Thursday, April 26, 2012

Are We Looking at the Wrong Depression? - Stephen Davies


The Freeman Online

Are We Looking at the Wrong Depression?

Today a lot of people are looking to economic history for help in understanding the current world economic situation and the options open to us. (This includes economists, many of whom have finally rediscovered an interest in economic history.)
Most of this attention is being paid to the Great Depression of the 1930s. However, it is worth pointing out the important ways in which the present situation differs from that of the 1930s. Many observers (most notably Paul Krugman) argue that we are presently in a classic liquidity trap, where monetary policy has no purchase on the real world economy. The main evidence for this is that despite massive expansion of the basic money supply by the Federal Reserve and other central banks, there has not been the kind of inflation that many had predicted. The argument is that this situation is similar to the one Keynes identified in the early 1930s and that therefore the same policy response—fiscal stimulus—is appropriate.
Leaving aside whether the “Keynesian” analysis and prescription were correct in the 1930s (or indeed whether that was the argument Keynes actually made), it is worth pointing out a number of big differences between the events of the last four years and those of 1929–32. Most important, we have not seen the kind of decline in prices that took place then; indeed there have been short-term spikes in a number of prices, notably food and fuel. Furthermore, and fortunately, there has not been the kind of dramatic collapse in economic activity and employment that we saw in the entire world in the early 1930s. Although the present unemployment situation in the United States is not good, it is not catastrophic in the way it was by 1932. In other parts of the world, notably the United Kingdom, job losses have actually been less than most economists feared and predicted. Moreover while there is economic stagnation or very low growth in the United States, Europe, and Japan, the world economy as a whole is still growing, even if at a slower rate than a few years ago. So far there has not been the kind of sharp and sustained decline in world trade and economic activity that happened after 1930.
In other words what we are seeing is stagnation in large parts of the world economy instead of a sudden and acute contraction globally.
Perhaps we are looking at the wrong “Great Depression.”
Until as late as the 1950s, “Great Depression” in economic history generally referred to the period between 1873 and 1879 (in the United States) or 1873 and 1896 (in the United Kingdom and much of Europe). When we look more closely at those years, the likeness to where we are now becomes noticeable. The “Long Depression” (as it has come to be known) was sparked by a global financial panic in 1873, which arose from the bursting of several speculative bubbles, particularly in railroads and real estate. The panic started in Europe, then had a second phase in the United States before returning to the other side of the Atlantic. What followed were 30 years of gradually declining prices (deflation) in most parts of the world. Agricultural prices collapsed. This caused serious hardship for many farmers and peasants, and led to a massive movement of labor from agriculture and the hard-hit parts of the world (such as southern Italy, Scandinavia, and Russia) to places like the United Kingdom, United States, and Argentina. Most historical GDP records show a significant slowdown of growth in most of the world for at least part of the period between 1873 and 1896. On the other hand there was not the kind of dramatic collapse seen after 1930.
However, this picture of prolonged stagnation needs to be severely qualified. One early observer who questioned this widespread perception at that time was the American economist and historian David Ames Wells. His argument, and that of many other economic historians, was summed up in a short work by S. B. Saul, The Myth of the Great Depression, 1873–96. Wells pointed out, among other things, that the years after 1873 saw very large increases in global output of a number of key products, not only in agriculture but also steel and a range of manufactured products. As Wells explained, this was because of an unprecedented series of innovations in both technology and business organization. In fact the 30 to 40 years after 1870 saw the advent of technologies that would define modern life, including electricity, the internal-combustion engine, the telephone, the diesel engine, and the modern petroleum industry.
As a result, the official figures are seriously misleading. While nominal wages stagnated or declined, real living standards increased because of the falling cost of products. Output increased, but this is not captured unless one applies a GDP inflator to account for the increasing value of money. So the Long Depression of the 1870s and 1880s was not a simple story of economic standstill.
So what happened? Essentially a set of innovations in technology and business organization made in the later eighteenth and early nineteenth centuries had exhausted their potential to raise productivity and growth by the 1860s. This, combined with mistaken policies, had led to malinvestment and a significant buildup of debt by the early 1870s in both Europe and the United States.
What followed, Irving Fisher argued, was a crisis brought about by the realization that many investments were not going to pay enough and the consequent need for sustained “deleveraging” (paying back or writing off of debt). At the same time there was a burst of technological and organizational innovation. This increased productivity and created many new products but also led to large adjustments as older industries and forms of employment shrank, prompting a large movement of labor. This took some time, so the costs of the transition in human terms were significant.
A shift in the focus of the world economy also took place—away from established areas such as the United Kingdom and France (both of which were more adversely affected by the changes and for a longer period than other parts of the world) toward the new developing parts of the world, such as Germany, the United States, northern Italy, and Japan. Significant parts of the population in many places were worse off, but the majority gained because of the rise in living standards brought about by technical innovation and the consequent “benign deflation.”
Increasingly it looks as though the world as a whole is going through the same kind of experience: an exhaustion of profitable investment opportunity in some places and sectors, leading to an artificially stimulated bubble the bursting of which has triggered sustained deleveraging and a decline in growth in many parts of the world. At the same time other parts of the world are enjoying continued growth. This is not simply “catch-up growth,” since much of it comes from a shift in activity brought about by the early stages of a new wave of innovation. There is going to be a change in the patterns and locations of employment, but a rise in living standards for the majority because of the innovation and global growth.
This means that a fiscal stimulus would be ineffective and wasteful, since the underlying problem is one of a long-term economic realignment rather than a simple decline in demand.


