Tag Archives: debt default

Gold as the Silent Witness

Dan Norcini writes:

I wanted to post some brief comments to let some of the newer readers understand why many of us believe that there is a war being waged upon gold by the Central Banks of the West.

Let me start this off by quoting from none other than former Fed Chairman Alan Greenspan more than 40 years ago:

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. … This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard

What the former Fed Chairman was then saying was that absent a gold standard or some device for restraining the unlimited creation of fiat money, there was nothing to impede monetary officials from engaging in such activity to the extent that it would ultimately set in motion a process of inflation, which is really just another name for the erosion of the purchasing power of a nation’s currency by debasing it. Inflation was and is in essence, the transfer of wealth from one class to another.

Today we have the Fed engaging in the very process that Greenspan warned against back then. We also have the BOJ and the ECB effectively doing the same thing to an extent.

Unlike Silver, Gold is the main metal that most analysts and commentators look to when attempting to decipher whether or not inflation is a serious problem. That means the reference point of gold has become a target for Central Banks which want the world to believe that they can create unlimited amounts of funny money with absolutely ZERO impact on inflation levels. In other words, that they can conjure up wealth and produce prosperity with the electronic equivalent of a printing press and produce no serious inflationary impact by so doing.

A rising gold debunks their hubristic assertions to the contrary for it stands as a silent witness testifying against them. This is the reason the yellow metal is despised by so many Central Banks. It mocks their policies and displays their folly for all the world to see. Central Bankers, being the demigods that they are, will tolerate no rivals to their claims of economic omniscience. You see they have actually come to believe that it is their own wisdom and foresight which enables them to see through the fog that hinders and impedes our economic progress and that they are in a unique position to provide the rest of us with lasting prosperity. They attempt to do this by basically providing or withdrawing liquidity as they in their wisdom judge best and by the setting or manipulation of interest rates.

Those of us who believe that it is free market capitalism and the industry and efforts of mankind that produce wealth and prosperity would beg to differ but that is another story altogether. I would add that it is my opinion that the world would be better off without this plague of locusts that actually devour a nation’s wealth but the fact is that they are here.

While they are here gold will attempt to move in such a manner that it either blesses or curses their policies. Now we all would love to have our policies approved by the vote of the market but what about those times in which the market frowns on our course of action and refuses to smile upon it? Why this is but a simple matter – attack the messenger! If one can somehow manage to keep the price of gold under wrap so that it does not move sharply higher then one can attempt to make the claim that inflation is not a serious problem. The comments usually go something like this:

“Well Jerry, we are looking at the gold price and from what we can see, that while it is definitely higher, it is not soaring out of control. The market may be pricing in some gradual inflation but the action in the gold price is telling us that any fears of inflation getting out of control are definitely unwarranted. Besides, we all agree that some inflation is a good thing because the alternative is deflation and no one wants to see that”.

Imagine Fed Chairman Ben Bernanke testifying before Congress saying that the current rise in prices of many goods is only “temporary” and “relatively modest” if the gold price were soaring beyond $1650 and higher! Do you think anyone would take anything that the Chairman said seriously? Copper can soar higher and most will not notice it. Even if it does, it is generally explained as a positive because we are told it is a sign of strong economic growth ahead. Crude oil and energy prices can rocket higher and that can be attributed to geopolitical unrest among oil producing nations. Food can rise sharply and everyone notices that but such things are often explained away by citing weather conditions, supply constraints, etc. but a rising gold price? How does one explain that away?

The only reason that gold has a sustained price rise is because of a lack of confidence in the monetary system. It does not rise sharply because of such things as jewelry demand or industrial demand – it rises when fear, distrust, doubt, suspicion and uncertainty over Central Bank policy reigns. It rises when REAL interest rates are negative and investors understand the insidious process of currency debauchment practiced by these monetary authorities is underway. It thus cries aloud and issues a warning to those who can hear it and what it shouts displeases many Central Bankers because they are among those who while they despise its message, are all too keenly able to hear that message.

Thus the messenger, the prophet, the oracle, must be silenced or at the very least, his message blunted, toned down, marginalized, trivialized by whatever means possible. The mechanism employed to do just this is a subject for another time and place. Suffice it to say for now, without the efforts by the monetary officials of the West to discredit gold, it would be trading considerably higher. Even at that however, the ancient metal of kings refuses to go quietly and docilely into the night. It will yet have the final say.

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Something Wicked This Way Comes – Doug Casey

From Conversations with Casey:

(Interviewed by Louis James, Editor, International Speculator)

L: Doug, a couple weeks ago we talked about mass riots spreading beyond the Middle East, and you were right. Yemen, Bahrain, and Libya – hundreds reported dead in Tripoli. But I see on Google News that some very brave individuals have organized protests in Moscow and Beijing. And now we have tens of thousands protesting in Madison, Wisconsin, citing the successful uprising in Egypt. There are counter-protesters in Wisconsin, fears of violence… talk of the governor calling up the National Guard. Is the spirit of revolution in the air?

Doug: On a deep level, there is a common thread running through these events. But, in bankrupt Wisconsin, the pro-union forces trying to hold on to artificially high wages and benefits have nothing in common with the hungry, oppressed, miserable people who took to the streets of Egypt. It’s fashionable for all sorts of people with a grievance to call those Egyptians “freedom fighters” and identify themselves with them. I’m a freedom-fighter, you’re a rebel, he’s a terrorist. The semantics are used to muddy the distinctions, not to clarify.

To a fair degree the Egyptians really are freedom fighters – they actually did oust a tyrant – but they are just going to replace the old boss with a new boss. It’s not been a radical revolution – at least not so far. The odds are that the new boss will be every bit as bad as, or worse, than the old boss, regardless of whatever window dressings of reform he uses to gain international acceptance for his regime.

Back in Wisconsin, it’s completely disingenuous – actually ridiculous and shameful – for unionized state employees to label themselves freedom fighters. These are the people who most directly slop at the trough at the public’s expense. They’re minions of the ruling class. They’re not trying to overthrow an unjust situation, they’re rioting to maintain it.

L: So, what’s the deeper, connecting thread?

Doug: Economic hardship. It seems to me that the driving factor behind these protests spreading in the Arab world – and what pushed them from inevitable to imminent – was rising commodity prices, especially food prices. Food prices are also rising rapidly in the U.S. Many fruits and vegetables have doubled, and bread is up 50% over the last year. Cotton has tripled over the last two years. That’s going to make clothing more expensive. The difference is that most Americans don’t live hand to mouth, not the way most Arabs do. But nonetheless they don’t like to see their standard of living drop, and they’ll strike out as well. As we just discussed in January, it would be most prudent to prepare for chaotic times ahead.

L: Oppressed Middle Easterners take to the streets out of hunger. Wisconsin union members take to the streets because their entitlements are threatened. Both relate to the rising costs of real things resulting from the global currency crisis, which is part of the larger train-wreck of the old economic world order.

