Commodities as More or Less Saleable

It is an error in economics, as prevalent as it is patent, that all commodities, at a definite point of time and in a given market, may be assumed to stand to each other in a definite relation of exchange, in other words, may be mutually exchanged in definite quantities at will. It is not true that in any given market 10 cwt. of one article = 2 cwt. of another = 3 lbs. of a third article, and so on. The most cursory observation of market phenomena teaches us that it does not lie within our power, when we have bought an article for a certain price, to sell it again forthwith at the same price. If we but try to dispose of an article of clothing, a book, or a work of art, which we have just purchased, in the same market, even though it be all once, before the same juncture of conditions has altered, we shall easily convince ourselves of the fallaciousness of such an assumption. The price at which any one can at pleasure buy a commodity at a given market and a given point of time, and the price at which he can dispose of the same at pleasure, are two essentially different magnitudes.

This holds good of wholesale as well as retail prices. Even such marketable goods as corn, cotton, pig-iron, cannot be voluntarily disposed of for the price at which we have purchased them. Commerce and speculation would be the simplest things in the world, if the theory of the “objective equivalent in goods” were correct, if it were actually true, that in a given market and at a given moment commodities could be mutually converted at will in definite quantitative relations—could, in short, at a certain price be as easily disposed of as acquired. At any rate there is no such thing as a general saleableness of wares in this sense. The truth is, that even in the best organized markets, while we may be able to purchase when and what we like at a definite price, viz.: the purchasing price, we can only dispose of it again when and as we like at a loss, viz.: at the selling price.

The loss experienced by any one who is compelled to dispose of an article at a definite moment, as compared with the current purchasing prices, is a highly variable quantity, as a glance at trade and at markets of specific commodities will show. If corn or cotton is to be disposed of at an organised market, the seller will be in a position to do so in practically any quantity, at any time he pleases, at the current price, or at most with a loss of only a few pence on the total sum. If it be a question of disposing, in large quantities, of cloth or silk-stuffs at will, the seller will regularly have to content himself with a considerable percentage of diminution in the price. Far worse is the case of one who at a certain point of time has to get rid of astronomical instruments, anatomical preparations, Sanskrit writings, and such hardly marketable articles!

If we call any goods or wares more or less saleable, according to the greater or less facility with which they can be disposed of at a market at any convenient time at current purchasing prices, or with less or more diminution of the same, we can see by what has been said, that an obvious difference exists in this connection between commodities. Nevertheless, and in spite of its great practical significance, it cannot be said that this phenomenon has been much taken into account in economic science. The reason of this is in part the circumstance, that investigation into the phenomena of price has been directed almost exclusively to the quantities of the commodities exchanged, and not as well to the greater or less facility with which wares may be disposed of at normal prices. In part also the reason is the thorough-going abstract method by which the saleableness of goods has been treated, without due regard to all the circumstances of the case.

The man who goes to market with his wares intends as a rule to dispose of them, by no means at any price whatever, but at such as corresponds to the general economic situation. if we are going to inquire into the different degrees of saleableness in goods so as to show its bearing upon practical life, we can only do so by consulting the greater or less facility with which they may be disposed of at prices corresponding to the general economic situation, that is, at economic prices. A commodity is more or less saleable according as we are able, with more or less prospect of success, to dispose of it at prices corresponding to the general economic situation, at economic prices.

The interval of time, moreover, within which the disposal of a commodity at the economic price may be reckoned on, is of great significance in an inquiry into its degree of saleableness. It matters not whether the demand for a commodity be slight, or whether on other grounds its saleableness be small; if its owner can only bide his time, he will finally and in the long run be able to dispose of it at economic prices. Since, however, this condition is often absent in the actual course of business, there arises for practical purposes an important difference between those commodities, on the one hand, which we expect to dispose of at any given time at economic, or at least approximately economic, prices, and such goods, on the other hand, respecting which we have no such prospect, or at least not in the same degree, and to dispose of which at economic prices the owner foresees it will be necessary to wait for a longer or shorter period, or else to put up with a more or less sensible abatement in the price.

Again, account must be taken of the quantitative factor in the saleableness of commodities. Some commodities, in consequence of the development of markets and speculation, are able at any time to find a sale in practically any quantity at economic, approximately economic, prices. Other commodities can only find a sale at economic prices in smaller quantities, commensurate with the gradual growth of an effective demand, fetching a relatively reduced price in the case of a greater supply.

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The Problem of the Genesis of a Medium of Exchange

In primitive traffic the economic man is awaking but very gradually to an understanding of the economic advantages to be gained by exploitation of existing opportunities of exchange. His aims are directed first and foremost, in accordance with the simplicity of all primitive culture, only at what lies first to hand. And only in that proportion does the value in use of the commodities he seeks to acquire, come into account in his bargaining. Under such conditions each man is intent to get by way of exchange just such goods as he directly needs, and to reject those of which he has no need at all, or with which he is already sufficiently provided. It is clear then, that in those circumstances the number of bargains actually concluded must lie within very narrow limits. Consider how seldom it is the case, that a commodity owned by somebody is of less value in use than another commodity owned by somebody else! And for the latter just the opposite relation is the case. But how much more seldom does it happen that these two bodies meet! Think, indeed, of the peculiar difficulties obstructing the immediate barter of goods in those cases, where supply and demand do not quantitatively coincide; where, e.g., an indivisible commodity is to be exchanged for a variety of goods in the possession of different person, or indeed for such commodities as are only in demand at different times and can be supplied only by different persons! Even in the relatively simple and so often recurring case, where an economic unit, A, requires a commodity possessed by B, and B requires one possessed by C, while C wants one that is owned by A—even here, under a rule of mere barter, the exchange of the goods in question would as a rule be of necessity left undone.

These difficulties would have proved absolutely insurmountable obstacles to the progress of traffic, and at the same time to the production of goods not commanding a regular sale, had there not lain a remedy in the very nature of things, to wit, the different degrees of saleableness (Absatzfahigkeit) of commodities. The difference existing in this respect between articles of commerce is of the highest degree of significance for the theory of money, and of the market in general. And the failure to turn it adequately to account in explaining the phenomena of trade, constitutes not only as such a lamentable breach in our science, but also one of the essential causes of the backward state of monetary theory. The theory of money necessarily presupposes a theory of the saleableness of goods. If we grasp this, we shall be able to understand how the almost unlimited saleableness of money is only a special case,—presenting only a difference of degree—of a generic phenomenon of economic life—namely, the difference in the saleableness of commodities in general.

