Hyperinflations Are Caused by the Financing of Huge Public Budget Deficits Through Money Creation

In this section it will be demonstrated by looking at 12 hyperinflations that they have all been caused by the financing of huge public budget deficits through money creation. . . .

The figures demonstrate clearly that deficits amounting to 40 per cent or more of expenditures cannot be maintained. They lead to high and hyperinflations, reforms stabilising the value of money or in total currency substitution leading to the same result. . . .

The examples of both Germany and Bolivia suggest that at least deficits of about 30 per cent or more of gross domestic product are not maintainable since they imply hyperinflations.

--Peter Bernholz, Monetary Regimes and Inflation: History, Economic and Political Relationships (Cheltenham, UK: Edward Elgar Publishing, 2003), 69, 71.

The French Revolution Had the First Hyperinflation in History

In the last chapter we studied the development of inflation during the American War of Independence as a case nearly approaching hyperinflation. In this chapter we begin by analysing whether the French hyperinflation during the Revolution, which was the first hyperinflation in history, shows similar characteristics. This inflation, moreover, is the only hyperinflation in history during a time when most other countries were still on a silver or gold standard (Britain suspended convertibility only in 1797). . . .

During the French Revolution beginning in 1789 it soon became impossible to cover the financial requirements of the state, including the revolutionary wars, from ordinary revenues, especially since the Assemblée Nationale had lowered the taxes which were perceived by the population as repressive. To finance the budget deficit the new authorities soon issued the assignats, which were constructed to be guaranteed by land, since their holders could later use them to acquire former Church property which had been nationalised. These assignats could first only be transferred through a formal endorsement, like drafts. They still mentioned the King and were denominated in livres which had until then only been a money of account, that is they had never circulated as currency before.

Soon more and more assignats were issued, turned into bearer papers, the royal name on them was removed and their denomination changed to francs (1 franc = 1 livre). Devaluation of the currency and inflation began.

--Peter Bernholz, Monetary Regimes and Inflation: History, Economic and Political Relationships (Cheltenham, UK: Edward Elgar Publishing, 2003), 65-66.

LSE's Lionel Robbins Argued That the Free Market Economy Had Been Replaced by Another Regime Since World War I

Lionel Robbins, a well-known London School of Economics professor, was also among the economists who argued that the free market economy had been replaced by another regime since World War I. “The essence of pre-war capitalism,” he wrote in 1934, “was the free market . . . in the sense that the buying and selling of goods and the factors of production was not subject to arbitrary interference by the State or strong monopoly controls.” Since World War I, he said, the free market “has tended to be more and more restricted”by state intervention. He wrote:

The cartelisation of industry, the growth of the strength of trade unions, the multiplication of State controls, have created an economic structure which, whatever its ethical or aesthetic superiority, is certainly much less capable of rapid adaptation to change than the older more competitive system. Certainly no one who wishes to understand the persistence of the maladjustments of the great slump can neglect the element of inelasticity and uncertainty introduced by the existence of the various pools and restriction schemes, the rigidities of the labour market and cartel prices which are the characteristic manifestation of these developments. These tendencies are the creation of policy.

He concluded that the Great Depression was not due to the conditions of capitalism but “to their negation”:

It was due to monetary mismanagement and State intervention operating in a milieu in which the essential strength of capitalism had already been sapped by war and by policy. Ever since the outbreak of war in 1914, the whole tendency of policy has been away from that system . . .

 --Pierre Lemieux, Somebody in Charge: A Solution to Recessions? (New York: Palgrave Macmillan, 2011), 65-66.

Mussolini Asks about Roosevelt's New Deal: Just How Much “Fascism” Does the American President’s Program Contain?

There was hardly a commentator who failed to see elements of Italian corporatism in Roosevelt’s managed economy under the National Recovery Administration, the institution formed in 1933 to maintain mandatory production and price “codes” for American industry. The Italian press was quite taken with these similarities, and Mussolini laid the groundwork for such comparisons in a book review he wrote of Roosevelt’s Looking Forward. On the one hand, he identified a spiritual kinship:

The appeal to the decisiveness and masculine sobriety of the nation’s youth, with which Roosevelt here calls his readers to battle, is reminiscent of the ways and means by which Fascism awakened the Italian people.

