Saturday, July 27, 2019

Price-Raising and Price-Fixing Agreements Are Extremely Difficult to Arrange and Even Harder to Maintain; A Characteristic Pattern of Cartel Breaking Is “Secret Price-Cutting”

Early in the career of large-scale railroads, some railroad men sought a way out from the rigors of competition and competitive price-cutting. What they sought was the time-honored device of the cartel agreement, in which all the firms in a certain industry agree to raise their selling prices. If the firms could be trusted to abide by the agreement, then all could raise prices and every firm could benefit.

The general public conceives of price-raising and price-fixing agreements to be as easy as a whispered conversation over cocktails at the club. They are, however, extremely difficult to arrange and even harder to maintain. For prices have been driven low by the competition of supply and production; in order to raise prices successfully, the firms will also have to agree to cut production. And there is the sticking point: for no business firm, no entrepreneur, and no manager likes to cut production. What they prefer to do is expand. And, if the businessman is to agree, grudgingly, to cut production, he has to make sure that his competitors will do the same. And then there will be interminable quarrels about how much production each firm is supposed to cut. Thus, if several firms are, collectively, producing 1 million tons of Metal X and selling it at $100 a ton, and the firms wish to agree to raise the price to $150 a ton, they will have to agree on how far below the million tons to cut production, and who should cut how much. And such agreements are at best very difficult to arrive at.

But this is only the beginning of the headaches in store for our cartelists. Generally, they will agree on quota production cuts under the output of a base year, usually the current year of operation. So, if the cartel is being formed in the year 1978, firms A, B, C, etc. may each agree to cut its output in 1979 20% below the previous year. But very quickly in the cartel agreement, and more and more as time goes on, human nature is such that each businessman and manager is thinking as follows: “Darn it, why am I stuck with the maximum production based on 1978 production? This is now 1979 (or 1980, etc.) and now we have installed such-and-such a new process, or we have such-and-such a hotshot product or salesman, that I know,  if our company were all free to compete and to cut prices, we could sell more, pick up a larger share of the market, and make more profits, than we did that year.” As 1978 recedes more and more into the past, and 1978 conditions become more obsolete, each firm chafes increasingly at the bit, longing to be able to cut prices and compete once more. A firm might petition the cartel for an increased quota, but other firms, whose production would have to be cut, would protest bitterly and turn down the request.

Eventually, the internal pressures within the cartel become too great, and the cartel falls apart, prices tumbling once more. A characteristic pattern of cartel breaking is secret price-cutting. The restless firm, anxious to cut prices, decides to try to have its cake and eat it too. While its boobish fellow-producers keep sticking to the agreed cartel price of, say, $150 a ton, our hypothetical firm approaches a few customers whom it is anxious to keep, or others whom it is eager to acquire. “Look, because you’re such a great person and your firm is such a good one, I’m going to let you have our metal for $130 a ton. In return, I want you to keep quiet about it, so that your and our competitors won’t find out about the deal.” For a few months, this will work, and the firm will be reaping extra profits at its competitors’ expense. But, truth will get out, and eventually the word spreads to the firm’s other customers and competitors about the secret price-cut. Other customers will demand similar treatment, the competitors will self-righteously denounce our firm as a “rate-buster,” a “cheat,” and a traitor, and the cartel will dissolve in intensified competition, price-cutting, and intra- industry recriminations.

--Murray N. Rothbard, The Progressive Era, ed. Patrick Newman (Auburn, AL: Mises Institute, 2017), 56-58.



Businessmen or Manufacturers Can Either Be Genuine Free Enterprisers or Statists, But Bankers Are Inherently Inclined Toward Statism

Businessmen or manufacturers can either be genuine free enterprisers or statists; they can either make their way on the free market or seek special government favors and privileges. They choose according to their individual preferences and values. But bankers are inherently inclined toward statism.

Commercial bankers, engaged as they are in unsound fractional reserve credit, are, in the free market, always teetering on the edge of bankruptcy. Hence they are always reaching for government aid and bailout.

Investment bankers do much of their business underwriting government bonds, in the United States and abroad. Therefore, they have a vested interest in promoting deficits and in forcing taxpayers to redeem government debt. Both sets of bankers, then, tend to be tied in with government policy, and try to influence and control government actions in domestic and foreign affairs.

--Murray N. Rothbard, Wall Street, Banks, and American Foreign Policy, 2nd ed. (Auburn, AL: Ludwig von Mises Institute, 2011), 1.


