German Labor Turned toward Nazism because the Nazis Had a Program Dealing with Their Most Urgent Problem—Foreign Trade Barriers. The Other Parties Lacked Such a Program

A riddle that has puzzled nearly all writers dealing with the problems of Nazism is this: There were in Germany many millions organized in the parties of the Social Democrats, of the communists, and of the Catholic Center; they were members of the trade unions affiliated with these parties. How could the Nazis succeed in overthrowing these masses of resolute adversaries and in establishing their totalitarian system? Did these millions change their minds overnight? Or were they cowards, yielding to the terror of the Storm Troopers and waiting for the day of redemption? Are the German workers still Marxians? Or are they sincere supporters of the Nazi system?

There is a fundamental error in posing the problem in this way. People take it for granted that the members of the various party clubs and trade-unions were convinced Social Democrats, communists, or Catholics, and that they fully endorsed the creeds and programs of their leaders. It is not generally realized that party allegiance and trade-union membership were virtually obligatory. Although the closed shop system was not carried to the extreme in Weimar Germany that it is today in Nazi Germany and in some branches of foreign industry, it had gone far enough. In the greater part of Germany and in most of the branches of German production it was practically impossible for a worker to stay outside of all the big trade-union groups. If he wanted a job or did not want to be dismissed, or if he wanted the unemployment dole, he had to join one of these unions. They exercised an economic and political pressure to which every individual had to yield. To join the union became practically a matter of routine for the worker. He did so because everybody did and because it was risky not to. It was not for him to inquire into the Weltanschauung of his union. Nor did the union bureaucrats trouble themselves about the tenets or feelings of the members. Their first aim was to herd as many workers as possible into the ranks of their unions.

These millions of organized workers were forced to pay lip service to the creeds of their parties, to vote for their candidates at the elections for Parliament and for union offices, to subscribe to the party newspapers, and to avoid open criticism of the party’s policy. But daily experience nonetheless brought them the evidence that something was wrong with their parties. Every day they learned about new trade barriers established by foreign nations against German manufactures—that is, against the products of their own toil and trouble. As the trade unions, with few exceptions, were not prepared to agree to wage cuts, every new trade barrier immediately resulted in increased unemployment. The workers lost confidence in the Marxians and in the Center. They became aware that these men did not know how to deal with their problems and that all they did was to indict capitalism. German labor was radically hostile to capitalism, but it found denunciation of capitalism unsatisfactory in this instance. The workers could not expect production to keep up if export sales dropped. They therefore became interested in the Nazi arguments. Such happenings, said the Nazis, are the drawbacks of our unfortunate dependence on foreign markets and the whims of foreign governments. Germany is doomed if it does not succeed in conquering more space and in attaining self-sufficiency. All endeavors to improve the conditions of labor are vain as long as we are compelled to serve as wage slaves for foreign capitalists. Such words impressed the workers. They did not abandon either the trade unions or the party clubs since this would have had very serious consequences for them. They still voted the Social Democrat, the communist, or the Catholic ticket out of fear and inertia. But they became indifferent both to Marxian and to Catholic socialism and began to sympathize with national socialism. Years before 1933 the ranks of German trade-unions were already full of people secretly sympathizing with Nazism. Thus German labor was not greatly disturbed when the Nazis finally forcibly incorporated all trade-union members into their Labor Front. They turned toward Nazism because the Nazis had a program dealing with their most urgent problem—foreign trade barriers. The other parties lacked such a program.

The removal of the unpopular trade-union bureaucrats pleased the workers no less than the humiliations inflicted by the Nazis on the entrepreneurs and executives. The bosses were reduced to the rank of shop managers. They had to bow to the almighty party chiefs. The workers exulted over the misfortunes of their employers. It was their triumph when their boss, foaming with rage, was forced to march in their ranks on state holiday parades. It was balm for their hearts.

Then came the rearmament boom. There were no more unemployed. Very soon there was a shortage of labor. The Nazis succeeded in solving a problem that the Social Democrats had been unable to master. Labor became enthusiastic.

It is highly probable that the workers are now fully aware of the dark side of the picture. They are disillusioned. The Nazis have not led them into the land of milk and honey. In the desert of the ration cards the seeds of communism are thriving. On the day of the defeat the Labor Front will collapse as the Marxian and the Catholic trade unions did in 1933.

—Ludwig von Mises, Omnipotent Government: The Rise of the Total State and Total War, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2011), 245-247.

Ludwig von Mises Warns Austrian Bankers in 1919: “We Are Going Down a Road That Leads to the Collapse of Our Currency”

We are going down a road that leads to the collapse of our currency. Our financial policy has been reduced to one remedy: printing more and more paper money. There is almost no prospect that things will change in this respect. It is unreasonable to expect that the Social Democratic party will suddenly admit the inner collapse of its socialist ideas or openly recognize the falsity of all that it has proclaimed for decades. We cannot expect better things from the Christian Socialist party, whose economic ideal is the survival of autarchic farmers and of small craftsmen mainly concerned about their daily bread. . . . And when it comes to the German Nationalists, they have always tried to outdo the other parties by their social-reformist radicalism and are currently the special advocates for the large sector of public employees, whose syndicalism has dealt the final blow to our financial situation. . . . Our entire political life is impregnated with imperialist, mercantilist, and socialist thinking, and with the fantasies of “economic nationalism.” . . .