In other passages, Mussolini was more reserved:

The question is often asked in America and in Europe just how much “Fascism” the American President’s program contains. We need to be careful about overgeneralizing. Reminiscent of Fascism is the principle that the state no longer leaves the economy to its own devices, having recognized that the welfare of the economy is identical with the welfare of the people. Without question, the mood accompanying this sea change resembles that of Fascism. More than that cannot be said at the moment.

Mussolini’s reserve reflected the customary etiquette among world leaders, who try to avoid appearing partisan: in July 1933, the month Mussolini’s review appeared, his press department was ordered not to describe the New Deal as Fascist because it might provide welcome ammunition to Roosevelt’s political enemies at home. A year later, Mussolini was sufficiently convinced of the strength of the president’s position to be rather less diplomatic in his choice of words. In his review of the Italian edition of New Frontiers, a book written by Roosevelt’s secretary of agriculture, Henry A. Wallace, Mussolini wrote:

The book as a whole is just as “corporativistic” as the individual solutions put forth in it. It is both a declaration of faith and an indictment of economic liberalism. . . . Wallace’s answer to the question of what America wants is as follows: anything but a return to the free-market, i.e., anarchistic economy. Where is America headed? This book leaves no doubt that it is on the road to corporatism, the economic system of the current century.

--Wolfgang Schivelbusch, Three New Deals: Reflections on Roosevelt's America, Mussolini's Italy, and Hitler's Germany, 1933-1939, trans. Jefferson Chase (New York: Metropolitan Books, 2006), e-book.

The History of the State’s Dealings with Money Is a Long History of Lies and Fraud

The history of government management of money has, except for a few short happy periods, been one of incessant fraud and deception.” 

--Friedrich von Hayek

Today holders of bank notes cannot demand to be paid in precious metal. Recall the speech by the president of the German Bundesbank, Jens Weidmann: “Modern money is not backed by any physical asset. Bank notes are printed paper — those knowledgeable among you know that in the case of the euro, it is made of cotton.”

Just as a passing thought: just for fun, send a 5-euro note to the European central bank or a 5-dollar bill to the Fed. Include a friendly letter and ask for it to be redeemed. If you receive an answer at all, it will consist of a nice letter and a different 5-euro note or 5-dollar bill.

At any rate, history has run its course and you can now understand Hayek’s statement that the history of the state’s dealings with money is a long history of lies and fraud.

The origins of the symbiotic relationship between the state and the banking system, to the benefit of both, goes far back in history. So far back that most of the people living today know only a paper money system; they do not question it because they have known nothing else.

Ludwig von Mises in his 1949 book Human Action wrote:

It is a fable that governments interfered with banking in order to restrict the issue of fiduciary media [bank notes] and to prevent credit expansion. The idea that guided governments was, on the contrary, the lust for inflation and credit expansion.

Governments gave banks privileges because they wanted to remove the limits that market money puts on credit expansion, or because they were eager to make available to the treasury an additional source of revenue.

--Andreas Marquart and Philipp Bagus, Blind Robbery! How the Fed, Banks and Government Steal Our Money (München: FinanzBuch Verlag, 2016), e-book.

The 5 Key Insights of "Austrian Finance," an Alternative Theory to Modern Finance

Chapter 11 presents the main building blocks to an alternative theory to Modern Finance, which I call Austrian Finance. As explained above, economics and finance are social sciences. They need to analyze and describe the patterns of behavior of individuals, groups and societies, in order to make qualitative predictions. The key insights of this analysis are: (1) people base their action on subjective knowledge; (2) they minimize the time it takes to reach their objectives and hence have positive time preferences and positive "natural" interest rates; (3) markets are in a continuous dynamic disequilibrium; (4) uncertainty is radical and cannot be measured; (5) the diversification of portfolios serves the purpose of reducing the consequences of errors and follows the rule of diminishing benefits from diversification.