Doug: Yes, and with modern communications, widespread public sentiment can be mobilized with speed never seen before. But you know, it’s a bit similar to what happened back in the ’60s – although for different reasons. We had simultaneous riots in Europe – mostly in France, but also in Germany and Italy. In Paris, they were tearing up the cobblestone streets to throw rocks at the cops. You had the race riots in Detroit, LA, and Washington, DC, among other U.S. cities, and later, anti-war protests. At exactly the same time, you had the Red Guard and a huge conflagration in China. Three major centers of world civilization erupted in civil unrest at once. But those riots were strictly political. Today’s riots are economic, and that’s much more serious. Political riots are generally for sport. Economic riots are the real thing.

I’ve no doubt that with the economic, social, and political forces at work in the world today, we’ll see more unrest, lots more. But it’s going to be much more violent, and much more dangerous than it was in the ’60s, because the world is much less stable.

L: And more countries have nuclear weapons. If more U.S. puppets fall in the Middle East, that’s going to be really bad for Israel, which is surrounded and outnumbered by foes who have no interest whatsoever in reaching a peaceful accommodation. If pressed hard enough, Israel could go nuclear, the threat of which has not stopped individuals from shooting rockets into their midst. I know you don’t like making predictions, but does your guru-sense tell you that’s likely to actually happen soon?

Doug: Nobody knows, of course, but the odds favor new leaders in most of the Arab countries – and most of the Muslim world. Israel is opposed to any change, because they have an accommodation with the old governments. The same is true with the U.S. Israel and the U.S. are like a nasty dog and his bad-tempered master – although I’m not sure which is which. Sometimes the master kicks the dog, sometimes the dog bites the master, but they still work together.

Anyway, now both the U.S. and Israel are going to have to cut new deals with new governments. I suspect the new governments will be less inclined to be U.S. stooges, and more likely to be actively anti-Israel.

Meanwhile, bankrupt state governments in the U.S. could precipitate chaos there, before the balloon goes up elsewhere. We are in uncharted waters, in which anything can happen – and probably will. The key is that most people in the world live on less than $3 a day, most of it goes to food, and food prices are exploding upwards. As is fuel.

L: I remember the terrible events in New Orleans when civil order broke down just a couple years ago. Most Americans seem to be ignoring that embarrassing event, and have long forgotten the Watts riots and Kent State. How do you get such people to consider the facts without sounding like Chicken Little?

Doug: Good question. When the going gets rough, it often turns out that civilization is really just a pretty veneer that lies on top of a fetid cesspool. The fact of the matter is that many – actually most – people suffer from serious psychological aberrations that rise to the surface if you push the right hot buttons. Losing what they have, and going hungry – especially when they see thieves like most politicians and their pals making billions – won’t sit well with the masses. It’s going to push a lot of hot buttons.

I don’t like thinking about rioting and martial law and all of that unpleasantness either; people get hurt, property is destroyed, and so forth. But at this point, a good dose of that looks almost inevitable. What we’ve seen in Tunisia, Egypt, now Bahrain, and Libya – it’s not just a flash in the pan. It’s the start of something big.

L: It’s a pity to see so much human energy being unleashed, creating powerful forces for change, at a time when it’s unlikely that that power will be used for good. So few people have any grasp of basic economics – they have no idea where prosperity comes from. So few people understand that human rights are individual rights and that entitlements are not rights… These people are going to ask for Big Brother to take them in hand, and Big Brother is going to give them what they ask for, good and hard.

Doug: You’re quite correct. The logical next step, as we mentioned before, is a new Robespierre – or a whole slew of them. But you know I always try to look at the bright side, and the good news is that a lot of despotic states are going to be overthrown. Others that are not overthrown will be discredited – also very good. This comes at a time when many of these states are on the ragged edge of collapse anyway – their days are numbered, even without this force precipitating their collapse.

Perhaps technology has advanced to the level that people will begin to see they can conduct their lives without the dead hand of the state trying to tell them what to do, and taking most of what they produce for the privilege.

L: Perhaps. The time may not be far off when the very idea of the nation-state itself will be discredited, and human society will evolve to a – hopefully – better form of organization.

Doug: I’d love to think so. I think that as technology continues to advance and liberate the individual, the disappearance of the state is inevitable, even if it’s not imminent. But whether things get better after the crash or not, I’m increasingly convinced that what has long been inevitable for the whole world is now becoming imminent. We are in the early stages of a major upheaval. In other words, distortions in the way the world works have been built up to a level where the old order could easily collapse. I’m quite serious when I refer to the coming Greater Depression.

L: Just as we all knew the Soviet Union had to collapse from its internal problems – tyranny and economic stupidity – but weren’t sure when. Now, decades of economic mismanagement and bad decision-making in the global arena must eventually be liquidated. But how do you know the bill is coming due?

Doug: Well, timing is always the problem. If you wait long enough, absolutely everything that is possible will happen. I suppose that’s why we have time itself – to keep everything from happening at once [chuckles]. But we have to think about what’s likely in the course of a single lifetime, so we can benefit from foresight – or be punished for guessing wrongly.

Consider that several other U.S. states are looking at “union-busting” legislation such as Wisconsin’s. Unions can no longer pretend to be vehicles to protect the workers; they are really nothing but cartels that reward their members at the expense of everybody else. And, unlike the federal government, the states can’t just print money. They have to tax people directly to pay for things. Now they have two choices: raise taxes or default on past promises.

Raising taxes is very hard to do during a depression. People who feel their standard of living is slipping just won’t stand for it. Taxes were a major cause of the French Revolution and the American Revolution.

The riots in the ’60s weren’t about this type of thing – entitlements and taxes – but remember, in the ’60s, few states had sales taxes, and where there was one, it was usually only one percent, or two, max. Now, sales taxes regularly run six, seven, eight, even ten percent. In addition, real estate taxes have gone up tremendously, as have state income taxes, of which there were also fewer back then. So these governments are already straining their ability to tax, and they know that if they raise taxes again, it will destroy much of what’s left of their economies.

L: But they can’t really default either – that would get the politicians thrown out of office just as quickly.

Doug: Default would hurt bondholders – generally older people who are very active voters. Also, pension funds, insurance companies, and banks would see a large chunk of their assets wiped out, which would be another body blow to struggling state economies. Not being able to print money, they won’t be able to keep paying their debts, so they’ll be forced to lay off more and more government employees. State and local governments are truly between a rock and a hard place, just like the U.S. government. But the U.S. has the option of destroying the currency to put off the hour of reckoning, and that’s what they’ll do.

L: Well, if the governments have to fire a bunch of employees, that’s a good thing. But it will add to the unemployment burden, unless they scrap unemployment benefits too, which would also get the politicians tossed out of office.

Doug: Well, most government employees just push paper, and stop things from happening. It would be cheaper and better to pay them not to work, so they won’t do actual damage – or give them unemployment compensation. Unfortunately, though, they’ll just fire a few employees, or cut their wages and benefits a bit. What they need to do is totally abolish whole departments – each state has hundreds of them, making the lives of businessmen miserable and expensive. They won’t do that, so the bureaucracy will just grow back if there is any recovery. Rather, the reduced number of employees will slow down approvals even more, slowing business even more. And that will further open the door to corruption.

