Another Way of Looking at the Essential and Inherent Unsoundness of Fractional Reserve Banking Is to Look at the Maturity Mismatching Problem, A Violation of the “Golden Rule of Banking”

Another way of looking at the essential and inherent unsoundness of fractional reserve banking is to note a crucial rule of sound financial management—one that is observed everywhere except in the banking business. Namely, that the time structure of the firm’s assets should be no longer than the time structure of its liabilities. In short, suppose that a firm has a note of $1 million due to creditors next January 1, and $5 million due the following January 1. If it knows what is good for it, it will arrange to have assets of the same amount falling due on these dates or a bit earlier. That is, it will have $1 million coming due to it before or on January 1, and $5 million by the year following. Its time structure of assets is no longer, and preferably a bit shorter, than its liabilities coming due. But deposit banks do not and cannot observe this rule. On the contrary, its liabilities—its warehouse receipts—are due instantly, on demand, while its outstanding loans to debtors are inevitably available only after some time period, short or long as the case may be. A bank’s assets are always “longer” than its liabilities, which are instantaneous. Put another way, a bank is always inherently bankrupt, and would actually become so if its depositors all woke up to the fact that the money they believe to be available on demand is actually not there.

—Murray N. Rothbard, The Mystery of Banking, 2nd ed. (Auburn, AL: Ludwig von Mises Institute, 2008), 98-99.

According to Ludwig von Mises, the Standard Textbook Equation of Exchange, MV = PT, Is a Superficial and Unsatisfactory Theory of the Purchasing Power of Money

One of the main contributions of Mises’s TMC [The Theory of Money and Credit] is his trenchant criticism of the classical equation of exchange MV = PT. This equation, however, is still used today in every standard textbook—what is more, it is often the only formulation of the quantitative theory of money that is offered to students. The criticism by Mises is clearly unknown to the current writers belonging to the “orthodox” paradigm. This is unfortunate because Mises has convincingly shown that the equation of exchange is a superficial and ultimately unsatisfactory theory of the purchasing power of money. His main criticism is aimed at the concept of velocity of money: counting how many times a unit of money changes hands on average in a year cannot replace the concept of the subjective demand for money. The velocity of money is only a manifestation of the effects of the demand for money, and it obfuscates the causal processes through which the value of money is determined. The concept of the subjective demand for money is, as we have seen in the previous section, the necessary foundation for an explanation of the PPM. Mankiw (2011) and Milton Friedman (in his entry “Quantity Theory of Money” in the New Palgrave) both recognize this fact. They begin their respective presentations of the quantity theory with the subjectivist theory expounded above, but then they fall back and focus on the holistic and mathematical equation only.

—Renaud Fillieule, “The Monetary Theory in Current Textbooks in Light of The Theory of Money and Credit,” in Theory of Money and Fiduciary Media: Essays in Celebration of the Centennial, ed. Jörg Guido Hülsmann (Auburn, AL: Ludwig von Mises Institute, 2012), 256.

In 1913 Ludwig von Mises Warned That There Is a Serious Danger for the Future of the Individualistic Organization of the Economy in the Development of Fiduciary Media

As I have explained elsewhere, there is a serious danger for the future of the individualistic organization of the economy in the development of fiduciary media; if the legislature does not put some obstacle in the way of its expansion, an unrestrained inflation could easily come about, the destructive effects of which cannot really be imagined. Even if we ignore this, as yet, not immediate threat, there is sufficient risk from the very nature of the system of fiduciary media. We have already mentioned that it would be desirable to put an end to the artificial expansion of fiduciary media. It would not only slow down the rate of devaluation, but it would also be the best way of preventing economic crises.

Mises defined “money substitutes” as claims to a commodity money such as gold in the form of banknotes or checks that are readily and generally accepted in transactions and that are believed to be fully redeemable on demand at the banking institution that has issued them. Mises distinguished between money substitutes that are backed 100 percent by commodity money reserves at the issuing institution (“money certificates”) and those money substitutes issued by a bank that are less than fully backed (“fiduciary media”). Loans extended on the basis of 100 percent reserve backing were referred to as “commodity credit” and those loans extended on the basis of less than 100 percent reserve backing were called “circulation credit.” Mises argued that it was the extension of fiduciary media not covered by 100 percent reserves that was the source of business cycles, in that it created the illusion of more savings available in society (in the form of money loans extended through the banking system) to support and sustain investment and capital formation than really existed.

—Ludwig von Mises, “The General Rise in Prices in the Light of Economic Theory,” 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), 155, 135n5.

European Politicians Introduced the “Stability and Growth Pact” (SGP) in 1997 in order to “Manage the Commons”; However, the Regulation of the Commons Failed

These tragic incentives stem from the unique institutional setup in the EMU [European Monetary Union]: one central bank. These incentives were not unknown when the EMU was planned. The Treaty of Maastricht (Treaty on the European Union), in fact, adopted a no-bailout principle (Article 104b) that states that there will be no bailout in case of fiscal crisis of member states. Along with the no bailout clause came the independence of the ECB. This was to ensure that the central bank would not be used for a bailout.