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Wednesday, April 25, 2012

John Stossel - Obamacare Abominations

The Freeman Online

Obamacare Abominations

John Stossel



President Obama says his health care “reform” will be good for business.
Business has learned the truth.
Three successful businessmen explained to me how Obamacare is a reason that unemployment stays high. Its length and complexity make businessmen wary of expanding.
Mike Whalen, CEO of Heart of America Group, which runs hotels and restaurants, said that when he asked his company’s health insurance experts to summarize the impact of Obamacare, “the three of them kind of looked at each other and said, ‘We’ve gone to seminar after seminar, and, Mike, we can’t tell you.’ I think that just kind of sums up the uncertainty.”
Brad Anderson, CEO of Best Buy, added that Obamacare makes it impossible to achieve even basic certainty about future personnel costs:
“If I was trying to get you to fund a new business I had started and you asked me what my payroll was going to be three years from now per employee, if I went to the deepest specialist in the industry, he can’t tell me what it’s actually going to cost, let alone what I’m going to be responsible for.”
You would think a piece of legislation more than a thousand pages long would at least be clear about the specifics. But a lot of those pages say: “The secretary will determine. . . .” That means the secretary of Health and Human Services will announce the rules sometime in the future. How can a business make plans in such a fog?
John Allison, former CEO of BB&T, the 12th biggest bank in America, pointed out how Obamacare encourages employers not to insure their employees. Under the law an employer would be fined for that. But the penalty at present—about $2,000—is lower than the cost of a policy.
“What that means is in theory every company ought to dump their plan on the government plan and pay the penalty,” he said. “So you don’t really know what the cost is because it’s designed to fail.”
Of course, then every employee would turn to the government-subsidized health insurance. Maybe that was the central planners’ intention all along.
An owner of 12 IHOPs told me that he can’t expand his business because he can’t afford the burden of Obamacare.
Many of his waitresses work part time or change jobs every few months. He hadn’t been insuring them, but Obamacare requires him to. He says he can’t make money paying a $2,000 penalty for every waitress, so he’s cancelled his plans to expand. It’s one more reason why job growth hasn’t picked up post-recession.
Of course we were told that government health care would increase hiring. After all, European companies don’t have to pay for their employees’ health insurance. If every American employer paid the $2,000 penalty and their workers turned to the government for insurance, American companies would be better able to compete with European ones. They might save $10,000 per employee.
That sounded good, but like so many politicians’ promises, it leaves out the hidden costs. When countries move to a government-funded system, taxes rise to crushing levels, as they have in Europe.
The law’s impenetrable complication does almost as much damage. Robert Higgs of the Independent Institute is right: If you wonder why businesspeople are not investing and reviving the economy, the answer lies in all the question marks that Obamacare and other new regulations confront them with. Higgs calls this “regime uncertainty.” It’s also what prolonged the Great Depression.
No one who understands the nature of government as the wielder of force—as opposed to the peaceful persuasion of the free market—is surprised by this.


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Tuesday, April 24, 2012

The Clos-Vougeot - Frédéric Bastiat



The Clos-Vougeot∗


Services are exchanged for services. Often services prepared in advance are exchanged for present or future services.

Services have value, not according to the labor they demand or have demanded, but according to the labor they save.

Now, it is a fact that human labor is becoming more efficient.

From these two premises is deduced a very important phenomenon for social economy: In general, labor previously performed loses value when exchanged for current labor.2

Twenty years ago, let us say, I made something that cost me a hundred days' work. I propose an exchange and say to my prospective buyer: Give me something that costs you likewise a hundred days. Probably he will be able to reply: In the last twenty years great progress has been made. What cost you a hundred days can now be made with seventy days' labor. Now, I measure your service, not by the time it cost you, but by the service it renders me. This service of yours is worth seventy days, since with that amount of time I can perform it for myself or find someone to perform it for me.

Consequently, the value of capital falls constantly, and capital, or previous labor, is not in as favorable a position as superficial economists believe.

There is no machine not completely new that has not lost some of its value, exclusive of deterioration resulting from use, from the very fact that better ones are made now.

This is true also of land. There are very few farms that have not cost more labor to bring them to their present state of fertility than it would cost today with the more efficient means we have at our disposal.

Such is the general, but not inevitable, trend.

Labor performed in the past may render greater service today than it did previously. This is rare, but it does happen. For example, I have kept some wine that represents twenty days' labor. If I had sold it immediately, my labor would have received a certain remuneration. I have kept my wine; it has improved; the next crop was a failure; in short, the price has gone up, and my return is greater. Why? Because I render more service, because the buyer would have to take more pains to get this wine than I took, because I satisfy a want that has become greater, of higher value, etc.