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The Origins Of Money by Carl Menger

I. Introduction
There is a phenomenon which has from of old and in a peculiar degree attracted the attention of social philosophers and practical economists, the fact of certain commodities (these being in advanced civilizations coined pieces of gold and silver, together subsequently with documents representing those coins) becoming universally acceptable media of exchange. It is obvious even to the most ordinary intelligence, that a commodity should be given up by its owner in exchange for another more useful to him. But that every economic unit in a nation should be ready to exchange his goods for little metal disks apparently useless as such, or for documents representing the latter, is a procedure so opposed to the ordinary course of things, that we cannot well wonder if even a distinguished thinker like Savigny finds it downright “mysterious.”

It must not be supposed that the form of coin, or document, employed as current-money, constitutes the enigma in this phenomenon. We may look away from these forms and go back to earlier stages of economic development, or indeed to what still obtains in countries here and there, where we find the precious metals in a uncoined state serving as the medium of exchange, and even certain other commodities, cattle, skins, cubes of tea, slabs of salt, cowrie-shells, etc.; still we are confronted by this phenomenon, still we have to explain why it is that the economic man is ready to accept a certain kind of commodity, even if he does not need it, or if his need of it is already supplied, in exchange for all the goods he has brought to market, while it is none the less what he needs that he consults in the first instance, with respect to the goods he intends to acquire in the course of his transactions.

And hence there runs, from the first essays of reflective contemplation of a social phenomena down to our own times, an uninterrupted chain of disquisitions upon the nature and specific qualities of money in its relation to all that constitutes traffic. Philosophers, jurists, and historians, as well as economists, and even naturalists and mathematicians, have dealt with this notable problem, and there is no civilized people that has not furnished its quota to the abundant literature thereon. What is the nature of those little disks or documents, which in themselves seem to serve no useful purpose, and which nevertheless, in contradiction to the rest of experience, pass from one hand to another in exchange for the most useful commodities, nay, for which every one is so eagerly bent on surrendering his wares? Is money an organic member in the world of commodities, or is it an economic anomaly? Are we to refer its commercial currency and its value in trade to the same causes conditioning those of other goods, or are they the distinct product of convention and authority?


II. Attempts at Solution Hitherto
Thus far it can hardly be claimed for the results of investigation into the problem above stated, that they are commensurate either with the great development in historic research generally, or with the outlay of time and intellect expended in efforts at solution. The enigmatic phenomenon of money is even at this day without an explanation that satisfies; nor is there yet agreement on the most fundamental questions of its nature and functions. Even at this day we have no satisfactory theory of money.

The idea which lay first to hand for an explanation of the specific function of money as a universal current medium of exchange, was to refer it to a general convention, or a legal dispensation. The problem, which science has here to solve, consists in giving an explanation of a general, homogeneous course of action pursued by human beings when engaged in traffic, which, taken concretely, makes unquestionably for the common interest, and yet which seems to conflict with the nearest and immediate interests of contracting individuals. Under such circumstances what could lie more contiguous than the notion of referring the foregoing procedure to causes lying outside the sphere of individual considerations? To assume that certain commodities, the precious metals in particular, had been exalted into the medium of exchange by general convention or law, in the interest of commonweal, solved the difficulty, and solved it apparently the more easily and naturally inasmuch as the shape of the coins seemed to be a token of state regulation. Such in fact is the opinion of Plato, Aristotle, and the Roman jurists, closely followed by the mediaeval writers. Even the more modern developments in the theory of money have not in substance got beyond this standpoint.

Tested more closely, the assumption underlying this theory gave room to grave doubts. An event of such high and universal significance and of notoriety so inevitable, as the establishment by law or convention of a universal medium of exchange, would certainly have been retained in the memory of man, the more certainly inasmuch as it would have had to be performed in a great number of places. Yet no historical monument gives us trustworthy tidings of any transactions either conferring distinct recognition on media of exchange already in use, or referring to their adoption by peoples of comparatively recent culture, much less testifying to an initiation of the earliest ages of economic civilization in the use of money.

And in fact the majority of theorists on this subject do not stop at the explanation of money as stated above. The peculiar adaptability of the precious metals for purposes of currency and coining was noticed by Aristotle, Xenophon, and Pliny, and to a far greater extent by John Law, Adam Smith and his disciples, who all seek a further explanation of the choice made of them as media of exchange, in their special qualifications. Nevertheless it is clear that the choice of the precious metals by law and convention, even if made in consequence of their peculiar adaptability for monetary purposes, presupposes the pragmatic origin of money, and selection of those metals, and that presupposition is unhistorical. Nor do even the theorists above mentioned honestly face the problem that is to be solved, to wit, the explaining how it has come to pass that certain commodities (the precious metals at certain stages of culture) should be promoted amongst the mass of all other commodities, and accepted as the generally acknowledged media of exchange. It is a question concerning not only the origin but also the nature of money and its position in relation to all other commodities.

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A Walk on the Supply Side

Establishment historians of economic thought—they of the Smith-Marx-Marshall variety—have a compelling need to end their saga with a chapter on the latest Great Man, the latest savior and final culmination of economic science. The last consensus choice was, of course, John Maynard Keynes, but his General Theory is now a half-century old, and economists have for some time been looking around for a new candidate for that final chapter. For a while, Joseph Schumpeter had a brief run, but his problem was that his work was largely written before the General Theory. Milton Friedman and monetarism lasted a bit longer, but suffered from two grave defects: (1) the lack of anything resembling a great, integrative work; and (2) the fact that monetarism and Chicago School Economics is really only a gloss on theories that had been hammered out before the Keynesian Era by Irving Fisher and by Frank Knight and his colleagues at the University of Chicago. Was there nothing new to write about since Keynes?

Since the mid 1970s, a school of thought has made its mark that at least gives the impression of something brand new. And since economists, like the Supreme Court, follow the election returns, “supply-side economics” has become noteworthy.