Central Banking Works Like a Cozy Compulsory Bank Cartel to Expand the Banks' Liabilities and the Banks Expand on a Larger Base of Cash in the Form of Central Bank Notes

But if banking is the cause of the business cycle, aren’t the banks also a part of the private market economy, and can’t we therefore say that the free market is still the culprit, if only in the banking segment of that free market? The answer is No, for the banks, for one thing, would never be able to expand credit in concert were it not for the intervention and encouragement of government. For if banks were truly competitive, any expansion of credit by one bank would quickly pile up the debts of that bank in its competitors, and its competitors would quickly call upon the expanding bank for redemption in cash. In short, a bank’s rivals will call upon it for redemption in gold or cash in the same way as do foreigners, except that the process is much faster and would nip any incipient inflation in the bud before it got started. Banks can only expand comfortably in unison when a Central Bank exists, essentially a governmental bank, enjoying a monopoly of government business, and a privileged position imposed by government over the entire banking system. . . .

Not that the banks complain about this intervention; for it is the establishment of central banking that makes long-term bank credit expansion possible, since the expansion of Central Bank notes provides added cash reserves for the entire banking system and permits all the commercial banks to expand their credit together. Central banking works like a cozy compulsory bank cartel to expand the banks’ liabilities; and the banks are now able to expand on a larger base of cash in the form of central bank notes as well as gold.

So now we see, at last, that the business cycle is brought about, not by any mysterious failings of the free market economy, but quite the opposite: By systematic intervention by government in the market process. Government intervention brings about bank expansion and inflation, and, when the inflation comes to an end, the subsequent depression- adjustment comes into play.

--Murray N. Rothbard, Economic Depressions: Their Cause and Cure (Auburn, AL: Ludwig von Mises Institute, 2009), 26-28.


Thursday, July 25, 2019

The Purchasing Power or the “Objective Exchange-Value” of Money Is Determined by the Intersection of the Money Stock and the Demand for Cash Balance Schedule

The purchasing power of the money unit, which Mises also termed the “objective exchange-value” of money, was then determined, as in the usual supply-and-demand analysis, by the intersection of the money stock and the demand for cash balance schedule. We can see this visually by putting the purchasing power of the money unit on the y-axis and the quantity of money on the x-axis of the conventional two-dimensional diagram corresponding to the price of any good and its quantity. Mises wrapped up the analysis by pointing out that the total supply of money at any given time is no more or less than the sum of the individual cash balances at that time. No money in a society remains unowned by someone and is therefore outside some individual’s cash balances.

While, for purposes of convenience, Mises’s analysis may be expressed in the usual supply-and demand diagram with the purchasing power of the money unit serving as the price of money, relying solely on such a simplified diagram falsifies the theory. For, as Mises pointed out in a brilliant analysis whose lessons have still not been absorbed in the mainstream of economic theory, the purchasing power of the money unit is not simply the inverse of the so-called price level of goods and services.

—Murray N. Rothbard, “The Austrian Theory of Money,” in Economic Controversies (Auburn, AL: Ludwig von Mises Institute, 2011), 686.


It Is Up to Us Citizens to Try to Do on Our Own What the Government Is Failing to Do for Us Because We Can Hardly Expect the Government to Be of Any Help

Domestic anarchy, a possible Communist-Bolshevik uprising, and enemy occupation, these are all conceivable consequences resulting from the collapse of our currency. If we wish to avoid all these eventualities, we must prepare for the day of the catastrophe. We can hardly expect the government to be of any help. For five years the Ministry of Finance has not only pursued a disastrous inflationary course but has repeatedly tried to defend it. Beyond that, it has accelerated the depreciation of the crown by misguided measures that stemmed from its complete blindness to the single true cause of the monetary depreciation. It can hardly be assumed that it will now suddenly see the light. Even those influential financial policymakers who have an insight into the economic nexus have not been able to swim against the tide of prevailing ideas. It is up to us citizens to try to do on our own what the government is failing to do for us. All we can hope for from the government is that it will not stymie the endeavors of its private citizens. In their own interest and in the interest of the community, banks as well as large industrial and commercial enterprises must take the necessary preparatory steps to avert the catastrophic consequences that will follow from the collapse of the currency.

--Ludwig von Mises, “On the Actions to Be Taken in the Face of Progressive Currency Depreciation,” in Between the Two World Wars: Monetary Disorder, Interventionism, Socialism, and the Great Depression, ed. Richard M. Ebeling, vol. 2 of Selected Writings of Ludwig von Mises (Indianapolis: Liberty Fund, 2002), 53.