--Thomas Mayer, introduction to Austrian Economics, Money and Finance, Banking, Money and International Finance 8 (London: Routledge, 2018), Kobo e-book.

The Nazi Press Enthusiastically Hailed the Early New Deal Measures: America, Like the Reich Had Broken with the Frenzy of Market Speculation

Critics of Roosevelt's New Deal often liken it to fascism. Roosevelt's numerous defenders dismiss this charge as reactionary propaganda; but as Wolfgang Schivelbusch makes clear, it is perfectly true. Moreover, it was recognized to be true during the 1930s, by the New Deal's supporters as well as its opponents. . . . 

The Nazi press enthusiastically hailed the early New Deal measures: America, like the Reich, had decisively broken with the "uninhibited frenzy of market speculation." The Nazi Party newspaper, the Völkischer Beobachter, "stressed 'Roosevelt's adoption of National Socialist strains of thought in his economic and social policies,' praising the president's style of leadership as being compatible [to] Hitler's own dictatorial Führerprinzip." . . .

Mussolini, who did not allow his work as dictator to interrupt his prolific journalism, wrote a glowing review of Roosevelt's Looking Forward. He found "reminiscent of fascism. . .the principle that the state no longer leaves the economy to its own devices"; and, in another review, this time of Henry Wallace's New Frontiers, Il Duce found the Secretary of Agriculture's program similar to his own corporativism.

--David Gordon, review of Three New Deals: Reflections on Roosevelt's America, Mussolini's Italy, and Hitler's Germany, by Wolfgang Schivelbusch, Mises Review 12, no. 3 (Fall 2006).

On the Keynesian "Bankers Gone Wild" Hypothesis of Credit Bubbles: Deregulation of Financial Markets, Financial Fragility, Too Much Bad Debt, a "Minsky Meltdown," the Market Failure, and the Credit Crisis

There are two main theories of why we had a credit bubble, and we might as well call them 'Keynesian' and 'Austrian'. In the Keynesian story, there is an irrational expansion of credit, perhaps because creditors under-estimate the risks they are taking. Paul Krugman represents this view rather well. In good economic times 'debt looks safe' and 'the memory of the bad things debt can do fades into the mists of history. Over time, the perception that debt is safe leads to more relaxed lending standards'. Eventually, bankers will become complacent and forgetful, at which point they start making a lot of bad loans. With all that bad debt, there must come a moment of crisis, which Paul McCulley has dubbed the 'Minsky moment'. Such a moment is 'the point at which excess leverage cannot be sustained and the system unravels'. It is called the 'Minsky moment' because the idea of such 'financial fragility' comes from the Keynesian economist Hyman Minsky, whom Krugman cites. Janet Yellen tells a similar tale when she calls the crisis a 'Minsky meltdown', although she admits that 'Fed monetary policy may also have contributed to the U.S. credit boom'.

Krugman, Yellen and others have used the terms such as 'Minsky moment' and 'Minsky meltdown' to suggest that the crisis is an example of market failure. The basic idea is that we had deregulation of financial markets in the US and elsewhere, which led to a lot of irresponsible lending and, ultimately, a credit crisis.  The 'combination of deregulation and failure to keep regulations updated', Krugman explains, 'was a big factor in the debt surge and the crisis that followed'. It is true that there was a kind of selective deregulation before the crisis. But the idea that excess lending was somehow a market failure overlooks a big important fact: too big to fail. The bankers were gambling with other people's money. As I discuss below, they had plenty of incentive to lower their lending standards. And if the bottom falls out? Well, we will get a bailout.

--Roger Koppl, introduction to From Crisis to Confidence: Macroeconomics after the Crash, Hobart Paper 175 (London: The Institute of Economic Affairs, 2014), 7-8.