Supply-side economics has been hampered among students of contemporary economics in lacking anything like a grand treatise, or even a single major leader, and there is scarcely unanimity among its practitioners. But it has been able to take shrewd advantage of highly placed converts in the media and easy access to politicians and think tanks. Already it has begun to make its way into last chapters of works on economic thought.

A central theme of the supply-side is that a sharp cut in marginal income-tax rates will increase incentives to work and save, and therefore investment and production. That way, few people could take exception. But there are other problems involved. For at least in the lands of the famous Laffer Curve, income tax cuts were treated as the panacea for deficits; drastic cuts would so increase revenue as allegedly to yield a balanced budget. Yet there was no evidence whatever for this claim, and indeed, the likelihood is quite the other way. It is true that if income-tax rates were 98% and were cut to 90%, there would probably be an increase in revenue; but at the far lower tax levels we have been at, there is no warrant for this easy assumption. In fact, historically, increases in tax rates have been followed by increases in revenue and vice versa.

But there is a deeper problem with supply-side than the inflated claims of the Laffer Curve. Common to all supply-siders is nonchalance about total government spending and therefore deficits. The supply-siders do not care that tight government spending takes resources that would have gone into the private sector and diverts it to the public sector. They care only about taxes. Indeed, their attitude toward deficits approaches the old Keynesian “we only owe it to ourselves.” Worse than that: the supply-siders want to maintain the current swollen levels of federal spending. As professed “populists,” their basic argument is that the people want the current level of spending and the people should not be denied.
Even more curious than the supply-sider attitude toward spending is their viewpoint on money. On the one hand, they say they are for hard money and an end to inflation by going back to the “gold standard.” On the other hand, they have consistently attacked the Paul Volcker Federal Reserve, not for being too inflationist, but for imposing “too tight” money and thereby “crippling economic growth.”
In short, these self-styled “conservative populists” begin to sound like old-fashioned populists in their devotion to inflation and cheap money. But how to square that with their championing of the gold standard?

In the answer to this question lies the key to the heart of the seeming contradictions of the new supply-side economics. The “gold standard” they want provides only the illusion of a gold standard without the substance. The banks would not have to redeem in gold coin, and the Fed would have the right to change the definition of the gold dollar at will, as a device to fine-tune the economy. In short, what the supply-siders want is not the old hard-money gold standard, but the phony “gold standard” of the Bretton Woods era, which collapsed under the bows of inflation and money management by the Fed.
The heart of supply-side doctrine is revealed in its best-selling philosophic manifesto, The Way the World Works by Jude Wanniski. Wanniski’s view is that the people, the masses, are always right, and have always been right through history.

In economics, he claims, the masses want a massive welfare state, drastic income-tax cuts, and a balanced budget. How can these contradictory aims be achieved? By the legerdemain of the Laffer Curve. And in the monetary sphere, we might add, what the masses seem to want is inflation and cheap money along with a return to the gold standard. Hence, fueled by the axiom that the public is always right, the supply-siders propose to give the public what they want by giving them an inflationary, cheap-money Fed plus the illusion of stability through a phony gold standard.

The supply-side aim is therefore “democratically” to give the public what they want, and in this case the best definition of “democracy” is that of H. L. Mencken: “Democracy is the view that the people know what they want, and deserve to get it good and hard.”

Murray N. Rothbard

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The Coming World Central Bank

International statists have long dreamed of a world currency and a world central bank. Now it looks as if their dream may come true.
European governments have targeted 1992 for abolishing individual European currencies and replacing them with the European Currency Unit, the Ecu. Next they plan to set up a European central bank. The next step is the merger of the Federal Reserve, the European central bank, and the Bank of Japan into one world central bank.

The Ecu is a basket of ten European currencies weighted according to their respective country’s economic strength. The German mark gets the highest weight while the Irish pound, the Danish krone, and the Greek drachma get lower. The Ecu doesn’t qualify as a working currency yet, but it is already being used by international banks and multinational corporations. And traveler’s checks denominated in Ecus are also popular in Europe.

The Ecu first appeared in 1979. Its creators quickly found that its usefulness was limited without a clearing system, so Credit Lyonnais of Paris and Morgan Guaranty Bank of New York formed the Ecu Banking Association, made up of top central bankers and government officials. In March 1986 they set up the European Investment Bank and SWIFT (the Society for Worldwide Interbank Financial Telecommunications) to process Ecu transactions. Within a few months, all major central banks had signed on, and today, Ecu transactions represent the fifth largest trading volume in international currency markets.

The big push for the European central bank began after the October 1987 stock market crash as politicians seized the moment of crisis to advance their agenda. “The logic of developments . . . demand that the European currency takes over from the national ones,” argued socialist French President Francois Mitterrand.
In November 1987, European politicians, businessmen, and bankers formed the Action Committee for Europe to promote the European central bank, arguing that Europe needs one currency and “a common authority to manage it.”

The European central bank (ECB) will be modeled after the Federal Reserve. Like the Fed in 1913, it will have the institutional appearance of decentralization, but also like the Fed it will be run by a cartel of big bankers in collusion with politicians at the expense of the public.

Margaret Thatcher is the only influential holdout in Europe. And she objects because she thinks the influence of Germany’s central bank will allow less inflation than she wants! But like all central banks, the ECB is designed to inflate. And it will have a particularly free hand. With twelve separate currencies, exchange rate fluctuations allow people to sell more inflationary currencies for the stronger ones, providing some constraint on inflation. That will no longer be the case with the Ecu.

The head of the European Monetary System, former French President Valery Giscard d’Estaing, says Thatcher will join when the Ecu becomes “a real currency.” However, no government or group of governments can create a currency out of thin air. They must pay attention to the economic laws that Ludwig von Mises proved with his “regression theorem,” namely, that currencies must originate in the free market. But unlike the International Monetary Funds Special Drawing Rights (SDRs), European governments did not create the Ecu out of nothing. It is composed of existing currencies which in turn had their origins in gold and silver.