But political interests and the will to go on with the Euro project have proven stronger than the paper on which the no bailout clause has been written. Moreover, the independence of the ECB [European Central Bank] does not guarantee that it will not assist a bailout. In fact and as we have seen, the ECB is supporting all governments continuously by accepting their government bonds in its lending operation. It does not matter that it is forbidden for the ECB to buy bonds from governments directly. With the mechanism of accepting bonds as collateral it can finance governments equally well.

There was another attempt to curb the perverse incentives of incurring in excessive deficits. Politicians introduced “managed commons” regulations to reduce the external effects of the tragedy of the commons. The Stability and Growth Pact (SGP) was adopted in 1997 to limit the tragedy in response to German pressure. The pact permits certain “quotas,” similar to fishing quotas, for the exploitation of the common central bank. The quota sets limits to the exploitation in that deficits are not allowed to exceed three percent of the GDP and total government debt not sixty percent of the GDP. If these limits had been enforced, the incentive would have been to always be at the maximum of the three percent deficit financed indirectly by the ECB. Countries with a three percent deficit would partially externalize their costs on countries with lower deficits.

However, the regulation of the commons failed. The main problem is that the SGP is an agreement of independent states without credible enforcement. Fishing quotas may be enforced by a particular state. But inflation and deficit quotas of independent states are more difficult to enforce. Automatic sanctions, as initially proposed by the German government, were not included in the SGP. Even though countries violated the limits, warnings were issued, but penalties were never enforced. Politically influential countries such as France and Germany, which could have defended the SGP, violated its provisions by having more than three percent deficits from 2003 onward. With a larger number of votes, they and other countries could prevent the imposition of penalties. Consequently, the SGP was a total failure. It could not close the Pandora’s Box of a tragedy of the commons. For 2010, all but one member state are expected to violate the three percent maximum limit on deficits. The general European debt ratio to GDP is eighty-eight percent.

—Philipp Bagus, The Tragedy of the Euro, 2nd ed. (Auburn, AL: Ludwig von Mises Institute, 2012), 108-110.

The Theory of the “Tragedy of the Commons” Should Be Applied to Fractional-Reserve Banking Since the Expansive Process Derives from a Privilege Against Property Rights

We first had the opportunity to defend the thesis that the theory of the “tragedy of the commons” should be applied to fractional-reserve banking at the Regional Meeting of the Mont-Pèlerin Society which took place in Rio de Janeiro, September 5–8, 1993. There we pointed out that the typical “tragedy of the commons” clearly applies to banking, given that the entire expansive process derives from a privilege against property rights, since each bank entirely internalizes the benefits of expanding its credit while letting the other banks and the whole economic system share the corresponding costs. Moreover, an interbank clearing mechanism within a free banking system may thwart individual, isolated attempts at expansion, but it is useless if all banks, moved by the desire for profit in a typical “tragedy of the commons” process, are more or less carried away by “optimism” in the granting of loans.

—Jesús Huerta de Soto, Money, Bank Credit, and Economic Cycles, trans. Melinda A. Stroup (Auburn, AL: Ludwig von Mises Institute, 2006), 394n.

From a Position of Military Strength, the Dominating State Will Use Its Superior Power to Enforce a Policy of Internationally Coordinated Inflation, Or Monetary Imperialism

And a similarly straightforward yet once again entirely non-Marxist explanation exists for the observation always pointed out by Marxists, that the banking and business establishment is usually among the most ardent supporters of military strength and imperial expansionism. It is not because the expansion of capitalist markets requires exploitation, but because the expansion of state protected and privileged business requires that such protection be extended also to foreign countries and that foreign competitors be hampered through non-contractual and nonproductive property acquisitions in the same way or more so than internal competition. Specifically, it supports imperialism if this promises to lead to a position of military domination of one’s own allied state over another. For then, from a position of military strength, it becomes possible to establish a system of—as one may call it—monetary imperialism. The dominating state will use its superior power to enforce a policy of internationally coordinated inflation. Its own central bank sets the pace in the process of counterfeiting, and the central banks of the dominated states are ordered to use its currency as their own reserves and inflate on top of them. This way, along with the dominating state and as the earliest receivers of the counterfeit reserve currency its associated banking and business establishment can engage in an almost costless expropriation of foreign property owners and income producers. A double layer of exploitation of a foreign state and a foreign elite on top of a national state and elite is imposed on the exploited class in the dominated territories, causing prolonged economic dependency and relative economic stagnation vis-à-vis the dominant nation. It is this—very uncapitalist—situation that characterizes the status of the United States and the U.S. dollar and that gives rise to the—correct—charge of U.S. economic exploitation and dollar imperialism.