In terms of economic policy, however, our system, like that of the Bolsheviks, promotes an undisguised onslaught on private property, not only of the means of production but of consumption goods as well. And like Bolshevism, it survives only by using up the capital that has been accumulated over several generations under a freer economy. Movable and fixed equipment in public enterprises is not replaced as it gets worn out, and devious taxation and trade policies combine to hinder private enterprises in renovating their technical equipment. Food supplies are imported from other countries, and their counterpart is generated not by the export of domestically produced goods but by increasing indebtedness, the piecemeal sale of domestic productive capital—sale of shares, decimation of timber supplies—and an equally undesirable reduction of the domestic stock of consumption goods.

—Ludwig von Mises, “On the Actions to Be Taken in the Face of Progressive Currency Depreciation,” in Selected Writings of Ludwig von Mises, vol. 2, Between the Two World Wars: Monetary Disorder, Interventionism, Socialism, and the Great Depression, ed. Richard M. Ebeling (Indianapolis: Liberty Fund, 2002), 47-49.

Ludwig von Mises on the Monetary System of German-Austria After the Dissolution of the Habsburg Dual Monarchy in October 1918

Austria and Hungary also largely financed the World War by using the printing press. At the very beginning of the war, the legislation was set aside that had imposed limitations on the expansion of bank notes by the Austro-Hungarian Bank, and on the use of credit by both states of the monarchy through their central bank. This cleared the way for inflation. The indebtedness of both states to the bank grew from month to month, the circulation of bank notes increased precipitously, and, in line with the proliferation of paper currency, the prices of goods and services and the rates of foreign bills of exchange increased.

When, in October 1918, the dual monarchy of the Habsburgs disintegrated into a number of separate national territories, some of them constituted as independent states while others incorporated into neighboring states, the Austro-Hungarian Bank finished its role as the joint institution enjoying the sole privilege of issuing currency for the entire monarchy. In the legal sense, its privilege of issuing notes continued until the end of 1919. However, in actual fact this privilege was only respected by German-Austria.

After the dissolution it was obvious that the Austro-Hungarian Bank would no longer be able to extend credit to the various successor states as it had extended to the Austrian and Hungarian states during the war. . . .

At the beginning of 1919, the first step in this direction was taken by the Southern Slav government [Yugoslavia]. Czechoslovakia was to follow. The notes of the Austro-Hungarian Bank circulating within their territories were stamped, and all other notes were no longer legal tender. Henceforth, only stamped notes could be used to fulfill all contracts denominated in crowns. This completed the creation of Southern Slav and Czechoslovak crowns, though the technical implementation of these reforms may have been deficient from a monetary point of view.

Now German-Austria, also, had to act. It could no longer wait until all other states had made the transition from the Austro-Hungarian crown to separate national crowns. It had to give up the Austro-Hungarian crown in order to avoid there being notes that, for whatever reason, had not been stamped in the other states that would now flow back into German-Austria and increase the inflation within German-Austria. It had to prevent the Czechoslovak Ministry of Finance from using the half of its citizens’ holdings of notes that had been retained upon the marking of currency for the purchasing of securities in German-Austria. Bank notes circulating in the Ukraine and in neutral foreign countries that totaled several billion crowns were not to be regarded simply as German-Austrian currency. This is why German-Austria, as well, applied a special mark to bank notes denominated in crowns and circulating within her territory. The decree of March 25, 1919, which had the force of law, withdrew legal-tender status from all obligations not so denominated. This created a separate German-Austrian currency. All further issues are then of a technical nature and pertain to the independent German-Austrian currency. Important though that may be, it takes second place behind the fact of the independence of the currency. Among the issues open for discussion is the question of whether or not to set up an independent German-Austrian central bank, and the further question of whether to keep the stamped notes in circulation or to replace them by newly designed notes because of the easy possibility of falsifying stamp imprints.

—Ludwig von Mises, “The Reentry of German-Austria into the German Reich and the Currency Question,” in Selected Writings of Ludwig von Mises, vol. 2, Between the Two World Wars: Monetary Disorder, Interventionism, Socialism, and the Great Depression, ed. Richard M. Ebeling (Indianapolis: Liberty Fund, 2002), 69, 71.

A Major Defect in the German Banking System Is That Bankers Stopped Being Bankers in the Classical Sense of the Term

The events of the last few weeks have made obvious to everyone the defects in the German and Austrian banking systems, which previously were recognized by only a few.