Actually, it would be therapeutic to see some of them end up like Mussolini. It’s certainly a good thing to see action toward recovering the money Mubarak stole. The same should be true in the U.S. Everybody in high office emerges very wealthy from a small salary – it’s all stolen money.

But at this point, there is just no way out. It’s like jumping off the top of a 100-story building – it’s an exhilarating ride until you get to the bottom. That’s exactly where, not just the U.S., but the whole global economy is.

L: I guess so… You could spread your arms and try to slow the fall, or if you were an experienced sky-diver, you could try to angle your descent toward one side or the other, but it’s not going to change what happens when you hit the street.

Doug: That’s exactly right. In the real world, actions have consequences. Economic causes have effects, and the piper can only be put off from payment for so long. I don’t think he can be put off any longer.

L: When, exactly, do you think the bill – and its ever-accumulating interest – will come due?

Doug: I’m not going to put a date on it, but it’s starting. The next ten years are going to be the most interesting decade in centuries. The events that are now under way – economic, financial, social, technological, political, and military – have the promise of being the biggest thing in a very, very long time.

L: Okay, but, with all due respect, you were full of doom and gloom back in 1980 – said we were going to tip over the edge, but we didn’t.

Doug: I was, and I did say that – and we could indeed have gone over the edge back then. It was a very close thing. Fortunately – or unfortunately, if you consider the much, much larger bill now coming due – they papered it over. And things actually got better, due to two things: one, many individuals produced more than they consumed, and saved the difference; and, two, we got many improvements in technology. But financial and economic affairs are much worse now than they were then.

L: You don’t believe it’s possible to paper it over this time? Doesn’t it make you uncomfortable to say, “It really is different this time!” – at least a bit?

Doug: Sure it does. Famous last words. But, in fact, it really is different this time, as anyone who searches the news for phrases such as “unprecedented,” “record deficit,” “record bank failures,” etc., can see. It’s a judgment call, obviously. But we have to make judgments if we’re going to succeed, or even survive. Sometimes you have to call for a change in a major trend – which is risky. But not nearly as risky as getting trampled by the mob after it actually changes. I’m not afraid to leave the mainstream. In fact, I far prefer it, whether I’m right or wrong.

L: How can you be so sure there’s no possible way to paper this over again? Mugabe trashed his currency and is still in power. Life goes on in Zimbabwe. Couldn’t multi-trillion-dollar deficits become the new normal in the U.S.?

Doug: No, that’s not possible. It would destroy the currency. It’s bad enough when you do that in a nothing/nowhere country like Zimbabwe, where subsistence farmers can keep on scratching a living out of the dirt with sticks and stones, if they have to. But it wipes out most of the economy above the subsistence level, as just about everyone has their savings in the destroyed currency. If you do that to the Canadian dollar, say, it would be a disaster – but mainly for people who live in Canada. And plenty of Canadians have assets in other countries. But if you do it to the U.S. dollar, it wouldn’t just be a disaster in the U.S. The U.S. dollar is the world reserve currency. Few Americans have assets outside of the U.S. Foreigners hold, maybe, eight trillion U.S. dollars. All the central banks of the world have mostly dollars. People all over the world have dollars in their pockets and bank accounts. When Bernanke destroys the dollar it will be a worldwide catastrophe. And that will happen all the faster if the feds bail out the states – which is a possibility with someone like Obama in charge.

Let me re-emphasize this. Almost everyone with net worth around the world tries to keep much of it in dollars. There are trillions of dollars outside the U.S. – far more than inside, and the people holding them are going to be impoverished. They won’t be able to invest or to spend. A collapse of the dollar would lower the standard of living of a lot of people around the world, basically overnight.

This is really, really serious, and there’s no way out. We are going to go through the meat grinder.

If we were to somehow stumble through this one – I would be fascinated to see how – and manage to move ahead in some semblance of the way things were pre-2008, I very much doubt it would last long. And I’m very sure it will just make the ultimate reckoning day that much more catastrophic.

I hate to say it, because I know the human cost will be enormous, but I think the odds greatly favor this being “it.” I only hope to not be very adversely affected by it – and to have the right to say “I told you so”… although it will be unwise to draw that to anyone’s attention after it happens. [Chuckles]

L: Hm. Well, even if there was some way to gain a reprieve for a few more years, it’s still going to be ugly. The 70,000 people protesting in Wisconsin show that the so-called jobless recovery is a lie. Improving the bottom line by laying people off is not the same as increasing the top line, and increased government spending is not real GDP growth. Even if we manage to struggle on this way, the minimum payments now due the piper are going to keep things dicey. That means that the risk of social/political collapse remains, even if we avoid economic collapse.

Snow Crash could be starting right now.

Investment implications?

Doug: Nothing we haven’t said before: we’re headed out of the eye of the storm, so you better rig for stormy weather – the worst you’ve ever seen.

L: Specifically…

Doug: Buy gold – lots of gold, even though it’s no longer cheap. To capitalize on the likely next bubble, buy gold stocks. Given the trouble in the Middle East, the right energy stocks are also good to invest in. Short anything that won’t do well in economic hard times, including the whole financial sector – and the retail, consumer, and construction sectors. Use those investments to build your cash position so you’re ready to take advantage of the spectacular investment opportunities all of this turmoil is going to cause.

And do not – do not – forget to diversify yourself out of your country of residence. If you have the means, and have not done so yet, buy a “vacation” home. Make it in some nice remote place where you’d enjoy spending time in any event, but where the people live close to the earth and don’t depend on the modern global economy. Also, make it in a place where hungry masses from unsustainable cities are unlikely to show up on your doorstep.

L: And if the sky is not falling?

Doug: Then you still make a bundle on the volatility ahead and end up with a nice vacation home you can sell if you decide you no longer need it for insurance.

But remember, nothing lasts forever. Few governments last as long as that of the U.S. has – and it’s showing clear signs of terminal decay. Don’t kid yourself, thinking, “It could never happen here.” Europeans have an advantage over Americans; they remember fighting each other much more recently, and know full well it certainly can happen there.

L: Okay, Tatich. I guess I’ll add the gun shop to my stops when I head down to my local coin shop to buy gold – time to load up on ammo again.

Doug: Sure, why not? You can always sell it later if you don’t use it. Cigarettes too, even though I know you don’t smoke. And alcohol, even though I know you don’t drink.

L: I’ll feel like a Y2K fanatic, but I guess there’s room in the attic.

Doug: Sounds trite, but it’s better safe than sorry, and it won’t hurt to prepare for the worst and hope for the best.

L: Sometimes old wisdom is the truest wisdom.

Doug: Indeed. We’ll talk more next week. This business with the labor unions in Wisconsin is interesting – we should talk about labor unions.

L: Good topic. I look forward to our conversation.

Doug: ‘Til next week then.

Robert Wenzel on the Global Riots

Robert Wenzel writes:

The world is exploding with protests, riots and in some cases revolutions. Behind this disruption of the status quo is the reaction against government attempts to force people against the natural order. In Egypt, Tunisia, Libya, and the like, it is pure revolt against totalitarian control. In Greece, Ireland and Wisconsin it is protests against the fact that governments can’t do the impossible, i.e. pay out more plunder than they take in (in one form or another). In Greece, Ireland and Wisconsin, the protesters clearly want the impossible. They want the plunder that isn’t there.