—Hans-Hermann Hoppe, “Marxist and Austrian Class Analysis,” in The Economics and Ethics of Private Property: Studies in Political Economy and Philosophy, 2nd ed. (Auburn, AL: Ludwig von Mises Institute, 2006), 135

When A King Sold Bonds Under the Gold Standard This Had No Effect on the Total Money Supply; If He Spent More, Others Would Have to Spend Less

Furthermore, constrained by a commodity money standard, monarchs were unable to "monetize" their debt. When the king sold bonds to private financiers or banks, under the gold standard this had no effect on the total money supply. If the king spent more as a consequence, others would have to spend less. Accordingly, lenders were interested. in correctly assessing the risk associated with their loans, and kings typically paid interest rates substantially above those paid by commercial borrowers.

In contrast, under the gold exchange standard with only a very indirect tie of paper money to gold, and especially under a pure fiat money regime with no tie to gold at all, government deficit financing is turned into a mere banking technicality. Currently, by selling its debt to the banking system, governments can in effect create new money to pay for their debt. When the treasury department sells bonds to the commercial banking system, the banks do not pay for these bonds out of their existing money deposits; assisted by open-market purchases by the government owned central bank, they create additional demand deposits out of thin air. The banking system does not spend less as a consequence of the government spending more. Rather, the government spends more, and the banks spend (loan) as much as before. In addition, they earn an interest return on their newly acquired bond holdings. Accordingly, there is little hesitation on the part of banks to purchase government bonds even at below market interest rates, and rising government debt and increased inflation thus goes hand in hand.

—Hans-Hermann Hoppe, Democracy: The God That Failed; The Economics and Politics of Monarchy, Democracy, and Natural Order (New Brunswick, NJ: Transaction Publishers, 2011), 60n27.

Under a Hard-Money Regime, the Money-Supply Process Is Totally Privatized; Mining, Minting, Certification and Warehousing of Money Are Undertaken by Private Firms for Profit

The defining characteristic of such a monetary system has been incisively identified by Milton Friedman. In his words, “A real, honest-to-God gold standard … would be one in which gold was literally money, and money literally gold, under which transactions would literally be made in terms either of the yellow metal itself, or of pieces of paper that were 100 per cent warehouse certificates for gold.”

Thus, under a genuine gold standard, the monetary unit is, in fact as well as in law, a unit of weight of gold. This is the case whether the monetary unit bears the name of a standard unit of weight, such as a “gram” or “ounce,” or whether it bears a special name, like “dollar” or “franc,” that designates specifically a standard weight of the commodity used as money.

While it is true that certain types of government intervention in the monetary system are consistent with the basic criterion of a genuine gold standard, it is equally true that no particular government policy is essential to the operation of this monetary standard. Indeed, as Friedman notes, “If a domestic money consists of a commodity, a pure gold standard or cowrie bead standard, the principles of monetary policy are very simple. There aren’t any. The commodity money takes care of itself.”

Under the quintessential hard-money regime, therefore, the money-supply process is totally privatized. The mining, minting, certification, and warehousing of the commodity money are undertaken by private firms competing for profits in an entirely unrestricted and unregulated market. The money supply consists of gold in various shapes and weight denominations and claims to gold, in the form of paper notes or checkable demand deposits, that are accepted in monetary transactions as a substitute for the physical commodity money. These money substitutes are literally warehouse receipts that are redeemable for gold on demand at the issuing institutions, which hold a specifically earmarked reserve of gold exactly equal in amount to their demand liabilities. Barring fraud or counterfeiting, the total supply of money in the economy is therefore always equal to the total weight of gold held in the money balances of the nonbank public and in the reserves of the banks.

—Joseph T. Salerno, “Gold Standards: True and False,” in Money: Sound and Unsound (Auburn, AL: Ludwig von Mises Institute, 2010), 356-357.

The Tragedy of the Euro Is the Incentive to Incur Higher Deficits and Make the Whole Euro Group Burden the Costs of Irresponsible Policies

The tragedy of the Euro is the incentive to incur higher deficits, issue government bonds, and make the whole Euro group burden the costs of irresponsible policies—in the form of the lower purchasing power of the Euro. With such incentives, politicians tend to run high deficits. Why pay for higher expenditures by raising unpopular taxes? Why not just issue bonds that will be purchased by the creation of new money, even if it ultimately increases prices in the whole of the EMU [European Monetary Union]? Why not externalize the costs of government spending?

The resulting moral hazard is asymmetrical. Governments of larger states would produce considerable inflationary pressure running high deficits and might be too big to be bailed out. On the contrary, governments of smaller states would not produce much inflationary pressures even if they would run high deficits because the impact of the money creation would not be important for the Eurozone as a whole. Moreover, small countries could expect to be bailed out by larger countries. It is unsurprising that the sovereign debt crisis has been worse in small countries such as Greece, Ireland and Portugal.

The tragedy of the Euro is aggravated by the typical shortsightedness of rulers in democracies: politicians tend to focus on the next election rather than the long-term effects of their policies. They use public spending and extend favors to voting factions in order to win the next election. Increasing deficits delays problems into the future and also into the other countries of the Eurozone. EMU leaders know how to externalize the costs of government spending in two dimensions: geographically and temporarily. Geographically, some of the costs are borne in the form of higher prices by the whole Eurozone. Temporarily, the problems resulting from higher deficits are possibly borne by other politicians and only in the remote future. The sovereign debt problems caused by the deficits may require spending cuts imposed by the EMU.