This is the question that must always be considered.

There are a thousand of us. We each have our acre of land, which we clear. Time goes by, and we sell it. Now, it happens that out of the thousand of us nine hundred and ninety-eight do not receive, or never will receive, as many days of current labor for our land as it has cost us; and that is because our past labor, which was less skillful, performs relatively less service than current labor. But there are two landowners whose labor has been more intelligent or, if you will, more successful. When they offer it for sale, it is found to represent inimitable services. Everyone says: It would cost me much more to perform this service for myself; hence, I shall pay a high price; and, provided I am not coerced, I am still very sure that it will not cost me as much as if I performed this service by any other means.

This is the story of the Clos-Vougeot. It is the same as the case of the man who finds a diamond or who has a beautiful voice or a figure to exhibit for five sous, etc.

In my native province there is much uncultivated land. The stranger never fails to ask: Why do you not cultivate this land? The answer is: Because the soil is poor. But, it may be objected, right beside it is absolutely similar land, and it is cultivated. To this objection the native finds no reply.

Is it because he was wrong to answer in the first place: The soil is poor?

No, the reason why new land is not cleared is not that the soil is poor; for some of it is excellent, and still it is not cleared. This is the reason: to bring this uncultivated land to a state of fertility equal to that of the adjacent cultivated land would cost more than to buy the adjacent land itself.

Now, to any man capable of reflection this proves incontestably that the land has no value in itself.

(Develop all the implications of this idea.)3

Money4
Credit5

[∗][The famous Burgundy vineyard possessing a particular quality of soil enabling it to produce correspondingly superior grapes (and wine). Bastiat uses it, along with the diamond, as an illustration of a commodity having—apparently, but not actually—value derived from “the gratuitous gifts of Nature.”—Translator.]

[1.][The author has left only two or three short fragments on this important chapter. The reason is that he intended, as he said, to rely principally on the works of Mr. Carey of Philadelphia to refute Ricardo's theory.—Editor.]

[2.][The same idea is presented at the end of the supplement to chap. 5.—Editor.]

[3.][Of these proposed developments not one, unfortunately, exists; but we may be permitted to present here, in brief form, the two main conclusions to be drawn from the phenomenon that the author describes:
  • 1. Suppose two fields, one, A, cultivated; the other, B, uncultivated. Assuming them to be of identical quality, the amount of labor previously required to clear A may be taken as the amount necessary to clearB. We can even say that because of our better knowledge, implements, means of communication, etc., it would take fewer days to put B into cultivation than it took for A. If the land had value in itself, A would be worth all that it cost to put it into cultivation, plus something for its natural productive powers; that is, much more than the sum now necessary to put B into comparable condition. Now, the opposite is true: A is worth less, since people buy it rather than cultivate B. When they buy A, they therefore pay nothing for its natural productive powers, since they do not pay even as much for the labor of cultivating it as this originally cost.
  • 2. If field A yields 1,000 measures of wheat per year, field B when cultivated would yield the same quantity:A has been cultivated because, in the past, 1,000 measures of wheat fully compensated for the labor required both for its original clearance and its annual cultivation. B is not under cultivation because now 1,000 measures of wheat would not pay for an identical amount of labor—or even less, as we noted above.
What does this mean? Obviously that the value of human labor has risen as compared with the value of wheat; that a day's labor of a worker is worth more and receives more wheat in wages. In other words, wheat is produced for less effort and is exchanged for less labor, and the theory of the rising costs of foodstuffs is false. 

Monday, April 23, 2012

Rent - Frédéric Bastiat



Rent1


If, when there is an increase in the value of land, there were a corresponding increase in the prices of agricultural products, I could understand the objections raised against the theory presented in chapter 9 of this book. It could then be said: As civilization advances, the worker's situation becomes less favorable in relation to the landowner's; this is perhaps a necessary development, but it is certainly not a law of harmony.

Fortunately, this is not the case. In general, the circumstances that increase the value of land decrease at the same time the prices of what is raised on it. Let me explain this by an illustration.

Let us suppose that there is a farm located twenty miles from the city and worth one hundred francs. A highway is constructed that runs close to this farm. It opens up a market for the crops, and at once the value of the farm rises to one hundred and fifty francs. The landowner, now having the means to make improvements or to raise a greater variety of crops, improves his property, and its value increases to two hundred francs.

Thus, the farm's value has been doubled. Let us examine this additional value, first from the standpoint of justice, then from the standpoint of the utility enjoyed, not by the proprietor, but by the consumers in the city.

As for the increase in value coming from the improvements made by the landowner at his own expense, there is no question. This is a capital investment and follows the law of all capital investments.

The same is true, I venture to say, for the highway. The operation follows a more circuitous course, but the result is the same.

In fact, the owner, by reason of his farm, pays his share of the public expense. For many years he contributed to the general utility by doing work on outlying areas. Finally, a road has been constructed that runs in a direction that is helpful to him. All the taxes he has paid can be compared to stocks he might have bought in government enterprises; and the yearly rent, which now comes to him because of the new highway, may be regarded as their dividend.