But at the core, the fundamental problem with all these upheavals is there is no indication that the people in any of these situations understand what makes for a growing prosperous society. In Greece, Ireland and Wisconsin, the protesters are clearly self-centered, who have no clue that they would live in a much better society if the governments simply ended their positions and stopped taxing the people. This would result in the people hiring the government employees in the private sector, where the incentives would result in a growing society.

In the revolutions of Egypt, Tunisia and Libya it is not clear what will replace the totalitarians. There is no indication that the masses understand the destructive nature of government control.

From Wisconsin to Libya, the teachings of Hayek, Mises and Rothbard are still not generally understood. Until they are, protests, riots and revolutions may simply just set the stage for future protests, riots and revolutions, as one government plan is replaced by some other government plan that won’t work in the long run. Nothing will really change until the people truly understand the importance of the rule of law, private property and free markets. Until Hayek, Mises and Rothbard are on the lips of revolutionaries the way Marx and Guevera and are now, the revolutions shall continue.

10 Things That Would Be Different If The Federal Reserve Had Never Been Created

From EconomicCollapseBlog.com:

The vast majority of Americans, including many of those who believe that they are “educated” about the Federal Reserve, do not really understand how the Federal Reserve really makes money for the international banking elite.  Many of those opposed to the Federal Reserve will point to the record $80.9 billion in profits that the Federal Reserve made last year as evidence that they are robbing the American people blind.  But then those defending the Federal Reserve will point out that the Fed returned $78.4 billion to the U.S. Treasury.  As a result, the Fed only made a couple billion dollars last year.  Pretty harmless, eh?  Well, actually no.  You see, the money that the Federal Reserve directly makes is not the issue.  Rather, the “magic” of the Federal Reserve system is that it took the power of money creation away from the U.S. government and gave it to the bankers.  Now, the only way that the U.S. government can inject more money into the economy is by going into more debt.  But when new government debt is created, the amount of money to pay the interest on that debt is not also created.  In this way, it was intended by the international bankers that U.S. government debt would expand indefinitely and the U.S. money supply would also expand indefinitely.  In the process, the international bankers would become insanely wealthy by lending money to the U.S. government.

Every single year, hundreds of billions of dollars in profits are made lending money to the U.S. government.

But why in the world should the U.S. government be going into debt to anyone?

Why can’t the U.S. government just print more money whenever it wants?

Well, that is not the way our system works.  The U.S. government has given the power of money creation over to a consortium of international private bankers.

Not only is this unconstitutional, but it is also one of the greatest ripoffs in human history.

In 1922, Henry Ford wrote the following….

“The people must be helped to think naturally about money. They must be told what it is, and what makes it money, and what are the possible tricks of the present system which put nations and peoples under control of the few.”

It is important to try to understand how the international banking elite became so fabulously wealthy.  One of the primary ways that this was accomplished was by gaining control over the issuance of national currencies and by trapping large national governments in colossal debt spirals.

The U.S. national debt problem simply cannot be fixed under the current system.  U.S. government debt has been mathematically designed to expand forever.  It is a trap from which there is no escape.

Many liberals won’t listen because they don’t really care about ever paying off the debt, and most conservatives won’t listen because they are convinced we can solve the national debt problem if we just get a bunch of “good conservatives” into positions of power, but the truth is that we have such a horrific debt problem because it was designed to be this way from the beginning.

So how would America be different if we could go back to 1913 and keep the Federal Reserve Act from ever being passed?  Well, the following are 10 things that would be different if the Federal Reserve had never been created….

#1 If the U.S. government had been issuing debt-free money all this time, the U.S. government could conceivably have a national debt of zero dollars.  Instead, we currently have a national debt that is over 14 trillion dollars.

#2 If the U.S. government had been issuing debt-free money all this time, the U.S. government would likely not be spending one penny on interest payments.  Instead, the U.S. government spent over 413 billion dollars on interest on the national debt during fiscal 2010.  This is money that belonged to U.S. taxpayers that was transferred to the U.S. government which in turn was transferred to wealthy international bankers and other foreign governments.  It is being projected that the U.S. government will be paying 900 billion dollars just in interest on the national debt by the year 2019.

#3 If the U.S. government could issue debt-free money, there would not even have to be a debate about raising “the debt ceiling”, because such a debate would not even be necessary.

#4 If the U.S. government could issue debt-free money, it is conceivable that we would not even need the IRS.  You doubt this?  Well, the truth is that the United States did just fine for well over a hundred years without a national income tax.  But about the same time the Federal Reserve was created a national income tax was instituted as well.  The whole idea was that the wealth of the American people would be transferred to the U.S. government by force and then transferred into the hands of the ultra-wealthy in the form of interest payments.

#5 If the Federal Reserve did not exist, we would not be on the verge of national insolvency.  The Congressional Budget Office is projecting that U.S. government debt held by the public will reach a staggering 716 percent of GDP by the year 2080.  Remember when I used the term “debt spiral” earlier?  Well, this is what a debt spiral looks like….

#6 If the Federal Reserve did not exist, the big Wall Street banks would not have such an overwhelming advantage.  Most Americans simply have no idea that over the last several years the Federal Reserve has been giving gigantic piles of nearly interest-free money to the big Wall Street banks which they turned right around and started lending to the federal government at a much higher rate of return.  I don’t know about you, but if I was allowed to do that I could make a whole bunch of money very quickly.  In fact, it has come out that the Federal Reserve made over $9 trillion in overnight loans to major banks, large financial institutions and other “friends” during the financial crisis of 2008 and 2009.

#7 If the Federal Reserve did not exist, it is theoretically conceivable that we would have an economy with little to no inflation.  Of course that would greatly depend on the discipline of our government officials (which is not very great at this point), but the sad truth is that our current system is always going to produce inflation.  In fact, the Federal Reserve system was originally designed to be inflationary.  Just check out the inflation chart posted below.  The U.S. never had ongoing problems with inflation before the Fed was created, but now it is just wildly out of control….

#8 If the Federal Reserve had never been created, the U.S. dollar would not be a dying currency.  Since the Federal Reserve was created, the U.S. dollar has lost well over 95 percent of its purchasing power.  By constantly inflating the currency, it transfers financial power away from those already holding the wealth (the American people) to those that are able to create more currency and more government debt.  Back in 1913, the total U.S. national debt was just under 3 billion dollars.  Today, the U.S. government is spending approximately 6.85 million dollars per minute, and the U.S. national debt is increasing by over 4 billion dollars per day.

#9 If the Federal Reserve did not exist, we would not have an unelected, unaccountable “fourth branch of government” running around that has gotten completely and totally out of control.  Even some members of Congress are now openly complaining about how much power the Fed has.  For example, Ron Paul told MSNBC last year that he believes that the Federal Reserve is now more powerful than Congress…..

“The regulations should be on the Federal Reserve. We should have transparency of the Federal Reserve. They can create trillions of dollars to bail out their friends, and we don’t even have any transparency of this. They’re more powerful than the Congress.”