At least until very recently, English and American banks have acted, in principle, purely as bankers in the classical sense of the term. That is, they have viewed their primary business to be the lending of money. The development of German banking activity made them not merely banks but also put them in the business of being industrial holding companies and investment trusts. This development did not occur through any logical process. In the beginning, German banks also limited themselves to the granting of credit. They ended up becoming partners in the businesses to which they had granted credit because they lent too much to these enterprises in proportion to their own capital. These banks were plunged into difficulties when there were attempts for immediate conversion of those enterprises’ stocks and debentures into cash.

Gradually, banks were pushed out of the role of creditor into the role of the chief interested party. As a result, these banks no longer faced those enterprises with the critical eye of a banker who carefully judges the businesses’ prospects as debtors, and who constantly evaluates the borrower’s creditworthiness in order to limit or withdraw lines of credit if changing circumstances warrant it. These banks no longer looked at businesses’ activities from the standpoint of a lender but from the viewpoint of the borrower. When the monitoring function that the lending institution normally exercises over businesses fell by the wayside, an essential regulator of the money market disappeared in fact if not in name.

The news media would appropriately offer strong criticisms of any combination of the banking business with production and trading activities, when individual enterprises and business firms made attempts to publicly raise investment money. But it was overlooked that at many respected banks that had readily put money into risky ventures (including three major banks in Vienna and Berlin that have recently failed) conditions were no better. The independence of these banks from industrial enterprises was in many cases purely formal in the legal sense.

The representatives of the banks who had to decide on the granting of credit were, unfortunately, in many instances, identical with the representatives of the debtors who appealed for loans and credit expansion. When writers on the economy spoke out against this combining of banking and industry, those in banking labeled them ivory-tower theoreticians. Modern conditions, it was said, absolutely demand the amalgamation of banking and industry. The failure of this system clearly proves who was right. The more cautious the bank was in the establishment of its associations, the better off it is today.

The most pressing reform that must be pushed for is the elimination of the existing close ties between the banks and industrial combinations. Everyone agrees with this. Of course, this goal can be only slowly achieved. It will be years before it will be possible to transfer the large debts of many enterprises from the banks to the public through the issuing of stocks and bonds. Recent experience has caused severe mistrust of stocks and bonds issued by industry, and this mistrust will not be quickly overcome. But the distrust is even stronger against stocks issued by banks, due to the serious doubts about their connections with industry.

—Ludwig von Mises, “The Economic Crisis and Lessons for Banking Policy,” in Selected Writings of Ludwig von Mises, vol. 1, Monetary and Economic Policy Problems Before, During, and After the Great War, ed. Richard M. Ebeling (Indianapolis: Liberty Fund, 2012), 296-298.

Foreign-Exchange Control Enables European Banks to Use the Government's Restrictions As a Way to Avoid Making Their Repayments Abroad

The primary problem behind the foreign-exchange controls comes from the fact that a number of European banks have invested long-term the equivalent of the short-term credits that have been extended to them from abroad, with no ability to pay on their part being anticipated in the near future. These banks are not in a position to fulfill obligations to their creditors to pay on demand or on short notice. It is the most difficult problem confronting these European banks today. Foreign-exchange control enables these banks to use the government’s restrictions as a way to avoid making their repayments abroad. But this does not resolve the underlying problem, it merely postpones it. This problem, however,must be resolved; otherwise a restoration of international relations in these as well as in credit matters in general cannot be restored.

Foreign-exchange control allows these banks to contact their creditors and temporarily arrange moratorium agreements. But these agreements do not provide a definitive solution. But a definitive solution must be found in order to restore the credit system and its functioning again in a normal manner. This is one of the principal conditions necessary for bringing an end to the world economic crisis.

The restructuring of the insolvent banks must therefore precede the abolition of foreign-exchange control. The banks whose balances are in severe deficit must be liquidated, and the losses that have occurred must be recognized as complete losses. It is useless to postpone the liquidation of these enterprises. The losses will only be made greater by delaying a final settling of accounts. Fortunately, the balances of the majority of the banks in question are not bankrupt but only insolvent. These banks would be in a sound condition if the maturity dates of their own debt obligations coincided with the dates when they received claims owed to them. It is necessary to make every effort to reach an arrangement through agreements between these banks and their foreign creditors, in collaboration with the governments of the various countries involved as well as with international organizations (the League of Nations, the Bank of International Settlements, the International Chamber of Commerce). This is all the more feasible considering that it is not in the interest of creditors that the banks in which they have placed their capital should fail and suffer further losses, only adding to the harm to themselves in the process. These arrangements should be initiated and carried out as soon as possible. Once they are, there will no longer be any obstacles, from this source, to delay the abolition of foreign-exchange control.

It would be superfluous, in this regard, to provide special legislation requiring that banks maintain their own liquidity in the future. The banks will do this in their own interest, particularly if it is clear that any bank that poorly manages it own affairs can have no hope of being kept afloat by government intervention at the expense of the rest of society.

—Ludwig von Mises, “The Return to Freedom of Exchange,” in Selected Writings of Ludwig von Mises, vol. 2, Between the Two World Wars: Monetary Disorder, Interventionism, Socialism, and the Great Depression, ed. Richard M. Ebeling (Indianapolis: Liberty Fund, 2002), 217-218.