Will it be said that a landowner may pay taxes forever and never receive anything in return for them? This case, then, is analogous to the other; and the improvements, although effected through the complicated and more or less questionable medium of the tax, may be considered as having been carried out by the landowner and at his expense in proportion to the partial advantage that he realizes.

I spoke of a highway, but I could have cited any other example of government intervention. Police protection, for example, gives value to land as well as to capital and labor. But who pays for police protection? The landowner, the capitalist, the worker.

If the state spends its revenue wisely, equivalent value must in some form or other find its way back to the landowner, the capitalist, and the worker. For the landowner it can only be in the form of an increased price for his land. If the state spends its revenue unwisely, it is unfortunate. The tax money is lost; the taxpayers should have been more alert. In that case the land does not rise in value, but certainly that is not the fault of the landowner.

But, now that the land has thus increased in value through government action and private initiative, do the crops raised on it bring a higher price from the city dwellers? In other words, is the interest on these hundred francs added as a surcharge on every hundredweight of grain that comes from this land? If the grain previously cost fifteen francs, does it now cost fifteen and a fraction? This is a most interesting question, since justice and the universal harmony of men's interests depend on its answer.

I reply confidently: No.

No doubt the landowner will now get a return of five francs more (I am assuming a profit rate of five per cent), but he will not get them at a cost to anyone. Quite the contrary; the buyer, in his turn, will profit even more.

The fact is that the farm we have chosen as an illustration was originally remote from any markets, and little was produced on it. Because of transportation difficulties the products that reached the market were expensive. Today production has been stepped up; transportation is economical; a greater amount of grain reaches the market, costs less to get there, and is sold at a better price. So even though he yields the landowner a total profit of five francs, the buyer profits even more.

In a word, an economy of effort has been effected. To whose profit? To the profit of the two contracting parties. According to what law is a gain of this kind shared? The law that we have often cited in reference to capital, since this increase in value represents a capital gain.

When there is a capital gain, the landowner's (or capitalist's) share increases in absolute value and diminishes in relative value; the worker's (or consumer's) share rises in both absolute and relative value.

Observe how this occurs. As civilization develops, the lands nearest the centers of population increase in value. Inferior crops give way to superior ones. First, pasture lands give way to cereal crops; then, cereals are replaced by truck gardens. Foodstuffs come from greater distances at less cost, so that—and this is an unquestionable fact—meat, bread, vegetables, even flowers, cost less than in more backward countries, although labor is better paid than elsewhere.


Sunday, April 22, 2012

The Two Mottoes- Frédéric Bastiat

The Two Mottoes

Modern moralists who hold up the axiom: One for all, all for one, against the ancient proverb: Every man for himself, every man by himself, have a very incomplete notion of society, and, for that reason, a quite false one. I shall even add, to their surprise, a very gloomy one.

Let us first eliminate the superfluous elements from these two famous mottoes. All for one is a redundancy, added for the sake of antithesis, since its meaning is necessarily included in one for all. Every man by himself is an idea that has no direct bearing on the other three, but as it is very important for political economy, we shall examine its implications later.

There remains, then, the conflicting sense of these two fragments of proverbs: One for all—every man for himself. The first one, it is said, expresses the principle of altruism; the second, the principle of individualism. The one unites; the other divides.

If we refer solely to the motive that prompts any effort, the conflict is undeniable. But I maintain that this is not the case if we consider the final outcome achieved by all human efforts taken collectively. Examine society as it actually is, obeying the individualistic impulse where remunerable services are concerned, and you will be convinced that every man, while working for himself, is in fact working for all. This cannot, indeed, be contested. If the reader of these lines follows a profession or a trade, I have only to ask him to consider his own case. I ask him whether all his labors do not have satisfactions for other persons as their object, and whether, on the other hand, he does not owe all his own satisfactions to the labor of others.

Obviously those who say that every man for himself and one for all are mutually exclusive believe that individualism and association are incompatible. They think that every man for himself implies isolation or a tendency in that direction; that personal interest divides men instead of uniting them, and results in a situation in which every man is by himself, that is, the absence of all social relations.

In this respect, I repeat, they have a quite false notion of society, because it is an incomplete one. Men, even when moved only by their own self-interest, seek to unite with others, to combine their efforts, to join forces, to work and to perform for one another, tobe sociable, or to associate. It would not be correct to say that they act in this way in spite of self-interest; on the contrary, they act in this way because of self-interest. They are sociable because they benefit from association. If they were to lose by it, they would not associate. Individualism, then, accomplishes the task that the sentimentalists of our day would entrust to brotherhood, to self-sacrifice, or to some other motive opposed to self-love. And this fact proves (this is the conclusion we are always reaching) that Providence has known much better how to take care of the organization of society than do its self-styled prophets. For either society is harmful to individuality, or else it is advantageous. If harmful, how and why in all good reason are our socialist friends to introduce something that hurts everyone? If, on the contrary, association is an advantage, it will be achieved by virtue of self-interest, the strongest, the most lasting, the most uniform, the most universal of all motives, whatever may be said.