From Neoclassical Equilibrium Theory to an Evolving Complex Adaptive System Theory

The purpose of this book is to put forward an alternative to neoclassical equilibrium theory. The limitations of equilibrium theory have become increasingly apparent in recent years, particularly to those economists who attempt to use it to explain the workings of an actual market economy, whether in offering policy advice to politicians and businessmen, or simply in interpreting events to a wider public. In response to rising dissatisfaction, neoclassical economists have offered some modest modifications to the standard theory, but these modifications have generally taken the form of accommodating new assumptions to the requirements of the existing model rather than to reality. This is not a satisfactory scientific procedure.

In the last ten years a quite different approach to economic theory, in which the market economy is treated as an evolving complex adaptive system, has emerged, but it has yet to capture the imagination of the profession or the wider public. The rather cool reception which this approach has so far received may in large part be explained by its presentation. It has been treated by its proponents as if it were a mathematical technique originating in the natural sciences which may have some limited applications in some specific aspects of economics and the other social sciences. In fact, as we shall show, its underlying principles of self-organisation and evolution can trace their intellectual origins to seventeenth and eighteenth-century philosophers of society. Its perspective is of perfectly general application to all branches of science. Furthermore, it does something which equilibrium theory, originating in nineteenth-century mechanics, fails to do, which is to distinguish clearly between human and non-human phenomena.

--David Simpson, introduction to Rethinking Economic Behaviour: How the Economy Really Works (Houndmills, UK: Macmillan Press, 2000), 1-2.

Mainstream Macroeconomics and Modern Finance Do Not Work in the Fields of Economic Policy and Finance

During the Great Financial Crisis of 2007-08, the financial skyscrapers fell down. The general public blamed the greed and irresponsibility of bankers for the catastrophe. Politicians and academics in economics and finance joined in on the banker bashing as it distracted attention from their own contribution to the mess. I do not want to whitewash the bankers. But in this book I shall make the case that mainstream macroeconomics and Modern Finance deserve a fair share of the blame. They produced theories which may have been internally consistent, but not applicable to the real world. Nothing would have happened, had they remained a pastime for the residents of the ivory towers. But they broke out and guided decision making in economic policy and financial activities.

What is to be done now? In this book, I argue that practitioners in economic policy and the financial sector need to go back to practical knowledge, based on common sense and experience gained from trial and error. Physical science can be successfully applied in construction, but mainstream macroeconomics and modern finance do not work in the fields of economic policy and finance. What is then left for economics and finance as sciences? Economics and finance are social sciences and follow rules that are different from those of natural sciences. They are unable to derive reliable quantitative impulse response functions for individuals, groups or societies as a whole in the way natural sciences do for objects. But they can analyze and describe the patterns of behavior of individuals, groups and societies. Based on the recognition of such patterns, they can make qualitative predictions. In this book, I shall argue that the Austrian school of economics provides a highly useful base for rethinking macroeconomics and finance from a sociological perspective.

--Thomas Mayer, introduction to Austrian Economics, Money and Finance, Banking, Money and International Finance 8 (London: Routledge, 2018), Kobo e-book.

Three Principal Hallmarks of Classical Economics: Growth of the Economy, Processes of Continuing Change, and the Interaction of Individuals

The purpose of this book is to put forward an alternative to equilibrium economics, the paradigm that has dominated the mainstream of economic thought for the best part of a century. That alternative is what may be called classical economics, namely the intellectual tradition that began with Adam Smith, evolved in the nineteenth century, was continued in the twentieth century by Marshall and the Austrians amongst others, and is today represented by theorists of complexity.

The hallmarks of the classical tradition are principally three. The first is the belief that the growth of the economy, rather than relative prices, should be the principal object of analysis. Coupled with that belief is an understanding of the market economy as a collection of processes of continuing change rather than as a structure, and that the nature of this change is self-organising and evolutionary. Finally there is a conviction that economic activity is rooted in human nature and the interaction of individual human beings. Many people might suppose from the similarity of the terms 'classical' and 'neoclassical' that the one school of economic thought is closely related to the other. In fact, as this book will try to show, they are more nearly exact opposites.

--David Simpson, introduction to The Rediscovery of Classical Economics: Adaptation, Complexity and Growth, New Thinking in Political Economy (Cheltenham, UK: Edward Elgar Publishing, 2013), 1.