#10 If the Federal Reserve had never been created, the American people would be much more free.  We would not be enslaved to this horrific national debt.  Our politicians would not have to run around the globe begging people to lend us money.  Representatives that we directly elect would be the ones setting national monetary policy.  Our politicians would be much less under the influence of the international banking elite.  We would not be at the mercy of the financial bubbles that the Fed has constantly been creating.

There is a reason why so many of the most prominent politicians from the early years of the United States were so passionately against a central bank.  The following is a February 1834 quote by President Andrew Jackson about the evils of central banking….

I too have been a close observer of the doings of the Bank of the United States. I have had men watching you for a long time, and am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the Bank. You tell me that if I take the deposits from the Bank and annul its charter I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves. I have determined to rout you out and, by the Eternal, (bringing his fist down on the table) I will rout you out.

But we didn’t listen to men like Andrew Jackson.

We allowed the Federal Reserve to be created in 1913 and we have allowed it to develop into an absolute monstrosity over the past century.

Now we are drowning in debt and we are on the verge of national bankruptcy.

Will the American people wake up before it is too late?

“They work for us now…”

Economic Depressions: Their Cause and Cure

By Murray N. Rothbard

We live in a world of euphemism. Undertakers have become “morticians,” press agents are now “public relations counsellors” and janitors have all been transformed into “superintendents.” In every walk of life, plain facts have been wrapped in cloudy camouflage.

No less has this been true of economics. In the old days, we used to suffer nearly periodic economic crises, the sudden onset of which was called a “panic,” and the lingering trough period after the panic was called “depression.”

The most famous depression in modern times, of course, was the one that began in a typical financial panic in 1929 and lasted until the advent of World War II. After the disaster of 1929, economists and politicians resolved that this must never happen again. The easiest way of succeeding at this resolve was, simply to define “depressions” out of existence. From that point on, America was to suffer no further depressions. For when the next sharp depression came along, in 1937–38, the economists simply refused to use the dread name, and came up with a new, much softer-sounding word: “recession.” From that point on, we have been through quite a few recessions, but not a single depression.

But pretty soon the word “recession” also became too harsh for the delicate sensibilities of the American public. It now seems that we had our last recession in 1957–58. For since then, we have only had “downturns,” or, even better, “slowdowns,” or “sidewise movements.” So be of good cheer; from now on, depressions and even recessions have been outlawed by the semantic fiat of economists; from now on, the worst that can possibly happen to us are “slowdowns.” Such are the wonders of the “New Economics.”

For 30 years, our nation’s economists have adopted the view of the business cycle held by the late British economist, John Maynard Keynes, who created the Keynesian, or the “New,” Economics in his book, The General Theory of Employment, Interest, and Money, published in 1936. Beneath their diagrams, mathematics, and inchoate jargon, the attitude of Keynesians toward booms and bust is simplicity, even naïveté, itself. If there is inflation, then the cause is supposed to be “excessive spending” on the part of the public; the alleged cure is for the government, the self-appointed stabilizer and regulator of the nation’s economy, to step in and force people to spend less, “sopping up their excess purchasing power” through increased taxation. If there is a recession, on the other hand, this has been caused by insufficient private spending, and the cure now is for the government to increase its own spending, preferably through deficits, thereby adding to the nation’s aggregate spending stream.

The idea that increased government spending or easy money is “good for business” and that budget cuts or harder money is “bad” permeates even the most conservative newspapers and magazines. These journals will also take for granted that it is the sacred task of the federal government to steer the economic system on the narrow road between the abysses of depression on the one hand and inflation on the other, for the free-market economy is supposed to be ever liable to succumb to one of these evils.

All current schools of economists have the same attitude. Note, for example, the viewpoint of Dr. Paul W. McCracken, the incoming chairman of President Nixon’s Council of Economic Advisers. In an interview with the New York Times shortly after taking office [January 24, 1969], Dr. McCracken asserted that one of the major economic problems facing the new Administration is “how you cool down this inflationary economy without at the same time tripping off unacceptably high levels of unemployment. In other words, if the only thing we want to do is cool off the inflation, it could be done. But our social tolerances on unemployment are narrow.” And again: “I think we have to feel our way along here. We don’t really have much experience in trying to cool an economy in orderly fashion. We slammed on the brakes in 1957, but, of course, we got substantial slack in the economy.”

Note the fundamental attitude of Dr. McCracken toward the economy – remarkable only in that it is shared by almost all economists of the present day. The economy is treated as a potentially workable, but always troublesome and recalcitrant patient, with a continual tendency to hive off into greater inflation or unemployment. The function of the government is to be the wise old manager and physician, ever watchful, ever tinkering to keep the economic patient in good working order. In any case, here the economic patient is clearly supposed to be the subject, and the government as “physician” the master.

It was not so long ago that this kind of attitude and policy was called “socialism”; but we live in a world of euphemism, and now we call it by far less harsh labels, such as “moderation” or “enlightened free enterprise.” We live and learn.

What, then, are the causes of periodic depressions? Must we always remain agnostic about the causes of booms and busts? Is it really true that business cycles are rooted deep within the free-market economy, and that therefore some form of government planning is needed if we wish to keep the economy within some kind of stable bounds? Do booms and then busts just simply happen, or does one phase of the cycle flow logically from the other?

The currently fashionable attitude toward the business cycle stems, actually, from Karl Marx. Marx saw that, before the Industrial Revolution in approximately the late eighteenth century, there were no regularly recurring booms and depressions. There would be a sudden economic crisis whenever some king made war or confiscated the property of his subject; but there was no sign of the peculiarly modern phenomena of general and fairly regular swings in business fortunes, of expansions and contractions. Since these cycles also appeared on the scene at about the same time as modern industry, Marx concluded that business cycles were an inherent feature of the capitalist market economy. All the various current schools of economic thought, regardless of their other differences and the different causes that they attribute to the cycle, agree on this vital point: That these business cycles originate somewhere deep within the free-market economy. The market economy is to blame. Karl Marx believed that the periodic depressions would get worse and worse, until the masses would be moved to revolt and destroy the system, while the modern economists believe that the government can successfully stabilize depressions and the cycle. But all parties agree that the fault lies deep within the market economy and that if anything can save the day, it must be some form of massive government intervention.

There are, however, some critical problems in the assumption that the market economy is the culprit. For “general economic theory” teaches us that supply and demand always tend to be in equilibrium in the market and that therefore prices of products as well as of the factors that contribute to production are always tending toward some equilibrium point. Even though changes of data, which are always taking place, prevent equilibrium from ever being reached, there is nothing in the general theory of the market system that would account for regular and recurring boom-and-bust phases of the business cycle. Modern economists “solve” this problem by simply keeping their general price and market theory and their business cycle theory in separate, tightly-sealed compartments, with never the twain meeting, much less integrated with each other. Economists, unfortunately, have forgotten that there is only one economy and therefore only one integrated economic theory. Neither economic life nor the structure of theory can or should be in watertight compartments; our knowledge of the economy is either one integrated whole or it is nothing. Yet most economists are content to apply totally separate and, indeed, mutually exclusive, theories for general price analysis and for business cycles. They cannot be genuine economic scientists so long as they are content to keep operating in this primitive way.

