Foreign Exchange Control Is Tantamount to the Full Nationalization of Foreign Trade, and It Is the Main Vehicle of European Dictatorships

At any rate, foreign exchange control is tantamount to the full nationalization of foreign trade. For the United States, this would not mean very much, as the amount of its foreign trade is a comparatively small part of its total trade. But for almost all other countries, nationalization of foreign trade results in dictatorial powers for the government. Where every branch of business depends, to some extent at least, on the buying of imported goods or on the exporting of a smaller or greater part of its output, the government is in a position to control all economic activity. He who does not comply with any whim of the authorities can be ruined either by the refusal to allot him foreign exchange or to grant him what the government considers as an export premium, that is, the difference between the market price and the official rate of foreign exchange. Besides, the government has the power to interfere in all the details of every enterprise’s internal affairs; to prohibit the importation of all undesirable books, periodicals, and newspapers; and to prevent everybody from traveling abroad; from educating his children in foreign schools; and from consulting foreign doctors. Foreign exchange control was the main vehicle of European dictatorships. When Hitler came to power in 1933, in order to impose his dictatorship upon the whole German nation he had nothing to do but to enforce the foreign exchange control established by one of his predecessors, Mr. Bruening, in 1931.

—Ludwig von Mises, “A Noninflationary Proposal for Postwar Monetary Reconstruction,” in Selected Writings of Ludwig von Mises, vol. 3, The Political Economy of International Reform and Reconstruction, ed. Richard M. Ebeling (Indianapolis: Liberty Fund, 2000), 95.

Herbert Hoover Dramatically Increased Government Spending; Budget Surpluses Became Deficits; Taxes Were Raised; the Smoot-Hawley Tariff Was Imposed

Hoover also dramatically increased government spending during the depression. The federal government went from surpluses to deficits from 1930 to 1931. Since the government is a consumer, as I discussed in chapter 2, any increase in consumption beyond its appropriate bounds—beyond the protection of individual rights—detracts from the ability to produce wealth.

In addition, taxes were raised in 1932 to help pay for the additional spending. The tax increase was more onerous for high-income earners. The tax rate on the highest income earners was raised from 25 to 63 percent. Higher taxes on the wealthiest income earners are particularly destructive. First, they are immoral because they sacrifice the rich to the poor by redistributing income from the former to the latter. Second, higher taxes on the wealthy take money away from the most productive individuals in the economy and redistribute it to the least productive individuals. As discussed in chapter 2, this reduces the productive capability and standard of living.

Hoover also raised tariffs dramatically and effectively banned immigration. The Smoot-Hawley Tariff that was passed in June of 1930 effectively imposed a tax rate of 60 percent on more than 3,200 products and materials imported into the United States. The tariff did not cause the depression, as is sometimes believed, but it did make the depression worse. The Smoot-Hawley Tariff did not cause the Great Depression because it was imposed about a year after the depression had already begun.

—Brian P. Simpson, Money, Banking, and the Business Cycle, vol. 1, Integrating Theory and Practice (New York: Palgrave Macmillan, 2014), 206-207.

Secretary of the Treasury Andrew Mellon Wanted to “Liquidate” Labor, Stocks, Farmers, and Real Estate to Purge the Rottenness from the Economy

And so we see that when the Great Depression struck, heralded by the stock market crash of October 24, President Hoover stood prepared for the ordeal, ready to launch an unprecedented program of government intervention for high wage rates, public works, and bolstering of unsound positions that was later to be christened the New Deal. As Hoover recalls:

the primary question at once arose as to whether the President and the Federal government should undertake to investigate and remedy the evils. . . . No President before had ever believed that there was a governmental responsibility in such cases. No matter what the urging on previous occasions, Presidents steadfastly had maintained that the Federal government was apart from such eruptions . . . therefore, we had to pioneer a new field.

As his admiring biographers, Myers and Newton, declared, “President Hoover was the first President in our history to offer Federal leadership in mobilizing the economic resources of the people.” He was, of course, not the last. As Hoover later proudly proclaimed: It was a “program unparalleled in the history of depressions in any country and any time.”