The Pre-Keynesian Classical Theory of Recession Is Based on Disharmony between the Structure of Supply and the Structure of Demand

The structure of production refers to the way in which an economy as a whole fits together. Every output has their inputs, and each of those inputs has inputs of their own, and so on throughout the whole of the economy. There are literally an unquantifiable number of individual units of capital, workers and potential workers each of every kind who collectively possess a vast array of skills and abilities, along with resources of every kind found in different places undertaking particular roles. All of these inputs must be fit together to produce the output that is part of a process that eventually brings to us the goods and services we consume. Keynesian economics thinks in terms of aggregates, entire blocks of buyers and producers. Economic theory properly conceived instead looks at the atomic structure of the economy, at each of the individual productive components separately to understand how they can all be made to work together in a productive way. Moreover, Keynesian economics focuses almost entirely on final demand and ignores the actual structure of the economy, which it treats as irrelevant. Pre-Keynesian classical theory, on the other hand, thought of the structure as the crucial issue. They focused on whether the structure of production was synchronized with what buyers were spending their money on. For classical economics, it was whether the structure of supply could rapidly conform to the structure of demand that was the matter of first importance in understanding how well an economy worked. The Pre-Keynesian theory of recession was based on explaining why the structure of supply and the structure of demand might no longer be in harmony. Policy during recessions was therefore directed towards restoring this balance by hastening, as best a government could, the readjustment of the economy until the structure of supply and demand were in conformity once again.

--Steven Kates, Free Market Economics: An Introduction for the General Reader, 3rd ed. (Cheltenham, UK: Edward Elgar Publishing, 2017), Kobo e-book.

On the Basis of the Law of Markets, No Obstacle to Growth Exists on the Demand Side so long as Production Corresponds to the Demands of Buyers

Classical economists had a different and far more penetrating understanding of the nature of recession and the business cycle than Keynes, or indeed most modern interpreters of classical theory, give them credit for. And, in what may be the greatest irony of all, it will be shown that the theory of the cycle held by classical economists was based on an understanding of Say's Law. That is, far from being an impediment to understanding the causes of recession and unemployment, Say's Law was a fundamental part of the theory which explained their occurrence.

What will be shown is that the basis of the classical theory of the cycle was the structure of demand rather than the level of demand. Classical economists argued, on the basis of the law of markets, that no obstacle to growth existed on the demand side, so long as production corresponded to the demands of buyers. Classical theory explained recessions by showing how errors in production might arise during cyclical upturns which would cause some goods to remain unsold at cost-covering prices.

--Steven Kates, Say's Law and the Keynesian Revolution: How Macroeconomic Theory Lost its Way (Cheltenham, UK: Edward Elgar, 2009), 19.

Keynesians Represent Profits as Resulting From (1) A Difference between the Rate of Interest and the "Marginal Efficiency of Capital," and/or (2) Monopoly and High-Pressure Salesmanship

Keynesians usually represent profits as resulting from either or both of: (1) a difference between the rate of interest and the "marginal efficiency of capital," (2) monopoly and high-pressure salesmanship. In either case, the recipient of profits is given little or no credit for earning them by useful service.

This Keynesian antipathy or indifference to the qualities developed in free markets arises from the belief that free markets are economically undesirable (e.g., the capital markets) and politically impracticable (e.g., the labor market).

Moreover, as difficulties arise in carrying out their proposals for "socializing" saving and investment, economists of this persuasion usually advocate more restriction of markets rather than less. Thus Dr. Lawrence Klein, for example, favors government price control to prevent inflation that might result from Keynesian "loan expenditures," and he rationalizes this repudiation of freedom of exchange by the contention that "greedy profiteering" was the only liberty infringed by the Office of Price Administration in World War II.

--Vervon Orval Watts, Away from Freedom: The Revolt of the College Economists (1952; repr., Auburn, AL: Ludwig von Mises Institute, 2008), 89-90.

Keynes Launched a Frontal Assault on the Price System When He Declared That Interest Rates Are Too High

Keynes: Interest rates are too high:

The rate of interest is not self-adjusting at a level best suited to the social advantage but constantly tends to rise too high. . . .

