Austrian Economics Is Essential to Understand Booms, Busts, and Money Itself

By Richard Ebeling

Originally published on May 25, 2018 for the Foundation for Economic Education

Looking to the next few years, will America and the world continue to ride a wave of economic growth, improved living standards, and technological changes that raise the quality of life? Or will this turn out to be, at least partly, an artificial economic boom that ends in another economic bust?

Reading the economic tea leaves is never an easy task. But the Austrian theory of the business cycle offers clues of what may be in store. In 1928, the famous Austrian economist Ludwig von Mises published a monograph called Monetary Stabilization and Cyclical Policy. It was an extension of his earlier work, The Theory of Money and Credit (1912).

Many things have happened, of course, over the last nine decades—the Great Depression, the Second World War, the Cold War, the end of the Soviet Union, roller coasters of inflations and recessions, replacement of gold with paper monies, the dramatic expansion of the welfare state, and an era of government debt fed by deficit spending to cover the costs of political largesse.

Then, as today, many governments were busy manipulating the supply of money and credit. 

Yet, the laws of economics have not been overturned. As a result, like causes still bring about like effects. Minimum wage laws still price some workers out of the labor market whose value added to the employer is less than what the government dictates he must be paid. Rent controls and restrictive zoning laws create housing shortages when government interferes with market-based pricing.  

This is no less the case in the area of money and banking. When Mises published Monetary Stabilization and Cyclical Policy in 1928, most of the major countries of the world where still on some version of the gold standard. But that world was still recovering from the political, economic, social, and monetary catastrophes of the First World War (1914-1918) and was on the verge of the Great Depression.

Then, as today, many governments were busy manipulating the supply of money and credit. The goals of governments and their central banks may have been somewhat different ninety years ago, but they followed the same logic as today: monetary central planning with the intent to manage the economy as a whole.

There were still ways governments could influence the monetary system and the value of money. 

In Monetary Stabilization, Mises reminded readers that before 1914, the leading nations of the world, especially in Europe and North America, had monetary systems based on a gold standard. These were, indeed, government-managed gold standards through national central banks, but nonetheless, they limited the amount of currency these authorities could inject into their respective economies. To a noticeable degree, Mises emphasized, it had removed the government’s hand from the handle of the monetary printing press. There were still ways governments could influence the monetary system and the value of money, but the methods were more indirect and less open to manipulation.

In the wake of the monetary madness during and immediately following the First World War, when some countries suffered massive hyperinflation (such as Germany and Mises’ homeland of Austria), there had been halting and partial attempts to return to versions of the gold standard.

In the 1920s, the goal of government monetary policy, especially in the United States, became price level stabilization. American economists, such as  Irving Fisher, argued that central banks should manage the creation of money and credit to maintain stable prices. This would require injections of larger quantities of money into the economy when a general price index was measured as tending to decline and withdrawals of money from the economy when such a price index was tending to rise.

But money in the marketplace, unlike other goods, has no single price. It possesses as many prices as the goods against which it trades. 

Mises’ critical response was two-pronged. First, he pointed out that all general price indices were statistical fictions that had no absolute scientific validity or precision. Money is the most widely used and generally accepted medium of exchange. It facilitates an easier and less costly exchange of goods and services between multitudes of market transactors. 

But money has no single price or exchange ratio in the market, unlike other goods. In a money-using economy, it becomes the practice and pattern for everyone to first trade the good or service they specialize in offering on the market for a sum of money: two dollars for a box of breakfast cereal; twenty-five dollars for a restaurant meal; seventy-five dollars for a pair of blue jeans; four hundred dollars for prescription sunglasses, etc. Thus, every good offered on the market tends to, competitively, have one market price at any moment of time—its money price. 

But money in the marketplace, unlike other goods, has no single price. It possesses as many prices as the goods against which it trades. Hence, money’s general value or purchasing power is represented in the set, or array, or structure of relative money prices.

For many decades in the 19th century, economic historians and statisticians had diligently worked to devise various ways to construct “index numbers” as an average measurement of the general value of money and changes in it. But Mises had become well known as a critic of such attempts. He pointed out the limits in the construction of a hypothetical “basket” of goods, the value or cost of which was to be tracked through time: 

  1. There had to be a decision as to which goods were to be considered “representative” of the purchases of an average consumer and placed in this imaginary basket when in reality there are as many buying patterns for different goods and combinations of goods as there are individuals making choices in the market; 
  2. There needed to be a decision concerning the “weight” assigned to each good in the imaginary basket; that is, a relative amount of each good presumed to be consumed per period of time for following the cost of buying the basket. In reality, these relative amounts can widely vary based upon each person’s preferences and ability to pay; 
  3. It needed to be assumed that, in spite of constant real-world changes in market supplies and demands that might influence a person’s willingness or ability in buying different amounts or types of goods in this basket, this representative consumer’s buying patterns remained the same over time; and,
  4. It needed to be assumed that changes in the qualities and characteristics of the goods offered on the market did not influence this representative consumer’s judgment concerning the real relative worth of any of the goods that might otherwise affect this artificial buyer’s purchasing decisions. 

Without some version of these assumptions, there is no common denominator—a given basket of particular goods unchanging in the relative amounts purchased due to no change in the artificial representative consumer’s buying patterns from either a change in taste or relative price or worth of the items bought—so to compare what the same basket of goods costs over extended periods of time. (And, thus, whether, the basket has become more or less costly to buy “tomorrow” compared to “today,” or perhaps simply costs the same.) 

The details and construction of various price indices have become more sophisticated and complex since Mises wrote his original criticism of index number methods (for example, “chain-weighted” techniques meant to reduce the impact of any changes in the basket by averaging out these changes over periods of time). But the core criticisms remain the same because of the reality of the diversity and changeability in the buying patterns of individuals whose choices make up the market process.

Secondly, Mises emphasized that when focusing on the average change in a general “price level,” it is easy to assume that changes in the money supply impact prices more or less at the same time and to the same degree. Mises became well known for drawing attention to the fact that changes in the supply of money and credit, in fact, are “non-neutral” in their effects in the economy.

The impact and influence of any monetary changes reflect the “inject” point from which they are introduced. 

That is, changes in the money supply are not like manna from heaven impacting everyone at the same time, to the same degree. The impact and influence of any monetary changes reflect the “inject” point from which they are introduced. Suppose there is an increase, say, in the gold supply due to the discovery and mining of new gold fields. The 19th-century classical economist John E. Cairnes insightfully traced the history of how the Australian gold discoveries in the 1840s and 1850s set in motion a worldwide monetary rippling effect. 

It started in the Australian coastal cities and towns where gold prospectors and miners spent their newly-mined gold, raising the prices for the particular goods and services they demanded from Australian merchants. As the new gold supplies passed into the hands of Australian merchants, they demanded more goods for imports from European wholesalers and manufacturers, which slowly but surely pushed up prices in European markets. These European producers then spent their new gold money receipts on increasing their demands for resources and raw materials and other inputs, which they imported from Latin America, Asia, and Africa. 

Prices around the world increased as a result of the increase in the quantity of gold money injected into the global market starting in Australia. But, as Cairnes emphasized, there was a temporal sequence, with prices rising in a distinct pattern over time reflecting who had the new money first, second, third, and so on, bringing about a rise in some prices. The final result, of course, was a decline in the purchasing power of money due to an increase in the supply of money relative to the demand for holding money for transactions and other purposes. But it was neither proportional nor simultaneous. (See, John E. Cairnes, Essays in Political Economy: Theoretical and Applied [1873] pp. 1-165.)

The other major theme in Monetary Stabilization was that the institutional manner in which governments attempt to influence the amount of money and credit within an economy carried with it the potential to set in motion the phases of the business cycle—that is, an inflationary boom followed by a recessionary bust.

Interest rates are meant to facilitate the transfer of and access to the use of resources and the employment of labor for desirable uses closer to the present. 

Central banks inject additional “reserves” into the banking system which serve as the means for financial institutions to increase their lending to interested and willing borrowers. However, a primary means by which banks with new excess reserves can attract potential borrowers to take on additional lending is to reduce the cost of loans. This means lowering the rates of interest at which additional money loans may be had. 

What is the purpose of market-based rates of interest? They are the intertemporal prices at which savers choose to set aside, for a period of time, portions of previously earned income in the form of savings which are made available to others who desire access to portions of the scarce means of production for, most frequently, investment purposes that their own incomes are not sufficient to undertake. Thus, interest rates are meant to facilitate the transfer of and access to the use of resources and the employment of labor for desirable uses closer to the present to those involving more time-consuming production processes.

Thus, market interest rates are meant to reflect the supply of and demand for real savings and to balance the two sides of the market so investment activities are limited to and undertaken for investment periods consistent with the willingness and decisions of other income-earners to forgo the use of that savings for equivalent periods of time. Thus, market-based interest rates coordinate savings and investment in consistent ways over time. Investment plans tend to be compatible with the demands of savers willing to forgo finished goods in the present in exchange for more and different consumer goods in the future.

The heart of Ludwig von Mises’ “Austrian” theory of the business cycle is that by expanding the money supply through the banking system and, as a consequence, tending to lower rates of interest in the financial markets, like any price artificially pushed below its market-clearing or “equilibrium” level, it generates a quantity demanded in excess of quantity supplied. In any other market, if the government artificially manipulates a price below its market-clearing level, it tends to bring about a shortage, that is, a desire by people to buy more of a good than is available to be purchased from willing sellers.

Instead, the trading of goods and services is done through the use of money, the market’s medium of exchange. 

But with monetary expansion, an illusion is created that there is, in fact, more real savings available to undertake more investments and more time-consuming investments that is actually the case. People do not trade saved goods and resources across time from the hands of savers into the hands of investment borrowers like might be the case in some hypothetical system of direct barter exchange. 

Instead, the trading of goods and services is done through the use of money, the market’s medium of exchange. People forgo buying all the real goods and services they might have with the money income they have previously earned. They supply that money-savings to interested investment borrowers through the intermediation of banks into which those savers have deposited their savings. Those borrowers take up that savings through banks and use it to hire, purchase, and employ available factors of production that have been freed up for such uses. 

But, now, the central bank has created an increased amount of the medium of exchange through the banking system. Borrowers are able to obtain larger loans, not representing real savings (in the form of money) set aside by actual savers, but with created bank credit.

With an increase in the amount of money available for spending and investment purposes in the economy as a whole, over time there will be (all other things given) a tendency for a general rise in prices—that is, a possible price inflation. But a central point in Mises’ analysis is to argue that prices do not rise simultaneously or to the same degree. The banking system serves as the “injection point” from which the inflationary process is set in motion.

In this inflationary process, some demands and prices necessarily rise before others. 

First, the prices for those goods demanded by investment borrowers will tend to be nudged up. The money they spend is then passed on as additional revenues to those from whom they buy (or in the case of labor, those they hire) for the investment projects of different types and durations they now attempt to undertake. Those who have received these additional sums of created money as additional revenues increase their demands for the specific goods and services.

In this inflationary process, some demands and prices necessarily rise before others. This influences the relative profitability of different economic and investment activities, which, in turn, influences the allocation and use of resources, labor, and capital goods in different ways across sectors in the economy. The entire structure of the economy is skewed toward greater and more time-consuming investment projects that, in fact, the actual savings in the economy cannot sustain in the long-run.

The inflation-induced distortions are not sustainable. The use of resources across time is out of balance with the desire and willingness of actual income-earners to consume and save. The “crisis” comes when these imbalances finally reach a breaking point, and it is discovered that the hoped-for investment profitability has been unmasked as serious mal-investments, many of which not only turn unprofitable but which cannot be brought to completion. The economy then goes through an adjustment period, a process of “rebalancing” of prices and  costs, as well as reallocations of labor and resources between various sectors of the market that is labeled the “recession” or the “bust” or, when severe enough, the “depression” phase of the business cycle.

It was due to governments introducing regulations, controls, interventions, and tax burdens that hindered the market from successfully “rebalancing” the economy. 

This “Austrian” analysis became the basis for Ludwig von Mises and his younger friend and protégé, Friedrich A. Hayek, to explain in the 1930s the causes and consequences of the Great Depression. The attempt to “stabilize” the general price level though central bank monetary manipulation, especially by the American Federal Reserve in the 1920s, created the appearance of a healthy, well-balanced, growing economy. In fact, beneath the surface of that relatively “stable” price level, central bank policy had generated unbalanced and distorted patterns of investment activities and resource uses that meant that the “good times” were coming to an end. 

The severity and duration of the Great Depression, the Austrian Economists argued, was not due to any inherent flaws in the market economy, as John Maynard Keynes and the “Keynesians” who followed him insisted. It was due to governments, including the U.S. government under Herbert Hoover and Franklin D. Roosevelt, introducing regulations, controls, interventions, and tax burdens that hindered the market from successfully “rebalancing” the economy.

The financial and economic crisis of 2008-2009 can easily be analyzed within the “Austrian” framework: a large money expansion, artificially low interest rates, and reduced credit standards fostered unsustainable investment, housing, and consumer spending booms that finally ended with a major market crash.

If carefully read and reflected upon, Ludwig von Mises’ still has much to teach us about money and the central banking problems of our own time. 

This was followed by a slow economic recovery with potentially new distortions due to even greater monetary expansion and interest rate manipulations since 2009 combined with a grab bag of Federal Reserve tricks to influence banks not to lend a good part of the money the Fed created in the banking system since 2009.

If carefully read and reflected upon, Ludwig von Mises’ Monetary Stabilization and Cyclical Policy still has much to teach us about money and the central banking problems of our own time. This includes a section in which Mises argues that the only long-run, lasting solution to the periodic occurrence of the business cycle is the end to central banking and its replacement with private, competitive banking.

Creativity and Competition Are the Heart of Capitalism

By Richard Ebeling

Originally published on December 17, 2017 for the Foundation for Economic Education

Market competition is at the heart of the capitalist system. It serves as the driving force for creative innovation, the mechanism by which supply and demand are brought into coordinated balance for multitudes of goods, and as the institutional setting where individuals freely find their place to best earn a living in society.  

Yet, listening to the critics of capitalism, competition is made out to be a cruel and dehumanizing process that feeds unnecessary wants and desires, or has a tendency to evolve into anti-competitive monopolies that are contrary to the “public interest.” Competition fosters a “selfish” disregard for the “common good” and misdirects resources from their most important socially-valuable uses.

As long as resources are scarce and social positions are too limited to satisfy everyone’s desire for status, competition will exist. The crucial questions concern: how will it be decided what gets produced and for whom, and how shall social positions in society be determined and filled?

For almost all of human history these questions were determined by conquest and coercion. Those with greater physical strength or manipulative guile used these superior abilities and skills to gain the goods they wanted and the status they desired over others.

Most, if not all, forms of competition were battles for political power and position.

In a competition between the physically “strong” and the “weak,” it was often the case that “might made right.” Pillage and plunder enabled some to seize goods and to then subjugate and enslave those they conquered to work for them and accept their conquerors as their legitimate masters.

Most, if not all, forms of competition were battles for political power and position. Closeness to the throne and having favor with the king or prince gave one control over land and people, and therefore possession of material wealth in the forms in which they existed in those earlier times. The mythologies of the aristocratic nobility – the lords of the manor – asserted that they were the repository of grace, charm, and culture, the carriers of civilized manners and the benefactors of civilization. This hid the fact that their leisure time for and attention to the “higher things” of life were only made possible – to the extent that any of them were actually concerned with anything other than their personal pleasures and pastimes – due to their success in gaining legitimized authority over the productions of others.

Commerce and trade is as old as recorded history. Anyone who peruses, for instance, Marco Polo’s (1254-1324) famous account of his experiences traveling to China from Europe and back in the late 1200s finds descriptions of merchants and manufacturers, exporters and importers, everywhere that went around the Mediterranean, the Middle East, Central Asia, and eastern and southern Asia. But all these market activities operated under various forms of government regulations, restrictions, and prohibitions, given the reach and methods of control by the political rulers of the time in different parts of the world.