Wednesday, July 24, 2019

Lord Keynes, the Principal Author of Bretton Woods, Boasted That They Set Up “the Exact Opposite of a Gold Standard” (They Set Up a “Gold-Exchange” Standard)

Let us, at the cost of repetition, remind ourselves of what really went wrong. The Bretton Woods agreements never seriously considered the return of each signatory nation to a gold standard. Lord Keynes, their principal author, even boasted that they set up “the exact opposite of a gold standard.” In any case, what Bretton Woods really set up was what used to be called a “gold-exchange” standard. Every other country in the scheme undertook simply to keep its own currency unit convertible into dollars. The United States alone undertook (on the demand of foreign central banks) to keep its own currency unit directly convertible into gold.

Neither the politicians of foreign countries, nor unfortunately of our own, realized the awesome responsibility that this scheme put on the American banking and currency authorities to refrain from excessive credit expansion. The result was that when President Nixon closed the American gold window on August 15, 1971, our gold reserves amounted to only about 2 per cent of our outstanding currency and demand and time bank deposits ($10,132 million of gold vs. $454,500 million of M2). In other words, there was only $2.23 in gold to redeem every $100 of paper promises. But this takes no account of outstanding “Eurodollars,” or even of the outstanding currency and bank deposits of all the foreign signatories to Bretton Woods. The ultimate gold reserves on which the conversion burden could legally fall under the system must have been only some small fraction of 1 per cent of the total paper obligations against them. Even if the American Congress, and our own banking and currency authorities, had acted far more responsibly, the original Bretton Woods system was inherently impossible to maintain.

—Henry Hazlitt, introduction to From Bretton Woods to World Inflation: A Study of Causes and Consequences (Chicago: Regnery Gateway, 1984), 11-12.


Recently (Late 1922, Early 1923), the German Reich Has Provided a Picture of What Must Happen When People Believe that the Course of Monetary Depreciation Is Not Going to Stop

In the long run, trade is not helped by a monetary unit which continually deteriorates in value. Such a monetary unit cannot be used as a “standard of deferred payments.” Another intermediary must be found for all transactions in which money and goods or services are not exchanged simultaneously. Nor is a monetary unit which continually depreciates in value serviceable for cash transactions either. Everyone becomes anxious to keep his cash holding, on which he continually suffers losses, as low as possible. All incoming money will be quickly spent. When purchases are made merely to get rid of money, which is shrinking in value, by exchanging it for goods of more enduring worth, higher prices will be paid than are otherwise indicated by other current market relationships.

In recent months, the German Reich has provided a rough picture of what must happen, once the people come to believe that the course of monetary depreciation is not going to be halted. If people are buying unnecessary commodities, or at least commodities not needed at the moment, because they do not want to hold on to their paper notes, then the process which forces the notes out of use as a generally acceptable medium of exchange has already begun. This is the beginning of the “demonetization” of the notes. The panicky quality inherent in the operation must speed up the process. It may be possible to calm the excited masses once, twice, perhaps even three or four times. However, matters must finally come to an end. Then there is no going back. Once the depreciation makes such rapid strides that sellers are fearful of suffering heavy losses, even if they buy again with the greatest possible speed, there is no longer any chance of rescuing the currency.

--Ludwig von Mises, The Causes of the Economic Crisis: And Other Essays Before and After the Great Depression, ed. Percy L. Greaves Jr., trans. Bettina Bien Greaves and Percy L. Greaves Jr. (Auburn, AL: Ludwig von Mises Institute, 2006), 3-4.


Mises Corrected a Fallacy Held by a Leading Official of the Hungarian Soviet Republic Who Assumed that the Valuation of the Monetary Unit Depended on the Wealth of the Country

In the course of speculation in stocks and securities, the speculator has developed the procedure which is his tool in trade. What he learned there he now tries to apply in the field of foreign exchange speculations. His experience has been that stocks which have dropped sharply on the market usually offer favorable investment opportunities and so he believes the situation to be similar with respect to the monetary unit. He looks on the monetary unit as if it were a share of stock in the government. When the German mark was quoted in Zurich at ten francs, one banker said: “Now is the time to buy marks. The German economy is surely poorer today than before the war so that a lower evaluation for the mark is justified. Yet the wealth of the German people has certainly not fallen to a twelfth of their prewar assets. Thus, the mark must rise in value.” And when the Polish mark had fallen to five francs in Zurich, another banker said: “To me this low price is incomprehensible! Poland is a rich country. It has a profitable agricultural economy, forests, coal, petroleum. So the rate of exchange should be considerably higher.”

Similarly, in the spring of 1919, a leading official of the Hungarian Soviet Republic told me: “Actually, the paper money issued by the Hungarian Soviet Republic should have the highest rate of exchange, except for that of Russia. Next to the Russian government, the Hungarian government, by socializing private property throughout Hungary, has become the richest and thus the most credit-worthy in the world.”