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.

The Socialist Theory of Exploitation Is Fallacious, and When Considered from the Point of View of Theoretical Soundness, It Occupies One of the Lowest Places Among All Theories of Interest

I have devoted an exceptionally and disproportionately large amount of space to the discussion of the exploitation theory. I have done so advisedly. Certainly none of the other doctrines has approached it in the influence it exercised on the thoughts and the emotions of whole generations. And just our era has seen it at its apogee. And unless I am mistaken, its descent has already begun. But it is to be expected that there will still be attempts at stubborn defense or at revivification by metamorphosis. And so I thought I should be serving the good cause if I avoided restricting myself to a purely retrospective critique of the  developmental stages of the doctrine, now definitely terminated. I thought it would be well to look forward, and even now cast some critical illumination on the intellectual theatre of operations to which, according to definitely discernible signs, its adherents are intending to transfer the renewed controversy.

So far as that old socialist theory of exploitation is concerned, which has been presented here in the person of its two most distinguished protagonists, Rodbertus and Marx, I cannot render a verdict any less severe than the one I handed down in the first edition of this book. It is not only fallacious but, considered from the point of view of theoretical soundness, it occupies one of the lowest places among all theories of interest. Grievous as may be the errors in logic made by the representatives of other theories, I hardly think that anywhere else are the worst errors concentrated in such abundance—frivolous, premature assumptions, specious dialecticism, inner contradictions and blindness to the facts of reality. The socialists are excellent critics, they are exceptionally weak theorists.

—Eugen von Böhm-Bawerk, The Exploitation Theory of Socialism-Communism: The Idea that All Unearned Income (Rent, Interest and Profit) Involves Economic Injustice; An Extract, 3rd ed. (South Holland, IL: Libertarian Press, 1975), xxx.

Antagonistic Interests Exist Between Producers and Those Who Acquire Wealth Nonproductively and/or Noncontractually in the Pre-Marxist View on Exploitation

In the Marxist tradition this stage of social development is termed “monopoly capitalism,” “finance capitalism,” or “state monopoly capitalism.” The descriptive part of Marxist analyses is generally valuable. In unearthing the close personal and financial links between state and business, they usually paint a much more realistic picture of the present economic order than do the mostly starry-eyed “bourgeois economists.” Analytically, however, they get almost everything wrong and turn the truth upside down.

The traditional, correct pre-Marxist view on exploitation was that of radical laissez-faire liberalism as espoused by, for instance, Charles Comte and Charles Dunoyer. According to them, antagonistic interests do not exist between capitalists as owners of factors of production and laborers, but between, on the one hand, the producers in society, i.e., homesteaders, producers and contractors, including businessmen as well as workers, and on the other hand, those who acquire wealth nonproductively and/or noncontractually, i.e., the state and state-privileged groups, such as feudal landlords. This distinction was first confused by  Saint-Simon, who had at some time been influenced by Comte and Dunoyer, and who classified market businessmen along with feudal lords and other state-privileged groups as exploiters. Marx took up this confusion from Saint-Simon and compounded it by making only capitalists exploiters and all workers exploited, justifying this view through a Ricardian labor theory of value and his theory of surplus value. Essentially, this view on exploitation has remained typical for Marxism to this day despite Böhm-Bawerk’s smashing refutation of Marx’s exploitation theory and his explanation of the difference between factor prices and output prices through time preference (interest). To this day, whenever Marxist theorists talk about the exploitative character of monopoly capitalism, they see the root cause of this in the continued existence of the private ownership of means of production. Even if they admit a certain degree of independence of the state apparatus from the class of monopoly capitalists (as in the version of “state monopoly capitalism”), for them it is not the state that makes capitalist exploitation possible; rather it is the fact that the state is an agency of capitalism, an organization that transforms the narrow-minded interests of individual capitalists into the interest of an ideal universal capitalist (the ideelle Gesamtkapitalist), which explains the existence of exploitation.

In fact, as explained, the truth is precisely the opposite: It is the state that by its very nature is an exploitative organization, and capitalists can engage in  exploitation only insofar as they stop being capitalists and instead join forces with the state. Rather than speaking of state monopoly capitalism, then, it would be more appropriate to call the present system “state financed monopoly socialism,” or “bourgeois socialism.”

—Hans-Hermann Hoppe, “Banking, Nation States, and International Politics: A Sociological Reconstruction of the Present Economic Order,” in The Economics and Ethics of Private Property: Studies in Political Economy and Philosophy, 2nd ed. (Auburn, AL: Ludwig von Mises Institute, 2006), 95-97n18.

Mises's Fundamental Axiom, the Nub of Praxeology, Is the Existence of Human Action; Men Have Some Ends and They Use Some Means To Try To Attain Them

We turn now to the Fundamental Axiom (the nub of praxeology): the existence of human action. From this absolutely true axiom can be spun almost the whole fabric of economic theory. Some of the immediate logical implications that flow from this premise are: the means-ends relationship, the time-structure of production, time-preference, the law of diminishing marginal utility, the law of optimum returns, etc. It is this crucial axiom that separates praxeology from the other methodological viewpoints-and it is this axiom that supplies the critical “apriori” element in economics.