Entry into professions, occupations, and crafts were all controlled by trade guilds in the Europe of the Middle Ages. The guilds limited competitive entry into various lines of employment and they restricted the methods of production that sellers could use in manufacturing goods to those approved by the respective town and city guild associations. In the countryside, the peasants were tied to the land that was owned by the nobility and bound within the tradition-based techniques of farming and craftsmanship to meet the needs of those living on the properties.

The slow liberation of men and production from these restraints and the opening of both labor and manufacturing to greater market-based competition freed a growing number of people from a life of oppression and wretched poverty. Competition meant that a man could leave behind the legal tethers that had tied him to the land and obligatory work for the aristocracy. Now, an individual could more freely find work more to his own liking where it might be offered in towns far away from where he had been born, and earn a far greater income than he ever had in the rural areas, however modest those incomes may seem by today’s standards.

No longer was production focused on meeting the whims of the privileged few.

Competition meant that a resourceful individual with a willingness to bear risk could found his own business, make a product of his own choice, and market it to those with whom he increasingly freely negotiations and contracts. He could experiment with new manufacturing methods and techniques, he could hire based on mutually agreed upon terms of work and wages, and he could retain the profits he may have earned to not only live better himself but to plow a good part of those profits back into his business to expand production in new and better ways.

No longer was production focused on meeting the whims of the privileged few who circled the king and the landed aristocracy. Market-based competition now was directed to serving the growing wants of the wider population who were increasingly participating in the manufacturing processes of the emerging and intensifying industrial revolution. The “revolutionary” character of the new industrial era of the late eighteenth and then nineteenth centuries was due to the fact that men were freer in mind and body to experiment and to voluntarily associate with others in radically different ways than in previous ages.

“Capitalism,” as this new economic arrangement of society has come to be called, had as its hallmark the new philosophy of human liberty, based on the revolutionary idea that individuals have inherent and inviolable rights. They own themselves; they are not and may not be the owned property of another. They have liberty to live for themselves, guided by their own conception of the good; they may not be coerced into the role of sacrificed servant to the wants and desires of others.

The ethical principle behind capitalist competition is a moral and legal prohibition on coercion in all human relationships. If you want what others have, if you would like to have the material means to achieve the goals that will offer you happiness (as you define it), if you desire the association and companionship of others to advance purposes that you consider worthwhile, your only means to them are mutual agreement and voluntary consent with your fellow human beings.

In Ludwig von Mises’s (1881-1973) famous treatise on economics, Human Action (1966), he explains:

Competing in cooperation and cooperating in competition all people are instrumental in bringing about the result, viz., the price structure of the market [for consumer goods and the factors of production], the allocation of the factors of production into the various lines of want-satisfaction [consumer demand], and the determination of the share of each individual [the relative incomes earned in the market].”

If we step back and look at competition as a wider social process at work, Mises’s words help to explain the logic and the humanity of the capitalist economy. Peaceful and voluntary cooperation is the hallmark of the market economy. Sellers compete in offering their goods to the potential buying public, and buyers’ demands attract sellers to produce. All cooperate in this competitive process by following the “rules” of the market game that excludes violence and fraud. Everyone must attempt to get what they want by focusing their mental and physical efforts on devising ways to offer to others what they want and are willing to take in agreed upon trade.  

Resources must be applied to produce those goods that all of us as demanders desire.

Each must apply his abilities, talents, and skills to offer better products, new products, and less expensive products to their possible trading associates since each knows that every one of those potential exchange partners is at liberty to accept the offer of some rival who is also keen on getting their business. The interaction of competing buyers and sellers brings about the resulting structure of prices for all the goods and services offered on the market and determines how much of each one is bought and sold in a way that tends to bring about a coordinated balance between what is demanded and what is supplied.

At the same time, virtually all that is bought and sold first must be produced. This means the existing resources in society must be directed and applied to produce those goods that all of us as demanders desire. Those in the social system of division of labor who undertake the role and task of entrepreneur – the designer, coordinator, and director of the activities of a private enterprise – must marshal the land, labor and capital judged to be most economically effective and efficient in bringing a final, finished good to market.

These enterprising entrepreneurs must compete amongst each other for the hire of workers, raw materials, and the capital goods (machinery, tools, and equipment), and coordinate their use to bring consumer demanded goods to market. Competition estimates what each of those various factors of production is worth.

In turn, the owners of those factors of production – the workers looking for employment, the owners of land and resources, and lenders of savings who are looking for interested borrowers – offer their services or products to those competing entrepreneurs. Again, the cooperative outcome of this two-sided competition determines the allocation of those scarce means of production based on the appraisement of their most highly valued uses in producing alternative goods and services. This also determines the cost of each of those factors of production, including the wages for different types of labor, upon which each laborer may then reenter the market as a consumer to demand the very products that their activities have assisted in bringing to market.

As Ludwig von Mises summarized the nature of the competitive process:

The market economy is the social system of the division of labor under private ownership of the means of production. Everybody acts on his own behalf; but everybody’s actions aim at the satisfaction of other people’s needs as well as the satisfaction of his own. Everybody in acting serves his fellow men . . .

“This system is steered by the market. The market directs the individual’s activities into those channels in which he best serves the wants of his fellow men. There is in the operation of the market no compulsion or coercion. The state . . . protects the individual’s life, health and property against the violent or fraudulent aggression on the part of domestic gangsters and external foes . . .

“Each man is free; nobody is subject to a despot. Of his own accord the individual integrates himself into the cooperative system. The market directs him and reveals to him in what way he can best promote his own welfare as well as that of other people. The market is supreme. The market alone puts the whole social system in order and provides it with sense and meaning.

“The market is not a place, a thing, or a collective entity. The market is a process, actuated by the interplay of the actions of the various individuals cooperating under the division of labor.”

The entrepreneurs who imagine, coordinate and direct those production activities through time are what Ludwig von Mises referred to as the “driving force” of the entire market process. While it is consumer demand that ultimately directs all the activities of the market, it is the entrepreneurs who decide what shall be produced, how, where, and by whom. All production takes time, whether this is a day, a week, a month or even years. Thus, decisions must be made “today” to set production processes in motion so a finished product can be offered on the market at some more distant tomorrow.

The entrepreneur also runs the possibility of suffering losses rather than earning profits.

Thus in the system of division of labor, entrepreneurs are tasked with anticipating future demand, to infer what prices those desired products might sell for in the future, and which ways of producing them would minimize their production costs so as to (hopefully) earn a profit – that is, earn revenues greater than incurred expenditures. While all others participating in the production process normally do so for contractually agreed upon wages, input prices, or interest,  the entrepreneur bears the uncertainty of whether or not he will, in fact, gain a profit from the enterprise that he directs.  This means that he also runs the possibility of suffering losses rather than earning profits, and that burden of uncertainty resides with him alone.

Entrepreneurial competition is ultimately a rivalry over alternative visions for the shape of market things, with the final outcome determined by the consumers who may or may not buy a product, and who may or may not be willing to pay a certain price, such that revenues earned cover or exceed the expenditures incurred by entrepreneurs.

Unsuccessful entrepreneurs who suffer losses and who are unable to repair their faulty forecasts finally go out of business, with their assets passing into the hands of other enterprising entrepreneurs who are confident that they can more effectively manage their use to serve the consuming public. Successful entrepreneurs are able to use all or a part of the profits they have earned to expand their businesses to better fulfill the demands of consumers.

Thus, the competitive profit and loss mechanism always tends to put business decision-making and allocational discretion over scarce resources into the hands of those who more successfully demonstrate their competency within the capitalist economy. But as Mises also emphasized in his essay on “Profit and Loss” (1952), entrepreneurial success is ultimately based on the creative imaginings of the human mind, the capacity of seeing the possibilities of the future better than others and bringing production to fruition, which is then tested by the choices of consumers in the market:

In the capitalist system of society’s economic organization the entrepreneurs determine the course of production. In the performance of this function they are unconditionally and totally subject to the sovereignty of the buying public, the consumers.

“If they fail to produce in the cheapest and best possible way those commodities which the consumers are asking for most urgently, they suffer losses and are finally eliminated from their entrepreneurial position. Other men who know better how to serve the consumers replace them . . .

“It is the entrepreneurial decision that creates profit or loss. It is mental acts, the mind of the entrepreneur, from which profits ultimately originate. Profit is a product of the mind, of success in anticipating the future state of the market. It is a spiritual and intellectual phenomenon.”

To this may be added Friedrich A. Hayek’s (1899-1992) focus on “Competition as a Discovery Procedure” (1969). Competition is useful and, indeed, essential to the creative processes of the market. As Hayek pointed out, if in, say, a foot race we already knew ahead of time who would come in first, second, third, etc., along with each runner’s relative times, what would be the point of running the race?

It is only through competition that we can find out how a race will end.

It is only through competition that we can find out how a race will end. Only through the competitive process can we discover the abilities of each individual relative to others. It is also true that each individual cannot know for sure what he or she is capable of in a particular setting unless they try to find out what they can accomplish by challenging themselves.

What will consumers want in the future in terms of existing or new goods and services; who can effectively devise the most cost-efficient way of bringing a good or service to market; which competitor can do so better than his supply-side rivals; what applications of resources will reflect their most highly valued uses among the alternatives? There is no way of really knowing the answers to any such questions independent of a open competitive market in which the opportunities for earning profits exist and individuals have the motives to try.

All of these characteristics of a competitive market economy are only possible and available due to the institutional prerequisites of a capitalist system. It is the liberation of individuals from political restraints, the freeing of market interactions from governmental regulations, and the recognition that every market participant must be presumed to possess rights to his life, liberty, and honestly-acquired property that enables competition to fully come into play. And from which liberty and prosperity are made possible for mankind.   

But what about the critic’s criticisms that left to itself, competition may degenerate into a socially harmful and detrimental monopoly, or that competition serves misdirected and wasteful consumer demands? We will turn to these issues in the next part of this series.

Freedom and the Minimum Wage

By Richard Ebeling

Originally published on February 12, 2018 for The Future of Freedom Foundation

Most of us both value and take for granted the ability to make decisions about our own lives. When busybodies put their noses and their mouths into our personal affairs, we often say or at least think, “Mind your own business.” Unfortunately, we live in a world in which too frequently government won’t leave us alone, and instead, very actively tries to mind our business for us.

Let us briefly look at one such instance in which Uncle Sam puts his nose in other people’s business, that being the legal hourly minimum wage. The federal government began dictating the minimum lawful amount an employer must pay someone working for them in 1933, as part of Franklin Roosevelt’s New Deal legislation. It was declared unconstitutional in 1935 by the U.S. Supreme Court, but was reinstituted in 1938 as part of the Fair Labor Standard Act, and the Supreme Court (with other judges now on the bench) upheld it in a 1941 decision.

The Minimum Wage vs. Personal Choice

When first implemented the federal hourly minimum wage was set at 25 cents an hour (prices and wages in general were much lower 80 years ago than today, so that represented not a high but a noticeable sum of money at the time). It is currently $7.25 an hour. But in recent years, there has been a call for significantly increasing it to as much as $15 per hour. A variety of cities around the country have, in fact, instituted such legislation within their jurisdictions, with a number of state governments having proposed increases in that direction within their respective boundaries.

The assertion is made that anything less than an hourly wage in that general amount (or more!) is denying a person the chance to earn a “living wage.” It is offered as paternalistic intervention in the labor market meant to improve the working and living conditions of those who may be unskilled or poorly experienced to have a chance to earn enough to get ahead in life.

Who, after all, can be against someone having some minimal amount to live decently? Only the cold, callus, and uncaring, surely; or those who are apologists and accomplices of the greedy, selfish, and profit-hungry businessmen who have no sense of humanity for those who are in their employ. That’s why there needs to be a law.

Left rarely asked and less often answered is, who is the government or those behind such legislation to tell people at what hourly pay they may work in the marketplace and how much an employer is required to pay them? Essential to human freedom is the liberty for each individual to say “yes” or “no” to an offer made by another concerning some potential association, interaction, or exchange among two or more persons.

Forcing or Prohibiting Exchange

Suppose I go into a shoe store and after looking around and trying on a few pairs, I decide to leave the store empty handed because the store does not have the styles or the fit I’m interested in, or because the shoes are not offered at prices that seem worth paying. But suppose, now, that a large gruff fellow stands in the doorway, and declares, “Da boss says you ain’t leavin’ till ya buy a pair of shoes at da price he says you gotta pay.”

I think most of us would consider this to be outrageous and unethical. Most of us would no doubt say to ourselves, who is this guy or his boss to tell me what shoes I have to buy and at a price that I consider to be more than those shoes are worth to me, or which is beyond what my budget can afford?

Further suppose that the bouncer replies to any such remark you might make, by saying, “Unless ya buy a pair of shoes at dis minimum price, the da boss says he can’t afford to pay me and de uda employees a “livin’ wage.’ Cough up da dough – or else.” Many of us might try to pull out our cell phones and dial 911 for police assistance.

We take it for granted that no one, regardless of the rationale, should be able to force us into an exchange or a relationship not of our own choosing and voluntary consent. Otherwise, we are a victim, a slave, to the other person’s wants and wishes, at our coerced expense.

We would also be much aggrieved if there was a mutually agreeable association or exchange opportunity into which we did want to enter, but someone comes along and tells us that we cannot, even if that association or exchange did not physically harm or defraud anyone else in the process.

Yet, this is precisely what the government mandated minimum wage laws demand of market participants in American society. Government coercively imposes the terms under which one group of people may accept employment and another group may hire them for jobs to be done. What are some of the consequences from this government-legislated minimum wage intervention into the marketplace?

The Minimum Wage and Low Skilled Unemployment

First, it results in some who might have found acceptable and gainful employment from doing so. This is especially true of the unskilled and workplace inexperienced in the labor force. The only source of revenues from which an employer can pay salaries to all those he may employ is from producing, marketing and selling a product to willing consumers at a price they are willing to pay for what he is offering for sale.

The employer, therefore, must ask himself, does an existing or would a prospective employee contribute a value-added to his production process that is less than or more than the value of the finished product that employee may be able to assist in manufacturing? All of us would like to get a bargain (paying less for something than we think it is worth to ourselves), but we never intentionally pay more for something that what we prospectively consider it to be worth.

Any worker whose value-added is viewed by the employer to be greater than the competitive market wage that has to be paid for his hire is offered work by the employer in question. When the government imposes a legal minimum hourly wage above the wage currently prevailing for various types of labor services, the law necessarily threatens the employment of any and all workers who’s estimated value-added is now less than the mandated legal minimum wage.

Suppose that a worker helps to produce an addition to marketable output that has a competitive value of, say, $5 an hour. But the government now imposes a minimum wage of $7.25 per hour. Those workers whose value-added is only $5 an hour will find themselves priced out of the market, because from the employer’s perspective, they cost more to employ than they are worth in terms of value-adding revenue to be earned from their hire at a minimum wage of $7.25. A private enterpriser cannot successfully maintain or establish a profitable competitive edge in the long run, if (at the margin) he has to pay $7.25 for what has a market worth of $5.

The Minimum Wage vs. Earned Labor Skills

But the harm runs deeper for the employee who either loses his job due to the legal minimum wage or who, to begin with, never gets a job due to the law. The lowest earners in the labor market are usually those with the least skills and work experience. That is why their productive worth is at the lower end of the wage scale.

But how can they ever acquire the on-the-job training, experience and workplace skills if the minimum wage so prices them out of the market that they may never have the opportunity to get their foot on the bottom or lower rungs of ‘the ladder of success”? By being priced out of the market in this way due to minimum wage legislation, some of them may be condemned to permanent unemployment.

In our day-and-age of the modern redistributive state, such persistent unemployment due to the minimum wage means that those who are gainfully employed find themselves taxed even more than would otherwise have been the case. Their salaries must provide the needed government tax revenues to cover the income transfer costs that the welfare system is expected to incur to meet the “needs” of those the government’s own minimum wage policy has forced into and left in the rolls of the unemployed.