—Philipp Bagus, The Tragedy of the Euro, 2nd ed. (Auburn, AL: Ludwig von Mises Institute, 2012), 107-108.

There Is Really No Essential Difference Between the Unlimited Power of the Democratic State and the Unlimited Power of the Autocrat

And he also stressed that democracy must not be conceived as the unlimited rule of the general will:

There is really no essential difference between the unlimited power of the democratic state and the unlimited power of the autocrat. The idea that carries away our demagogues and their supporters, the idea that the state can do whatever it wishes, and that nothing should resist the will of the sovereign people, has done more evil perhaps than the caesar-mania of degenerate princelings.

Mises concluded that “only within the framework of Liberalism does democracy fulfill a social function. Democracy without Liberalism is a hollow form.” The great danger inherent in democracy is to turn the libertarian postulate of equality before the law into the postulate of economic equality.

Here is a fertile field for the demagogue. Whoever stirs up the resentment of the poor against the rich can count on securing a big audience. Democracy creates the most favourable preliminary conditions for the development of this spirit, which is always and everywhere present, though concealed. So far all democratic states have foundered on this point. The democracy of our own time is hastening towards the same end.

—Jörg Guido Hülsmann, Mises: The Last Knight of Liberalism (Auburn, AL: Ludwig von Mises Institute, 2007), 412-413.

Society Is Purely and Solely a Continual Series of Exchanges; the Two Contracting Parties Always Both Gain; Society Is an Uninterrupted Succession of Advantages

Liberal class conflict theory emerged in a polished form in France, in the period of the Bourbon Restoration, following the defeat and final exile of Napoleon. From 1817 to 1819, two young liberals, Charles Comte and Charles Dunoyer, edited the journal Le Censeur Européen; beginning with the second volume (issue), another young liberal, Augustin Thierry, collaborated closely with them. The Censeur Européen  developed and disseminated a radical version of liberalism, one that continued to influence liberal thought up to the time of Herbert Spencer and beyond. It can be viewed as a core-constituent—and thus one of the historically defining elements—of authentic liberalism (see “Liberalism, True and False,” in the present work). In this sense, a consideration of the world-view of the Censeur group  is of great importance in helping to give shape and content to the protean concept of liberalism. Moreover, through Henri de Saint-Simon and his followers and other channels, it had an impact on socialist thought as well. Comte and Dunoyer called their doctrine Industrialisme, Industrialism.

There were several major sources of Industrialism. One was Antoine Destutt de Tracy, the last and most famous of the Idéologue school of French liberals, whose friend, Thomas Jefferson, arranged for the translation and publication of his Treatise on Political Economy in the United States before it appeared in France. Destutt de Tracy’s definition of society was crucial:

Society is purely and solely a continual series of exchanges. It is never anything else, in any epoch of its duration, from its commencement the most unformed to its greatest perfection. And this is the greatest eulogy we can give to it, for exchange is an admirable transaction, in which the two contracting parties always both gain; consequently, society is an uninterrupted succession of advantages, unceasingly renewed for all its members.

Destutt de Tracy’s position was that “commerce is society itself. . . . It is an attribute of man. . . . It is the source of all human good . . .” Commerce was a “panacea,” in the words of a student of his thought, “the world’s civilizing, rationalizing, and pacifying force.”

—Ralph Raico, “The Conflict of Classes: Liberal vs. Marxist Theories,” in Classical Liberalism and the Austrian School (Auburn, AL: Ludwig von Mises Institute, 2012), 189-190.

The Acid Rain Scare Was the Dress Rehearsal for the Global Warming Scare; Both Scares Originated in Sweden; Bert Bolin, Future First Chair of the IPCC, Wrote the Report

This book tells the story of two countries and three environmental scares. Two originated in Sweden (acid rain and global warming) and one (the nuclear winter) was transmitted from Moscow via Stockholm. . . .

Acid rain (Scare #1) was the dress rehearsal for global warming. The politicized science of acid rain swept all before it, the bar set low in the first government report on acid rain, which happened to be written by Bert Bolin, a friend of Palme [prime minister of Sweden] and future first chair of the IPCC. It spread to Germany, where hysteria about “forest death” destroyed any hope of rationality and objectivity. It was taken up by Canada, which waged a relentless campaign to get the United States to cut its power station emissions. The Reagan Administration held firm against virtually unanimous scientific opinion. Elected as the environmental president, George H. W. Bush gave the Canadians what they wanted. However, the science was not as solid as the consensus asserted, and a ten-year federal study revealed it for what it was. Scandalously, the Environmental Protection Agency (EPA) suppressed its findings until the main provisions of the acid rain legislation had been agreed in Congress.

—Rupert Darwall, Green Tyranny: Exposing the Totalitarian Roots of the Climate Industrial Complex (New York: Encounter Books, 2019), Kobo e-book.

