become a major culprit in the 1930s?
And what did it mean to “go off gold”? It meant that US citizens who disobeyed Roosevelt’s order to turn in gold were subject to a ten-thousand-dollar fine and a ten-year prison sentence. This was the punishment for possessing the money chosen by tens of millions of market participants. Roosevelt’s order meant people around the world holding dollar-denominated assets and thinking they could redeem them in gold got stiffed.
Also, is it really surprising that economic conditions improved after “going off gold”? Murphy likens going off the gold standard to a homeowner’s declaring he is “going off his mortgage.” He says to his mortgage holder, “I’m not paying you anymore. And I have more guns than you, so tough.”
With no mortgage to pay, it is unsurprising that the homeowner’s standard of living rises. Achieving short-term prosperity by relieving yourself of certain contractual obligations does not prove those obligations were unfounded.
The government never wants to lose the ability to inflate (counterfeit). As we have seen, a gold standard frustrates the government’s ability to inflate.
A free-market monetary system, which would be devoid of a central bank, is the only way to restrict the government’s ability to affect us.
[This article originally appeared in the January 4 edition of Lewrockwell.com.]
While behavioral economics claims to be an effective way of measuring individual economic behavior, it actually sets back authentic economic analysis.
Original Article: “Behavioral Economics Challenges the Rationality of Consumer Choices”
This Audio Mises Wire is generously sponsored by Christopher Condon.
On this episode of Radio Rothbard, Ryan McMaken and Tho Bishop call for breaking up the US into smaller states. While this idea sounds radical to some, there has been growing conversation about shifting state borders, including proposals to break up California and a recent vote on the Greater Idaho project. Ryan and Tho discuss what lessons the Swiss model of federalism, as well as consider the cynical political considerations of this humble proposal.
“If American Federalism Were like Swiss Federalism, There Would be 1,300 States” by Ryan McMaken: Mises.org/RR_116_A
“The Borders Between US States Are Obsolete” by Ryan McMaken: Mises.org/RR_116_B
Be sure to follow Radio Rothbard at Mises.org/RadioRothbard.