Let us take a concrete example. A squatter goes and clears some land in the Far West. Not a day goes by that he does not realize how many inconveniences isolation causes him. Soon a second squatter also moves out to the wilderness. Where will he pitch his tent? Does he spontaneously move away from the first squatter? No. He spontaneously moves near him. Why? Because he is aware of the advantages men enjoy, for equal efforts, from the mere fact of being near each other. He knows that in countless instances they can lend and borrow tools, unite their action, overcome obstacles that would be too much for them individually, make exchanges, communicate their ideas and opinions, provide for their common defense. A third, a fourth, a fifth squatter come into the wilderness, and invariably they are attracted by the presence of the firstcomers. Then others with more capital may arrive on the scene, certain that they will find hands waiting to be put to work. A colony is formed. They may vary the crops somewhat; cut a road through to the main highway where the stagecoach passes; begin to trade with the outside world; plan construction of a church, a schoolhouse, etc. In a word, the settlers become stronger, by the very fact of being together, infinitely stronger than would be their total strength if each were living alone. This is the reason that they were drawn together.

But, it will be said, every man for himself is a very gloomy and cold-blooded maxim. All the arguments, all the paradoxes in the world will not keep it from arousing our resentment, from reeking with selfishness; and is not selfishness worse than an evil, is it not the source of all the ills of society?

Let us understand one another, please.

If the motto every man for himself is understood in the sense that it must direct all our thoughts, all our actions, all our relations, that it must underlie all our affections, as fathers, sons, brothers, husbands, wives, friends, and citizens, or rather, that it must stifle these affections, it is frightful, horrible, and I do not believe that there is a single man on earth who, even if he did make it the guiding rule of his life, would dare to proclaim it as such.

But will the socialists always refuse to admit, despite the evidence of the facts everywhere, that there are two kinds of human relations: those springing from altruism, which we leave to the realm of morality; and those that are actuated by self-interest, which exist among people who do not know one another, who owe one another nothing but justice, and which are regulated by agreements voluntarily arrived at after free debate? This is precisely the type of agreements that constitute the domain of political economy. Now, it is no more possible to found transactions of this nature on the principle of altruism than it would be reasonable to base the ties of family and friendship upon self-interest. I shall never cease telling the socialists: You wish to combine two things that cannot be combined. If you are mad enough to try, you will never be strong enough to succeed. The blacksmith, the carpenter, the farmer, who exhaust their strength in rough toil, may be excellent fathers, admirable sons; they may have a high moral sense and affectionate hearts. Nevertheless, you will never persuade them to labor from dawn to dusk, to strain and sweat, to impose upon themselves hard privations, in the name of disinterested devotion to their fellow men. Your sentimental sermonizing is and always will be unavailing. If, unfortunately, a small number of workers should be led astray by your words, they would be just so many dupes. Let a merchant begin to sell his goods on the principle of brotherly love, and I do not give him even a month before his children will be reduced to beggary.

Providence has therefore wisely given our predilection for social relations quite other guarantees than these. Granted man's nature as a being whose feelings are inseparable from his personality, it is impossible to hope, to desire, to imagine that self-interest could beuniversally eradicated. And yet nothing less than this would be necessary to establish a just balance in human relations; for if you eliminate this motive force only in the case of some superior individuals, you will be creating two classes: the evil ones on the alert for victims, and the virtuous, for whom the role of victim is ready-made.

Since, in matters of labor and exchange, the principle of every man for himself was the motive bound to prevail, what is admirable, what is marvelous is that the Author of all things has made it work within the social order to achieve the ideal of brotherhood expressed in the motto, one for all; that His deft hand has made the obstacle the instrument of His will; that the general interest has been entrusted to self-interest and is eternally safeguarded by the very fact that self-interest is indestructible. It seems to me that, confronted with these facts, the communists and other inventors of artificial social orders might well admit—and without too much sense of humiliation, after all—that when it comes to organization, their divine rival is definitely their superior.

And note well that in the natural order of society, the principle of one for all, which developed from that of every man for himself, is much more complete, much more absolute, much more personal, than would be the case under communism or socialism. Not only do we work for all, but we cannot make any kind of progress whatsoever without sharing its benefits with the entire human community.1 Things are arranged in such a marvelous way that when we have developed a technique or discovered a gift of Nature, some new fertility in the soil, or some new application of the laws of the physical universe, the profit goes to us momentarily, fleetingly, as is our just recompense, useful to spur us on to further efforts. Then our advantage slips through our hands, despite our attempts to retain it; it ceases to be personal, becomes social, and eventually comes to rest for all time within the realm of what is free of charge and common to all. And, even while we contribute to the enjoyment of mankind the progress we have made, we ourselves enjoy the progress that other men have made.

In the last analysis, by the application of the principle of every man for himself, all the efforts of the most intense individualism act in the direction of a situation that could be characterized by the expression, one for all, and everything that represents a step on the road to progress is worth to society in gratuitous utility millions of times more than the profits it brings its inventor.

On the principle of one for all, no one would act even for himself. What producer would consider doubling his labor in order to receive one thirty-millionth more in wages?