No Wonder Goebbels Declared Eighty Years Later that National Socialism Was “anti-Semitic” because It Was Socialistic

But the real Marx came to life in his letters, especially when he vented  his hatred on former friends, collaborators, or sympathizers. Marx actually vied with Engels in heaping anti-Jewish invectives upon the head of  Lassalle, insults of a descriptive physical nature reminiscent of the smutty Nazi weekly Der Stürmer, edited by Julius Streicher. Marx saw in Lassalle a “niggerlike Jew,” and Engels' invectives were no more moderate.  In a way these attitudes are not surprising because socialism and the Jewish  outlook, the Jewish mind, the Jewish character do not easily mix. Belonging to a religious minority within Christendom (with which they  remain mysteriously connected), the Jews are apt to have the critical bent of  small religious bodies everywhere. These minorities question much of the intellectual-spiritual foundations upon which the majority live, and they are often emphatic in their criticisms. Thus they easily become unpopular,  because the Philistine hates the critic. Let such minorities rise financially and opposition to them will increase—envy will be added to discomfort and suspicion. . . .

Yet even in Eastern Europe a break between the socialist and communist  forces and the Jews had to come. (For a while this was obscured by the fact  that the Nazis literally drove these Jews into the arms of organized leftism.)  A latent, sometimes even an open, anti-Jewish sentiment existed in the ranks of Europe's socialist parties—and it was prominent in Red Russia  as well. By the time World War II broke out, Stalin had killed many  more Jews than Hitler. Needless to say, Jewish haute finance was never  really procommunist. If Jewish bankers did business with the Soviet  Union, gentile manufacturers and financiers are even more guilty in this  respect.

Antonio Machado, the great Spanish poet who died in exile, predicted  the inevitable turn to anti Judaism that Marxism would take. Marx  himself started it, of course: “What is the secular basis of Judaism?” he  asked. “Practical needs, egoism. What is the secular cult of the Jew?  Huckstery. What is his secular God? Money.” No wonder Goebbels declared eighty years later that National Socialism was “anti-Semitic” because it was socialistic.

Marxism does not harmonize with the Jewish mind, which is individualistic and commercially oriented; nor has it in any way a “proletarian” character. Marx ended his revolting pamphlet against the Jews, in his Die Frühschriften, with the remark that the true emancipation of the Jews  consisted in “the emancipation of society from Jewry” (his emphasis). This is precisely what the National Socialists attempted with the Endlösung [the Final Solution]. 

--Erik von Kuehnelt-Leddihn, Leftism Revisited: From de Sade and Marx to Hitler and Pol Pot (Washington, DC: Regnery Gateway, 1990), 119-121.

The Cancer Chapter in Rachel Carson's “Silent Spring” Incorporated the Nazi Belief that Industrialization Was Causing a Cancer Epidemic

America invented Earth Day in 1970 and gave birth to postwar environmentalism with Rachel Carson's Silent Spring (1962). Yet even these seemingly all-American products drew on ideas from across the Atlantic and from across the chasm of the Second World War; the cancer chapter in Rachel Carson's Silent Spring, for instance, incorporated the Nazi belief that industrialization was causing a cancer epidemic.

If there was a purely American strand of environmentalism, the demands it made on America were fairly limited. The costs of banning DDT—the principal policy consequence of Silent Spring—were mainly inflicted on Africans exposed to the risk of malaria. Thanks to the availability of cheap substitutes, phasing out CFCs a decade and a half later to preserve the ozone layer hardly required Americans to change their lifestyles. Preserving habitats and wildernesses did not necessitate transforming American society and culture.

—Rupert Darwall, Green Tyranny: Exposing the Totalitarian Roots of the Climate Industrial Complex (New York: Encounter Books, 2019), Kobo e-book.

There Can Be No Calculation Problem in the Evenly Rotating Economy (ERE) Because No Calculation There Is Necessary

The proof-by-listing-of-mathematical-equations is no proof at all. It applies, at best, only to the evenly rotating economy. Obviously, our whole discussion of the calculation problem applies to the real world and to it only. There can be no calculation problem in the ERE because no calculation there is necessary. Obviously, there is no need to calculate profits and losses when all future data are known from the beginning and where there are no profits and losses.  In the ERE, the best allocation of resources proceeds automatically. For Barone to demonstrate that the calculation difficulty does not exist in the ERE is not a solution; it is simply a mathematical belaboring of the obvious. The difficulty of calculation applies to the real world only.

—Murray N. Rothbard, Man, Economy, and State with Power and Market, 2nd ed. of the Scholar's ed. (Auburn, AL: Ludwig von Mises Institute, 2009), 616.

The New Deal Can Be Seen As a Veteran's Reunion Reconvening the Bureaucrats Who Had Managed the Wartime Economy in 1917-18

The war metaphor influenced nearly all of the New Deal’s reform programs and the institutions put in place to implement them. The NRA was modeled on the War Industries Board of 1917, established by Woodrow Wilson to subordinate industry to the needs of wartime production, and it was directed by a former general who had served on that body. The Civilian Conservation Corps was paramilitary in structure. Even programs that seemed far removed from military purposes—the construction of settlements, the regulation of rivers, and the production of electricity—were thoroughly infused with the aura of wartime mobilization. Indeed, the Tennessee Valley Authority was presented to the public as a continuation of a defense project from World War I.

