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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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