Comment: This is a frontal assault on the entire price system.

Keynes does not define any of his terms. He does not say what the “social advantage” is. He does not tell us how we will know when interest rates have fallen far enough. Nevertheless, he has told us something important—that the price system cannot be trusted.

It is important to keep in mind that interest rates are a price, the price of borrowed money. They are not only a price; they are one of the most important prices in an economy. All prices are interconnected, but this price in particular affects all other prices.

Businesses depend on prices to give them the information with which to run the economy. If the price system for interest rates is broken, no part of the price system is unaffected. If the price system is hobbled, it is a very serious matter because attempts to replace market prices with government-imposed prices have not generally been successful. As Oysten Dahle, a Norwegian oil executive, said about the Soviet Union, “[It] collapsed because it did not allow [market] prices to tell the economic truth.”

--Hunter Lewis, Where Keynes Went Wrong: And Why World Governments Keep Creating Inflation, Bubbles, and Busts, rev. ed. (Mount Jackson, VA: Axios Press, 2011), 89-90.

The Basic Fallacy of Keynesian Theory Is Treating Goods and Credit as Two Quite Separate Things

This brings us to what is perhaps the basic fallacy of Keynesian thought. The Keynesian economist treats of goods and credit as though they were two quite separate things. He teaches that the output of goods creates a need for credit and currency. He warns that goods may go unsold, forcing down prices and causing unemployment, unless government: (1) adds to the supply of currency as the output of goods increases, and (2) sees to it that those who get the new money spend it promptly.

The classical view, on the other hand, is that goods themselves are the source of all sound credit and sound currency. Let us see what this means.

--Vervon Orval Watts, Away from Freedom: The Revolt of the College Economists (1952; repr., Auburn, AL: Ludwig von Mises Institute, 2008), 56.

The Mixed Economy of the Keynesians Is Highly Unstable Moving from Crisis to Crisis and from Emergency to Emergency

Professor Ludwig von Mises, in his scholarly but readable little books, Bureaucracy and Planned Chaos, shows perhaps better than any other modern author why government interference with the free market leads to crisis, totalitarianism, and war. Every interventionist measure results in conditions which are even less satisfactory than those which preceded it, as shortages follow price control and black markets follow rationing. Yet, those who favor such intervention usually blame the evil results of their measures on the selfishness, stupidity, or perverseness of individuals. Then they urge more coercion to deal with the new problems. Thus, for example, Samuelson fears that producers may "react perversely" to government spending and subsidies, so that prices and wage rates may rise before full employment has been achieved. In that case, he intimates, the government may have to apply price and wage controls to stop inflation.

The "mixed economy" advocated by the Keynesian economists, therefore, is highly unstable. It moves from crisis to crisis, from one emergency to another, while the currency depreciates, producers are demoralized, demagogy increases, government becomes more despotic, and international friction mounts. This spiral towards totalitarianism and war persists as long as faith in coercion and government planning prevails over a preference for voluntarism and free enterprise.

--Vervon Orval Watts, Away from Freedom: The Revolt of the College Economists (1952; repr., Auburn, AL: Ludwig von Mises Institute, 2008), 72-73.

The Federal Reserve as a Cartelization Device

In fact, the Fed was largely fashioned by the banks as a cartelizing device. The government interventions of the Progressive era were systemic devices to restrict competition and cartelize industry, stratagems that followed on the previous failure of industry to sustain successful voluntary cartels. Just as other industries turned to the government to impose cartelization that could not be maintained on the market, so the banks turned to government to enable them to expand money and credit without being held back by the demands for redemption by competing banks. In short, rather than hold back the banks from their propensity to inflate credit, the new central banks were created to do precisely the opposite. Indeed, the record of the American economy under the Federal Reserve can be considered a rousing success from the point of view of the actual goals of its founders and of those who continue to sustain its power.

--Murray N. Rothbard, The Progressive Era, ed. Patrick Newman (Auburn, AL: Mises Institute, 2017), 464.