The plan for the transition has central banks fixing the trading range of the Ecu relative to other currencies while allowing them to freely circulate side by side. Then governments will overvalue the Ecu relative to other European currencies, and people will sell their pounds, lira, and marks for the Ecu, putting into effect a kind of backwards Gresham’s Law.

“There is one hitch,” says Forbes magazine. “Although currencies that make up the Ecu maintain a balance relative to one another, the entire currency basket fluctuates against the dollar, so cashing in Ecus for dollars could result in a gain or a loss.”

One of the few constraints now operating on the Fed is that if it inflates too much, people will dump the dollar for a more stable currency. That’s why there is a push to achieve international monetary “stability” (that is, equal rates of inflation) by cartelizing what will then be three remaining central banks of the industrialized world into one world central bank charged with manipulating one world currency.

The Economist of London says that “Thirty years from now, Americans, Japanese, Europeans, and people in many other rich countries” will be “paying for their shopping with the same currency. Prices will be quoted not in dollars, yen, or D-marks” but in terms of a new world currency.

Central banking is a horrendous idea to begin with. Merging central banks will be even worse. The resulting institution would become, as Dr. Edwin Vieira has remarked, “the biggest agent of economic and political irresponsibility the world has ever seen.” Today, if the U.S. Congress has a sudden fit of economic sanity, it could restrict the Fed’s power. The mere threat of that serves as a limit. But the world central bank would be subject to no authority.
The world central bank might be based on the International Monetary Fund or the World Bank, says the Economist. But I think the more likely candidate is the Bank for International Settlements (BIS), the “central banker’s bank” in Basle, Switzerland. World central bankers have been holding “consultative meetings” there once a month for over a year. Recently, the meetings have concentrated on giving the BIS “lender of last resort functions and responsibilities.” That means the power to create money and credit out of thin air.

They all want, as Banker magazine noted, “a world in which national policy authority is greatly reduced, and replaced by more powerful international policy-making bodies.”
Finance Minister Edouard Balladur of France writes in the Wall Street Journal that we should “entrust a small group of distinguished people of unquestionable moral authority” with the job of designing “a world order” that is “binding on all.” But such an elitist idea would only produce a monster. That is why those of us who believe in individual liberty and free markets must actively oppose this plan, despite the proponents’ use of free-market rhetoric. (One free-market publication praised the Ecu as “an extension of Hayek’s work on competitive currency.”)
None of this is to say that I approve of the status quo. The world monetary system is shaky. The system of floating exchange rates between fiat currencies only adds to the volatility. And we do need more international cooperation. But we want economic integration without political integration.

We all know the troubles we have dealing with city hall, let alone the state house or Washington, D.C. A world system would be unimaginably worse. Internationally as well as domestically, the answers to economic problems are free markets, free trade, free labor, and a gold standard. All would build the only kind of world economic order consistent with sound economics and individual freedom.

Ron Paul

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Brothers Under the Skin

Republican or Democrat, all four of these Keynesians differ only in degree. For example, liberal Keynesians think saving is ridiculous, and want government to discourage it, whereas Boskin thinks that some saving is OK.

There are as many varieties of Keynesian economics as there are economists in Washington, D.C. Its doctrines are muddy and open to different interpretations, which is one reason it’s so popular: it can be used to justify any interventionist policy, Republican or Democrat.

The Keynesian answer to every economic ill is government stimulation of total demand to increase consumption, investment, and prices. How is this “aggregate demand” to be stimulated? Through government spending and deficits, funded by taxation during booms and inflation during busts.
Before Keynes, most non-socialist economists held to some sort of sound economics. There were no models pretending that the whole of the economy, with millions of individuals and billions of decisions, could be crammed into a group of equations. Economic laws and the logic of human action governed economists’ thinking, so most economists advocated a free market.

That ended with the “Keynesian revolution,” which gave the first intellectual justification to what politicians wanted to do anyway. All of a sudden, economists—who used to criticize inflation, deficits, and high spending—were applauding these policies.

Not surprisingly, Keynesians of one stripe or another have filled prominent posts in every administration since Herbert Hoover (and his advisors were proto-Keynesians). FDR took all of Keynes’s propositions seriously, and sought to centralize investment decisions in Washington and drive prices up through the destruction of wealth (burning crops, killing animals, inflating the money supply, and raising taxes). He also hired the unemployed for unwanted and unnecessary tasks, and cartelized business and banking in the name of promoting a higher level of coordination.

FDR-style Keynesianism is rare today. But the basic themes of Keynesian economics still constitute the mainstream: that countercyclical fiscal policy is necessary to compensate for the free market; that investment and consumption are in lock-step, and when one is primed, the other booms; that there is a necessary trade-off between inflation and unemployment; that interest rates are properly manipulated by the central bank, as is the supply of money; that this monetary manipulation can successfully redirect investment; that inflation promotes growth; that consumption is economically superior to savings; and that the free market cannot properly allocate resources. All are exactly wrong, but no one—aside from the Austrian school—has ever challenged the fundamental Keynesian assumptions.

Today, most prominent economists reflect the theory’s bad policy implications to one degree or another. And that is true of these four economists, who although they may be competitors, are Keynesian brothers under the skin. They also share an ambition to use their undoubted intellectual powers to serve big government and thus advance their careers. As Joseph A. Pechman of the liberal Brookings Institution says: All are “made from the same cloth” (NYT, 6/5/88).

Ludwig von Mises discussed such men in Human Action (1966 [1949], p. 869):
The early economists devoted themselves to the study of the problems of economics. . . . They never conceived of economics as a profession. The development of a profession of economists is an offshoot of interventionism [with] the specialist who is instrumental in designing various measures of government interference. . . . He is an expert . . . at hindering the operation of the market economy.

There are thousands and thousands of such professional experts busy in the bureaus of the governments and of the various political parties and pressure groups . . . and pressure-group periodicals. . . . The eminent role they play is one of the most characteristic features of our age of interventionism.
There can be no doubt that [this] class of men . . . includes extremely talented individuals. . . . But the philosophy that guides their activities narrows their horizon. By virtue of their connection with definite parties and pressure groups, eager to acquire special privileges, they become one-sided. They shut their eyes to the remoter consequences of the policies they are advocating. With them nothing counts but the short-run concerns of the group they are serving. The ultimate aim of their efforts is to make their clients prosper at the expense of other people.