First, it must be emphasized that whatever role “rationality” may play in  Professor Machlup's theory, it plays no role whatever for Professor Mises. Hutchison charges that Mises claims “all economic action was (or must be) ‘rational.’ ” This is flatly incorrect. Mises assumes nothing whatever about the rationality of human action (in fact, Mises does not use the concept at all). He assumes nothing about the wisdom of man's ends or about the correctness of his means. He “assumes” only that men act, i.e., that they have some ends, and use some means to try to attain them. This is Mises’ Fundamental Axiom, and it is this axiom that gives the whole praxeological structure of economic theory built upon it its absolute and apodictic certainty.

—Murray N. Rothbard, “In Defense of ‘Extreme Apriorism,’” Southern Economic Journal 23, no. 3 (January 1957): 317.

There Is No Consistency in Keynes's Use of the Term “Rate of Interest”; Keynes Also Fails to Adhere to His Own Theory of Interest (Liquidity Preference and Quantity of Money)

Let us consider first Keynes's failure to adhere to fixed meanings for his terms.

Keynes at times uses the rate of interest to mean a rate of discount, measuring the premium on present goods over future goods. This is implied in his initial definition of the marginal efficiency of capital, to which later reference is made on page 135 of this book. It is, moreover, made explicit by Keynes on page 93 of his book, where he says that, as an approximation, we can identify the rate of time-discounting, i.e., the ratio of exchange between present goods and future goods, with the rate of interest. Later, however, Keynes gives us a radically different theory of interest. He makes the rate of interest depend on liquidity preference and the quantity of money. And he holds that interest is not paid for the purpose of inducing men to save but for the purpose of inducing men not to hoard. He holds that if money is made sufficiently abundant so that it can satiate liquidity preference, it will pull down, not merely the short time rate of interest or the short time money rates, but also the whole complex of interest rates, long and short. The whole complex of interest rates (with a given liquidity preference scale) can be governed, and is governed, in his system, by the abundance or scarcity of money. Interest becomes a phenomenon of money par excellence. Strangely enough, however, we find Keynes playing with the notion of commodity rates of interest, or “own rates of interest,” the rate between future wheat and present wheat, and designating this rate as the “wheat rate of interest.” Every commodity can have its own rate of interest in terms of itself, and Keynes says that there is no reason why the wheat rate of interest should be equal to the copper rate of interest, because the relation between the spot and future contracts as quoted in the markets is notoriously different for different commodities. The reader will find whatever he pleases in Keynes about the rates of interest, though his formal theory is the doctrine that the quantity of money, taken in conjunction with liquidity preference, governs the rate of interest.

But Keynes does not adhere long to his own theory of interest. In the same volume, 29 pages later, he has abandoned it. After saying, on pages 167-168, that the supply of money in relation to liquidity preference will govern the whole complex of interest rates, long and short, on page 197 he criticizes the Federal Reserve banks for their open market policy, 1933-1934, on the ground that they purchased only short term securities, the effect of which “may, of course, be mainly confined to the very short term rate of interest and have little reaction on the much more important long term rates of interest.” And he calls upon the central banks to regulate all rates of interest by having fixed rates at which they will buy obligations of differing maturities, long and short.

There is no consistency in Keynes's use of the term “rate of interest” in this volume.

--Benjamin M. Anderson, “Digression on Keynes,” in The Critics of Keynesian Economics, ed. Henry Hazlitt (Irvington-on-Hudson, NY: Foundation for Economic Education, 1995), 199-200.

Hardly Any Economists in America Anticipated that Price-Level Stabilization during the 1920s Would Lead to the Economic Depression that Began in October 1929

Hardly any economists in America anticipated that price-level stabilization during the 1920s would lead to the economic depression that began in October 1929. One of the few who saw a danger in this policy of the Federal Reserve System was Benjamin M. Anderson. As the senior economist for the Chase National Bank of New York City throughout this period, Dr. Anderson authored the Chase Economic Bulletin, which was usually published four to five times every year. He offered detailed analyses of the economic currents in the United States, with special attention to monetary and banking policy and its likely effects on general market conditions. He also often critically evaluated the theories underlying Federal Reserve policy, most particularly the notion of stabilizing the price level as a guide for economic stability.

The most insightful bulletins on this theme were “The Fallacy of ‘The Stabilized Dollar’” (August 1920); “The Gold Standard vs. ‘A Managed Currency’” (March 1925); “Bank Money and the Capital Supply” (November 1926); “Bank Expansion and Savings” (June 1928); “Two ‘New Eras’ Compared: 1896–1903 and 1921–1928” (February 1929); “Commodity Price Stabilization as a False Goal of Central Bank Policy” (May 1929); and “The Financial Situation” (November 1929).