There was opposition within the administration, headed, surprisingly enough, considering his interventions throughout the boom, by Secretary of Treasury Mellon. Mellon headed what Hoover scornfully termed “the leave-it-alone liquidationists.” Mellon wanted to “liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate,” and so “purge the rottenness” from the economy, lower the high cost of living, and spur hard work and efficient enterprise. Mellon cited the efficient working of this process in the depression of the 1870s. While phrased somewhat luridly, this was the sound and proper course for the administration to follow. But Mellon’s advice was overruled by Hoover, who was supported by Undersecretary of the Treasury Ogden Mills, Secretary of Commerce Robert Lamont, Secretary of Agriculture Hyde, and others.

—Murray N. Rothbard, America's Great Depression, 5th ed. (Auburn, AL: Ludwig von Mises Institute, 2000), 209-210.

The “New Economics” of Herbert Hoover Made Real Wages Rise During the Early 1930s

Summarizing his boss's position (whether or not he personally thought it wise), Treasury Secretary Mellon explained in 1931:

In this country, there has been a concerted and determined effort on the part of both government and business not only to prevent any reduction in wages but to keep the maximum number of men employed, and thereby to increase consumption.

It must be remembered that the all-important factor is purchasing power, and purchasing power. . . is dependent to a great extent on the standard of living. . . that standard of living must be maintained at all costs.

Economic historians have shown that Hoover and Mellon were not blowing smoke to the voters. What economists call “real wages” actually rose during the early 1930s, because businesses cut money-wages either not at all or very reluctantly, while the prices of most goods and services were plummeting. This perversely made labor relatively more expensive for businesses to hire, and guess what? During a huge economic slump, when the relative price of workers rose (because of Hoover's misguided worldview), businesses hired fewer workers. Economists Richard Vedder and Lowell Gallaway explain:

While the initial increase in unemployment can be largely explained by the productivity shock, the very sharp rise in unemployment in 1931 was not related to further declines in output per worker. Productivity per worker changed little, actually rising somewhat. . . . Money wages fell, but rather anemically. Whereas in the 1920-1922 depression a roughly 20 percent fall in money wages was observed in one year, the 1931 decline was less than 3 percent. By contrast, prices fell more substantially, 8.8 percent, so real wages actually rose significantly in 1931, and were higher in that year than in 1929, despite lower output per worker. The 1931 price [declines], accompanied by a failure of money wages to adjust. . . seemed to be the root cause of the rise in unemployment to over 15 percent in 1931.

The comparison with the previous depression of the early 1920s is instructive. Herbert Hoover and his allies in the labor movement thought it unconscionable that labor should have been “liquidated”during that downturn, to use Andrew Mellon's politically incorrect term. Indeed, during that earlier depression it must have seemed unbearable for workers to see their paychecks slashed by 20 percent in a single year (though other prices were falling too, cushioning the blow). Yet when the economy must readjust after an unsustainable boom, the prices of resources—including labor—need to change in order to facilitate the movement of workers to the correct sectors.

Things were very bad—briefly—during the earlier depression. The annual unemployment rate peaked at 11.7 percent in 1921, but it had fallen to 6.7 percent by the following year, and was down to an incredible 2.4 percent by 1923. That is how a market with flexible wages and prices quickly corrects itself after a Fed-induced inflationary boom. But because the “compassionate” Hoover forbade businesses from cutting wages after the 1929 crash, unemployment went up and up and up, hitting the unimaginable monthly peak of 28.3 percent in March 1933. For the quarter of the labor force thrown out of work, the fact that “[f]or the first time in the history of depression, dividends, profits, and the cost of living have been reduced before wages have suffered,” was little consolation.

—Robert P. Murphy, The Politically Incorrect Guide to the Great Depression and the New Deal (Washington, DC: Regnery Publishing, 2009), 39-42.

The New Deal Policies Prolonged the Depression by Creating “Regime Uncertainty”

The Great Depression and the New Deal continue to receive much attention from economists, economic and political historians, and other scholars. In my own research, I focused first on the initial New Deal response to the Depression and on the enduring consequences of the New Deal policies for the growth of government. Later, in the 1997 article reproduced as chapter 1 of this volume, I considered how the New Deal policies prolonged the Depression by creating “regime uncertainty” and how a number of related political changes brought about or hastened by the war diminished that uncertainty enough to permit a resumption of genuine prosperity (as opposed to the spurious “wartime prosperity”) after the war ended.