Minimum Wage Laws and the Black Market

An additional unintended consequence is that those thus left in the limbo land of unemployment who wish to have more money than the welfare state redistributes to them turn to alternative lines of work: the underground and black market economies. Both are market economies, only the underground economy is often the arena in which income may be earned outside of the prying eyes of the tax-collectors, even though the type of product or service offered for cash is completely legal but with less of a paper trail for the taxing authorities to follow.

The black market usually connotes goods or services that are legally prohibited by the government from being openly produced, sold and used: narcotics and other drugs, prostitution, and various forms of gambling, for instance.  While both underground and black markets have their seamier sides, especially the trade in prohibited or heavily restricted or controlled products tend to attract market participants of a violent, cruel and deadly type. Thus, some thrown into unemployment due to the minimum wage are drawn into arenas of crime, corruption and thuggish coercion to earn a living. This is an outcome, surely, that few who campaigned for minimum wage laws originally had in mind when doing so.

Who Decides Wages: People or Politicians?

But behind all of these negative and usually unintended consequences arising from the imposing of a government-enforced hourly minimum wage remains the fundamental ethical issue: who shall have the right to decide under what terms and conditions people enter into gainful employment? Shall it be the individuals, themselves, who decide what is an acceptable wage, given their own skill set and the market opportunities they find in the neighborhoods in which they look for work? Shall it be the prospective employers who offer work to others based on their market-based estimate of the worth of a possible employee in relation to the value of the good or service he might assist in producing, in the context of the employer’s hope of profitable success in offering goods to the consumer public

Or shall it be politicians and bureaucrats pressured by various interest groups with their own motives for asserting a right to dictate and determine the wage at which individuals who they personally know nothing about will be allowed to find a job? There is an inescapable arrogance, a hubris, on the part of those who claim to know what a person is worth in the marketplace and the wage at which he may or may not be hired, separate from the potential trading partners, themselves, respectively interested in finding useful employees to hire and those looking for income-earning employment.

In this the political paternalists who insist upon setting minimum wages through government command and control closely resemble the socialist central planners of the twentieth century. They suffer from that same “pretense of knowledge” that F. A. Hayek criticized nearly 45 years ago in his Nobel lecture. They suffer from dangerous delusion that they possess enough wisdom to know better than people, themselves, how they should live and work, and the terms under which they may contract and exchange for mutual gain.

Freedom requires that every individual have the liberty to peacefully decide how best to direct and plan his own life, and in voluntary association with others in the various corners of society. They are not free when the government can interpose itself and dictate the wage at which a human being may offer his labor services and another may choose to employ him. Anything less makes everyone an economic victim and tool of the coercing control of those commanding the halls of government.

Socialists vs. Civil Society

By Richard Ebeling

Originally published on May 24, 2019 for the Mises Institute

The socialist regimes of the 20th century that succeeded in comprehensively imposing their designs and central plans on the societies over which they ruled attempted to abolish any and all of the preceding institutions of civil society. Edward Shils noted this in his 1991 essay “The Virtue of Civil Society,” explaining how such regimes went to great lengths to replace civil society with the omnipotence of the state in all things. Indeed, as Shils said, “Marxist-Leninists declared themselves to be enemies of civil society.”

Today’s democratic socialists insist that they have nothing to do with those others in the 20th century who also called themselves “socialists.” Those others were not real, or true, or the right kind of socialists. Therefore, the “new” democratic socialism should not have to carry any of the baggage of guilt by association through connection with those “bad” or mislabeled socialists of the recent past.

But listen to what our new democratic socialists want and propose. Ask yourself, If successful in bringing their plans to fruition, what would remain of the existing institutions of civil society in America? Government already monopolizes most of education from kindergarten through to the Ph.D. level. By calling for “free” schooling for all levels up to the doctoral degree, this means, in fact, that the federal government would pay for everyone’s education, at taxpayer’s expense, of course.

The money would now fully and completely pass through the conduit of political and bureaucratic hands. Curriculum, hiring and firing of faculty and administration, entrance requirements, standards for student retention and graduation would be even more effectively and comprehensively overseen, influenced, and finally controlled by those possessing government budgetary power than is the case today.

If higher education is already heavily politicized in our current climate of political correctness, identity politics, and ideological bias and manipulation, this trend would be merely accelerated if there is nothing outside of the orbit and oversight of the government since everyone would have their “right” to “free” government-paid higher education.

How would this be any different in matters of medical treatment and health care? The federal and state governments already have an intrusive and highly heavy hand in the health care industry and how and what it provides. “Single payer” means a single provider that determines what medical treatment and health care services for whom, of what type, and to what extent, since the socialist state must focus on what is claimed to be the good of all the members of society as a whole.

Your health care quality and duration of life, and that of your family, will be in the hands of the government bureaucratic managers of the medical profession, hospital facilities, and other caregiving facilities. If you sometimes feel yourself nothing but an ignored or depersonalized number for health care treatment under the current politicized system, just wait for full government-socialized medicine under the “single payer” euphemism, and when you then become an even-smaller decimal with four zeros after the dot.

Centrally planned social and “identity” political justice? Forget about how you want to live, how and what you’d like to say, with whom you’d like to peacefully and voluntarily associate for mutually desired purposes, or the way you would like to honestly and non-violently go about earning a living and spending the money you’ve received through free exchange. Overcoming the injustices of the past — real and imagined — will require the progressives and democratic socialists to plan the redesigning of everyone’s place, status, opportunities, and outcomes throughout society. Every claimed unearned income, unjust social status, unfair employment, undeserved “privilege” will have to be reshaped according to the notions of the good society as seen inside the heads of those in charge of the political machinery of government.

Think of all the other corners and aspects of society, whether it is the physical environment, or culture, arts, and sciences, or investment patterns, or job locations, or the quantities and varieties of goods produced and supplied; each will have to be politically decided upon and imposed to make it compatible with “climate planning,” racial and gender fairness, and social egalitarianism. What corner of your part of society would not be under the determination and control of the state?

Democracy, Liberty, Socialism, and Civil Society

Analysts and advocates of the institutions of civil society have long emphasized what Shils pointed out, that they also serve as intermediaries, as buffers, between the state and the citizen. They are the societal associations, organizations, and arrangements outside and independent of the government so that the individual does not have to become a slave to the plans and purposes of those in political power. The individual person can live free of the state — a status that shrinks to nothing when that individual is dependent upon and receives virtually all the things needed and wanted for life from the government.

But it’s “democratic” socialism! It’s what the people want as shown by those they elect to political office with the campaign agenda that the citizen-voters have expressed their desire for. It is the “will of the people.” Who can be against that, other than enemies of freedom, and oppressors who do not want the victimized to be liberated from their lives of injustice and unfairness?

But democracy is not liberty. Democracy is a political institutional means to determine who holds political office and for what period of time through a peaceful voting procedure that makes violent means unnecessary to remove or substitute those in positions of political authority and decision-making. And it is usually based on some form of majority-determining procedure.

Democracy carries with it the high respect and deference that it normally holds in most people’s minds because in modern times it gained political prominence along with and more or less at the same time in the 18th and 19th centuries as the emergent classical liberal ideas and ideals of individual liberty, impartial rule of and equality before the law, economic freedom, and constitutionally limited government. Democracy, therefore, came to be considered as inseparable from and confused in many people’s minds with freedom. But it need not.

Democratic (classical) liberalism linked the two together because in the eyes of many of the liberals in those earlier centuries the role of democratic reform was to make those in political power more directly accountable to the people over whom they ruled. But simultaneously the liberal agenda was to restrain the responsibilities and prerogatives of the government because political control, planning, regulation, and redistribution were considered abridgements of the personal freedom of the individual to control, plan, and regulate his own life, partly through those voluntary associations and interconnecting relationships of the institutions of civil society.

Democratic socialism, on the other hand, remains socialism, a concept that insists and demands that the “political” is to replace the “social” as understood as meaning individual self-governing in conjunction with the voluntarism of the peaceful community of free human beings. In this understanding, socialism is inherently antisocial.

Democratic socialism coercively confines and constrains all those living within what a majority or a coalition of minorities making up a voting majority wish to have imposed on the entire society. Notice that come the political triumph of progressive, democratic socialism everyone will have to accept and be limited to a higher education funded by and therefore fully under the oversight of the federal government. No one will be able to break out of the government plan as the single payer or provider of medical and health care throughout the country. Each person’s income, wealth, position and status, and opportunities for personal betterment will be forcefully straitjacketed within what those in governmental power deem to be the politically correct, the identity politics right, and the socially just.

The pluralism and peaceful competitions of the institutions of civil society with the underlying individual freedom that it represents and helps to secure is replaced by political monopoly and coercion through the powers of government to insist upon one size fitting all for anything and everything that such a democratic socialist regime considers to be properly within its orbit and responsibility.

Democratic Despotism Comes in Many Varieties

Some authors in the past have referred to democratic despotism or totalitarian democracy. Once the antisocial agenda of socialism is in power and implemented, it can, at the end of the day, be nothing but despotic and totalitarian because it is either individuals making their own plans and coordinating their plans with those of others through the voluntary agreements of the market and those institutions of civil society, or it is the plans of some imposed on others through the use or threat of political compulsion. It comes down to freedom or tyranny, whether or not that tyranny has come to power through the use of bullets or votes dropped into a ballot box.

While I have focused on democratic socialism, the others that I referred to, nationalism, protectionism, and political paternalism, are all variations on the same theme. The Swiss classical liberal economist and political scientist William E. Rappard (1883-1958) long ago explained in an insightful essay, “Economic Nationalism,” (1938) that “nationalism, then, is the doctrine which places the nation at the top of the scale of political values, that is above the three rival values of the individual, of regional units and of the international community.… The individual subordinate to the state” is the hallmark of political and economic nationalism.

All that socialists argue about against nationalists and other forms of collectivism is for what purposes shall the coercive powers of the state be used in making all in society conform to some single or network of governmental plans that all are expected to obey and follow, if negative consequences are not to befall any individuals who attempt to act outside of the socialist scheme for that politically engineered bright and beautiful future.

Free market liberalism is the social system of a civil society based on and protective of personal liberty and human betterment. Socialism is the antisocial system of politics over people, governmental power instead of peaceful and free association, and a handful of imposed political plans instead of a pluralism of as many plans as there are people in the world.

Where is the freedom when one political plan replaces our many personal plans? What is liberating when the state becomes the political master and we are expected to be the obedient citizen-servants? Which one of these worlds — democratic market liberalism or democratic-planning socialism — do you want to live in?

Gold and Free Banking versus Central Banking

By Richard Ebeling

Originally published on July 27, 2020 for the American Institute for Economic Research

In spite of the officially declared “independence” of the Federal Reserve from the immediate political control of either Congress or the White House, America’s central bank is, nonetheless, a branch of the U.S. government that is responsible for setting monetary policy, overseeing a variety of banking regulations, and influencing market interest rates. As a result, politics is always present when it concerns the Federal Reserve, as witnessed in the nomination of Dr. Judy Shelton to serve on the central bank’s board of governors. 

Dr. Shelton has become a lightning rod for angry opposition, not only due to Donald Trump, who as president of the United States nominated her to fill one of the seven slots on the Federal Reserve’s Board of Governors, but the fact that she has long been a public and vocal advocate for a return to some version of the gold standard as an “anchor” for limiting discretionary policies by the central bank. 

Most academic and policy-oriented economists apparently are both flabbergasted and fearful that if she were to serve on the Fed board, she might actually attempt to limit the virtually unrestrained latitude the central bank currently has to seemingly create money and bank credit in practically any quantity, and, in the process, influence the level of interest rates at which banks make money available for borrowing purposes. 

What is clearly horrifying to so many in the wide mainstream of the economics profession is the notion of a check on the powers and prerogatives of what amounts to America’s system of monetary central planning. But that is the very point of a commodity-based monetary system such as a gold standard, to limit abuse of the monetary printing press. Given an established redemption ratio between bank notes and deposit accounts for a quantity of gold on deposit in banks; given reserve requirements on checking and other forms of bank deposits; given an established rule of the right of free import and export of gold between one’s own country and the rest of the world; and assuming that the political authority with responsibility over the country’s monetary system does not interfere with these conditions and rules, then political influences on the value and quantity of money would be minimized. 

The Gold Standard in Practice 

In the second half of the 19th century most of the major countries of the world put into place national monetary systems based on gold. By the fact that such a large number of countries had each linked their respective currencies to gold at some fixed rate of redemption in this manner, there emerged an international gold standard. A person in any one of those countries could enter any number of established, authorized banks and trade in a certain quantity of bank notes for a stipulated sum of gold, in the form of either coin or bullion. He could transport that sum of gold to any of the other gold-based countries and readily convert it at a fixed rate of exchange into the currency of the country to which he had traveled. 

Why did governments recognize and (with occasional exceptions) follow the rules of the gold standard through most of this part of the 19th century? Because the gold standard was considered an integral element in the reigning political philosophy of the time, classical liberalism. As the German free-market economist Wilhelm Röpke (1899-1966) explained in International Order and Economic Integration (1959):  

“The international ‘open society’ of the nineteenth century was the creation of the “‘liberal spirit’ in the widest sense  . . . [guided by] the liberal principle that economic affairs should be free from political direction, the principle of a thorough separation between the spheres of government and of economy . . . The economic process was thereby removed from the sphere of officialdom, of public and penal law, in short from the sphere of the ‘state’ to that of the ‘market,’ of private law, of property, in short to the sphere of ‘society.’”   (p. 75)

At the same time, said Röpke, 

“This [liberal] principle also solved an extremely important special problem of international integration . . . i.e., the problem of an international monetary system . . . in the form of a gold standard . . . It was a monetary system which rested upon the structural similarity of the national systems, and which made currency dependent, not upon political decisions of national governments and their direction, but upon the objective economic laws, which applied once a national currency was linked to gold . . . But it was at the same time a phenomenon with a moral foundation . . . The obligations, namely, which a conscientious conformity with the rules of the gold standard imposed upon all participating countries formed at the same time a part of that system of written and unwritten standards which . . . comprised the [international] liberal order.” (pp. 75-76) 

In the 19th century, the ruling idea, for the most part, had been liberty. The wealth of nations was seen as arising from individual freedom in a social order respecting private property in the means of production. The relationships among men, it was believed, should be based on voluntary exchange for mutual benefit. Just as there were no inherent antagonisms among men in a free market within the same nation, there were no inherent antagonisms among men living in different nations. The mutual gains from trade could be expanded by extending the principle of division of labor to a global scale. If men were to benefit from those possibilities, a stable, sound, and trustworthy monetary order had to assist in the internationalization of trade. Gold was considered the commodity most proven through the ages to serve that function. And preservation of the gold standard, therefore, was given a prominent place among the limited duties assigned to the classical-liberal state in that earlier era. 

There also was, in general, a greater humility through a good part of the 19th century among those who constructed and implemented various government economic policies. There was a general agreement with Adam Smith’s (1723-1790) observation in The Wealth of Nations (1776) that “the statesman, who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate, and which would nowhere be so dangerous as in the hands of a man who had the folly and presumption enough to fancy himself fit to exercise it.” (Cannan ed., 1904, pp. 423)

The Gold Standard was a Government-Managed Monetary System

The classical liberals were deeply suspicious of government abuse of the printing press. They believed that only a monetary system under which all bank-issued notes and other deposit claims were redeemable on demand for gold could act as a sufficient check against the abuse and debasement of a currency. 

However, even in the high-water mark of classical liberalism in the 19th century, practically all advocates of the free market and free trade believed that money was the one exception to the principle of private enterprise. The international monetary order of that earlier century, of which Wilhelm Röpke spoke in such glowing terms, was nonetheless the creation of a planning mentality. The decision to “go on” the gold standard in each of the major Western nations was a matter of state policy. 