He argued that the Federal Reserve had used its powers to reduce the reserve requirements of member banks, had set the discount rate at which member banks could directly borrow from the Fed below the market rates of interest, and had used “open-market operations” to inject new reserves into the banking system. The increase in bank reserves available for lending purposes as a result of these Fed policies had generated a huge increase in demand deposits and especially in time deposits. As a result, a large monetary inflation had been created by the Federal Reserve during the 1920s.

But the price level had remained stable, producing, Benjamin Anderson said, a false sense of economic stability. In 1926 and 1928, he argued that the amount of bank credit created by Fed policy enabled the financing of new investments in excess of actual savings in the economy. Influenced by Joseph Schumpeter’s The Theory of Economic Development (1911), Anderson argued that monetary expansion in the form of bank credit lowered interest rates, which attracted additional borrowing for long-term investment projects. These additional bank loans with newly created money enabled investment borrowers to bid resources and labor away from consumption and other uses in the economy and redirect their use towards various types of capital formation. The monetary expansion, in other words, induced the undertaking of investment activities in excess of the actual voluntary savings upon which a stable pattern of investment is ultimately dependent. Thus, Federal Reserve policy was creating a serious imbalance in the savings-investment relationship of the American economy.

Anderson estimated that between 1921 and 1928, demand deposits at Federal Reserve member banks had increased 33.8%, while time deposits (whose minimum reserve requirements had been set by the Fed significantly lower than those required for demand deposits) had increased by 135.1%. The resulting increase in lendable funds, he said, fed real-estate and construction booms and produced a dramatic rise in stock-market speculation.

In February 1929, Anderson pointed out that “excessive bank reserves generate bank expansion, that bank expansion running in excess of commercial needs will overflow into capital uses and speculative employments, and that low interest rates and abundant credit will ordinarily reflect themselves in rapidly rising capital values.” In Anderson’s view, these all pointed to the inevitability of a corrective downturn.

--Richard M. Ebeling, “Benjamin Anderson and the False Goal of Price-Level Stabilization,” in Monetary Central Planning and the State (Fairfax, VA: The Future of Freedom Foundation, 2015), Kindle e-book.

Propagandists for Central Banking Have Convinced People that “Free Banking” Would Be Banking Out of Control with Wild Inflationary Bursts and the Supply of Money Soaring to Infinity

Let us assume now that banks are not required to act as genuine money warehouses, and are unfortunately allowed to act as debtors to their depositors and noteholders rather than as bailees retaining someone else’s property for safekeeping. Let us also define a system of free banking as one where banks are treated like any other business on the free market. Hence, they are not subjected to any government control or regulation, and entry into the banking business is completely free. There is one and only one government “regulation”: that they, like any other business, must pay their debts promptly or else be declared insolvent and be put out of business. In short, under free banking, banks are totally free, even to engage in fractional reserve banking, but they must redeem their notes or demand deposits on demand, promptly and without cavil, or otherwise be forced to close their doors and liquidate their assets.

Propagandists for central banking have managed to convince most people that free banking would be banking out of control, subject to wild inflationary bursts in which the supply of money would soar almost to infinity. Let us examine whether there are any strong checks, under free banking, on inflationary credit expansion.

In fact, there are several strict and important limits on inflationary credit expansion under free banking. One we have already alluded to. If I set up a new Rothbard Bank and start printing bank notes and issuing bank deposits out of thin air, why should anyone accept these notes or deposits? Why should anyone trust a new and fledgling Rothbard Bank? Any bank would have to build up trust over the years, with a record of prompt redemption of its debts to depositors and noteholders before customers and others on the market will take the new bank seriously. The buildup of trust is a prerequisite for any bank to be able to function, and it takes a long record of prompt payment and therefore of noninflationary banking, for that trust to develop.

There are other severe limits, moreover, upon inflationary monetary expansion under free banking. One is the extent to which people are willing to use bank notes and deposits. If creditors and vendors insist on selling their goods or making loans in gold or government paper and refuse to use banks, the extent of bank credit will be extremely limited. If people in general have the wise and prudent attitudes of many “primitive” tribesmen and refuse to accept anything but hard gold coin in exchange, bank money will not get under way or wreak inflationary havoc on the economy.

But the extent of banking is a general background restraint that does precious little good once banks have become established. A more pertinent and magnificently powerful weapon against the banks is the dread bank run—a weapon that has brought many thousands of banks to their knees. A bank run occurs when the clients of a bank—its depositors or noteholders—lose confidence in their bank, and begin to fear that the bank does not really have the ability to redeem their money on demand. Then, depositors and noteholders begin to rush to their bank to cash in their receipts, other clients find out about it, the run intensifies and, of course, since a fractional reserve bank is indeed inherently bankrupt—a run will close a bank’s door quickly and efficiently.

--Murray N. Rothbard, The Mystery of Banking, 2nd ed. (Auburn, AL: Ludwig von Mises Institute, 2008), 111-113.