But there are still graver problems with the currently fashionable approach. Economists also do not see one particularly critical problem because they do not bother to square their business cycle and general price theories: the peculiar breakdown of the entrepreneurial function at times of economic crisis and depression. In the market economy, one of the most vital functions of the businessman is to be an “entrepreneur,” a man who invests in productive methods, who buys equipment and hires labor to produce something which he is not sure will reap him any return. In short, the entrepreneurial function is the function of forecasting the uncertain future. Before embarking on any investment or line of production, the entrepreneur, or “enterpriser,” must estimate present and future costs and future revenues and therefore estimate whether and how much profits he will earn from the investment. If he forecasts well and significantly better than his business competitors, he will reap profits from his investment. The better his forecasting, the higher the profits he will earn. If, on the other hand, he is a poor forecaster and overestimates the demand for his product, he will suffer losses and pretty soon be forced out of the business.

The market economy, then, is a profit-and-loss economy, in which the acumen and ability of business entrepreneurs is gauged by the profits and losses they reap. The market economy, moreover, contains a built-in mechanism, a kind of natural selection, that ensures the survival and the flourishing of the superior forecaster and the weeding-out of the inferior ones. For the more profits reaped by the better forecasters, the greater become their business responsibilities, and the more they will have available to invest in the productive system. On the other hand, a few years of making losses will drive the poorer forecasters and entrepreneurs out of business altogether and push them into the ranks of salaried employees.

If, then, the market economy has a built-in natural selection mechanism for good entrepreneurs, this means that, generally, we would expect not many business firms to be making losses. And, in fact, if we look around at the economy on an average day or year, we will find that losses are not very widespread. But, in that case, the odd fact that needs explaining is this: How is it that, periodically, in times of the onset of recessions and especially in steep depressions, the business world suddenly experiences a massive cluster of severe losses? A moment arrives when business firms, previously highly astute entrepreneurs in their ability to make profits and avoid losses, suddenly and dismayingly find themselves, almost all of them, suffering severe and unaccountable losses – How come? Here is a momentous fact that any theory of depressions must explain. An explanation such as “underconsumption” – a drop in total consumer spending – is not sufficient, for one thing, because what needs to be explained is why businessmen, able to forecast all manner of previous economic changes and developments, proved themselves totally and catastrophically unable to forecast this alleged drop in consumer demand. Why this sudden failure in forecasting ability?

An adequate theory of depressions, then, must account for the tendency of the economy to move through successive booms and busts, showing no sign of settling into any sort of smoothly moving, or quietly progressive, approximation of an equilibrium situation. In particular, a theory of depression must account for the mammoth cluster of errors which appears swiftly and suddenly at a moment of economic crisis, and lingers through the depression period until recovery. And there is a third universal fact that a theory of the cycle must account for. Invariably, the booms and busts are much more intense and severe in the “capital goods industries” – the industries making machines and equipment, the ones producing industrial raw materials or constructing industrial plants – than in the industries making consumers’ goods. Here is another fact of business cycle life that must be explained – and obviously can’t be explained by such theories of depression as the popular underconsumption doctrine: That consumers aren’t spending enough on consumer goods. For if insufficient spending is the culprit, then how is it that retail sales are the last and the least to fall in any depression, and that depression really hits such industries as machine tools, capital equipment, construction, and raw materials? Conversely, it is these industries that really take off in the inflationary boom phases of the business cycle, and not those businesses serving the consumer. An adequate theory of the business cycle, then, must also explain the far greater intensity of booms and busts in the non-consumer goods, or “producers’ goods,” industries.

Fortunately, a correct theory of depression and of the business cycle does exist, even though it is universally neglected in present-day economics. It, too, has a long tradition in economic thought. This theory began with the eighteenth century Scottish philosopher and economist David Hume, and with the eminent early nineteenth century English classical economist David Ricardo. Essentially, these theorists saw that another crucial institution had developed in the mid-eighteenth century, alongside the industrial system. This was the institution of banking, with its capacity to expand credit and the money supply (first, in the form of paper money, or bank notes, and later in the form of demand deposits, or checking accounts, that are instantly redeemable in cash at the banks). It was the operations of these commercial banks which, these economists saw, held the key to the mysterious recurrent cycles of expansion and contraction, of boom and bust, that had puzzled observers since the mid-eighteenth century.

The Ricardian analysis of the business cycle went something as follows: The natural moneys emerging as such on the world free market are useful commodities, generally gold and silver. If money were confined simply to these commodities, then the economy would work in the aggregate as it does in particular markets: A smooth adjustment of supply and demand, and therefore no cycles of boom and bust. But the injection of bank credit adds another crucial and disruptive element. For the banks expand credit and therefore bank money in the form of notes or deposits which are theoretically redeemable on demand in gold, but in practice clearly are not. For example, if a bank has 1000 ounces of gold in its vaults, and it issues instantly redeemable warehouse receipts for 2500 ounces of gold, then it clearly has issued 1500 ounces more than it can possibly redeem. But so long as there is no concerted “run” on the bank to cash in these receipts, its warehouse-receipts function on the market as equivalent to gold, and therefore the bank has been able to expand the money supply of the country by 1500 gold ounces.

The banks, then, happily begin to expand credit, for the more they expand credit the greater will be their profits. This results in the expansion of the money supply within a country, say England. As the supply of paper and bank money in England increases, the money incomes and expenditures of Englishmen rise, and the increased money bids up prices of English goods. The result is inflation and a boom within the country. But this inflationary boom, while it proceeds on its merry way, sows the seeds of its own demise. For as English money supply and incomes increase, Englishmen proceed to purchase more goods from abroad. Furthermore, as English prices go up, English goods begin to lose their competitiveness with the products of other countries which have not inflated, or have been inflating to a lesser degree. Englishmen begin to buy less at home and more abroad, while foreigners buy less in England and more at home; the result is a deficit in the English balance of payments, with English exports falling sharply behind imports. But if imports exceed exports, this means that money must flow out of England to foreign countries. And what money will this be? Surely not English bank notes or deposits, for Frenchmen or Germans or Italians have little or no interest in keeping their funds locked up in English banks. These foreigners will therefore take their bank notes and deposits and present them to the English banks for redemption in gold – and gold will be the type of money that will tend to flow persistently out of the country as the English inflation proceeds on its way. But this means that English bank credit money will be, more and more, pyramiding on top of a dwindling gold base in the English bank vaults. As the boom proceeds, our hypothetical bank will expand its warehouse receipts issued from, say 2500 ounces to 4000 ounces, while its gold base dwindles to, say, 800. As this process intensifies, the banks will eventually become frightened. For the banks, after all, are obligated to redeem their liabilities in cash, and their cash is flowing out rapidly as their liabilities pile up. Hence, the banks will eventually lose their nerve, stop their credit expansion, and in order to save themselves, contract their bank loans outstanding. Often, this retreat is precipitated by bankrupting runs on the banks touched off by the public, who had also been getting increasingly nervous about the ever more shaky condition of the nation’s banks.