A central-banking structure for the management and control of a gold-backed currency was established in each country by its respective government, either by giving a private bank the monopoly control over gold reserves and issuing banknotes or by establishing a state institution assigned the task of managing the monetary system within the borders of a nation. The United States was the last of the major Western nations to establish a central bank, but it finally did so in 1913. 

Central-banking authorities were given the power and responsibility to manage the gold reserves at their disposal and the quantity of notes and other bank deposit claims outstanding to maintain the soundness of the monetary system and to counteract various short-term fluctuations in the national currency’s foreign exchange rate, the balance of payments, and the quantity of financial credit available in the country’s economy. Their policy “tools” included manipulation of short-term interest rates and the buying and selling of private-sector bills of trade and securities. 

While the goals for monetary policy may have been considered modest and limited in the eyes of the classical liberals of the 19th century, it remained a fact that the monetary system was a subject for national government policy. In an era of relatively unrestricted free-market capitalism, money and the monetary system were a “nationalized industry.” And as such, even most of the advocates of economic liberty argued for what was in effect monetary socialism and monetary central planning. They failed to call for and defend the privatization of the most important commodity in a market economy – the medium of exchange. 

Lost Innocence About Money, and Changing Monetary Goals

What they forgot was that once a government has control and responsibility for the monetary system within a country, little is outside the power of that government to influence and manipulate. This was clearly stated by a prominent German economist, Gustav Stolper (1888-1947), who, while a refugee in the United States from war-torn Europe during the Second World War, argued in, This Age of Fable (1942): 

“Hardly ever do the advocates of free capitalism realize how utterly their ideal was frustrated at the moment the state assumed control of the monetary system . . . A “free” capitalism with government responsibility for money and credit has lost its innocence. From that point on it is no longer a matter of principle but one of expediency how far one wishes or permits governmental interference to go. Money control is the supreme and most comprehensive of all government controls short of expropriation.” (p. 59)

As a result, when economic collectivism, socialism, and interventionism gained popularity and power in the early decades of the 20th century, money was the one area in which the central planning ideal was already triumphant. For more than a hundred years, now, in the United States, it had been taken for granted that the state should have either direct or indirect monopoly control over the supply of money in the market. 

In the slightly over 100 years since the First World War, the goals assigned to monetary central planning have changed, but the instrument for their application remained the same: central bank management of the money supply. In the 1920s, Federal Reserve policy was heavily focused on “price level” stabilization; its result was generating a variety of imbalances between saving and investment that set the stage for the Great Depression.

Beginning in the 1930s, under the growing influence of Keynesian Economics, the goal was to influence the levels of aggregate employment and output in the economy. After the disastrous experience with Keynesian-generated “stagflation” in the 1970s – a combination of significantly rising prices and persistently high unemployment – the monetary authorities in the 1980s and 1990s focused on slowing down and “controlling” inflation. In the late 1990s, the Federal Reserve switched back to a more “activist” monetary policy that fed the excesses of the “high tech” bubble that went bust shortly after the turn of the new century.

Then, in 2003, fearful of hypothetical “deflationary” forces, the Federal Reserve went on a policy of monetary expansion that created the monetary and credit wherewithal that produced the housing and investment and consumer spending boom that dramatically burst in 2008 – and from which it took nearly a decade to recover, especially in terms of employment, during which monetary expansion continued anew under the phraseology of “quantitative easing” for the ten years following the financial crisis.

Now, in the face of coronavirus crisis, the Federal Reserve has all but given up any notions of monetary restraining limits, as it has expanded the money supply in a matter of a handful of months since the beginning of 2020, making a huge amount of this money available not only to finance the more than $2 trillion of additional federal government spending, but to provide ready cash to households, private enterprises, financial markets, and state and local governments. In fact, from mid-March into June of 2020, the Federal Reserve increased its portfolio of securities and other assets from $3.9 trillion to $6.1 trillion; a nearly 57 percent increase in a matter of just three months. 

At the same time, interest rates have been pushed down to virtually zero by Federal Reserve policy. It has been totally forgotten that interest rates are supposed to serve the same function that all other prices in a functioning market economy: to tell people the relationship between supply and demand. When interest rates are reduced to nearly zero by the monetary central planners, how can people have any notion of the actual amount and availability of savings, and how can private-sector borrowers make any rational economic calculation about what is a real market-based cost of borrowing relative to a prospective profitability of an investment?

This has been made possible due to the fact that throughout the last century, governments – including the United States government – loosened the limits that gold had placed on the ability of central banks to expand the money supply and manipulate the amount of credit created and issued through the banking system to facilitate changing monetary and fiscal goals. For decades, now, governments – including the United States government – have completely eliminated this “break” on their discretionary monetary policy by ending any legal connection between the paper currencies they control and gold. 

The world economy operates in an economic environment of paper monies under the monopoly control of central banks. 

Central Banking is a Form of Central Planning – With the Same Defects 

One of the primary benefits of economic freedom is that it decentralizes the negative effects that may arise from ordinary human error. Every one of us makes decisions that we hope will produce outcomes we desire. 

Yet, the actual outcomes from our actions often fail to match up to the hopes that motivated them. A businessman who misreads market trends in planning his private company’s production and marketing strategies may experience losses that require him to cut back his activities, resulting in some of his employees’ losing their jobs, and in resource suppliers’ experiencing fewer sales because the loss-suffering businessman reduces his orders for what they have for sale. 

But the negative ripple effects from his entrepreneurial mistakes are localized within one corner of the overall market. Other sectors of the market need not be directly penalized or subject to the unfortunate effects of his poor judgment. Profit-making enterprises can freely go about their business hiring, producing, and then selling the goods that they have more correctly anticipated the consuming public actually desires to buy. 

Under government central planning, however, errors committed by the central planners are more likely to have an impact on the economy as a whole. Every sector of the economy is directly interlocked within the centrally planned blueprint for the allocation of resources, the quantities of different goods and services to be produced, and the distribution of the output to the consuming public. 

Centralized failures in resource use or production decisions more directly affect every sector of the economy, since nothing can happen in any of the government-run industries independently of how the central planners try to fix their mistakes. Everyone more directly feels the consequences of the central planners’ errors and must wait for those planners to devise a revised central plan to correct the problem. 

Central Banking’s Economy-Wide Impacts from Policy Mistakes

Monetary central planning suffers from the same sort of defect. Changes in the money supply emanate from one central source and are determined by the monetary central planners’ conceptions of the “optimal” or desired quantity of money that should be available in the economy. Their central decisions influence the pattern of interest rates (at least in the short run) and the market structure of relative prices and inevitably bring about changes in the general value, or purchasing power, of the monetary unit. The monetary central planners’ policies work their way through the entire economy, bringing about a cycle of an inflationary boom followed by general economic downturn or even depression. 

Halting an inflation and bringing an unsustainable boom to an end depends upon the monetary central planners’ discovery that things “may have gone too far” and a decision by them to reverse the course of monetary policy. Many, if not most, sectors of the market will then have to modify and correct investment, production, and employment decisions that had been made under the false, inflationary price signals the central planners’ monetary policy has artificially created. Capital, wealth, and income spending patterns in the market will have been misdirected and partly wasted because of the errors committed by the monetary central planners. 

The opponents of central banking have argued that the occurrence of such errors would be less frequent and discovered more quickly under an alternative system of competitive free banking. Any private bank that “over-issued” its currency would soon discover its mistake through the feedback of a loss of gold or other reserves through the interbank clearing process and withdrawals by its depositors. The bank would realize the necessity of reversing course to ensure that its gold- and other-reserve positions were not seriously threatened and avoid the risk of losing the confidence of its own customers because of heavy withdrawals by depositors. 

Moreover, the effect of such a private bank’s following a “loose” and “easy” monetary policy would be localized by the fact that only its banknotes and check money would be increasing in supply because of the additional spending of those to whom that bank had extended additional loans. It could neither force an economy-wide monetary expansion throughout the entire banking system nor create an economy-wide price-inflationary effect. Any negative consequences, while being unfortunate, would be limited to a relatively narrow arena of market decisions and transactions. 

Free Banking and the Benefits of Market Competition 

One of the strongest arguments that advocates of the free market have made over the last 200 years has been to point out the benefits of competition and the harmfulness of government-supported monopoly. In a competitive market, individuals are at liberty to creatively transform the existing patterns of producing and consuming in ways they think will make life better and less expensive for themselves and other members of society as a whole. 

Wherever legalized monopoly exists, the privileged producer is protected from potential rivals who would enter his corner of the market and supply an alternative product or service to those consumers who might prefer it to the one marketed by the monopolist. Innovation and opportunity are either prevented or delayed from developing in this politically guarded sector of the economy. Production methods remain unchanged or are modified only with great delay. Product improvements are slow in being developed and introduced. Incentives for cost efficiencies are less pressing and, when utilized, are often only sluggishly passed on to consumers in the form of lower sale prices. 

Those who have the vision and daring to enter the market and successfully innovate and create newer or better products than the existing suppliers are offering are stymied or blocked from doing so in the protected sectors of the economy. They are forced to apply their entrepreneurial drive in less profitable directions or are dissuaded by the political restrictions from even attempting to do so. The product improvements they would have supplied to the consuming public remain invisible “might-have-beens” lost to society. 

Furthermore, as Friedrich A. Hayek (1899-1992) especially emphasized, market competition is the great discovery procedure through which it is determined who can produce the better product with the most desired features and qualities and at the lowest possible price at any given time. It is the peaceful market method through which each participant in the social system of division of labor finds his most highly valued use as judged by the relative pattern and intensity of consumer demand for the various goods supplied. Competition’s dynamic quality is that it is a never-ending process. In the arena of exchange, every day offers new opportunities and allows entrepreneurs and innovators to create new opportunities that they are free to test on the market in terms of possible profitability. 

Every political restriction or barrier placed in the way of competition, therefore, closes the door on some potential creativity, risk-taking, and entrepreneurial discovery of more efficient and rational uses of men, materials, and money in the interdependent and mutually beneficial relationships of market specialization and cooperation. The choice is always between market freedom and political constraint, between the competitive process and governmentally created monopoly. 

This general argument in favor of market competition and against politically provided monopoly is no less valid in the arena of money and banking. The participants in a free market monetary system would have the liberty to choose the money they find most advantageous to use; or, instead, government can impose the use of a medium of exchange on society and monopolize control over its supply and value. The benefit from market-chosen money is that it reflects the preferences and uses of the exchange participants themselves. 

Participants in the market process will sort out which commodities offer those qualities and characteristics most useful and convenient in a medium of exchange. As the Austrian economists persuasively demonstrated, while money is one of those social institutions that are “the results of human action but not of human design,” it nonetheless remains the spontaneous composite outcome of multitudes of individual choices freely made by buying and selling in the marketplace. 

“Political Money” vs. Market-Based Money and Banking

The alternative is what the American economist Francis A. Walker (1840-1897) referred to in his Political Economy (1887) as “political money.” Political money is one that the government determines shall be used as money and whose supply “is made to depend upon law or the will of the ruler.” He warned that under the best of circumstances the successful management of a government-controlled money would “depend upon an exercise of prudence, virtue and self-control, beyond what is reasonably and fairly to be expected of men in masses, and of rulers and legislators as we find them.” Governments would, in the long run, always be tempted to abuse the printing press for various political reasons. (pp. 352-353)

But besides the dangers of political mischief, the fact is that the government monetary monopoly prevents the market from easily discovering whether, over time, market participants would find it more advantageous to use some particular commodity or several alternative commodities as different types of media of exchange to serve changing and differing purposes. The “optimal” supply of money becomes an arbitrary decision by the central monetary monopoly authority rather than the more natural market result of the interactions between market demanders desiring to use money for various purposes and market suppliers supplying the amount of commodity money that reflects the profitability of mining various metals and minting them into money-usable forms. 

But commodity money, as history has shown, has its inconveniences in everyday transactions in the market. There are benefits from financial depositories for purposes of safety and lowering the costs of facilitating transactions. But what type of financial and banking institutions would market participants find most useful and desirable under a regime of money and banking freedom? The answer is that we don’t know at this time precisely because government has monopolized the supplying of money; and it imposes, through various state and federal regulations, an institutional straitjacket that prevents the discovery of the actual and full array of preferences and possibilities that a free market in monetary institutions might be able to provide and develop over time. 

The increasing globalization of commerce, trade, and financial intermediation during the last several decades has certainly demonstrated that there is a far greater range of possibilities that market suppliers of these services could provide and for which there are clear and profitable market demands than traditionally thought 20 or 30 years ago. 

But even in this more vibrant global competitive environment, it remains the case that whatever options have begun to emerge have done so in a restrictive climate of national and international governmental regulations, agreements, and constraints. Governments clearly wish to crush or control market-originating cyber-currencies, for instance, that threaten to be out of their grasping reach. 

Depositors Would Decide Reserve Requirements Under Free Banking 

Suppose that monetary and banking freedom were established. What type of banking system would then come into existence? Some advocates of monetary freedom have insisted that a free banking system should be based on a 100 percent commodity money reserve. Others have argued that a free banking system would be based on a form of fractional-reserve banking, with the competitive nature of the banking structure serving as the check and balance on any excessive note issue by individual banks. 

Until monetary and banking freedom is established, we have no way of knowing which of the two alternatives would be the most preferred. This is for the simple reason that under the present government-managed and government-planned monetary and banking system, market competition is not allowed to demonstrate which options suppliers of financial intermediation might find profitable to offer and which options users of money and financial institutions would decide are the ones best fitting their needs and preferences. 

Given the diversity in people’s tastes and preferences, the differing degrees of risk people are willing to bear for a promised interest return on their money, and the variety of market situations in which different types of monetary and financial instruments might be most useful for certain domestic and international transactions, it probably would be the case that a spectrum of financial institutions would come into existence side by side. At one end of this spectrum might be 100 percent reserve banks that guaranteed complete and immediate redemption of all commodity money deposits, even if every depositor were to appear at that bank within a very short period of time. 

Along the rest of the spectrum would be various fractional-reserve banks at which lower or no fees would be charged for serving as a warehousing facility for deposited commodity money. Their checking accounts might offer different interest payments depending on the fractional-reserve basis on which they were issued and on the degree of risk or uncertainty concerning the banks’ ability to redeem all deposits immediately under exceptional circumstances. 

Some banks might offer both types: they might issue some bank notes and checking accounts that were guaranteed to be 100 percent redeemable on the basis of commodity money deposited against them; and they might issue other bank notes and checking accounts that, under exceptional circumstances, were not 100 percent redeemable at the same time. 

And these banks might offer “clauses” stipulating that if any designated notes or checking accounts were not redeemed on demand for some limited period of time, the note and account holder would receive a compensating rate of interest for the inconvenience and cost to himself. 

Whether most banks would be closer to the 100 percent reserve end of this spectrum or farther from it is not – and cannot be – known until the monetary and banking system is set free from government regulation, planning, and control. As long as the government remains as the monetary monopolist, there is just no way to know all the possibilities that the market could or would generate. Indeed, for all we know, the market might devise and evolve a monetary and banking system different from that conceived even by the most imaginative free-banking advocates. 

Competition is thwarted by government monopoly money, and the creative possibilities that only free competition can discover remain invisible “might-have-beens.” How then can the existing system be moved towards a regime of monetary and banking freedom? 