From examining these four men, we can know that big government and its associated special interests cannot lose in 1988. Yes, the subsidies may go to one interest group rather than another, but both sides agree on political control of our economic lives, and on higher taxes and more state planning. No matter who is elected, Keynesianism will be in control.

For that, we need economists who share the vision of Ludwig von Mises, and instead of promoting the interests of big government, oppose any interference with the peaceful prosperity of the free market.
Robert Reich

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Who Really Benefits From Foreign Aid?

A coalition of Third World regimes, businessmen, and bureaucrats is scheming for your wallet.
What they want is more: more tax dollars extracted from Americans to redistribute under the name of “foreign aid,” allegedly to lend a helping hand to “developing” countries so they can climb out of poverty.
Opponents of such policies are said to be selfish and uncaring, or perhaps they have some other more fundamental character flaw. American taxpayers are told to sacrifice their paychecks for the greater good of the poor around the world. How it is that the United States, Britain, Switzerland, Canada, Australia, Sweden, etc. were able to develop without foreign aid is never explained.
Assertions, emotion, and power drive these aid programs; not facts or reason. Peter T. Bauer and others have demonstrated that the hundreds of billions flowing from developed nations to the Less Developed Countries (LDCs) actually retard progress in those countries while bleeding the donor nations of precious capital.

U.S. government foreign aid, in all its various forms, is not assistance to poor people. It is aid to foreign governments, political regimes almost always of an authoritarian or totalitarian nature. Very little of this money ever gets to the poor people in those foreign lands.
Foreign aid is not charity from rich people to poor people. It is money extracted by government coercion (taxes) from working-class Americans and sent to the ruling cliques in foreign regimes. Politicians and civil servants in those countries dish it out to favored special interests, regardless of any “need.”
That’s why U.S. foreign aid dollars have helped buy, among many other things, modern TV stations in places where there is no electricity; dress suits for Greek undertakers; extra wives for Kenyan government officials; stretch limousines for African dictators; wasteful “national pride” boondoggles such as the construction of expensive capitals (Brasilia, Islamabad, and Dodoma in Tanzania); and filled the Swiss bank accounts of corrupt politicians. And since foreign aid goes to ruling elites, it helps entrench them in power.
Much of the largesse is pumped into state-run industries and collectivist programs run by socialist bureaucrats. By shoring up socialist systems, our foreign aid money virtually assures economic stagnation, political oppression, and therefore even fewer opportunities for poor people to climb out of their misery.
Julius Nyerere, Tanzania’s Marxist dictator, has received hundreds of millions in U.S. foreign aid, even while he brutalizes peasants, pulverizes whole villages, and murders political prisoners who dares to question his forced collectivization.
In Ethiopia, the socialist government uses food to control the population and as a weapon against dissenters. Its collectivist agricultural policies have—not surprisingly—caused famine. But foreign aid has only strengthened the grip of the dictatorial regime over its abject subjects.
Moreover, U.S. foreign aid has often been granted to both sides in the endless parade of wars between feuding nation-states: India and Pakistan, Ethiopia and Somalia, Israel and Egypt, Algeria and Morocco, etc. Of course, the munitions manufacturers don’t mind; they receive more orders for their wares from sovereign belligerents whose bank accounts are replenished by American citizens.
The foreign-aid scam also benefits politically privileged U.S. corporations. The recipient national regime must spend some of the aid money to purchase goods from US. exporters, with taxpayer-subsidized loans through the Export-Import Bank, the Commodity Credit Corporation, or the Overseas Private Investment Corporation. The corporation, the recipient government, U.S. bureaucrats—everybody wins in such a transaction. Except the U.S. taxpayer and the poor citizens of the foreign land.
From 1946 to the present, the U.S. government has given over $400 billion in foreign aid to other governments. Figuring the lost interest on that amount, the real total comes to a staggering $2.6 trillion. And foreign aid has zoomed during the Reagan years. In 1979, the U.S. government doled out $9.5 billion; this year it will waste over $21 billion on foreign aid. Few other budget items have increased as fast. The Reagan administration has spent more than $114 billion dollars on foreign aid—more than the total of foreign aid spending of the Nixon, Ford, and Carter administrations put together. The president once even threatened a veto because Congress had appropriated too little for foreign aid.

The U.S. Constitution nowhere permits the taxing of American citizens for the benefit of foreign governments, U.S. corporations, or U.S. bureaucrats. For the sake of morality, efficiency, and fairness, let’s leave foreign aid to those private organizations that actually help, and get the government out.


Sam Wells

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The Regulatory-Industrial Complex

The free market is great for consumers and producers, but some businessmen find government regulation an easier road to profits. That’s why they try to use government to protect them from the rivalry of the market.

There is nothing wrong with wanting to be on top, of course, so long as it is done peacefully. But when businessmen use the government to gain a monopoly, they cease being market competitors and become a political pressure group.

Some businesses advocate “fair trade” laws against “unfair competition,” government price floors, licenses, taxes on competitors, and other political measures.

Taxi monopolies are powerful on the city level. They lobby government to make new drivers go through lengthy procedures or acquire expensive licenses to own a taxi. These laws don’t exist to protect the public; they protect a privileged industry from competition and work against the public interest.

Dairy monopolies and utility companies are powerful on the state level. In New York, the dairy industry lobbies for protection from its New Jersey competitors who sell milk at a cheaper price. Utility companies get special privileges to be the sole provider of water, electricity, and natural gas. In all these cases, the consumer loses his freedom to choose.

At the national level, to take just two examples, the Post Office has a monopoly on mail and the Federal Reserve has a monopoly on money and banking.

Socialism is the final monopoly. Here the government allows no competition and only limited trade. Nationalizing an industry puts monopolists in power by merging their competitors under their control. Nationalizing an entire economy gives those on top the biggest boon of all. It’s no coincidence that statist U.S. industrialists like Dwayne Andreas of Archer-Daniels-Midland and Armand Hammer of Occidental Petroleum get along so well with the elites that run the Soviet economy.

In each case—local, state, and federal monopolies and under socialism—monopolists find that they gain more through special privileges from the government than they do from the free market. And they do so at our expense.