Since writing the 1997 essay, I have become aware of a major body of evidence bearing on my “regime uncertainty” hypothesis: Gary Dean Best’s Pride, Prejudice, and Politics: Roosevelt versus Recovery, 1933–1938 (1991). The evidence that Best has compiled and organized adds significant weight to the views that I previously documented with regard to how business people and investors perceived the New Deal and the seriousness of its threat to the security of private property rights during the latter 1930s.

How does my interpretation relate to other interpretations of the duration of the Depression, especially to those that characterize the recovery as, like the preceding Great Contraction, little more than a macro-monetary phenomenon? In brief, my interpretation complements, rather than substitutes for, those that focus on macro-monetary relations. I do not claim that the latter are wrong, only that, even if they are correct as far as they go, they are insufficient. If property rights are seriously up for grabs, no amount of pumping money into a depressed economy can bring about genuine complete economic recovery. From 1935 to 1940, such “up for grabs” conditions were precisely the ones that prevailed in the United States; hence, the unevenness and incompleteness of the recovery, even as late as 1940, more than ten years after the onset of the Great Contraction.

Moreover, my interpretation proves its value decisively when one approaches the task, not merely as one of explaining the slow recovery between 1933 and 1941, but as one of explaining several related aspects of a longer span of economic events (e.g., private output, long-term civilian investment, and unemployment) between 1935 and 1948. My interpretation shows how we can incorporate a defensible view of the wartime economy into our understanding of both the incomplete late-1930s recovery and the enormously successful reconversion to civilian production between 1945 and 1947. In this more ambitious endeavor, the first five chapters of this volume constitute essential pieces of one big puzzle, offering at once a new view of the prolongation of the Depression, a new view of the nature of the war production “boom,” and a new view of the transition from wartime command economy to postwar civilian prosperity—all within a single interpretive framework. In the light of these chapters, the old (and still widely accepted) view of how “the war got the economy out of the depression” must be abandoned.

—Robert Higgs, introduction to Depression, War, and Cold War: Studies in Political Economy (New York: Oxford University Press, 2006), x-xi.

In 1938, the Nazis Were About to Arrest Ludwig von Mises as an “Enemy of the State” Because He Publicly Criticized Them and Had a Jewish Ancestry

Ludwig von Mises was born in Austria in 1881. He wrote his first book while he was still a university student. He served as an artillery officer on the eastern front in the “Great War,” as World War I was known. Afterward, he became the chief economist for the Chamber of Commerce in Vienna. Although he was a retiring, almost reclusive, scholar, he gradually gained an international reputation, based on a series of important articles, books, and lectures that championed nineteenth-century classical liberalism. (By this, of course, I do not mean modern liberalism. In the twentieth century, the liberals hijacked the name, but not the meaning.)

In 1938, it became clear that the Nazis were about to arrest Mises as an “enemy of the state.” He had offended them not only because of his public criticisms of National Socialism, but also because he was of Jewish ancestry. He fled to Switzerland and eventually moved to the United States, where he assumed a teaching position at New York University.

He died in 1973 at the age of ninety-two after a long and distinguished career. His students, protégés, and devoted fans included economists, small business owners, corporate executives, politicians, scholars, teachers, and high school and college students. Most of his books remain in print and are just as relevant today as when they were first written.

Mises left his personal library to Hillsdale College. He explained his decision by writing, “Hillsdale, more than any other educational institution, most strongly represents the free market ideas to which I have given my life.” That is a remarkable testimony—and a remarkable legacy. For twenty-six years, Hillsdale has hosted the Ludwig von Mises Lectures and published the Champions of Freedom series in Mises’ honor. We have sought in our own way to keep his memory and his work alive.

—George Roche, “The Revolt Against Reason,” in Human Action: A 50-Year Tribute, ed. Richard M. Ebeling, Champions of Freedom: The Ludwig von Mises Lecture Series 27 (Hillsdale, MI: Hillsdale College Press, 2000), 141-142.