Extending the military metaphor, the New Deal could be seen as a veteran’s reunion, reconvening the bureaucrats who had managed the wartime economy in 1917 and 1918. For them, the New Deal was an occasion to bring a chapter of history that had ended in disappointment, to a happier conclusion. Tugwell spoke for many when he said that the wartime economy had been a kind of socialism and regretfully added that with the war’s end a great experiment had been broken off in midstream. Such sentiments were echoed in the nostalgic euphoria with which early Fascism and National Socialism pursued their experiments. Journalists who witnessed events on both sides of the Atlantic found the popular mood in the first days of the New Deal reminiscent of the Fascist March on Rome in 1922 and the German elections in March 1933.

—Wolfgang Schivelbusch, Three New Deals: Reflections on Roosevelt's America, Mussolini's Italy, and Hitler's Germany, 1933-1939 (New York: Picador Henry Holt and Company, 2007), Kobo e-book.

The Technocrats Had No Problem Seeing the Similarities between the National Recovery Administration (NRA) Codes and Fascist Corporatism

Roosevelt himself once spoke in the presence of journalists of Mussolini and Stalin as his “blood brothers.” And during the public unveiling of the National Industrial Recovery Act, when Roosevelt referred to the industrial associations that had been reconstituted by the codes as “modern guilds,” those fluent in the jargon may well have recognized the reference to the corporatist system associated with Fascism. . . .

Rexford Tugwell, the man who was known as the most left-wing member of Roosevelt’s brain trust and who was frank about his admiration for the Soviet planned economy, was also open in his respect for Mussolini’s economic policies, though he otherwise rejected Fascism on ideological grounds. . . .

The technocrats who worked below the level of political decision making had no problem seeing the similarities between the NRA codes and Fascist corporatism. As one put it: “The Fascist Principles are very similar to those which we have been evolving here in America and so are of particular interest at this time.”

—Wolfgang Schivelbusch, Three New Deals: Reflections on Roosevelt's America, Mussolini's Italy, and Hitler's Germany, 1933-1939 (New York: Picador Henry Holt and Company, 2007), Kobo e-book.

Mussolini Asks, “Where Is America Headed?” Il Duce Answers, “It Is on the Road to Corporatism”

In his review of the Italian edition of New Frontiers, a book written by Roosevelt’s secretary of agriculture, Henry A. Wallace, Mussolini wrote:

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

—Wolfgang Schivelbusch, Three New Deals: Reflections on Roosevelt's America, Mussolini's Italy, and Hitler's Germany, 1933-1939 (New York: Picador Henry Holt and Company, 2007), Kobo e-book.

People Produce for Profit But To Imply That Production for Profit Does Not Mean Production to Satisfy Needs, Is Entirely False

We refer to the objection that in capitalist societies prices are used as indicators of profitability. People produce for profit, it is said. This statement is correct. If the commodity to be produced, or resold, is not demanded at a price that covers costs, it will not be produced or bought at that price. On the other hand, to imply that production for profit does not mean production to satisfy needs, is entirely false. The contrary is the case. The producers' and traders' every effort is directed towards anticipating and satisfying the needs of the buyers, in the last resort the needs of the public, such as they are expressed in effective demand. The success of producers and traders will depend on their ability to do this. Their ability to anticipate correctly will decide whether the result will be profit or loss, which in the long run will decide whether they can stay in business or not.

Professor Boris Brutzkus goes so far as to say that the producer and trader in a capitalist country, strictly speaking, does not need to keep books or to calculate, as prices will give him all necessary indications. If he does not take heed of prices, he risks losing his fortune and his position. In socialist countries where the state is the only owner of the means of production and the only distributing agency, this automatic purging process does not exist, so that, as Brutzkus says, “economic calculation is of far greater significance in the socialist, than in the capitalist society.” (Economic Planning in Soviet Russia, p. 11.)

—Trygve J. B. Hoff, appendix A of Economic Calculation in the Socialist Society, trans. M. A. Michael (London: William Hodge and Company, 1949), 198, 198n.

Marx Bristled at the Charge, Evidently a Tired Old Cliché by 1871, that Communism Was Impossible

In 1920 an Austrian economist named Ludwig von Mises published a short article in which he claimed that socialism was not a practical possibility (Mises 1920). Two years later this article was incorporated in a book (Mises 1922) which became widely read and much debated on the European continent. At that time socialism still appeared to be in the ascendant. Its recent disappointments in Germany, Austria, and Hungary seemed temporary setbacks, and the construction of a completely new economic order was triumphantly under way in, of all places, Russia. To many observers of socialism, friendly, apprehensive, or hostile, its eventual triumph appeared inescapable. Yet Mises contended that, however powerful the socialist movement might become, and no matter how many people wanted socialism, howsoever ardently, they would always be powerless to bring socialism into being, because socialism was inherently unfeasible.