This isn’t something new. At the turn of the century, as historian Gabriel Kolko explains in the Triumph of Conservatism (1963):
Competition was unacceptable to many key business and financial interests. . . . As new competitors sprang up, and as economic power was diffused throughout an expanding nation, it became apparent to many important businessmen that only the national government could “rationalize” the economy. Although specific conditions varied from industry to industry, internal problems that could be solved only by political means were the common denominator in those industries whose leaders advocated greater federal regulation. Ironically, contrary to the consensus of historians, it was not the existence of monopoly that caused the federal government to intervene in the economy, but the lack of it.
One classic example is the Interstate Commerce Commission, a federal agency set up at the behest of the railroad industry in 1887, which has been a menace to consumers ever since. The ICC was this nation’s first “independent” regulatory agency, charged with preventing “cut-throat” competition in the transportation industry. The railroad industry sold it as a boon to consumers.

During the hearings on the Interstate Commerce Act of 1887, the leaders of the railroad industry lobbied hard for the ICC. Why? They wanted the government to outlaw price competition, which threatened established, old-line railroads. The ICC’s first action was to do exactly that. Over the years, the ICC brought less competition, higher prices, and lousy train service. Like a pact with Satan, the ICC eventually helped ossify and then destroy the railroad industry, but by that time, the original owners and managers had long since gone to their reward far richer than they would have been in a world of free competition.

The ICC—and other similar Progressive Era agencies like the FTC—set the stage for more cartelization under FDR’s National Industrial Recovery Act, which was drafted by Gerard Swope of General Electric, the Chamber of Commerce, the American Bar Association, and dozens of other business groups and leaders. As E. W. Hawley shows in his classic study, The New Deal and the Problem of Monopoly (1966), big business lobbied for the NIRA because they had a “vision of a business commonwealth, of a rational, cartelized business order in which the industrialists would plan and direct the economy, profits would be insured, and the government would take care of recalcitrant ‘chiselers.’”
In America, special interests are the minority. They are greatly outnumbered by taxpayers, voters, and competitors. But the interests get what they want in politics because they are well-organized, have well-defined goals, and can reward those in government who do their bidding. Consumers and taxpayers are spread out, disorganized, and pay a small marginal cost per intervention. Unfortunately, an interventionist economy tends to grant favors to well-organized minorities at the expense of the majority, even in a democracy where the will of the majority supposedly triumphs.

The special interests created the Interstate Commerce Commission, the Federal Reserve System, the Food and Drug Administration, the Federal Trade Commission, the Export-Import Bank, the Commodity Credit Corporation, the Securities and Exchange Commission, the Environmental Protection Agency, the Consumer Product Safety Commission, and a host of other agencies. In case after case, the agency served the special interests by promoting oligopoly and monopoly and retarding competition to the detriment of consumers.

The way to avoid such abuses is not by giving even more power to the political regulators who, after all, are already comfortably in bed with the vested interests.

The way to quash the regulatory-industrial complex is through a separation of Market and state, a strict adherence to the policy of laissez-faire. Only a purely free market will stop privilege-seeking businessmen from clustering around Washington like flies around a garbage can. Under a free market, the only road to profits will be to please the consumer.
Sam Wells

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How our Economic Constitution Has Deteriorated

Many people think of the Constitution as essentially unchanged, yet today’s document bears little resemblance to the original of 1787 in its relation to the economy. The original words remain, but they have been formally amended in critical ways; and reinterpreted by the Supreme Court so that their practical effect has become almost the opposite of the intent.

The original Constitution promoted economic development in many ways. For example, it resolved the disputes over the West by providing for the admission of new states on equal terms with the old, thereby fostering settlement of the vast interior. Provision for duty-free interstate trade increased productivity. The Constitution made state governments less intrusive by prohibiting their issuance of paper money and their passage of laws impairing the obligation of contracts.

By the mid-19th century, rapid economic growth had become the normal condition of the economy. But under the surface, an irresolvable contradiction was growing. The lump that would not digest was slavery.

In view of its importance in the southern economy and the deep disagreements between northerners and southerners about it, slavery received scant mention in the original Constitution. (The words “slave” and “slavery” do not appear at all.) Congress could not interfere with the international slave trade for 20 years; slaves escaping into free states had to be returned; and three-fifths of the slaves were counted in determining representation in Congress. Otherwise the Constitution left slavery to the states.
For seven decades, a succession of political compromises kept the conflict between North and South from boiling over, but finally either the will or the ability to fashion acceptable compromises ran out, and the Civil War ensued.

In the war’s aftermath the old Constitution was fundamentally altered. The Thirteenth Amendment abolished slavery. The Fourteenth guaranteed to all citizens, including the freed slaves, protection from state actions that would abridge the privileges and immunities of citizenship, deprive them of life, liberty, or property without due process, or deny them equal protection of the laws. The Fifteenth Amendment guaranteed the right of the freedmen to vote. The amendments of the 1860s transferred power from the states to the national government. Though disputes over states’ rights persisted, claims of dual sovereignty lost most of their force.

During the post-civil War era, Americans enjoyed unprecedented economic growth, an achievement favored by the Supreme Court’s insistence that due process of law included protection of economic liberties—rights of private property and freedom of contract. Then, government actions caused the economy to plunge into deep depression in the early 1930s. Governments at all levels responded by expanding their powers over economic affairs. At first the Supreme Court resisted many of these measures. Starting in 1937, though, the Court reversed so many important decisions on economic matters that its turnabout must be considered a constitutional revolution. The heart of the Court’s new position was a broad reading of the Commerce Clause. Practically everything, no matter how manifestly local, was seen as part of interstate commerce and therefore subject to regulation by Congress and its agencies.

During the past 50 years, the United States has developed a welfare state not much different from those of Western Europe. Economic affairs, once overwhelmingly private, have become pervasively politicized. Taxes now equal 40% of the national income—up from 13% as recently as 1929. The free-market economy has come to be regulated in minute and expensive detail, with the costs born largely by consumers. Citizens have lost much of the economic liberty their ancestors esteemed.
American traditions and political pressures have kept the government from totally destroying all private property rights. But the Constitution, which formerly served to guarantee economic liberties, no longer provides much if any substantial protection. One may well doubt whether the economic dynamism that made the average American rich by world standards will prove permanently compatible with a constitutional regime so permissive of governmental intrusion into economic affairs.