The bank contraction reverses the economic picture; contraction and bust follow boom. The banks pull in their horns, and businesses suffer as the pressure mounts for debt repayment and contraction. The fall in the supply of bank money, in turn, leads to a general fall in English prices. As money supply and incomes fall, and English prices collapse, English goods become relatively more attractive in terms of foreign products, and the balance of payments reverses itself, with exports exceeding imports. As gold flows into the country, and as bank money contracts on top of an expanding gold base, the condition of the banks becomes much sounder.

This, then, is the meaning of the depression phase of the business cycle. Note that it is a phase that comes out of, and inevitably comes out of, the preceding expansionary boom. It is the preceding inflation that makes the depression phase necessary. We can see, for example, that the depression is the process by which the market economy adjusts, throws off the excesses and distortions of the previous inflationary boom, and reestablishes a sound economic condition. The depression is the unpleasant but necessary reaction to the distortions and excesses of the previous boom.

Why, then, does the next cycle begin? Why do business cycles tend to be recurrent and continuous? Because when the banks have pretty well recovered, and are in a sounder condition, they are then in a confident position to proceed to their natural path of bank credit expansion, and the next boom proceeds on its way, sowing the seeds for the next inevitable bust.

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

The central bank acquires its control over the banking system by such governmental measures as: Making its own liabilities legal tender for all debts and receivable in taxes; granting the central bank monopoly of the issue of bank notes, as contrasted to deposits (in England the Bank of England, the governmentally established central bank, had a legal monopoly of bank notes in the London area); or through the outright forcing of banks to use the central bank as their client for keeping their reserves of cash (as in the United States and its Federal Reserve System). Not that the banks complain about this intervention; for it is the establishment of central banking that makes long-term bank credit expansion possible, since the expansion of Central Bank notes provides added cash reserves for the entire banking system and permits all the commercial banks to expand their credit together. Central banking works like a cozy compulsory bank cartel to expand the banks’ liabilities; and the banks are now able to expand on a larger base of cash in the form of central bank notes as well as gold.

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

The Ricardian theory of the business cycle grasped the essentials of a correct cycle theory: The recurrent nature of the phases of the cycle, depression as adjustment intervention in the market rather than from the free-market economy. But two problems were as yet unexplained: Why the sudden cluster of business error, the sudden failure of the entrepreneurial function, and why the vastly greater fluctuations in the producers’ goods than in the consumers’ goods industries? The Ricardian theory only explained movements in the price level, in general business; there was no hint of explanation of the vastly different reactions in the capital and consumers’ goods industries.

The correct and fully developed theory of the business cycle was finally discovered and set forth by the Austrian economist Ludwig von Mises, when he was a professor at the University of Vienna. Mises developed hints of his solution to the vital problem of the business cycle in his monumental Theory of Money and Credit, published in 1912, and still, nearly 60 years later, the best book on the theory of money and banking. Mises developed his cycle theory during the 1920s, and it was brought to the English-speaking world by Mises’s leading follower, Friedrich A. von Hayek, who came from Vienna to teach at the London School of Economics in the early 1930s, and who published, in German and in English, two books which applied and elaborated the Mises cycle theory: Monetary Theory and the Trade Cycle, and Prices and Production. Since Mises and Hayek were Austrians, and also since they were in the tradition of the great nineteenth-century Austrian economists, this theory has become known in the literature as the “Austrian” (or the “monetary over-investment”) theory of the business cycle.

Building on the Ricardians, on general “Austrian” theory, and on his own creative genius, Mises developed the following theory of the business cycle:

Without bank credit expansion, supply and demand tend to be equilibrated through the free price system, and no cumulative booms or busts can then develop. But then government through its central bank stimulates bank credit expansion by expanding central bank liabilities and therefore the cash reserves of all the nation’s commercial banks. The banks then proceed to expand credit and hence the nation’s money supply in the form of check deposits. As the Ricardians saw, this expansion of bank money drives up the prices of goods and hence causes inflation. But, Mises showed, it does something else, and something even more sinister. Bank credit expansion, by pouring new loan funds into the business world, artificially lowers the rate of interest in the economy below its free market level.

On the free and unhampered market, the interest rate is determined purely by the “time-preferences” of all the individuals that make up the market economy. For the essence of a loan is that a “present good” (money which can be used at present) is being exchanged for a “future good” (an IOU which can only be used at some point in the future). Since people always prefer money right now to the prospect of getting the same amount of money some time in the future, the present good always commands a premium in the market over the future. This premium is the interest rate, and its height will vary according to the degree to which people prefer the present to the future, i.e., the degree of their time-preferences.

People’s time-preferences also determine the extent to which people will save and invest, as compared to how much they will consume. If people’s time-preferences should fall, i.e., if their degree of preference for present over future falls, then people will tend to consume less now and save and invest more; at the same time, and for the same reason, the rate of interest, the rate of time-discount, will also fall. Economic growth comes about largely as the result of falling rates of time-preference, which lead to an increase in the proportion of saving and investment to consumption, and also to a falling rate of interest.

But what happens when the rate of interest falls, not because of lower time-preferences and higher savings, but from government interference that promotes the expansion of bank credit? In other words, if the rate of interest falls artificially, due to intervention, rather than naturally, as a result of changes in the valuations and preferences of the consuming public?

What happens is trouble. For businessmen, seeing the rate of interest fall, react as they always would and must to such a change of market signals: They invest more in capital and producers’ goods. Investments, particularly in lengthy and time-consuming projects, which previously looked unprofitable now seem profitable, because of the fall of the interest charge. In short, businessmen react as they would react if savings had genuinely increased: They expand their investment in durable equipment, in capital goods, in industrial raw material, in construction as compared to their direct production of consumer goods.

Businesses, in short, happily borrow the newly expanded bank money that is coming to them at cheaper rates; they use the money to invest in capital goods, and eventually this money gets paid out in higher rents to land, and higher wages to workers in the capital goods industries. The increased business demand bids up labor costs, but businesses think they can pay these higher costs because they have been fooled by the government-and-bank intervention in the loan market and its decisively important tampering with the interest-rate signal of the marketplace.

The problem comes as soon as the workers and landlords – largely the former, since most gross business income is paid out in wages – begin to spend the new bank money that they have received in the form of higher wages. For the time-preferences of the public have not really gotten lower; the public doesn’t want to save more than it has. So the workers set about to consume most of their new income, in short to reestablish the old consumer/saving proportions. This means that they redirect the spending back to the consumer goods industries, and they don’t save and invest enough to buy the newly-produced machines, capital equipment, industrial raw materials, etc. This all reveals itself as a sudden sharp and continuing depression in the producers’ goods industries. Once the consumers reestablished their desired consumption/investment proportions, it is thus revealed that business had invested too much in capital goods and had underinvested in consumer goods. Business had been seduced by the governmental tampering and artificial lowering of the rate of interest, and acted as if more savings were available to invest than were really there. As soon as the new bank money filtered through the system and the consumers reestablished their old proportions, it became clear that there were not enough savings to buy all the producers’ goods, and that business had misinvested the limited savings available. Business had overinvested in capital goods and underinvested in consumer products.