For a System of Monetary and Banking Freedom 

The great tragedy of the 20th century was the arrogant and futile belief that man can master, control, and plan society. Man has found it difficult to accept that his mind is too finite to know enough to organize and direct his overall social surroundings according to an overarching design. The famous American journalist, Walter Lippmann (1889-1974), neatly explained the nature of this problem in his 1937 book, An Inquiry into the Principles of the Good Society: 

“The thinker, as he sits in his study drawing his plans for the direction of society, will do no thinking if his breakfast has not been produced for him by a social process that is beyond his detailed comprehension. He knows that his breakfast depends upon workers on the coffee plantations of Brazil, the citrus groves of Florida, the sugar fields of Cuba, the wheat farms of the Dakotas, the dairies of New York; that it has been assembled by ships, railroads, and trucks, has been cooked with coal from Pennsylvania in utensils made of aluminum, china, steel, and glass. But the intricacy of one breakfast, if every process that brought it to the table had deliberately to be planned, would be beyond the understanding of any mind. Only because he can count upon an infinitely complex system of working routines can a man eat his breakfast and then think about a new social order. The things he can think about are few compared with those that he must presuppose . . . Of the little he has learned, he can, moreover, at any one time comprehend only a part, and of that part he can attend only to a fragment. The essential limitation, therefore, of all policy, of all government, is that the human mind must take a partial and simplified view of existence. The ocean of experience cannot be poured into the bottles of his intelligence…. Men deceive themselves when they imagine that they can take charge of the social order. They can never do more than break in at some point and cause a diversion.” (pp. 30-31)

Money is one of those institutions that owes its origin and early development to social processes beyond what individual minds could have fully anticipated or comprehended. But money’s evolution has been constantly “diverted” from what would have been its market-determined course by governments and political authorities that saw in its control an ability to plunder the wealth of entire populations. 

Debasement and depreciation of media of exchange through monetary manipulation has been the hallmark of recorded history. To prevent such abuses and their deleterious effects, advocates of freedom supported the gold standard to impose an external check on monetary expansion. Paper money was to be “convertible,” redeemable on demand into gold by all banknotes and checking account holders at a fixed ratio of redemption. 

But even this limit on government-managed money was eliminated in the 20th century by the hubris of the central planning mentality, under which money, too, was to be completely under the control of the monetary central planners as part of the vision of designing and directing the economic affairs of society. 

The fact is that even if monetary policy could somehow be shielded from the pressures and pulls of ideological and special-interest politics, there is no way to successfully centrally manage the monetary system. Government can no more correctly plan for the “optimal” quantity of money or the properly “stabilized” general scale of prices than it can properly plan for the optimal supply and pricing of shoes, cigars, soap, or scissors. 

The best monetary policy, therefore, is no monetary policy at all. The need for monetary policy would be eliminated by abolishing government monopoly control and regulation over the monetary and banking system. 

As Austrian economist Hans Sennholz (1922-2007) once concisely expressed it, “We seek no reform law, no restoration law, no conversion or parity, no government cooperation: merely freedom…. In freedom, the money and banking industry can create sound and honest currencies, just as other free industries can provide efficient and reliable products. Freedom of money and freedom of banking, these are the principles that must guide our steps.” 

An Agenda for Monetary Freedom 

So, what steps might be undertaken to move the American economy in the direction of establishing a regime of monetary freedom? At a minimum, they should include the following: 

  1. The repeal of the Federal Reserve Act of 1913, and all complementary and related legislation giving the federal government authority and control over the monetary and banking system. 
  2. The repeal of legal-tender laws, that give government power to specify the medium through which all debts and other financial obligations, public and private, may be settled. Individuals, in their domestic and foreign transactions, would determine through contract the form of payment they mutually found most satisfactory for fulfilling all financial obligations and responsibilities into which they entered. 
  3. Repeal all restrictions and regulations on the free entry into the banking business and in the practice of interstate banking. 
  4. Repeal all restrictions on the right of private banks to issue their own bank notes and to open accounts denominated in foreign currencies or in weights of gold and silver. 
  5. Repeal of all federal and state government rules, laws, and regulations concerning bank-reserve requirements, interest rates, and capital requirements. 
  6. Abolish the Federal Deposit Insurance Corporation. Any deposit insurance arrangements and agreements between banks and their customers and between associations of banks would be private, voluntary, and market-based. 

In the absence of government regulation and monopoly control, a free monetary and banking system would exist; it would not have to be created, designed, or supported. A market-based system would naturally emerge, take form, and develop out of the prior system of monetary central planning. 

What would be its shape and structure over time? What innovations and variety of services would a network of free, private banks offer to the public over time? What set of market-determined commodities might be selected as the most convenient and useful media of exchange? What types of money substitutes would be supplied and demanded in a free-market world of commerce and finance? Would many or most banks operate on the basis of fractional or 100 percent reserves? 

There are no definite answers to these questions, nor can there be. It is deceptive to believe, as Walter Lippmann explained, that we could comprehend and anticipate all the outcomes that will arise from all the market interactions and discovered opportunities that the complex processes of the free society would generate. It is why liberty is so important. It allows for the possibilities that can only emerge if freedom prevails. It’s why monetary freedom, too, must be on the agenda for economic liberty in the 21st century.

The Great German and Austrian Inflations, 100 Years Ago

By Richard Ebeling

Originally published on March 29, 2023 for The Future of Freedom Foundation

This year marks the 100th anniversaries of the great German and Austrian inflations that began with the coming of the First World War in 1914 and reached hyperinflationary severity following the war’s end in November 1918. While the German and Austrian inflations were particularly pronounced, all the belligerent countries in the conflict resorted to the monetary printing press to finance their war-related expenditures.

The first step was these governments going off the gold standard, either de facto or de jure. The citizens in these warring counties were often pressured or compelled to hand over their gold to their respective governments in exchange for paper money. Almost immediately, the monetary printing presses were turned on, creating the vast financial means needed to fight an increasingly expensive war.

Wartime Inflation in Britain, France, Italy, and America

In 1913, the British money supply amounted to 28.7 billion pounds sterling. But soon, as British economist Edwin Cannan expressed it, the country was suffering from a “diarrhea of pounds.” When the war ended in 1918, Great Britain’s money supply had almost doubled to 54.8 billion pounds, and it continued to increase for three more years of peacetime until it reached 127.3 billion pounds in 1921, a fivefold increase from its level eight years earlier.

The French money supply had been 5.7 billion francs in 1913. By war’s end in 1918, it had increased to 27.5 billion francs, in this case a fivefold increase in a mere five years. By 1920, the French money supply stood at 38.2 billion francs. The Italian money supply had been 1.6 billion lire in 1913 and increased to 7.7 billion lire, for more than a fourfold increase, and stood at 14.2 billion lire in 1921.

In addition, these countries took on huge amounts of debt to finance their war efforts. Great Britain had a national debt of 717 million pounds in 1913. At the end of the war, that debt had increased to 5.9 billion pounds and rose to 7.8 billion pounds by 1920. French national debt increased from 32.9 billion francs before the war to 124 billion francs in 1918 and 240 billion francs in 1920. Italy was no better, with a national debt of 15.1 billion lire in 1913 that rose to 60.2 billion lire in 1918 and climbed to 92.8 billion in 1921.

Though the United States had participated in only the last year and a half of the war, from April 1917 to November 1918, it too created a large increase in its money supply to fund government expenditures, which rose from $1.3 billion in 1916 to $15.6 billion in 1918. The U.S. money supply grew 70 percent during this period, from $20.7 billion in 1916 to $35.1 billion in 1918. Twenty-two percent of America’s war costs were covered by taxation, about 25 percent from printing money, and the remainder, 53 percent, by borrowing.

War and the Great German Inflation 

For decades before the start of the war, German nationalist and imperialist ambitions were directed to military and territorial expansion. A large number of German social scientists known as members of the Historical School had been preaching the heroism of war and the superiority of the German people who deserved to rule over other nationalities in Europe.

Hans Kohn, one of the twentieth century’s leading scholars on the history and meaning of nationalism, explained the thinking of leading figures of the Historical School, who were also known as “the socialists of the chair” in reference to their prominent positions at leading German universities. In Prophets and Peoples: Studies in Nineteenth Century Nationalism (1946), Kohn wrote:

The “socialists of the chair” desired a benevolent paternal socialism to strengthen Germany’s national unity. Their leaders, Adolf Wagner and Gustav von Schmoller, [who were Heinrich von] Treitschke’s colleagues at the University of Berlin and equally influential in molding public opinion, shared Treitschke’s faith in the German power state and its foundations. They regarded the struggle against English and French political and economic liberalism as the German mission, and wished to substitute the superior and more ethical German way for the individualistic economics of the West…. In view of the apparent decay of the Western world through liberalism and individualism, only the German mind with its deeper insight and its higher morality could regenerate the world.

These German advocates of war and conquest also believed that Germany’s monetary system had to be subservient to the wider national interests of the state and its imperial ambitions. Austrian economist Ludwig von Mises met frequently with members of the Historical School at German academic gatherings in the years before World War I. In his essay, “Remarks on the Ideological Roots of the Monetary Catastrophe of 1923” (1959), Mises recalled:

The monetary system, they said, is not an end in itself. Its purpose is to serve the state and the people. Financial preparations for war must continue to be the ultimate and highest goal of monetary policy, as of all policy. How could the state conduct war, after all, if every self- interested citizen retained the right to demand redemption of bank notes in gold? It would be blindness not to recognize that only full preparedness for war [could further the higher ends of the state]…. The gold standard, they alleged, made Germany permanently depend on the gold-producing countries…. It was a vital necessity for the German nation to have a monetary system independent of foreign powers, they claimed.

Germany’s Great Inflation began with the government’s turning to the printing press to finance its war expenditures. Almost immediately after the start of World War I, on July 29, 1914, the German government suspended all gold redemption for the mark. Less than a week later, on August 4, the German Parliament passed a series of laws establishing the government’s ability to issue a variety of war bonds that the Reichsbank — the German central bank — would be obliged to finance by printing new money. The government created a new set of Loan Banks to fund private-sector borrowing, as well as state and municipal government borrowing, with the money for the loans simply being created by the Reichsbank.

During the four years of war, from 1914 to 1918, the total quantity of paper money created for government and private spending went from 2.37 billion to 33.11 billion marks. By an index of wholesale prices (with 1913 equal to 100), prices had increased more than 245 percent (prices failed to increase far more because of wartime controls). In 1914, 4.21 marks traded for $1 on the foreign-exchange market. By the end of 1918, the mark had fallen to 8.28 to the dollar.

The Results of Germany’s Hyperinflation 

But the worst came in the five years following the war. Between 1919 and the end of 1922, the supply of paper money in Germany increased from 50.15 billion to 1,310.69 billion marks. Then in 1923 alone, the money supply increased to a total of 518,538,326,350 billion marks.

By the end of 1922, the wholesale price index had increased to 10,100 (still using 1913 as a base of 100). When the inflation ended in November 1923, this index had increased to 750,000,000,000,000. The foreign-exchange rate of the mark decreased to 191.93 to the dollar at the end of 1919, to 7,589.27 to the dollar in 1922, and then finally on November 15, 1923, to 4,200,000,000,000 marks to the dollar.

During the last months of the Great Inflation, according to Gustav Stolper in The German Economy, 1870–1940 (1940), “more than 30 paper mills worked at top speed and capacity to deliver notepaper to the Reichsbank, and 150 printing firms had 2,000 presses running day and night to print the Reichsbank notes.” In the last year of the hyperinflation, the government was printing money so fast and in such frequently larger and larger denominations that to save time, money, and ink, the bank notes were being produced with printing on only one side.

Even with banknotes issued in September 1923 with a face value of 500 million marks, cash for transactions increased in scarcity due to the rapid and erratic huge rise in prices on a more than daily basis as Germany entered the autumn of 1923. As Ludwig von Mises explained more than a year before the hyperinflation climaxed, in his essay, “Inflation and the Shortage of Money: Stop the Printing Presses” (March 1922), once people come to believe that the depreciation of the currency will have no end, every issuance of more paper money only intensifies people’s desire to spend it as fast as they can, before it becomes even more worthless:

If it is assumed that the monetary depreciation will continue, because the government is unwilling to observe moderation in the demands it makes on the printing press, then the value of the monetary unit will be lower than if no further inflation were expected. Because monetary depreciation is expected to continue, the people try, by the purchase of commodities, bills of exchange, or foreign money to rid themselves as quickly as possible of their domestic money that is daily losing its purchasing power. The panic buying in the shops, where the buyers go in droves in the attempt to acquire anything tangible, anything at all, and the panic buying on the exchange, where the prices of securities and foreign exchange go up leaps and bounds, race ahead of the actual situation. The future is anticipated and discounted in these prices.

Finally, facing a total economic collapse and mounting social disorder, the German government in Berlin appointed the prominent German banker Halmar Schacht as head of the Reichsbank. He publicly declared in November 1923 that the inflation would be ended and a new noninflationary currency backed by gold would be issued. The printing presses were brought to a halt, and the hyperinflation was stopped just as the country stood at the monetary and social precipice of total disaster.

But the statistical figures do not tell the human impact of such a catastrophic collapse of a country’s monetary system. In his book, Before the Deluge: A Portrait of Berlin in the 1920s (1972), Otto Friedrich wrote:

By the middle of 1923, the whole of Germany had become delirious. Whoever had a job got paid every day, usually at noon, and then ran to the nearest store, with a sack full of banknotes, to buy anything that he could get, at any price. In their frenzy, people paid millions and even billions of marks for cuckoo clocks, shoes that didn’t fit, anything that could be traded for anything else.

A story was told of a man going shopping with a wheelbarrow filled with German marks, who took an armful of them into a bakery to buy a loaf of bread. When he came out of the shop, on the sidewalk was a large pile of his billions of German marks; the thief had taken the far more valuable item, the wheelbarrow they had been in. Another story heard was of a successful German novelist, who before the war had saved enough money for a fairly comfortable old age. But in the second half of 1923, he withdrew his entire lifesavings from a bank and found that it was just sufficient to buy one token for a trolley ride in his native Berlin. He bought the token, took a ride around his beloved city, went home and committed suicide by putting his head in the oven with the gas on.

I knew someone who had lived through the hyperinflation during this period. He told me that the price of a cup of coffee could double in the time that a customer took to drink it in a Berlin café in the autumn of 1923. With bemusement, he said that the moral of the story was to “drink fast.”

Food supplies became both an obsession and a currency. The breakdown of the medium of exchange meant that the rural farmers became increasingly reluctant to sell their agricultural goods for worthless paper money in the cities. Urban dwellers streamed back to the countryside to live with relatives in order to have something to eat. Anything and everything were offered and traded directly for food to stave off the pangs of hunger.

Capital Consumption and Misdirection of Resources 

The inflation generated a vast and illusionary economic boom. In his classic study, The Economics of Inflation (1931), Constantino Bresciani-Turroni detailed how inflation distorted the structure of prices and wages, generating paper profits that created a false conception of wealth and prosperity. As the inflation pushed the selling price of a manufactured good far above the original costs of production, profits appeared huge. But when the manufacturer went back into the market to begin his production process again, he found that the costs of resources and labor had also dramatically increased. What had looked like a profit was not enough to replace the capital used up earlier. Inflationary profits hid from view what was actually a process of capital consumption.

The distorted relative-price signals during the inflation resulted in misallocations of capital and labor in various investment projects that were found to be unsustainable and unprofitable when the monetary debauchery finally came to an end. Thus, a “stabilization crisis” followed the German inflation. Capital and investment projects were left uncompleted because of a lack of available real resources, and workers faced a period of unemployment as they discovered that the jobs the inflation had drawn them into had now disappeared. The consumption of capital and the misuse of resources and labor during the years of inflation left the German people with a far lower real standard of living, which only years of work, savings, and sound new investment could improve.

Germany’s economic recovery in the middle and late 1920s turned out to be an illusion as well. A game of financial musical chairs was played out in which Germany borrowed money from the United States to pay off reparations to the victorious Allied powers, as well as to finance a vast array of municipal public works projects and business investment activities sponsored by the government. These all came crashing down when the boom of the 1920s turned into the Great Depression of the 1930s. The hyperinflation of the 1920s and subsequent financial and economic crash in the early 1930s also set the political stage for Adolf Hitler’s rise to power in 1933.