Someone may, perhaps, ask me why I go to the trouble to refute this socialist axiom. What harm can it do? Undoubtedly, it will not penetrate into the workshops, the countinghouses, the stores; it will not establish the principle of self-sacrifice in the fairs and the markets. Either it will come to nothing, and you can let it rest in peace; or else it will soften somewhat the unyielding principle of self-interest, which, since it brooks no feeling of sympathy for others, has no claim on ours.

What is false is always dangerous. It is always dangerous to represent as reprehensible and damnable a universal, eternal principle that God has clearly ordained for the preservation and improvement of mankind, a principle, I admit, that as a motive does not appeal to our hearts, but does, by its results, astonish and satisfy our minds. It is a principle, furthermore, that leaves the way completely open for the action of motives of a higher order that God has also implanted in men's hearts.

But what happens is that the socialist public accepts only half of their motto, the second half: All for one. People continue to work, as before, every man for himself, but to demand in addition that all also work for every man.

And this was inevitable. When the dreamers decided to change the great mainspring of human activity in order to replace individualism with brotherhood, what did they think up? A contradiction that is at the same time also pure hypocrisy. They began to cry out to the masses: “Stifle self-interest in your hearts, and follow us; and your reward shall be all the good things and all the pleasures of this world.” When people try thus to parody the tone of the Gospel, they must conclude as the Gospel does. The self-denial of brotherhood implies sacrifice and suffering. “Dedicate yourselves,” means: “Take the humblest place; be ye poor, and gladly endure hardship.” But, under the pretext of self-sacrifice, to promise enjoyment; to exhibit, behind the so-called renunciation, material comforts and wealth; to combat the passion that is scathingly called selfishness by appealing to the crassest materialism—all this was not merely to testify to the indestructible vitality of the very principle that they proposed to overthrow; it meant exalting it to the highest possible point, even while declaiming against it; reinforcing the enemy, instead of vanquishing him; substituting unjust covetousness for legitimate individualism; and, despite the sham of a vague mystic jargon, actually stirring up the grossest kind of sensuality. Greed was bound to respond to this appeal.2

And is not this the point that we have now reached? What is the cry going up everywhere, from all ranks and classes? All for one!When we say the word one, we think of ourselves, and what we demand is to receive an unearned share in the fruits of the labor of all. In other words, we are creating an organized system of plunder. Unquestionably, simple out-and-out plunder is so clearly unjust as to be repugnant to us; but, thanks to the motto, all for one, we can allay our qualms of conscience. We impose on others the dutyof working for us. Then, we arrogate to ourselves the right to enjoy the fruits of other men's labor. We call upon the state, the law, to enforce our so-called duty, to protect our so-called right, and we end in the fantastic situation of robbing one another in the name of brotherhood. We live at other men's expense, and then call ourselves heroically self-sacrificing for so doing. Oh, the unaccountable folly of the human mind! Oh, the deviousness of greed! It is not enough that each of us tries to increase our share at the expense of others; it is not enough that we want to profit from labor that we have not performed. We even convince ourselves that in the process we are sublime examples of self-sacrifice; we almost go so far as to call our unselfishness Christlike. We have become so blind that we do not see that the sacrifices that cause us to weep with admiration as we contemplate ourselves are not made by us at all, but are exacted by us of others.3

The manner in which this great hocus-pocus is carried out is worth observing.

“Stealing! For shame! How base! Besides, it can put you in prison; it's against the law.”

“But suppose the law prescribed it and sanctioned it; wouldn't that be nice?”

“What a brilliant idea!”

Forthwith they ask the law for some trifling privilege, just a small monopoly, and since, to give it proper authority will cost somebody a few francs, they ask the state to take over the responsibility. Then the state and the law connive to bring about the very thing that it was their mandate to prevent or to punish. Little by little the taste for monopoly spreads. There is no class that does not demand its own special privilege. All for one, they cry. We too want to show that we are philanthropic and understand what solidarity is.

The result is that the classes granted the privileges steal from one another and lose at least as much by the demands made on them as they gain by the demands they make on others. Furthermore, the great masses of workers, to whom it has been impossible to grant any privileges, suffer until they can endure it no longer. They revolt, they cover the streets with barricades and bloodshed, and now it is they who must be reckoned with.

What will they demand? An end to the abuses, privileges, monopolies, and restrictions by which they have been engulfed? Not at all. The masses, too, have been imbued with the spirit of philanthropy. They have been told that the famous principle of all for one was the solution to the social problem; they have been shown by countless examples that privilege (which is only theft) is nevertheless highly moral if it has the sanction of the law. Therefore, we see the people demand.... What? .... Privileges! They, too, call upon the state to provide them with education, employment, credit, assistance, at the people's expense. Oh, what a strange illusion! How long can it last? We can well understand how all the upper classes, beginning with the highest, can come, one after the other, to demand favors and privileges. Beneath them are the great masses of the people for the burden to fall upon. But how the people, once they have won their battle, can imagine that they too can enter as a body into the ranks of the privileged, create monopolies for themselves and over themselves, extend abuses widely enough to provide for their livelihood; how they can fail to see that there is nobody below them to support these injustices, is one of the most amazing phenomena of this or any age.