Authors Who Think They Have Substituted a Holistic or Social or Universalistic or Institutional or Macroeconomic Approach Delude Themselves and the Public

The authors who think that they have substituted, in the analysis of the market economy, a holistic or social or universalistic or institutional or macroeconomic approach for what they disdain as the spurious individualistic approach delude themselves and their public. For all reasoning concerning action must deal with valuation and with the striving after definite ends, as there is no action not oriented by final causes. It is possible to analyze conditions that would prevail within a socialist system in which only the supreme tsar determines all activities and all the other individuals efface their own personality and virtually convert themselves into mere tools in the hands of the tsar's actions. For the theory of integral socialism it may seem sufficient to consider the valuations and actions of the supreme tsar only. But if one deals with a system in which more than one man's striving after definite ends directs or affects actions, one cannot avoid tracing back the effects produced by action to the point beyond which no analysis of actions can proceed, i.e., to the value judgments of the individuals and the ends they are aiming at.

The macroeconomic approach looks upon an arbitrarily selected segment of the market economy (as a rule: upon one nation) as if it were an integrated unit. All that happens in this segment is actions of individuals and groups of individuals acting in concert. But macroeconomics proceeds as if all these individual actions were in fact the outcome of the mutual operation of one macroeconomic magnitude upon another such magnitude.

—Ludwig von Mises, The Ultimate Foundation of Economic Science: An Essay on Method (Princeton, NJ: D. Van Nostrand Company, 1962), 83.

Fiat Monetary Inflation Results in the Interest Rate Being Unable to Perform Its Proper Function of Allocating Resources between Production and Consumption

Perhaps the most thorough-going “free market” textbook in the 1950s was John V. Van Sickle and Benjamin A. Rogge's Introduction to Economics. Van Sickle and Rogge advocated an international gold standard and were critical of Keynesian economics. They used an elementary Crusoe model (a common device in old-fashioned principles texts) to support the case for increased savings and capital formation as sine qua non for economic growth. Crusoe eventually saves time and increases his standard of living by investing his labor in building a cabin, a water trough and other “round-about methods of production.”

Van Sickle and Rogge were highly critical of Keynesian economics in a chapter called “The Theory of Effective Demand.” A countercyclical spending policy by the government to increase “effective demand” during a recession was unnecessary, they argued, because “a reasonable amount of flexibility in wages and other cost elements is adequate to prevent widespread unemployment.”

The Keynesian critique was followed by the detailed chapter “Alternative Theories,” including the Hawtrey-Simons monetarist position and the Hayek-Mises “structural disequilibrium theory.” According to the Hayekian interpretation of the business cycle, fiat monetary inflation results in a situation where “the interest rate is not permitted to perform its proper function,” that is, to allocate resources between production and consumption. The business cycle is caused by “unwarranted changes in the production-mix, with first too many, then too few, resources being devoted to the production of capital goods.”

According to Van Sickle and Rogge, monetary inflation causes an excessive boom and artificially-inflated incomes.

When this newly created money reaches consumers, as it must when it is spent to acquire resources, they will use it to bid resources back into the production of consumer goods. This will cause serious difficulty to the investors who have not as yet completed their capital goods' projects, and many of those projects will have to be abandoned with great losses. Moreover, because resources do not move back and forth between the consumer goods and the capital goods industries with complete freedom, there is certain to be some unemployment. 

—Mark Skousen, The Structure of Production, new rev. ed. (New York: New York University Press, 2015), Kobo e-book.

Without the Federal Reserve, the New Deal Would Have Been Impossible Because Monetary Management Was the Core of the New Deal

One point may be made clear at once: without the Federal Reserve the New Deal would not have been possible. Monetary management was the core and the motor of the New Deal. The Federal Reserve provided the mechanism by which money was managed. It also was the veil by which these manipulations were concealed and given the illusion of normal fiscal operations in the traditional convention. It permitted the Administration to avoid the naked seizure and exercise of power. By filtering its activities through the monetary fabric,· government retained the appearance of functioning within the historic private enterprise system. Thus, government was never compelled to requisition or sequester property for its needs; it could always acquire it by purchase, since its means were unlimited.

—Elgin Groseclose, America's Money Machine: The Story of the Federal Reserve (Westport, CT: Arlington House Publishers, 1980), 185.