The Hapsburg Empire and the Great Austrian Inflation 

As clouds of war were forming in the summer of 1914, Franz Joseph (1830–1916) was completing the 66th year of his reign on the Hapsburg throne. During most of his rule, Austria-Hungary had basked in the nineteenth-century glow of the classical-liberal epoch. The constitution of 1867, which formally created the Austro-Hungarian empire, ensured every subject in Franz Joseph’s domain all the essential personal, political, and economic liberties of a free society.

The empire encompassed a territory of 415,000 square miles and a total population of more than 50 million. The largest linguistic groups in the empire were the German-speaking and Hungarian populations, each numbering about 10 million. The remaining 30 million were Czechs, Slovaks, Poles, Romanians, Ruthenians, Croats, Serbs, Slovenes, Italians, Jews, and a variety of smaller groups of the Balkan region.

In the closing decades of the nineteenth century, the rising ideologies of socialism and nationalism superseded the declining liberal ideal. Most linguistic and ethnic groups clamored for national autonomy or independence and longed for economic privileges at the expense of the other members of the empire. Even if the war had not brought about the disintegration of Austria-Hungary, centrifugal forces were slowly pulling the empire apart because of the rising tide of political and economic collectivism.

As with all the other European belligerent nations, the Austro-Hungarian government immediately turned to the printing press to cover the rising costs of its military expenditures. At the end of July 1914, just after the war had formally broken out, currency in circulation totaled 3.4 billion crowns. By the end of 1916, it had increased to more than 11 billion crowns. At the end of October 1918, shortly before the end of the war, the currency had expanded to a total of 33.5 billion crowns. From the beginning to the close of the war, the Austro-Hungarian money supply in circulation had expanded by 977 percent, or more than ninefold. A cost-of-living index that had stood at 100 in July 1914 had risen to 1,640 by November 1918.

But the worst of the inflationary and economic disaster was about to begin. Various national groups began breaking away from the empire, with declarations of independence by Czechoslovakia and Hungary, and the Balkan territories of Slovenia, Croatia, and Bosnia being absorbed into a new Serb-dominated Yugoslavia. The Romanians annexed Transylvania. The region of Galicia became part of a newly independent Poland. And the Italians laid claim to the southern Tyrol.

The last of the Hapsburg emperors, Karl, abdicated November 11, 1918. A provisional government of the Social Democrats and the Christian Socials declared German-Austria a republic on November 12. Reduced to 32,370 square miles and 6.5 million people — one third of whom resided in Vienna — the new, smaller Republic of Austria now found itself cut off from the other regions of the former empire as the surrounding successor states (as they were called) imposed high tariff barriers and other trade restrictions. In addition, border wars broke out between the Austrians and the neighboring Czech and Yugoslavian armies.

The New Austria and Paper-Money Inflation 

Within Austria, the various regions imposed internal trade and tariff barriers on other parts of the country, including Vienna. People in the regions hoarded food and fuel supplies, with black marketeers the primary providers of many of the essentials for the citizens of Vienna. Thousands of Viennese would regularly trudge out to the Vienna Woods, chop down the trees, and carry cords of firewood back into the city to keep their homes and apartments warm in the winters of 1919, 1920, and 1921. Hundreds of starving children begged for food at the entrances of Vienna’s hotels and restaurants.

The primary reason for the regional protectionism and economic hardship was the policies of the new Austrian government. The Social Democrats imposed artificially low price controls on agricultural products and tried to forcibly requisition food for the cities. By 1921, more than half the Austrian government’s budget deficit was attributable to food subsidies for city residents and the salaries of a bloated bureaucracy. The Social Democrats also regulated industry and commerce and imposed higher and higher taxes on the business sector and the shrinking middle class. One newspaper in the early 1920s called Social Democratic fiscal policy in Vienna the “success of the tax vampires.”

The Austrian government paid for its expenditures through the printing press. Between March and December 1919, the supply of new Austrian crowns increased from 831.6 million to 12.1 billion. By December 1920, it increased to 30.6 billion; by December 1921, 174.1 billion; by December 1922, 4 trillion; and by the end of 1923, 7.1 trillion.

Between 1919 and 1923, Austria’s money supply had increased by 14,250 percent. Prices rose dramatically during this period. The cost-of-living index, which had risen to 1,640 by November 1918, had gone up to 4,922 by January 1920. By January 1921, it had increased to 9,956; in January 1922, it stood at 83,000, and by January 1923, it had shot up to 1,183,600.

The foreign-exchange value of the Austrian crown also reflected the catastrophic depreciation. In January 1919, $1 could buy 16.1 crowns on the Vienna foreign-exchange market. By May 1923, a dollar traded for 70,800 crowns

During this period, the printing presses worked night and day churning out the currency. At the meeting of the German Verein für Sozialpolitik (Society for Social Policy) in 1925, Austrian economist Ludwig von Mises told the audience:

Three years ago, a colleague from the German Reich, who is in this hall today, visited Vienna and participated in a discussion with some Viennese economists…. Later, as we went home through the still of the night, we heard in the Herrengasse [a main street in the center of Vienna] the heavy drone of the Austro- Hungarian Bank’s printing presses that were running incessantly, day and night, to produce new bank notes. Throughout the land, a large number of industrial enterprises were idle; others were working part-time; only the printing presses stamping out notes were operating at full speed.

Finally, in late 1922 and early 1923, the Great Austrian Inflation was brought to a halt. The Austrian government appealed for help to the League of Nations, which arranged a loan to cover a part of the state’s expenditures. But the strings attached to the loan required an end to food subsidies and a 70,000-man cut in the Austrian bureaucracy to reduce government spending. At the same time, the Austrian National Bank was reorganized, with the bylaws partly written by Ludwig von Mises. A gold standard was reestablished in 1925, a new Austrian shilling was issued in place of the depreciated crown, and restrictions were placed on the government’s ability to resort to the printing press again.

But continuing government monetary, fiscal, and regulatory mismanagement prevented real economic recovery before 1938. Then Austria fell into the abyss of Nazi totalitarianism, followed by the destruction of World War II.

The 100-year Age of Inflation

Since World War I, there have been unending experiments with managed paper monies by governments everywhere. No leading countries in the West have collapsed into a German- or Austrian-type hyperinflation, but the post–World-War-II period has seen a continuing pattern of inflationary booms followed by post-bubble recessionary busts.

Expanding money supplies and artificially reduced interest rates have fed misallocations of resources and labor, misdirection of capital investment, and excessive consumer spending. These have necessitated the painful corrections of temporary falling output and rising unemployment that are part of the inescapable adjustments to restore balance in the market and a renewed path for sustainable growth and rising standards of living.

What is needed is to relearn what the older liberals of the nineteenth century had learned from their experiences with inflationary paper money — that only removing the hand of the government from the monetary printing press can permanently end cycles of booms and busts. This requires a return to a commodity-backed currency such as gold and a system of private, competitive free banking.

We can only hope that this earlier wisdom will eventually supersede the legacies of big government and monetary mismanagement that continue to linger 100 years after the end of the great German and Austrian inflations.

Dangerous Monetary Manipulations and Fiscal Follies

By Richard Ebeling

Originally published on April 6, 2021 for the American Institute for Economic Research

Back in the 1960s, Everett Dirksen (1896-1969) served as the Republican Party minority leader in the U.S. Senate. One of his famous lines about federal government spending was, “A billion here, a billion there, and pretty soon you’re talking about real money.” Those days are long past. Now it’s: A trillion here, and a trillion there, and then you are finally talking about a real amount of money.

Joe Biden hasn’t even reached his first 100 days in the White House, and he has already signed into law a $1.9 trillion spending bill, and is proposing over $3 trillion more of federal government expenditures that will fill in the potholes on our roads, help end global warming by building electric car charger stations about the country, and heal the racial wounds of those who see supposed racists around every corner.

Not one word was offered about where the money would come from for that $1.9 trillion of new spending, other than the presumption, obviously, that it simply would be more money borrowed by Uncle Sam and added to the national debt. And from whom would it be borrowed? U.S. Treasury securities are sold primarily to private bond holders at home and abroad, along with foreign governments investing in their “sovereign wealth funds.” But with the Federal Reserve chairman, Jerome Powell, assuring financial markets that key interest rates would stay near zero at least for another year or two, if the cost of borrowing is not to rise in the face of government demand for such sizable additional funds, the American central bank will basically create enough new money in the banking system to cover all or most of the Biden Administration’s deficit tab.  

Price Inflation and Money Creation

A number of economists have been reminding us that when a government or its appointed central bank prints enough paper money that ends up in circulation, at some point or another, we should not be too surprised if price inflation soon appears as a causal necessity. But other economists have been asserting that the presumptions of the simple and traditional quantity theory of money are no longer valid. After all, the Federal Reserve has massively expanded the monetary base; that is, cash held by the public plus reserves in the banking system, since the financial and housing crisis of 2008-2009, on the basis of which financial institutions may extend loans to private sector and government borrowers. And price inflation has remained relatively tame for more than a decade. 

In the middle of 2008, the monetary base was about $900 billion. By April 2015, it had grown to over $4 trillion. It had been declining slightly over the next five years, but in January of 2020, it still was at nearly $3.5 trillion. During the 12 months between February 2020 and February 2021, the monetary base grew to almost $5.5 trillion, or a 57 percent increase in one year. The monetary base grew by more than six-fold over the entire period between 2008 and early 2021.

The money supply as measured by M-2 (cash in circulation plus checking accounts, plus ordinary savings accounts and some time deposits) came to $7.8 trillion in mid-2008. It had increased to $12 trillion by mid-2015 and was $15.4 trillion in January 2020. Over the last year, M-2 expanded to $19.7 trillion by February 2021. Thus, the M-2 money supply grew by 54 percent between 2008 and 2015, and by 28 percent between 2015 and 2020, with an additional 28 percent increase just between January 2020 and February 2021. Or for the entire period, 2008-early 2021, M-2 expanded by 253 percent.

Assumptions of the Simple Quantity Theory of Money

So where has been all the price inflation, if one of the oldest of economic truisms, that increases in the money supply bring about rising prices, is still true? Like all properly expressed scientific statements, the simple quantity theory has attached to it the ceteris paribus clause, that is, “all other things being equal” or “staying the same.” The simplest expression of the quantity theory of money is captured in the Equation of Exchange:

MV = PQ

The total quantity of money (M) times the velocity (or turnover) of money (V) equals the average price level (P) times the total quantity of goods trading at those prices (Q). The quantity theory assumptions are that over a given period of time the rate at which money turns over to facilitate exchanges remains fairly constant and that the total output of goods and services over that same given period is fairly stable. Thus, if “M” increases, and “V” and “Q” are relatively unchanged, then the increase in the money supply has to manifest itself through a rise in “P.”

Consumer Prices and Real GDP

The Consumer Price Index (CPI), as a common measure of change in the price level and the cost of living, stood at 219 in the middle of 2008 (with 1982-1984 = 100). In 2015, the CPI was 238, or about 8.7 percent higher than in 2008. In January 2020, it was 258.7, or again 8.7 percent higher than five years earlier. And in February 2021, the CPI had reached 263.1, or 1.7 percent above a year earlier. Looking over the last 12 to 13 years, prices in general as measured by the CPI have increased by 20.1 percent. That is, a hypothetical basket of goods that would have cost, say, $100 in 2008 to purchase cost a little more than $120 in early 2021.

What, then, has been at work in the U.S. economy? In the 10 years from 2009 to the end of 2019, real Gross Domestic Product (GDP) grew from $15.2 trillion to $19.25 trillion, for a 26.6 percent increase. Thus, part of the monetary increase was counteracted by a significant growth in the “Qs” of the economy. That is, greater money demands for goods and services were partly counterbalanced by real increases in supplies meeting that increased number of dollars offered for goods and services.

However, considering that the monetary base grew by more than 600 percent over the 2008-2021 time period, why did M-2 only increase by 253 percent over the same 12 or 13 years, when it would be expected that such a huge increase in lendable reserves in the banking system would have percolated out into the market via far greater bank lending? The reason this has not been the case is that something else has not been “equal” due to a particular twist to Federal Reserve interest rate policy.

The Fed Pays Banks Not to Lend Reserves

When the Federal Reserve introduced its policy of “quantitative easing” – a fancy phrase for unusually large and rapid increases of bank reserves through central bank purchase of government securities and government-guaranteed mortgage-backed securities – the Fed was interested in bolstering bank liquidity in the midst of a serious financial and housing crisis, and preventing all that newly created money from generating the price inflation that at some point would have been highly likely.

So, the Federal Reserve introduced an additional trick into its usual toolkit of monetary policy instruments. This was to offer banks an interest rate premium slightly above the rate of interest financial institutions could earn from lending all those available reserves to the private sector; that is, to you and me. As a consequence, bank excess reserves – the bank reserves above those Federal Reserve member banks are legally obligated to hold against outstanding depositor liabilities – ballooned.

Before the 2008-2009 financial crisis, excess bank reserves were barely hovering above zero. In other words, any available reserves that banks did not legally have to hold as “cash” to meet hypothetical depositor withdrawals were readily lent out to willing and presumed credit-worthy borrowers. After all, any excess reserve dollar being held by a bank was one less dollar earning interest income for the bank and its depositors.

Trillions of Dollars of Excess Reserves

But from September 2008 to now, bank excess reserves have been at historically unique levels. In early September 2008, excess bank reserves came to $2.3 billion. But with the Fed’s bond and other buying plus paying banks not to lend money, by October 2014, excess reserves totaled $2.7 trillion. Just before the coronavirus crisis emerged with the accompanying government lockdowns and shutdowns that brought the U.S. economy to a screeching halt, excess reserves were still $1.5 trillion. But with the government prohibiting people to produce, work, or shop, plus the Fed’s interest premium policy, by May 2020, excess reserves were at $3.2 trillion. In February 2021, excess reserves stood at $3.3 trillion, even with the partial economic recovery in the second half of the year.

Another way of saying this is that out of the $5.5 trillion monetary base in February 2021, $3.3 trillion is sitting in the banks as unlent, excess reserves collecting interest from the Federal Reserve. In other words, 60 percent of the monetary base is made up of excess reserves. That, in itself, explains a good deal of the reason why an exceptionally large expansionary monetary policy by the American central bank has not brought about any of the significant price inflation that the simple quantity theory otherwise would have predicted.

A Decline in the Velocity of Money

Some economists have theorized that the explanation for the relatively low rate of price inflation in spite of the large increase in the money supply in the banking system is due to a noticeable decline in the velocity of money. That is, money is turning over more slowly, or the other way to look at it is that the demand to hold average cash balances has increased relative to income earned.

Looking over the data, before the financial crisis began in 2008, aggregate M-2 velocity was 1.93 (down from 2.13 at the beginning of 2000) and has been declining from then to the present. In late 2019, “V” was 1.42. But with the near total government command and control restrictions on economic life in the first half of 2020, by June of last year velocity had declined to 1.1. When much of the economy has reduced or shut down production due to government decree, and millions are now unemployed or underemployed with less income earned, while at the same time everyone is ordered to stay at home and not buy anything except what those in political authority define as “essentials,” it should not be too surprising that the rate at which dollars in the economy are turning over in transactions has noticeably slowed down. While velocity decreased by a little less than 25 percent between 2008 and 2019, it declined by 22 percent just over the first six months of 2020. By the end of 2020, velocity had only picked up to 1.13, or a less than 3 percent increase in the rate of money turnover.

Now, it is true that if, in our Equation of Exchange, on the left side “M” increases and “V” decreases while at the same time on the right side of the equation, the “Qs” are increasing, then any increase in the “Ps” can be noticeably less than if, as usually assumed for purposes of exposition, the “V” and the “Qs” are constant. But this does not mean that the simple quantity theory of money is logically incorrect and therefore invalid. It simply means that in the real world little that is analytically taken as “given” or “constant” for purposes of drawing inferences from reasoning starting points stays the same as time passes and human actions change in various ways not included in the hypothetical case.