There was nothing new in the assertion that socialism could not work in practice. Malthus’s 1798 Essay on the Principle of Population was written primarily to show that Godwin’s socialism (a form of agrarian anarchocommunism) was impossible. A passage in Marx’s Civil War in France shows him bristling at the charge, evidently a tired old cliché by 1871, that “communism” was “impossible.” What was new to Mises’s readers was his specific argument for the impossibility of socialism. Most earlier arguments had rested either on an appeal to human nature (especially the alleged need for appropriate material incentives) or on the Malthusian population theory. Arguments from human nature or motivation suffer from weaknesses which render them rather ineffective, and the Malthusian argument, though it was extraordinarily effective for a century, was eventually recognized to be unsound. Mises’s argument against the practical feasibility of what he calls “socialism” does not hinge upon questions of motivation, but rather claims that, with the best will in the world, humans are not able to operate a society on ‘socialist’ lines, because modern industry cannot be successfully guided or administered without the information provided by market prices of factors of production. Mises claims that even where there’s a will, there’s no way. It is part of Mises’s definition of socialism that factors of production are not exchanged on the market, so that under socialism there cannot be market prices of factors of production. Whether this really is integral to socialism is one of the questions I consider later. Mises’s argument, known as the Wirtschaftsrechnung or ‘economic calculation’ argument, had been proposed by several earlier writers, but little notice was taken, and no serious debate ensued until 1920.

—David Ramsay Steele, From Marx to Mises: Post-Capitalist Society and the Challenge of Economic Calculation (La Salle, IL: Open Court Publishing, 1992), e-book.

In The General Theory, Keynes Is Puzzled by the Austrian School's Use of the Term “Capital Consumption”

The matter was relevant to the Keynes–Hayek debate as well. As Horwitz (2011) notes: “In the only real mention of the Austrian view of capital in The General Theory, Keynes (1936) says:”

It seems probable that capital formation and capital consumption, as used by the Austrian school of economists, are not identical either with investment and disinvestment as defined above or with net investment and disinvestment. In particular, capital consumption is said to occur in circumstances where there is quite clearly no net decrease in capital equipment as defined above. I have, however, been unable to discover a reference to any passage where the meaning of these terms is clearly explained. The statement, for example, that capital formation occurs when there is a lengthening of the period of production does not much advance matters.

Horwitz continues:

Keynes’s dismissiveness aside, this passage reveals much about the differences in approaches. Keynes seems puzzled by the Austrian claim that capital can be “consumed” even though there is no net decrease in physical capital. The answer to the puzzle is that capital, for the Austrians, is about value, not about the physical object itself. If we build a machine in anticipation of some specific future demand and then discover our expectations were wrong, the machine will drop in value (which is a form of capital consumption), but it does not crumple into dust. Capital goods are valued in terms of the (discounted) value of the future consumption goods they will produce. If consumer demand changes, the value of the capital good changes (assuming it is insufficiently versatile to produce whatever new product is now in demand) and capital-value is lost, thus capital has been consumed even though the physical stock of capital has not changed. This [is important in any] discussion of the business cycle. (Horwitz, 2011)

—Peter Lewin and Nicolas Cachanosky, Austrian Capital Theory: A Modern Survey of the Essentials, Cambridge Elements in Austrian Economics (Cambridge, UK: Cambridge University Press, 2019), 31.

Governments Are Themselves Always, and Without Any Exception, the Greatest Spendthrifts in the Society, According to Adam Smith

Smith also wrote of the dangers of government spending with the kind of insight that the years since have done nothing to diminish the relevance of. The propensity of governments to profligate waste was recognized by Smith in ways that every generation has had to learn over again for itself:

It is the highest impertinence and presumption, therefore, in kings and ministers, to pretend to watch over the economy of private people … They [governments] are themselves always, and without any exception, the greatest spendthrifts in the society. Let them look well after their own expense, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will.

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

The Classical Economists Were Right; The Public Debt is a DOUBLE Burden on the Free Market

Lending to government, therefore, may be voluntary, but the process is hardly voluntary when considered as a whole. It is rather a voluntary participation in future confiscation to be committed by the government. In fact, lending to government twice involves diversion of private funds to the government: once when the loan is made, and private savings are diverted to government spending; and again when the government taxes or inflates (or borrows again) to obtain the money to repay the loan. Then, once more, a coerced diversion takes place from private producers to the government, the proceeds of which, after payment of the bureaucracy for handling services, accrues to the government bondholders. The latter have thus become a part of the State apparatus and are engaging in a “relation of State” with the tax-paying producers.