These observers do not understand that the valuation of a monetary unit depends not on the wealth of a country, but rather on the relationship between the quantity of, and demand for, money. Thus, even the richest country can have a bad currency and the poorest country a good one. Nevertheless, even though the theory of these bankers is false, and must eventually lead to losses for all who use it as a guide for action, it can temporarily slow down and even put a stop to the decline in the foreign exchange value of the monetary unit.

--Ludwig von Mises, On the Manipulation of Money and Credit: Three Treatises on Trade-Cycle Theory, trans. Bettina Bien Greaves, ed. Percy L. Greaves Jr. (Indianapolis: Liberty Fund, 2011), 17-18.


Sunday, July 21, 2019

The Failure of All “Leftist” Economic Doctrines Is Precisely Their Misconstruction of the Meaning of Saving, Capital Accumulation, and Investment

Every account of the history of modern culture must first of all distinguish between two groups of nations, viz. those that have developed a system which made domestic saving and the large-scale accumulation of capital possible and those that did not. The lamentable failure of all “leftist” economic doctrines from Saint-Simonism and Marxism down to the “imperialism” theory of Luxemburg, Lenin, and Hilferding and to Keynesianism is precisely to be seen in their misconstruction of the meaning of saving, capital accumulation, and investment. In the great ideological conflict of the nineteenth century the Liberals and their spokesmen, the much abused “vulgar economists,” were right in proclaiming as their main thesis: there is but one means to improve the material conditions of all of the people, viz., to accelerate the accumulation of capital as against the increase in population.

The great age of foreign investment came to an inglorious end when the twentieth century’s doctrinaires were no longer prepared to see any difference between the devastation of a country by military action and the investment of foreign capital for the construction of factories and transportation facilities. Each of these two entirely different procedures is called conquest and imperialism. The expropriation of foreign investments is styled “liberation.” It is, if at all, only mildly censured by the jurists and economists of the “capitalistic sector” of the world. No wonder that the eagerness to invest in foreign countries disappeared. Foreign aid tries now to fill the gap. As Miss Ayn Rand defined it, this new doctrine requests that our wealth should be given away to the peoples of Asia and Africa, “with apologies for the fact that we have produced it while they haven’t.”

--Ludwig von Mises, “The Outlook for Saving and Investment,” in Economic Freedom and Interventionism: An Anthology of Articles and Essays, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 1990), 47.


Regarding the Core Message of the Classical Economists, the One Pertaining to the Wealth of Nations, the Austrian School Has Been Their Intellectual Heirs

The classical economists had rejected the notion that overall monetary spending — in current jargon: aggregate demand — is a driving force of economic growth. The true causes of the wealth of nations are nonmonetary factors such as the division of labor and the accumulation of capital through savings. Money comes into play as an intermediary of exchange and as a store of value. Money prices are also fundamental for business accounting and economic calculation. But money delivers all these benefits irrespective of its quantity. A small money stock provides them just as well as a bigger one. It is therefore not possible to pull a society out of poverty, or to make it more affluent, by increasing the money stock. By contrast, such objectives can be achieved through technological progress, through increased frugality, and through a greater division of labor. They can be achieved through the liberalization of trade and the encouragement of savings.

For more than a century, the Austrian school of economics has almost singlehandedly upheld, defended, and refined these basic contentions. Initially Carl Menger and his disciples had perceived themselves, and were perceived by others, as critics of classical economics. That “revolutionary” perception was correct to the extent that the Austrians, initially, were chiefly engaged in correcting and extending the intellectual edifice of the classics. But in retrospect we see more continuity than rupture. The Austrian school did not aim at supplanting classical economics with a completely new science. Regarding the core message of the classics — the one pertaining to the wealth of nations — they have been their intellectual heirs. They did not seek to demolish the theory of Adam Smith root and branch, but to correct its shortcomings and to develop it.

The core message of the classics is very much out of fashion today — probably just as much as it was at the end of the eighteenth century. As the prevailing way of economic thinking has it, monetary spending is the lubricant and engine of economic activity. Savings are held to be a blight on the social economy, the selfish luxury of the ignorant or the evil, at the expense of the rest of humanity. To promote growth and to combat economic crises, it is crucial to maintain the present level of aggregate spending, and to increase it if possible.

This prevailing theory is precisely the one refuted by Smith and his disciples. Classical economics triumphed over that theory, which Smith called “mercantilism,” but its triumph was short-lived. Starting in the 1870s, at the very moment of the appearance of the Austrian school, mercantilism started its comeback, at first slowly, but then in ever-increasing speed. In the 1930s it was led to triumph under the leadership of Lord Keynes.

--Jörg Guido Hülsmann, foreword to Finance Behind the Veil of Money: The Economics of Capital, Interest, and the Financial Market, by Eduard Braun (West Palm Beach: Liberty.me, 2014), e-book.