Budget Deficits and Money Creation Do Matter

It certainly does not validate the declared “modern monetary theory” claims that all of the old economics that criticized budget deficits and money creation are no longer relevant or true. That now government can run annual budget deficits of almost any size for as far as the fiscal years can be seen into the future, with nary a worry about price inflation on the horizon.  

Before the coronavirus crisis broke out in early 2020, and before the government destruction of so much of the economy due to its central planning prohibitions at the national but especially at the state levels, the U.S. economy had reached an unemployment low of about 3.5 percent, and economic growth had been healthy through 2019, and was promising for 2020.

It was clear that at some point the anticipated, at that time, trillion-dollar-a-year budget deficits would bring about significant “drag” on the real economy, and that pressures were mounting on rising prices looking ahead. In other words, large and continuing budget deficits financed by money creation in an economy basically operating at “full employment” was not going to be able to permanently avoid noticeable price inflation above the 1.5 to 2.5 annual rates of CPI rising prices, as had been experienced during the preceding decade.

This past year temporarily changed all that. Unemployment reached over 14 percent in April of last year and while going down as state governments have been loosening up since last summer, as of February 2021, nationwide unemployment still stood at 6 percent of the labor force. And while GDP growth picked up in the second half of 2020, it is not yet fully recovered from the decline in the first half of the year. (See my articles, “America’s Fiscal Follies are Dangerously in the Red” and “To End Budget Deficits, Restrict Political Pickpockets”.)

Fantasies of Taxing “the Rich” with No Consequences

Now with the promise of an additional $3 trillion of government spending on top of the $1.9 trillion already passed by Congress and signed by the president, it will be difficult to forestall the workings of the “laws of economics.” Among those laws is that people respond to incentives and change their conduct in the face of changing costs and benefits. President Biden has promised that a good portion of that new $3 trillion will be covered by increased taxes on “rich” individuals and corporations.

A delusion that so many on “the left” seem to suffer from is that “rich people” have locked away in safes and strongboxes millions of dollars, just sitting idle in cash to be touched and gloated over like some compulsive cash-driven miser. The tens of millions, indeed, hundreds of billions of dollars, the political paternalists and social engineers are salivating over to fund all their collectivist redistributive dreams, are, in fact, tied up in the business of doing business. It is partly in the “fixed capital” of industrial plants, machinery, tools, and equipment, in inventories of resources, raw materials, and component parts essential and used in ongoing and continuous production. It is part of the “working capital” that continuously pays wages to all those employed and for all the other renewed means of production without which business cannot go on each and every day, which is necessary to produce all the outputs that represent the standards of living of all in society.

Try to tax away significant portions of all this wealth as it is monetarily added up on ledger books of private enterprises and the income statements of various financially comfortable individuals, and you do two things. First, you “nudge” people to find “shelters” for some of their wealth in less taxable and therefore less productive ways that slows down future economic growth and human improvement. 

Second, you prevent the existing levels of production and standards of living from possibly being maintained by taxing away the financial resources necessary for being able and willing to continue the size and scope of enterprises as before. It may seem extreme, but there have been instances in which tax burdens have resulted in capital consumption. 

Make it less financially possible and less profitably attractive to work, save, and invest, to creatively innovate, and entrepreneurially take risks and bear uncertainties, and you undermine both the present and the future of any society. Upon whom do these resulting lost opportunities for employment, rising standards of living, and financially securer futures most threaten to fall?  Those the political paternalists say they are most concerned about – the poor, the less skilled and educated, those with fewer chances and opportunities to get ahead.

Welfare State Makes More “Disadvantaged” People

They “transfer” a growing number of those “disadvantaged” and “marginalized” peoples from potential paths of personal betterment and self-supporting responsibility through the opportunities of a growing and improving market-driven economy to being permanent, dependent wards of the state. Which, of course, is where the political paternalists and the social engineers want them as rationales for their own governmental power and control that enriches them at the expense of not only those who they tax to pay for much of it, but also of all those whom they tie down to a life of welfare “security” from which escape is difficult once entrapped in its redistributive snares.

The “progressives” and the “democratic socialists” and the Democrat Party leadership in the political halls of Washington power are giddy with power and their dreams of remaking America and everyone in it in record time.  Who needs old fashioned Soviet-style five-year plans, when the political and legislative transformation to fuller collectivism in America can all be done within an achievable five-month plan of getting it done through presidential executive orders and Congressional bills squeaked through by manipulating the Senate rules and by keeping in line everyone on their side of the aisle through political carrots and sticks?

Reality, however, has a persistent tendency to keep rising to the surface. Running huge budget deficits does siphon off real resources that are no longer available for private sector improvements to the conditions of humanity. Debts accumulated will require huge expenditures simply on the interest to be paid on the cumulative national debt. The Congressional Budget Office (CBO) estimated in its latest revision that between 2022 and 2031, the Federal government will have to pay more than $4.5 trillion in interest on that debt. That is more than total federal spending in fiscal year 2019 of $4.4 trillion.

It may be true that the ceteris paribus clause must never be forgotten, but it remains a fact that if the monetary authority persists in printing large amounts of “paper” money year after year, both to fund government deficits and to try to “stimulate” private sector borrowing, and people’s willingness to hold larger and larger cash balances reaches a satiation point (at the margin), then those who find themselves with excess cash balances in their hands will attempt to trade it away for goods and services on the market, and prices in general will start to rise more and more at significantly higher rates.

The story of how inflations impact an economy is more complex than simply prices in general going up. Monetary expansions influence relative prices and wages, profit margins and resource allocations in ragged and uneven ways that bring about a whole series of distortions and imbalances that create instabilities and mismatches between supplies and demands that set the stage for a future “corrective” downturn during which markets attempt to rebalance themselves for sustainable economy-wide coordination. (See my eBook, Monetary Central Planning and the State, and my articles, “Macro Aggregates Hide the Real Market Processes at Work” and “The Myth of Aggregate Demand and Supply”.)

But what is clear is that the types of monetary, fiscal and regulatory policies being implemented and projected by the current Administration, Congress, and the Federal Reserve are all leading America down a dangerous and destabilizing road, any recovery from which will not be easy or cheap.  

Do Not Trust Governments with the Control of Money

By Richard Ebeling

Originally published on November 16, 2020 for the American Institute for Economic Research

If there one thing that is fairly certain in this life – besides the seeming inescapability of death and taxes – is that once someone is appointed to almost any position in the political and bureaucratic structures of a government they soon discover how important and essential is the organization of which they are a part for the well-being of the nation. The country could not exist without it, along with its increasing budget and expanded authority. This applies to the Federal Reserve, America’s central bank, no less than other parts of government. 

The news media has reported that the apparently unlikely appointment of Dr. Judy Shelton to the Federal Reserve Board of Governors probably will be successfully maneuvered through the full Senate confirmation process. Shelton would then sit on the Federal Reserve Board filling the balancing a term that ends in 2024 and then made eligible for a 14-year term. Hers has been one of the more controversial nominations to the Fed in recent years, with critics fervently expressing their negative views of her. 

For instance, Tony Fratto, a former Treasury official and deputy press secretary under George W. Bush, was recently quoted as saying that Shelton’s appointment would be “a discredit to the Senate and the Fed. It screams. Nothing at all is serious. Not us. Not you. Not them.”

Mainstream Economists Against Anyone for Gold

Back in August of this year, over one hundred academic and business economists issued an open letter to members of the U.S. Senate calling for rejection of her nomination to the Fed. Among those who signed were some economics Nobel Laureates, including Robert Lucas and Joseph Stiglitz. They insisted on her unfitness for such an appointment. Why? They said: “She has advocated a return to the gold standard; she has questioned the need for federal deposit insurance; she has even questioned the need for a central bank at all.” 

They also accused her of hypocrisy, saying that Shelton had changed her stance on Federal Reserve policy and the institution’s relevance based simply on a desire to be appointed to the Fed board, and to serve the wishes of the president who had nominated her. So, she stands damned if she opposes the Fed with her call for a gold-backed currency, and she is damned if she modifies her positions on monetary policy supposedly to be more palatable to the Senators deciding her professional fate. Clearly, her critics would only stop being critical if they were somehow convinced that Judy Shelton truly loved the Fed, hated the gold standard, and supported “activist” monetary policy and interest rate manipulation; and for the full 14 years of her term on the Fed Board. 

Political campaigns are full of people who say that they are drawn to higher echelon government employment so they can “give back” to or “serve” the country, and no doubt there are some who are seriously sincere when they say so. But who can deny that what also appeals to such people, and many others who are far more crudely opportunistic, is the attraction of being a “player” and an “insider” in the various halls of political power and decision-making in determining the bigger picture of the “shape-of-things-to-come?” 

And it may be that Judy Shelton, based on her own statements of desiring to “serve” the country in this particular capacity, truly wants to, even with all her apparent changing views and emphases. Or maybe it’s all a game to say what she thinks others want and need to hear so that will approve her as a Board member of the Federal Reserve, and then sit at the Big Boy’s – oh, I mean the Big Person’s – table.  

The Real Issue is the Case for Gold, Not a Person’s Sincerity  

Be that as it may, the real issues concern whether her views on gold and the Federal Reserve are reasonable or not as useful input into the decision-making process of Fed monetary policy. To begin with, there is a far longer history of human societies going back to the ancients in which gold or silver or some other “real” commodity has served as the medium of exchange, the money-good facilitating transactions. The period of history in which mankind has primarily relied upon fiat or paper money currencies only covers about the last one hundred years. 

Now, merely because an idea or an institution has been around a long time does not prove its validity or continuing usefulness. A variety of bad ideas and bad institutions beclouded human betterment for many centuries until they were finally overturned and replaced by other ideas and institutions considered more in line with bringing about improvements in the human social, economic, and political condition. 

Fundamentally, the case for a gold standard has been based on the idea that governments have been notorious in the misuse of their capacity to turn the handle of the monetary printing press to create the money needed to fund their expenditures, rather than fully rely upon the collection of taxes. By this means, governments are able to get around the necessity of telling their citizens the truth concerning the actual cost of the activities it wishes to undertake. This was understood by many economists of differing policy persuasions.

“Progressive” Richard T. Ely Challenged Arbitrary Monetary Policy

As an example, Richard T. Ely (1854-1943) is usually viewed as one of the early and successful proponents of the interventionist-welfare state in America in the late 19th and early 20th centuries. Having earned his bachelor’s and master’s degrees at Columbia University in New York in the second half of the 1870s, he went off to complete his studies in Imperial Germany. He came back imbued with the economic ideas and policy prescriptions of the German Historical School, with its emphasis on pragmatism and expediency as the needed basis for guiding governments in regulating industry and pursuing various forms of redistribution of wealth. He was also one of the founders of the American Economic Association in 1885 and a leading figure in the American Progressive Movement in the 1890s and early decades of the 20th century. 

In his co-authored textbook, Outlines of Economics (1893, 4th revised ed. 1926) Ely highlighted the abuse with which governments – including the U.S. government during the Civil War of the 1860s – had used the issuance of paper or fiat money to fund expenditures with serious inflationary consequences for the citizens of countries experiencing such dangerous power by those in political authority. And why governments have little or no incentive to ever rein in their monetary mischiefs: 

“The supply of gold, as we have seen, is subject to variations arising from such influences as the discovery of new deposits, the exhaustion of old ones, and changes in the methods of handling the ores. Variations in gold production are reflected in movements of the general level of prices.  

“The supply of fiat money, it is argued, could be arbitrarily controlled by government and its purchasing power could be kept more nearly stable. Closely scrutinized, this particular argument for fiat money turns into the strongest of the arguments against it. Under practical conditions, experience has shown, governments find it much easier to expand than to contract their issues of paper money. 

“Expansion permits larger expenditures; it is, for the time being a substitute for taxation; it raises prices and stimulates business. Contraction on the other hand, is at the expense of an immediate increase in taxation; it calls for rigid economy on the part of the government; it has for the time being a depressing effect upon business activities. 

“With all of its shortcomings, the gold standard has the great advantage that its variations, largely the result of the play of the forces of the market, are beyond the arbitrary control of government.” (p. 259)

J. Laurence Laughlin and the Perverse Incentives of Paper Money

We may use one more example, but this time by an economist with nearly the exact opposite of Richard Ely’s public policy views. J. Laurence Laughlin (1850-1933) earned his PhD from Harvard University, and became a founder of the economics department at the University of Chicago in 1892. He was an advocate of the establishment of a central bank in the United States in the years leading up to the opening of the Federal Reserve in 1914. He is also often considered a critic of the traditional quantity theory of money. On general matters of economic policy, Laughlin was a strong proponent of a general laissez-faire, free market society. 

In his Money and Prices (1919), Laughlin also emphasized the danger of paper currencies not connected to gold by redemption requirements to prevent governments from taking advantage of their capacity to increase the amount of paper money in circulation:  

“The very existence of paper [money] issues, originating in a wrong method of borrowing [by the government], is a constant menace. The mere lapse of time in which no injury has been incurred unfortunately serves to lull the fear of anger. If retained, such issues are a suggestion for similar crude expansions in the future, when men are too excited to judge calmly of their acts. Their very presence is an incentive.

“If legislators were all monetary experts, and never influenced by political considerations, there would be little risk in retaining for a time [such fiat money]; but we must take men as they are, and provide for probable acts of those who are incompetent and ill-advised. Obviously, these national guardians of our monetary system do not personally lose anything when they get the treasury into desperate straits . . . 

“What is still more dangerous is the fact that the whim of the government is the only limit to its [paper money] issues . . . If a fancied need presses upon men inexperienced in monetary operations, especially if they have been inoculated with the fallacy that the more money a country has the better off it is, there will be excessive issues, followed by raids on the reserves.

“The paper will depreciate – and the country will undergo rapid fluctuations in prices, an unsettling of contracts, a period of mad speculation, leading to the inevitable ruin of a commercial crisis . . . It being understood [therefore] that convertibility into gold is the prime prerequisite either of government or bank issues.” (pp. 265-266; 274)

The 20th Century Failures of Paper Money Systems

Is there anything in the history of the last one hundred years to invalidate the questions and concerns of such economists as Richard T. Ely or J. Laurence Laughlin, from so long ago, that led them to support and argue for a gold standard on political grounds? There was the monetary madness during and after the First World War, with paper money inflations to fund the expenses of the belligerent powers, and the destructive hyperinflations that followed the end of that conflict. (See my article, “The Lasting Legacies of World War I: Big Government, Paper Money and Inflation”.)

There was the false sense of economic and monetary stability in the 1920s, followed by the Great Depression due to misguided Federal Reserve policy in the ’20s and disruptive government interventions and centralized planning schemes in the decade of the 1930s. Then more inflations to finance the Second World War, with a rollercoaster of inflations and recessions in the post-World War II period, followed by the new Federal Reserve monetary mismanagements that led to the financial and housing crises of 2008-2009, with continuing monetary manipulation over the next ten years of economic recovery. (See my article, “Ten Years On: Recession, Recovery and the Regulatory State”.)

Institutions Restrict Potentially Harmful Behavior

Unfortunately, the benefit of a gold standard has not been that it has always effectively prevented government monetary mismanagement and abuse; far from it. But, like many social, economic and political institutions, it sets limits and rules on the conduct of the societal participants that restrict everyday conduct that if allowed and regularly pursued can bring about changes in attitudes and actions that cumulatively brings damage to all in society.

It can be easily argued that John Maynard Keynes’s “revolutionary” idea of governments balancing their budget over the business cycle – budget deficits in ‘bad” times and budget surpluses in “good” years – rather than on an annualized basis set loose the perverse political incentives of politicians never having to completely tell the citizenry from whence will come all the revenues to cover the costs of increasing government expenditures with which campaign contributions and votes are bought by politicians in the never-ending election cycles of modern democratic society. This institutional change has led to U.S. government budget deficits for 63 of the last 75 years since the end of the Second World War in 1945, with, now, annual trillion-dollar budget deficits likely to be the norm for as far as the fiscal eye can see. (See my articles, “Why Government Deficits and Debt Do Matter” and “Debt and Deficits are Out of Control” and “Debt, Deficits and the Cost of Free Lunches”.)