But the Constitution can be changed, as it has been changed before. In 1865 the Constitution gave the slaves freedom from their masters. We can hope that someday the Constitution will be changed again to give all Americans economic freedom from our masters in Washington.

Robert Higgs

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How Government Intervention Plagued Our 19th-Century Economy

The recessions and depressions of the 19th century are often cited as proof of the “inherent instability” of the free market. (Indeed, the promoters of the Federal Reserve System in 1913 argued for a central bank as a way of preventing future downturns!) This is, of course, a bum rap.

The 1800s were freer than today, but there was more than enough government intervention to cause serious setbacks in the economy. And Austrian trade cycle theory explains exactly how.

The source of the business cycle, Mises discovered, is government-engineered expansion of money and credit. Such a policy artificially depresses interest rates at first, deranges the structure of production by generating unsustainable malinvestments, and inevitably leads to contraction and painful readjustments.
The first economic calamity of the century occurred in 1808 when a federal embargo on overseas shipping produced widespread bankruptcies and unemployment. After that, five major cyclical depressions struck the American economy: in 1819, 1837, 1857, and 1893. The typical economic history text lists among the “causes” things like railroad speculation, stock crashes, trade imbalances, commodity price booms and busts, etc.

These are not, of course, causes at all, but merely symptoms. Only Austrian trade cycle theory as propounded by Ludwig von Mises, Murray N. Rothbard, and others, makes sense of the mess and provides a coherent explanation of these five depressions.

The 1819 collapse followed a flagrant credit expansion by the Second Bank of the United States, created by the feds in 1816. The definitive work on the experience is still Rothbard’s PhD thesis, The Panic of 1819.

Rothbard documented the extensive culpability of the Second Bank. In its very first year, it issued $23 million on a specie reserve of about $2.5 million. The expansion of credit, which eventually involved state banks as well, was actively encouraged by the U.S. Treasury. The government even made it legal for inflating banks to fraudulently suspend payment of specie, ripping off hapless depositors in the process.

Then, in a series of deliberate deflationary moves, the Second Bank pulled the rug out from under the very house of cards it had built. It forced a drastic reduction in the money supply starting as early as the middle of 1818. The depression, which came a few months later, was the unavoidable outcome of gross manipulation of money and credit.

Those who blame the gold standard for this debacle are wrong. In fact, the country was not even on a gold standard at the time. In 1792, the official policy was “bimetallism,” according to which silver and gold were to circulate side by side at a governmentally fixed ratio. (The ratio between the prices of any two commodities, including gold and silver, is always changing on the market, and an attempt to fix the ratio by government fiat always leads to trouble. In this instance, it forced the country onto a de facto silver standard from the start. The same sort of intervention proved to be a major factor in the later crisis of 1893.)

The Second Bank’s shenanigans created the depression of 1837. Anticipating a political battle to renew the Bank when its charter ran out in 1836, Bank authorities early in the decade embarked upon a rapid expansion of the money supply. Reserve ratios were pushed to their lowest levels of the entire antebellum period. Orchestrating “good times” through easy money was the Bank’s way of fighting hard-money, anti-central bank President Andrew Jackson.

Jackson, however, flattened the inflation by requiring specie in payment for federal lands and by vetoing the Bank’s charter. In the quick contraction that followed, the inflationary malinvestments promoted by the bank were liquidated. But Washington persisted with its policy of bimetallism. In addition, state and local governments responded to the 1837 collapse with a wave of anti-banking laws, outlawing banks altogether in some places and exacerbating the depression. This is hardly laissez-faire or gold standard behavior.

By the early 1850s, state governments got into the inflation act. Exerting control over their extensive network of state-chartered banks, they pressured the banks to monetize state debt. The result was another round of credit expansion, dangerous reduction of specie reserves, and a temporary, artificial boom in the economy, followed by panic and depression in 1857. Because the pressure on banks to monetize debt occurred principally in the Northern states, the subsequent collapse was considerably less pronounced in the South.

The general depression of 1873 also provides a clear example of government as the guilty party. In the prior decade, both Northern and Southern regimes abandoned a specie standard altogether and printed massive quantities of irredeemable, legal tender paper.

In the Confederacy, high taxes, a paper hyperinflation, and Northern scorched-earth military policies plunged the region into depression in 1865.

In the North, despite crippling tax hikes, revenues fell far short of the funds necessary to prosecute the war. No less than $5.2 billion in “greenbacks” were printed. At the war’s conclusion, a greenback dollar was worth only 35 cents in gold. The Northern economy struggled for a few more years, but with the complete cessation of paper inflation in the 1870s, collapse and readjustment began by 1873.
Recovery had barely commenced when the central government began a new form of monetary intervention, this one tied to silver. In 1878, Congress passed (over President Hayes’s veto) the Bland-Allison Act, which mandated the Treasury’s purchase of $2-$4 million in silver bullion per month. The metal was to be minted into silver dollars, each containing 371.25 grains of silver. Since the gold dollar was defined as 23.22 grains of gold, this established a ratio between the two metals of 16 to 1.

But the free-market value of silver in terms of gold was at least 18 to 1 in 1878. By overvaluing silver and undervaluing gold, Bland-Allison set Gresham’s Law into motion. “Bad” money (officially overvalued silver) began to drive “good” money (officially undervalued gold) out of circulation, deranging the nation’s finances and engendering a steady loss of confidence in the currency. On top of it all, Bland-Allison authorized the Treasury to issue paper silver certificates along with the depreciating silver dollars.

The inflationists of the period—who pushed for this intervention in the belief that “more money” would aid the economy in general and debtors in particular—were not satisfied. Throughout the 1880s, they pushed for even more inflation under the guise of “doing something for silver.”

Their crowning folly was enacted into law in 1890—the Sherman Silver Purchase Act. It required the Treasury to buy virtually the entire output of American silver mines—4.5 million ounces per month; mint it at 16 to 1 at a time when the gold/silver ratio in the free market was actually greater than 30 to 1; and issue new paper “Treasury Notes” simultaneously.