137 Hence, despite Buchanan’s criticism, the classical economists such as Mill were right: the public debt is a double burden on the free market; in the present, because resources are withdrawn from private to unproductive governmental employment; and in the future, when private citizens are taxed to pay the debt. Indeed, for Buchanan to be right, and the public debt to be no burden, two extreme conditions would have to be met: (1) the bondholder would have to tear up his bond, so that the loan would be a genuinely voluntary contribution to the government; and (2) the government would have to be a totally voluntary institution, subsisting on voluntary payments alone, not just for this particular debt, but for all in transactions with the rest of society.

—Murray N. Rothbard, Man, Economy, and State with Power and Market, 2nd ed. of the Scholar's ed. (Auburn, AL: Ludwig von Mises Institute, 2009), 1027, 1027n137.

Since the Purchasing Power of Money Can Vary, Some Economists Tried to Improve on the Free Market by Creating a Monetary Unit with Stable and Constant Purchasing Power

The knowledge that the purchasing power of money could vary led some economists to try to improve on the free market by creating, in some way, a monetary unit which would remain stable and constant in its purchasing power. All these stabilization plans, of course, involve in one way or another an attack on the gold or other commodity standard, since the value of gold fluctuates as a result of the continual changes in the supply of and the demand for gold. The stabilizers want the government to keep an arbitrary index of prices constant by pumping money into the economy when the index falls and taking money out when it rises. The outstanding proponent of “stable money,” Irving Fisher, revealed the reason for his urge toward stabilization in the following autobiographical passage: “I became increasingly aware of the imperative need of a stable yardstick of value. I had come into economics from mathematical physics, in which fixed units of measure contribute the essential starting point.” Apparently, Fisher did not realize that there could be fundamental differences in the nature of the sciences of physics and of purposeful human action.

It is difficult, indeed, to understand what the advantages of a stable value of money are supposed to be. One of the most frequently cited advantages, for example, is that debtors will no longer be harmed by unforeseen rises in the value of money, while creditors will no longer be harmed by unforeseen declines in its value. Yet if creditors and debtors want such a hedge against future changes, they have an easy way out on the free market. When they make their contracts, they can agree that repayment be made in a sum of money corrected by some agreed-upon index number of changes in the value of money. Such a voluntary tabular standard for business contracts has long been advocated by stabilizationists, who have been rather puzzled to find that a course which appears to them so beneficial is almost never adopted in business practice. Despite the multitude of index numbers and other schemes that have been proposed to businessmen by these economists, creditors and debtors have somehow failed to take advantage of them. Yet, while stabilization plans have made no headway among the groups that they would supposedly benefit the most, the stabilizationists have remained undaunted in their zeal to force their plans on the whole society by means of State coercion.

—Murray N. Rothbard, Man, Economy, and State with Power and Market, 2nd ed. of the Scholar's ed. (Auburn, AL: Ludwig von Mises Institute, 2009), 847-848.

The “National Income” Approach Is an Attempt to Justify the Marxian Idea That Under Capitalism Goods Are “Socially” Produced and Then “Appropriated” by Individuals

The concept of national income entirely obliterates the real conditions of production within a market economy. It implies the idea that it is not activities of individuals that bring about the improvement (or impairment) in the quantity of goods available, but something that is above and outside these activities. This mysterious something produces a quantity called “national income,” and then a second process “distributes” this quantity among the various individuals. The political meaning of this method is obvious. One criticizes the “inequality” prevailing in the “distribution” of national income. One taboos the question what makes the national income rise or drop and implies that there is no inequality in the contributions and achievements of the individuals that are generating the total quantity of national income.

If one raises the question what factors make the national income rise, one has only one answer: the improvement in equipment, the tools and machines employed in production, on the one hand, and the improvement in the utilization of the available equipment for the best possible satisfaction of human wants, on the other hand. The former is the effect of saving and the accumulation of capital, the latter of technological skill and of entrepreneurial activities. If one calls an increase in national income (not produced by inflation) economic progress, one cannot avoid establishing the fact that economic progress is the fruit of the endeavors of the savers, of the inventors, and of the entrepreneurs. What an unbiased analysis of the national income would have to show is first of all the patent inequality in the contribution of various individuals to the emergence of the magnitude called national income. It would furthermore have to show how the increase in the per-head quota of capital employed and the perfection of technological and entrepreneurial activities benefit—by raising the marginal productivity of labor and thereby wage rates and by raising the prices paid for the utilization of natural resources—also those classes of individuals who themselves did not contribute to the improvement of conditions and the rise in “national income.”

The “national income” approach is an abortive attempt to provide a justification for the Marxian idea that under capitalism goods are “socially” (gesellschaftlich) produced and then “appropriated” by individuals. It puts things upside down. In reality, the production processes are activities of individuals cooperating with one another. Each individual collaborator receives what his fellow men—competing with one another as buyers on the market—are prepared to pay for his contribution. For the sake of argument one may admit that, adding up the prices paid for every individual’s contribution, one may call the resulting total national income. But it is a gratuitous pastime to conclude that this total has been produced by the “nation” and to bemoan—neglecting the inequality of the various individuals’ contributions—the inequality in its alleged distribution.

—Ludwig von Mises, The Ultimate Foundation of Economic Science: An Essay on Method, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2006), 77-78.