Ben Bernanke Spoke of Printing Money and Distributing It from Helicopters and about Roosevelt's 40% Devaluation of the Dollar Against Gold As Effective Weapons Against Deflation

This doctrine of globally beneficial dollar devaluation in recession had got further embellishment in Bernanke’s reading of the Japanese experience of the 1990s. Bernanke sympathized with the view that where monetary policy became constrained (in bringing about recovery) by a zero-rate bound (inability of rates to fall below zero even though the equilibrium level of rates may indeed be negative), then devaluation was the way out of this (partly through generating inflation expectations) and internationally acceptable (not beggar-your-neighbour) in that all would gain from the return route to equilibrium. Bernanke, as recently appointed governor to the Federal Reserve, had reinforced this view in his notorious speech to the National Economists Club in Washington (November 2002) under the title of ‘Deflation: making sure it doesn’t happen here’.

Bernanke’s comments about printing money and distributing it from helicopters got the headlines at the time (and since). But in addition the new governor noted aloud:

Though a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it’s worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from US history is Franklin Roosevelt’s 40% devaluation of the dollar against gold in 1933–4, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the US deflation remarkably quickly. Indeed consumer price inflation in the US, year-on-year, went from −10.3% in 1932 to −5.1% in 1933 to 3.4% in 1934. The economy grew strongly and by the way 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt’s devaluation.

--Brendan Brown, The Global Curse of the Federal Reserve: Manifesto for a Second Monetarist Revolution (Houndmills, UK: Palgrave Macmillan, 2011), 115.

Capital Goods Can Only Be Used If Corresponding Quantities of Consumer Goods Are Fed into the Production Process to Sustain the Laborers Who Work with These Capital Goods

Strigl builds his theory of the macroeconomy on an original account of the part played by different forms of capital. In particular, he stresses the fundamental role that consumer goods, or means of subsistence, play in connection with the fact that production takes time. When consumer goods are used to sustain laborers engaged in time-consuming roundabout production processes, they are used as “free capital.” Since without sustenance for laborers no such roundabout production processes can be started at all, consumer-goods-used-as-capital are the most fundamental or “originary form” of capital.

This fundamental insight, that productively-used consumer goods are originary capital, had already been expressed in Jevons's wage-fund theory of capital, and it is still common stock in Austrian economics. However, no one has surpassed Strigl in systematically analyzing the implications thereof, and in integrating these findings into a theory of the macroeconomy. His legacy to present day capital theorists rests to a great extent mainly on this contribution.

One important implication of this insight is that it is unwarranted to conceive of capital from a purely technological point of view. Machines, buildings, etc.—that is, those capital goods most readily identified with the notion of capital—are themselves products of previous production processes which, ultimately, make use of labor, land, and “productively-used” consumer goods. Moreover, capital goods can only be used if corresponding quantities of consumer goods are fed into the production process to sustain the laborers who work with these capital goods. Using capital goods in production processes and supporting these processes with consumer goods are nothing but two aspects of “one and the same process.”  In short, the quantities and qualities of capital goods in use at any time depend ultimately on what people choose to do with the consumer goods they control. A man can choose to use all his consumer goods in “pure consumption” or to use a part of them (his “savings”) in “productive consumption”; that is, he can use this part to sustain himself or others while being engaged in a productive venture. Depending on such choices, consumer goods become either pure consumer goods or originary capital. Hence, whether one and the same physical object is capital depends ultimately on the choices of the market participants; capital formation has a subjective basis.

—Jörg Guido Hülsmann, introduction to Capital and Production, by Richard von Strigl (Auburn, AL: Ludwig von Mises Institute, 2000), xvii-xix.

The Federal Reserve as Engine of Reverse Robin Hood Redistribution

The Fed really abandoned all pretense of being “independent” of politics in the aftermath of “The Great Recession” of 2008, although it continues on, with the help of its academic supporters, with the rhetoric and propaganda of “Fed independence.” Specifically, the Fed made it ever so obvious that its primary concern is protecting the bonuses of the Wall Street investment banking titans who, in turn, supply millions of dollars in campaign “contributions” to the executive and legislative branches and the two major political parties. (It is not just a coincidence that the U.S. Treasury Secretary is almost always a top executive at Goldman Sachs). The Fed does this by responding to bursted bubbles in real estate and stock markets, among other places, by pumping even more liquidity into the economy, thereby creating new bubbles—and new profit opportunities for Wall Street speculators. As David A. Stockman (2013, p. 653) wrote in his book, The Great Deformation, “[T]he central banking branch of the state remains hostage to Wall Street speculators who threaten a hissy fit sell-off unless they are juiced again and again. Monetary policy has thus become an engine of reverse Robin Hood redistribution; it flails about implementing quasi-Keynesian demand-pumping theories that punish Main Street savers, workers, and businessmen while creating endless opportunities . . . for speculative gain in the Wall Street casino.” Thanks to the Fed, the machinery of the state and the machinery of reelection have become coterminous, says Stockman.

Monetary inflation enriches the “one percenters” on Wall Street while impoverishing just about everyone else. By deterring savings with its policy of artificially lowering interest rates the Fed destroys much of the essential ingredient of economic growth—savings, investment, and capital accumulation.