The same has happened with mismanagement of the monetary system with, first, the weakening of the gold standard during and after the First World War, and then its abandonment in one country after the other beginning in the 1930s. The world is on fiat or paper money standards with total control in the hands of various monetary central planners with little or no external check on their policy decisions, other than the particular monetary theory fads and fashions that central bankers and their staff economic advisors currently hold as a guide for actual policy actions; along with the pressures of contemporary politics, regardless of how much it may be formally punctuated that the leading central banks around the world make their policy choices independent of the political climate. 

Not having to worry about mandatory redemption of the bank notes and other monetary equivalents they issue being paid in gold “on demand” at a fixed rate of exchange by either domestic or foreign holders of their fiat currencies, central banks have been able to set loose what more than one economist has called the “age of inflation” since the end of the Second World War. 

Gold an International Money vs. Fluctuating Paper Currencies

The end to the gold standard also weakened the international quality of what had been in many ways a global monetary system in which gold was the world’s money and national currencies were merely different denominational ways of expressing relative amounts of the same money good. 

The French social philosopher, political economist, and “futurist,” Bertrand de Jouvenel (1903-1987), in an article on “Money in the Market” (1955), recounted the experience of a British family vacationing in France before and then after the end of the gold standard in the 1930s:

“In 1912, an English family spent its summer holiday in an out-of-the-way French village. A bill was presented, invoiced in francs; the English father had nothing but English gold sovereigns, then in circulation in Britain. This did not embarrass the innkeeper; true, he had never seen coins stamped with the British Monarch’s profile, but he was thoroughly familiar with the gold coins then circulating in France. 

“Placing a 20-franc gold piece by the side of the sovereign, he found the latter heavier (123.27 grains to 99.56) and it seemed to him that two sovereigns made up about the same weight as a 50-franc gold piece (50 francs = 248.9 grains; 2 sovereigns = 246.54). Therefore, without consulting anybody, he made up his mind to accept two sovereigns as equivalent to 50 francs . . .

“In 1932, the same English family returned to the same spot, again the head of the family had no other means of payment than those current in Britain at the time, i.e., pound notes. The aged innkeeper took these notes, laid them side by side with French notes, and this time learned nothing from the comparison . . . The ‘weighing’ of pounds had ceased to be a physical process, it was now a market process, a day-by-day confrontation of the French demand for pounds with the British demand for francs.

“In the former case the rate of exchange depended upon the unchanging balance of physical weights in fine gold between the national coins: it was therefore inherently stable; in the second case it depended upon the changing balance of claims between two countries . . . it was therefore inherently unstable.” (See Bertrand de Jouvenel, Economics of the Good Life [Transaction Publishers, 1999], pp. 179-180.)

The Changing Opinions of Economists on Monetary Policy

When Great Britain in 1931 and then the United States in 1933 went off the gold standard, there was much hue and cry among a large majority of economists and many in the general public that a terrible policy mistake had been made in ending gold as the core money based on obligatory redemption of bank notes into a fixed weight of gold. 

No doubt, the economists who issued that open letter in August of 2020 angrily protesting to the U.S. Senate their objection to Judy Shelton’s nomination to the Federal Reserve Board of Governors would all consider it the essence of monetary policy wisdom in the 1930s to have freed the British and American monetary systems from what Keynes had in the 1920s called that “barbarous relic” – gold. 

By implication they would also be saying how misguided and wrong-headed were all those economists of the 1930s to oppose the leaving of the gold standard so governments might have wider discretion to wield monetary policy in the “activist” attempt to overcome the Great Depression. 

Let me suggest that it is not outside the realm of the possible, perhaps the probable, that 50 years from now, many, maybe a significant majority, of economists will look upon the signers of that letter and think how misguided and foolish they were in thinking that governments and their central bankers had the knowledge, wisdom and ability to micromanage the economy through the macro-manipulation of money, credit and interest rates. 

The Freedom to Choose the Currency to Use

They will wonder how it was that so many in the economics profession could have suffered from the delusion that monetary central planning ever could be any more feasible than the failed Soviet-style system of general central planning of human affairs. Those future economists will be confounded that these economists of 2020 had not paid more attention to the reasoning of Austrian economist and Nobel Prize-winner, Friedrich A. Hayek (1899-1992), when he pointed out that nothing had been more wrong-headed than leaving the control of money in the monopoly hands of government.  

That, as Hayek had argued in Choice in Currency (1976), nothing would be more reasonable and rational than letting everyone, anywhere, choose the money or monies that they found more convenient and advantageous to use in various and sundry transactions and exchanges. That such freedom to choose would be an invaluable institutional means to keep government monetary mismanagement and abuse in check, since any political authority which noticeably reduced the value or increased the uncertainty of its national currency’s future worth, would see a flight out of its use by its own and other citizens of the world. (See my article, “Government Monopoly Money vs. Personal Choice in Currency”.)

Indeed, those future economists may also wonder why it was so difficult for those earlier economists of 2020 to fully appreciate the value and effectiveness of private competitive free banking as a replacement for the atavistic notion that a central bank was either necessary or desirable. They will be surprised at the general ignoring of an entire sub-field of monetary theorists that had emerged in the late 20th and early 21st centuries who demonstrated why central banks were the very institutional instrument to propagate the types of instabilities that monetary central planning was supposed to eliminate, or at least reduce. And why and how it was that the very stability and feedback needed for a functioning and growing economic order to flourish was far more likely and possible through monetary freedom. (See my eBook, Monetary Central Planning and the State.) 

And who knows, if Judy Shelton is appointed to the Federal Reserve Board of Governors, and if she actually espouses and defends the ideas for which she is being condemned by so many of those “mainstream” economists today, it may be a useful step to the societal transformation to a freer society, a key long run element of which must be the freeing of money from political control. 

The Miracle of the Free Market

By Richard Ebeling

Originally published on December 16, 2019 for the American Institute for Economic Research

One of the great fallacies arrogantly believed in by those in political power is the notion that they can know enough to manage and command the lives of everyone in society with better results than if people are left to live their own lives as they freely choose.

The fact is, there is far more in the world that successfully manages and “regulates” itself without the controlling hand of the government than many of us pause to reflect on or understand. 

Have you ever stopped to think about how much of the world around us we take for granted? How often do any of us reflect on the law of gravity that keeps the moon revolving around the earth or on the chemical workings of our internal organs after we have eaten a meal? 

The Physical and Biological Worlds Don’t Need Government

Yet whether we think about or even understand the law of gravity or the processes of chemical reactions, the moon continues to travel around the earth and the food we normally eat continues to be digested. These physical and biological processes operate whether or not we think about or understand them.

If the wonders of the physical world and the complexities of our own biology often seem miraculous to us, we should be no less awestruck at the miracle of the marketplace. 

Just as the forces of gravity and the internal chemistry of our bodies operate without conscious human intervention and control to direct or regulate them, so too the market brings together the actions of multitudes of producers with the desires and demands of an equivalent multitude of buyers with no central directing and commanding hand overseeing the processes at work. Just as most of nature and much of human biology are “self-regulating,” so too is the greater part of our economic activities in society.

Markets Use More Knowledge Than a Mind Can Master

Day in and day out we give little thought to the vast and complex array of economic processes, which if they were to stop or severely malfunction would mean hardship or even disaster for many of us. The supermarkets are daily replenished with wide varieties of fruits, vegetables, meats, canned and packaged goods, dairy products, and many other items. 

We crowd the shopping centers and find them filled with practically every conceivable commodity we can imagine, with each of them offered in attractive and diverse varieties. Just think of the wide spectrum of shoes and clothes placed at our disposal by the market as an example of this. 

And if we do not want the inconveniences and irritations of crowded shopping areas, especially at holiday time, a growing number of us now do an increasing amount of our shopping over the Internet with the mere click of the “mouse,.” or with our phones. In fact, in 2018, an estimated 40 percent of all shopping was done online. And 76 percent of all shoppers did some of their shopping over the internet in 2018. 

Even if we wanted to fully understand how all those goods are actually brought to the marketplace for our various wants and desires, virtually none of us would be able to trace through all the intricate ways by which our demands are satisfied. How many of us really know, technically, how the internet and online shopping is made possible in any detail, other than turning on the computer (or phone), browsing for a website, and making the final “click” when it’s time to complete our purchase? Some of us, no doubt,  do understand, but really not very many. 

Back in 1958, free market advocate, Leonard Read, wrote a famous essay titled “I, Pencil”. He outlined a history of manufacturing a simple old-fashioned wooden pencil, from a tree being cut down in a forest and the mining of the graphite in a faraway country to its assembly into its finished form so that it might be readily available for purchase by any of us in some neighborhood store. Read’s central insight was to remind us that no one individual or even wise and informed group of us possesses all the knowledge or information that has gone into that pencil’s manufacture.

Furthermore, it is not necessary for anyone to fully understand the processes involved in making that pencil for it to be available to us as a writing instrument. Indeed, if it were required for some mastermind to know all that is needed to know to make all of the goods offered to us every day on the market, the variety of goods available to us would be both fewer in number and much poorer in quality.

Market Competition and the Price System

How are the activities of an increasingly larger group of individuals successfully coordinated, so that all the multitudes of demands and supplies are brought into balance and harmony? The Austrian economist and Nobel Laureate Friedrich Hayek (1899-1992) showed how all of the knowledge and information in society is encapsulated in the price system of the free-market economy. In our roles as both consumers and producers we communicate to one another what we think goods, resources, capital, and labor services are worth to us in their various and competing uses through the prices we are willing to pay for them. These “price signals” serve as the means for all of us to decide and coordinate what we want and are willing to do together with other members of society.

Thus, and indeed quite miraculously, it is not necessary for an “economic czar” to rule over and command us in our everyday market activities to assure that a vast quantity of food gets to the supermarkets or that thousands of different varieties of goods are constantly available in the shopping areas or other stores and businesses throughout the land. 

Each individual finds his own corner of specialization — guided by those opportunities, expressed in market prices, that seem to offer the greatest likelihood of earning an income that will enable him to buy from others all of the goods he himself desires.

Competition in these voluntary interactions of the market helps us to discover where each of us can best interact with our fellow human beings for mutual betterment within the system of division of labor while pursuing our own personal interests. 

The competitive process tests us through the reward of profits and the penaltyies of losses. Profits lure us into those production activities that our neighbors, as consumers, want us to do more of. Losses warn us that we have undertaken production actions that those same neighbors think are not worth the costs of our continuing to do them in the same way.

No overseer’s whip is needed to prod people to do more of some things and less of others. No paternalistic planner is needed to assure that everything that is wanted is produced and in the direction of the most economically cost-efficient way. No restraining regulations and controls are needed to hamper the free choices and actions of the multitudes of millions, now billions, of people in the increasingly global society – other than the crucial and general legal rules against murder, theft, and fraud in our dealings with one another.

Mutual agreement and voluntary consent are the bases of these market relationships. It is not the police power of the government with its use or the threat of violence and force that needs to compel the cooperation and collaboration of humanity. It is self-interest, the profit motive, and the potential for gains from trade. 

The Morality of Market Relationships

There is also an important moral element in this functioning free-market economy. There are none who are only masters and others who are simply servants. In the market society we are all both servants and masters, but without either force or its threat. 

In our roles as producers — be it as those of us who hire out our labor for wages, or as resource owners who rent out or sell our property for a price, or as entrepreneurs who direct production for anticipated profits — we serve our fellow men in attempting to make the products and provide the services we think they may be willing and interested in buying from us.

“Service with a smile” and “the customer is always right” are hallmarks of the seller’s deference to those to whom they offer their supplies. What motivates such attitudes is the fact that in an open, competitive market no one can compel us to buy from a seller who offers something less attractive or more costly than what some rival of his is presenting to us for our consideration.

And why are we interested, as sellers, in not offending or driving away some potential customer into the arms of our rival suppliers? Because only by successfully making the better and less expensive product can we hope to earn the income that then enables us to re-enter the market, now in the role of consumer and demander of what our neighbors are offering to sell to us.

As consumers, we become the “masters” who those same neighbors attempt to satisfy with newer, better, and cheaper products. Now those whom we have served defer to us. We “command” them, not through the use of force but through the attraction of our demand and the money we offer for the goods they bring to the market. 

By how much we can “command” the services of others in the market in our role as consumer is directly related to the extent to which we have been successful in our service to our neighbors as reflected in the money income we have earned from satisfying their wants and desires. 

There is an ethical reciprocity in this aspect of the free marketplace. Each of us is able to demand the products of others as a reflection of our respective prior abilities to supply what our trading partners wanted and valued as expressed in the prices they paid us for what we have sold to them. 

We are also free as earners of income to charitably assist those whose own earning circumstances and abilities seem too limited to fulfill what we consider to be a better standard of living and opportunity for future betterment of some of our fellow creatures. But here, too, the ethical premise and practical consideration is that individuals rightly should have the respected liberty to determine how and in what form such benevolent and philanthropic giving should take on. 

No One May Be Compelled to Do Work He Disapproves Of 

In a free society, no man is required to do work or supply any good he considers morally wrong and ethically questionable. He may earn less from choosing to supply something that is valued less highly in the market, but he cannot be forced to produce anything that his conscience may dictate to be wrong.

On the other hand, we cannot prevent others from supplying a good or service we find morally objectionable. The ethics of liberty and the free market require that we use only morally justifiable means to stop our neighbors from demanding and supplying something that offends us. We must use reason, persuasion, and example of a better and more right way to live.

Unfortunately, too many of our fellow men want to preserve or extend a return to a form of a slave society — regardless of the name under which it is presented. Too many want to dictate how others may make a living, or at what price and under what terms they may peacefully and voluntarily interact with their fellow human beings for purposes of mutual material, cultural, and spiritual betterment.

Moral Courage for Winning Freedom

Our task, for those of us who understand and care deeply about human liberty, is to reawaken in our fellow men an awareness of the morality and the miracle of the free market. The task, I know, seems daunting. But it must have seemed that way to our American Founding Fathers when they heralded the truth of the inalienable individual rights of man to life, liberty and honestly acquired property for which they fought and then won a revolution, or when advocates of economic freedom first made the case for the free market against government control.

The world was transformed by these ideals of the morality of free men in free markets. What is most important is that each of us understands as best we can that morality and miracle in a competitive, self-coordinating market economy that does not need the designing, planning and directing hand of governments. 

Too often the friends of freedom allow the advocates of various forms of government regulation, control, and redistribution to set the terms of the debate. Freedom will not win if we do not put those proponents of political paternalism on the defensive.

By what moral right do they claim to tell other men how to peacefully go about their private and market affairs — as long as those men do not use murder, theft, or fraud in their dealings with others? By what ethical norm do those political paternalists declare their right to take that which others have honestly acquired through production and trade, and redistribute it without the voluntary consent of those from whom it has been taken? By what assertion of superior wisdom and knowledge do they presume to know more than the individual minds of all the members of society about how the market should go about the business of manufacturing all the things we want, and matching the demands with the supplies?

Defenders of individual freedom and the market economy have nothing to be ashamed or fearful of in advocating the free society. The American system of limited government, personal liberty, and free enterprise liberated the individual creativity and energies of many hundreds of millions of people. It provided the greatest opportunity for individual betterment and the highest standard of living ever experienced in human history. It also generated the most benevolent and philanthropic society in the world. Therefore, it should be the critics and opponents of this system of individual rights and human freedom that should have to justify their continuing calls for reducing our liberty.

It was clear thinking and moral courage that won men liberty in the past. Liberty can triumph again, if each of us is willing but to try. We need to take to heart the words of the free-market Austrian economist, Ludwig von Mises (1881-1973):

“Everyone carries a part of society on his shoulders; no one is relieved of his share of responsibility by others. And no one can find a safe way out for himself if society is sweeping towards destruction…. What is needed to stop the trend toward socialism and despotism is common sense and moral courage.”