What has happened? Society had followed this course to general shipwreck and quite properly grew alarmed. The people soon lost their power, and now the old order of abuses has temporarily regained its footing.∗

Yet the lesson has not been entirely lost on the upper classes. They realize that the workers must be given justice. They are eager to do so, not only because their own security depends upon it, but also, it must be admitted, out of a sense of equity. Yes, I state with great conviction that the wealthy classes ask nothing better than to find the solution to this great problem. I am sure that if they were asked to give up a considerable portion of their wealth in order to assure the future happiness and contentment of the common people, they would gladly make the sacrifice. They therefore earnestly seek to come, to use the time-honored phrase, to the aid of the laboring classes. But to that end what do they propose? Still a communistic system, the communism of privilege, though mitigated and held, they trust, within the bounds of prudence. That is all; they go no further.....


Gold as Money


LUDWIG von MISES
on
MONEY AND INFLATION


Now, we must realize that historically people everywhere used at the beginning a definite type of commodity as a medium of exchange. Sometimes you find mentioned in books what kinds of goods and commodities were used in different countries at different ages as a general medium of exchange, as money. People once chose various kinds of commodities as media of exchange, as intermediaries between sellers and buyers. These commodities which they chose were commodities which were available in limited quantities only. If something is available in sufficient quantity to meet all possible kinds of demand, or can be increased in quantity in such a way as to meet all possible kinds of demand, then it doesn’t have any value in exchange. Only something that is available in a limited quantity can have exchange value, can be considered as valuable by people.

Over centuries traders eliminated everything else from among the various articles and commodities used as media of exchange until only the precious metals—gold and silver—remained. All other commodities were eliminated as media of exchange. When I say that the other things were eliminated from being used as money, what I mean is that people in making agreements eliminated them; people in making agreements rejected other things as media of exchange and turned to using only gold and silver; they specified gold and silver in the contracts they made when trading with other parties. Thus we must realize that the evolution to gold and silver money was brought about by private persons. Then silver also disappeared as a medium of exchange in the last centuries and the fact remained that the commodity gold was used as the medium of exchange. The function of the government consisted of producing small pieces of this medium of exchange, the weight and content of which was determined by the government offices and acknowledged by the laws and by the courts. I cannot enter into the whole history of money. But what resulted was the gold standard. The system of the gold standard, the gold exchange standard, is practically the only monetary system in the world. This was not done
by governments; it was done through the market; it was done by parties
exchanging on the market.

In the history of money, which is identical with the history of government attempts to destroy money, we must distinguish two great periods. And these two periods are not separated from one another by some monetary fact or by some specific monetary problem—they are separated from one another by the great invention made in the 15th century by a man named Gutenberg. If the governments need more money—and they always need more money because they don’t earn it—the simplest way for them to increase the quantity of money since Gutenberg is just to print it.
Just as the government says “dollar”—but let us not use the term of a country with money which still functions today—let us say “ducats.” You have agreed upon a definite quantity of ducats. And then, because the government doesn’t want to restrict its expenditures, it declares: “What I have printed in my printing office, in my government printing office and called a Ducat is also a Ducat, the same thing as a gold Ducat.” These things started when there were private banks to which the government
gave privileges. At the time you made this agreement a Ducat meant a definite quantity of gold. But the government now says it is something else. When the government does this, the situation is similar to what it would be if you agreed to deliver a horse to another party but instead of a horse you delivered a chicken, saying, “This is all right ... I say that this chicken means a horse.” It is such a system that destroys the markets, you know.

I want to say something about the reason why the gold standard was adopted in the first place and also why today it is considered as the only really sound system of money. It is because gold alone makes the determination of the purchasing power of the monetary unit independent of the changes in ideas of governments and political parties. Gold has one advantage. It cannot be printed. It cannot be increased ad libitum [at pleasure]. If you think that you, or an institution with which you are connected doesn’t have enough gold money, you cannot do anything about it that would increase the quantity of gold money in a very simple and cheap way. The reason why there is the gold standard, why the gold standard was accepted, is that an increase in the quantity of gold costs money. Gold is restricted; it is limited by nature; the production of an additional quantity of gold is not cheaper than the acquisition of such a quantity by exchanges on the market. That means that the metal gold was used as a medium of
exchange.

Governments and writers for governments make fun of the fact that the world, the nations of the world, consider gold as money. They say a lot of things against the gold standard. But what they say is not what matters. What matters is that, without any interference on the part of a central authority, without any government action, individuals chose gold as “money” through the process of trading on the market. People make jokes about the uselessness of gold. It is just a silly yellow metal. We can’t
eat it, they say. It is only good for dentists and for unimportant things like jewelry. There are people who say, “Why gold? Why use precisely this yellow metal as money? Leave the gold to the dentists. Don’t use it for monetary purposes.” Now I do not have the right to talk about the dentists; I use the dentists only as an illustration. Whether they want the gold is another question. Lord Keynes called the gold standard a “barbarous relic.” Many books say that the government had to step in because the gold standard failed. But the gold standard didn’t fail! The government abolished the gold standard by making it illegal to hold gold. But still today, all international trade is calculated in gold. Critics have no valid arguments against the gold standard because the gold standard works while the paper standard of the government does not work, not even in a way which the government itself considers satisfactory.