Drugged by easy money, the economy took on the classic symptoms of a boom. Unemployment and interest rates in 1891 and 1892 fell dramatically. Capital goods industries worked feverishly. Foreigners, however, were the first to sense danger and began withdrawing their capital from America as early as 1891.

The economic reversal started in 1893, and led to the worst depression in 50 years. It also produced one of the more scholarly addresses ever delivered before the House of Representatives. Congressman Bourke Cochran of New York, a first-rate historian, traced the history of coinage in England and explained how debasing the currency led to recurrent depressions. Applying that principle to his day, he declared:
I think it safe to assert that every commercial crisis can be traced to an unnecessary inflation of the currency, or to an improvident expansion of credit. The operation of the Sherman Law has been to flood this country with paper money without providing any method whatever for its redemption. The circulating medium has become so redundant that the channels of commerce have overflowed and gold has been expelled.

Viewing the crisis of 1893, contemporary historian Ernest Ludlow Bogart said:
It must be said that the net results of this experiment of “managed currency,” that is, one in which the government undertakes to provide the necessary money for the people, were disastrous. For the maintenance of a suitable supply, the operation of normal economic forces is more reliable than the judgment of a legislative body.

The economy of 19th-century America was punctuated by serious economic setbacks. They were caused not by the free market, but by the destructive manipulations and interventions of government authorities. This was not a century of government as innocent bystander, but of government as the incessant bungler, running roughshod over the principle of sound and honest money. (Although, without a Fed and other government interventions, the recoveries from these panics were quick.)
We can learn much from the experiences sketched here. Monetary reform, if it is to be genuine and successful, must sever money and banking from politics. That’s why a modern gold standard must have: no central bank; no fixed rations between gold and silver; no bail-outs; no suspension of gold payments or other bank frauds; no monetization of debt; and no inflation of the money supply, all of which have proved so disastrous in the past.

Anything short of the discipline and honesty of a true gold coin standard will inevitably self-destruct, consuming our wealth and liberties, and nurturing the omnipotent state.
Lawrence W. Reed

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The Balanced-Budget Amendment Hoax

It is a hallmark of the triumph of image over substance in modern society that an administration which has submitted to Congress budgets with the biggest deficits in American history should propose as a cure-all a constitutional amendment mandating a balanced budget. Apart from the high irony of such a proposal from such a source, the amendment-mongers don’t seem to realize that the same pressures of the democratic process that have led to permanent and growing deficits will also be at work on the courts that have acquired the exclusive power to interpret the Constitution. The federal courts are appointed by the executive and confirmed by the legislature, and are therefore part and parcel of the government structure.

Apart from these general strictures on rewriting the Constitution as a panacea for our ills, the various proposed balanced-budget amendments suffer from many deep flaws in themselves. The major defect is that they only require a balance of the future estimated budget, and not of the actual budget at the end of a given fiscal year. As we all should know by this time, economists and politicians are expert at submitting glittering projected future budgets that have only the foggiest relation to the actual reality of the future year. It will be duck soup for Congress to estimate a future balance; not so easy, however, to actually balance it. At the very least, any amendment should require the actual balancing of the budget at the end of each particular year.

Secondly, balancing the budget by increasing taxes is like curing influenza by shooting the patient; the cure is worse than the disease. Dimly recognizing this fact, most of the amendment proposals include a clause to limit federal taxation. But unfortunately, they do so by imposing a limit on revenues as a percentage of the national income or gross national product. It is absurd to include such a concept as “national income” in the fundamental law of the land; there is no such real entity, but only a statistical artifact, and an artifact that can and does wobble according to the political breeze. It is all too easy to include or exclude an enormous amount from this concept.

A third flaw highlights again the problem of treating “the budget” as a constitutional entity. As a means of making the deficit look less bleak, there has been an increasing tendency for the government to spend money on “off-budget” items that simply don’t get included in official expenses, and therefore don’t get added to the deficit. Any balanced-budget amendment would provide a field day for this kind of mass trickery on the American public.

We must here note a disturbing current tendency for “born again” pro-deficit economists in conservative ranks to propose that “capital” items be excluded from the federal budget altogether. This theory is based on an analogy with private firms and their “capital” versus “operating” budgets. One would think that allegedly free-market economists would not have the affrontery to apply this to government. Get this adopted, and the government could happily throw away money on any boondoggle, no matter how absurd, so long as they could call it an “investment in the future.” Here is a loophole in the balanced-budget amendment that would make any politician’s day!


A fourth problem is that the various proposals make it all too easy for Congress to override the amendment. Suppose Congress and/or the president violate the amendment. What then? Would the Supreme Court have the power to call the federal marshals and lock up the whole crew? To ask that question is to answer it. (Of course, by making the budget balance prospective instead of real, this problem would not even arise, since it would be almost impossible to violate the amendment at all.)
But isn’t half a loaf better than none? Isn’t it better to have an imperfect amendment than none at all? Half a loaf is indeed better than none, but even worse than no loaf is an elaborate camouflage system that fools the public into thinking that a loaf exists where there is really none at all. Or, to mix our metaphors, that the naked Emperor is really wearing clothes.

We now see the role of the balanced budget amendment in the minds of many if not most of its supporters. The purpose is not actually to balance the budget, for that would involve massive spending cuts that the Establishment, “conservative” or liberal, is not willing to contemplate.

The purpose is to continue deficits while deluding the public into thinking that the budget is, or will soon be, balanced. In that way, the public’s slipping confidence in the dollar will be shored up. Thus, the balanced-budget amendment turns out to be the fiscal counterpart of the supply-siders’ notorious proposal for a phony gold standard. In that scheme, the public would not be able to redeem its dollars in gold coin, the Fed would continue to manipulate and inflate, but all the while this inflationist policy would now be cloaked in the confidence-building mantle of gold.

In both plans, we would be dazzled by the shadow, the rhetoric of sound policy, while the same old program of cheap money and huge deficits would proceed unchecked. In both cases, the dominant ideology seems to be that of P. T. Barnum: “There’s a sucker born every minute.”
Murray N. Rothbard

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