--Thomas DiLorenzo, "A Fraudulent Legend: The Myth of the Independent Fed," in The Fed at One Hundred: A Critical View on the Federal Reserve System, ed. David Howden and Joseph T. Salerno (Cham, CH: Springer International Publishing, 2014), 69-70.

The Gold Standard Criticism of the Friedmanite Position Is that the Chicagoites Want a Free Market Between Entities that Are Different Units of the SAME Entity (Different Weights of Gold)

The Friedmanite program cannot be fully countered in its details; it must be considered at the level of its deepest assumptions. Namely, are currencies really fit subjects for “markets”? Can there be a truly “free market” between pounds, dollars, francs, etc.?

Let us begin by considering this problem: suppose that someone comes along and says, “The existing relationship between pounds and ounces is completely arbitrary. The government has decreed that 16 ounces are equal to 1 pound. But this is arbitrary government intervention; let us have a free market between ounces and pounds, and let us see what relationship the market will establish between ounces and pounds. Perhaps we will find that the market will decided that 1 pound equals 14 or 17 ounces.” Of course, everyone would find such a suggestion absurd. But why is it absurd? Not from arbitrary government edict, but because the pound is universally defined as consisting of 16 ounces. Standards of weight and measurement are established by common definition, and it is precisely their fixity that makes them indispensable to human life. Shifting relationships of pounds to ounces or feet to inches would make a mockery of any and all attempts to measure. But it is precisely the contention of the gold standard advocates that what we know as the names for different national currencies are not independent entities at all. They are not, in essence, different commodities like copper or wheat. They are, or they should be, simply names for different weights of gold or silver, and hence should have the same status as the fixed definitions for any set of weights and measures.

Let us bring our example a bit closer to the topic of money. Suppose that someone should come along and say, “The existing relationship between nickels and dimes is purely arbitrary. It is only the government that has decreed that two nickels equal one dime. Let us have a free market between nickels and dimes. Who knows? Maybe the market will decree that a dime is worth 7 cents or 11 cents. Let us try the market and see.”  Again, we would feel that such a suggestion would be scarcely less absurd. But again, why? What precisely is wrong with the idea? Again the point is that cents, nickels, and dimes are defined units of currency. The dollar is defined as equal to 10 dimes and 100 cents, and it would be chaotic and absurd to start calling for day-to-day changes in such definitions. Again, fixity of definition, fixity of units of weight and measure, is vital to any sort of accounting or calculation.

To put it another way: the idea of a market only makes sense  between different entities, between different goods and services, between, say, copper and wheat, or movie admissions. But the idea of a market makes no sense whatever between different units of the same entity: between, say, ounces of copper and pounds of copper. Units of measure must, to serve any purpose, remain as a fixed yardstick of account and reckoning.

The basic gold standard criticism of the Friedmanite position is that the Chicagoites are advocating a free market between entities that are in essence, and should be once more, different units of the same entity, i.e., different weights of the commodity gold. For the implicit and vital assumption of the Friedmanites is that every national currency—pounds, dollars, marks, and the like—is and should be an independent entity, a commodity in its own right, and therefore should fluctuate freely with one another.

—Murray N. Rothbard, “Title of Chapter: Subtitle of Chapter,” in Gold Is Money, ed. Hans F. Sennholz, Contributions in Economics and Economic History 12 (Westport, CT: Greenwood Press, 1975), 26-28.

Murray N. Rothbard Criticizes the Chicago School's Definition of the Supply of Money as a Flagrant Example of Question-Begging

The concept of the supply of money plays a vitally important role, in differing ways, in both the Austrian and the Chicago Schools of economics. Yet, neither school has defined the concept in a full or satisfactory manner; as a result, we are never sure to which of the numerous alternative definitions of the money supply either school is referring.

The Chicago School definition is hopeless from the start. For, in a question-begging attempt to reach the conclusion that the money supply is the major determinant of national income, and to reach it by statistical rather than theoretical means, the Chicago School defines the money supply as that entity which correlates most closely with national income. This is one of the most flagrant examples of the Chicagoite desire to avoid essentialist concepts, and to “test” theory by statistical correlation; with the result that the supply of money is not really defined at all. Furthermore, the approach overlooks the fact that statistical correlation cannot establish causal connections; this can only be done by a genuine theory that works with definable and defined concepts.

In Austrian economics, Ludwig von Mises set forth the essentials of the concept of the money supply in his Theory of Money and Credit, but no Austrian has developed the concept since then, and unsettled questions remain (e.g., are savings deposits properly to be included in the money supply?). And since the concept of the supply of money is vital both for the theory and for applied historical analysis of such consequences as inflation and business cycles, it becomes vitally important to try to settle these questions, and to demarcate the supply of money in the modern world. In The Theory of Money and Credit, Mises set down the correct guidelines: money is the general medium of exchange, the thing that all other goods and services are traded for, the final payment for such goods on the market.

—Murray N. Rothbard, “Austrian Definitions of the Supply of Money,” in Economic Controversies (Auburn, AL: Ludwig von Mises Institute, 2011), 727-728.