The advantage of this gold money system, as of every system of nongovernmental money, is that an increase in the quantity of money does not depend on decisions of the government. The advantage of the gold standard is that the quantity of gold available is independent of the actions, the wishes, the projects and, I would say, of the “crimes,” of the various governments. Gold may not be an ideal money, certainly not; there are no ideals in the world of reality. But we can use gold as a medium of exchange because the quantity of gold is by and large limited and the production of additional quantities requires expenditures that do not influence the purchasing power of the already existing gold to a greater extent than such changes are occurring daily again and again in everything. We can therefore live, we can therefore exist, with the system of gold money. With gold money, there is no danger that a great revolution in prices will be brought about. The advantage of the gold standard is not that gold is yellow and shiny and heavy, but on account of the fact that the production of gold, like the production of everything else, depends on actors who cannot be manipulated by the government in the way in which the government can manipulate the production of government paper money. When the government prints a piece of paper, it doesn’t cost more to print “100” than it does to print “10” or “1” on this same piece of paper. And the market situation, the situation for all human exchanges, the whole economic system is undermined, destroyed, by the governments when they consider it advisable to increase the quantity of money by increasing the quantity of government money.

The monetary crisis, the monetary problem which faces the world today is due to the fact that the governments think they are free to do anything they want with regard to money, you know. Not only do individuals sometimes fail to fulfill promises they have made, but governments do the same.They have already used practically all possible methods of trying to evade the necessity of paying what they have promised. And this is the problem which we have now.

Legal tender legislation made it impossible for anybody to refuse to accept the paper money. Gold clauses were written into some contracts by some people in the attempt to protect them against the legal tender laws which would force them to accept paper. To give an example, there is a country in Europe, a very nice country with a great history, considered even today as one of the most civilized countries of the world. I don’t want to give the name of the nation, but let us call it Utopia. This country issued a loan, a public loan. On every page of this loan there was inscribed: “This government promises to pay 20 pieces of Utopian gold money, that is a definite quantity of gold coins in the coinage of this nation, that amount in gold, or an equivalent quantity in American dollars redeemable in gold according to the McKinley standard.” The man who bought this obligation, this letter of indebtedness, would have said: “I am really protected against all accidents. It has happened in the past that a country did not pay the same weight of gold which it had promised to pay. But now I have the promise not only of being paid in gold, but I also have the power to choose. I can ask them to pay me in the Utopian national
currency, or the equivalent in American dollars, which are redeemable in gold.” Then in 1933 the United States changed the “price” of gold, as you know; it reduced the ratio of gold to the U.S. dollar. In 1935 the U.S. Supreme Court ruled that, as the bondholders had received payment in legal tender notes, they could not show damage and would not be paid in gold. This country of Utopia said, “We also accept this new ‘price.’ We will pay you, the bondholder, only the lower quantity of gold according to the new American law, a law which didn’t exist at the time we sold you
this obligation when we bound ourselves to pay to you.” That means the right of governments concerning money is considered as something quite special today, something which is not subject to the general conditions and practices of the market economy. This precisely is the reason for the monetary problem which we now have.

All this was possible only on account of the fact that government is the institution that determines what the agreements between the citizens mean, what the content of these agreements are. Government has the power to force people who, according to their government’s declaration, do not comply with their agreement to pay the sums required. And as the government assumes, necessarily, that the courts should have the power to declare whether or not the parties have complied with an agreement concluded between them, so do the governments presume that they alone have the power to declare what money is and what money is not. Just as the courts have to determine if there is a conflict between the parties
to an agreement as to whether a certain thing referred to in a contract is wool, for instance, or is not wool, so do the governments presume to say whether a certain thing is money or is not money of a certain definite quantity. And in this way, again and again, governments have destroyed
the markets of the world. And in destroying the markets they have gone so far as to destroy completely the system of money, making it necessary to develop a new monetary system.

What we have to realize is this: Every kind of human arrangement is connected in some way or other with money payments. And, therefore if you destroy the monetary system of a country or of the whole world, you are destroying much more than simply one aspect. When you destroy the monetary system, you are destroying in some regards the basis of all interhuman relations. If one talks of money, one talks about a field in which governments were doing the very worst thing which could be done, destroying the market, destroying human cooperation, destroying  all peaceful relations between men.
The fact is that with the gold standard it is possible to have a monetary standard that cannot be destroyed by the governments. There is no reason to give to the governments greater influence over monetary problems.
While it is really absolutely correct to say that it is just an accident that it is precisely gold and not something else that serves this monetary purpose, the fact is that with the gold standard it is impossible for governments to destroy the monetary system. On the other hand, there is nothing easier for
governments to do than to destroy a system of money which is based upon too much confidence in the government.


The majority of the Court found on February 18, 1935 in the Gold Clause cases that the plaintiffs had not been harmed by the abrogation of the gold clause because they did not show that in relation to buying power they had sustained any loss whatsoever. —BBG



Ludwig von Mises on Money and Inflation: A Synthesis of Several Lectures