The inflationary boom thus leads to distortions of the pricing and production system. Prices of labor and raw materials in the capital goods industries had been bid up during the boom too high to be profitable once the consumers reassert their old consumption/investment preferences. The “depression” is then seen as the necessary and healthy phase by which the market economy sloughs off and liquidates the unsound, uneconomic investments of the boom, and reestablishes those proportions between consumption and investment that are truly desired by the consumers. The depression is the painful but necessary process by which the free market sloughs off the excesses and errors of the boom and reestablishes the market economy in its function of efficient service to the mass of consumers. Since prices of factors of production have been bid too high in the boom, this means that prices of labor and goods in these capital goods industries must be allowed to fall until proper market relations are resumed.

Since the workers receive the increased money in the form of higher wages fairly rapidly, how is it that booms can go on for years without having their unsound investments revealed, their errors due to tampering with market signals become evident, and the depression-adjustment process begins its work? The answer is that booms would be very short lived if the bank credit expansion and subsequent pushing of the rate of interest below the free market level were a one-shot affair. But the point is that the credit expansion is not one-shot; it proceeds on and on, never giving consumers the chance to reestablish their preferred proportions of consumption and saving, never allowing the rise in costs in the capital goods industries to catch up to the inflationary rise in prices. Like the repeated doping of a horse, the boom is kept on its way and ahead of its inevitable comeuppance, by repeated doses of the stimulant of bank credit. It is only when bank credit expansion must finally stop, either because the banks are getting into a shaky condition or because the public begins to balk at the continuing inflation, that retribution finally catches up with the boom. As soon as credit expansion stops, then the piper must be paid, and the inevitable readjustments liquidate the unsound over-investments of the boom, with the reassertion of a greater proportionate emphasis on consumers’ goods production.

Thus, the Misesian theory of the business cycle accounts for all of our puzzles: The repeated and recurrent nature of the cycle, the massive cluster of entrepreneurial error, the far greater intensity of the boom and bust in the producers’ goods industries.

Mises, then, pinpoints the blame for the cycle on inflationary bank credit expansion propelled by the intervention of government and its central bank. What does Mises say should be done, say by government, once the depression arrives? What is the governmental role in the cure of depression? In the first place, government must cease inflating as soon as possible. It is true that this will, inevitably, bring the inflationary boom abruptly to an end, and commence the inevitable recession or depression. But the longer the government waits for this, the worse the necessary readjustments will have to be. The sooner the depression-readjustment is gotten over with, the better. This means, also, that the government must never try to prop up unsound business situations; it must never bail out or lend money to business firms in trouble. Doing this will simply prolong the agony and convert a sharp and quick depression phase into a lingering and chronic disease. The government must never try to prop up wage rates or prices of producers’ goods; doing so will prolong and delay indefinitely the completion of the depression-adjustment process; it will cause indefinite and prolonged depression and mass unemployment in the vital capital goods industries. The government must not try to inflate again, in order to get out of the depression. For even if this reinflation succeeds, it will only sow greater trouble later on. The government must do nothing to encourage consumption, and it must not increase its own expenditures, for this will further increase the social consumption/investment ratio. In fact, cutting the government budget will improve the ratio. What the economy needs is not more consumption spending but more saving, in order to validate some of the excessive investments of the boom.

Thus, what the government should do, according to the Misesian analysis of the depression, is absolutely nothing. It should, from the point of view of economic health and ending the depression as quickly as possible, maintain a strict hands off, “laissez-faire” policy. Anything it does will delay and obstruct the adjustment process of the market; the less it does, the more rapidly will the market adjustment process do its work, and sound economic recovery ensue.

The Misesian prescription is thus the exact opposite of the Keynesian: It is for the government to keep absolute hands off the economy and to confine itself to stopping its own inflation and to cutting its own budget.

It has today been completely forgotten, even among economists, that the Misesian explanation and analysis of the depression gained great headway precisely during the Great Depression of the 1930s – the very depression that is always held up to advocates of the free market economy as the greatest single and catastrophic failure of laissez-faire capitalism. It was no such thing. 1929 was made inevitable by the vast bank credit expansion throughout the Western world during the 1920s: A policy deliberately adopted by the Western governments, and most importantly by the Federal Reserve System in the United States. It was made possible by the failure of the Western world to return to a genuine gold standard after World War I, and thus allowing more room for inflationary policies by government. Everyone now thinks of President Coolidge as a believer in laissez-faire and an unhampered market economy; he was not, and tragically, nowhere less so than in the field of money and credit. Unfortunately, the sins and errors of the Coolidge intervention were laid to the door of a non-existent free market economy.

If Coolidge made 1929 inevitable, it was President Hoover who prolonged and deepened the depression, transforming it from a typically sharp but swiftly-disappearing depression into a lingering and near-fatal malady, a malady “cured” only by the holocaust of World War II. Hoover, not Franklin Roosevelt, was the founder of the policy of the “New Deal”: essentially the massive use of the State to do exactly what Misesian theory would most warn against – to prop up wage rates above their free-market levels, prop up prices, inflate credit, and lend money to shaky business positions. Roosevelt only advanced, to a greater degree, what Hoover had pioneered. The result for the first time in American history, was a nearly perpetual depression and nearly permanent mass unemployment. The Coolidge crisis had become the unprecedentedly prolonged Hoover-Roosevelt depression.

Ludwig von Mises had predicted the depression during the heyday of the great boom of the 1920s – a time, just like today, when economists and politicians, armed with a “new economics” of perpetual inflation, and with new “tools” provided by the Federal Reserve System, proclaimed a perpetual “New Era” of permanent prosperity guaranteed by our wise economic doctors in Washington. Ludwig von Mises, alone armed with a correct theory of the business cycle, was one of the very few economists to predict the Great Depression, and hence the economic world was forced to listen to him with respect. F. A. Hayek spread the word in England, and the younger English economists were all, in the early 1930s, beginning to adopt the Misesian cycle theory for their analysis of the depression – and also to adopt, of course, the strictly free-market policy prescription that flowed with this theory. Unfortunately, economists have now adopted the historical notion of Lord Keynes: That no “classical economists” had a theory of the business cycle until Keynes came along in 1936. There was a theory of the depression; it was the classical economic tradition; its prescription was strict hard money and laissez-faire; and it was rapidly being adopted, in England and even in the United States, as the accepted theory of the business cycle. (A particular irony is that the major “Austrian” proponent in the United States in the early and mid-1930s was none other than Professor Alvin Hansen, very soon to make his mark as the outstanding Keynesian disciple in this country.)

What swamped the growing acceptance of Misesian cycle theory was simply the “Keynesian Revolution” – the amazing sweep that Keynesian theory made of the economic world shortly after the publication of the General Theory in 1936. It is not that Misesian theory was refuted successfully; it was just forgotten in the rush to climb on the suddenly fashionable Keynesian bandwagon. Some of the leading adherents of the Mises theory – who clearly knew better – succumbed to the newly established winds of doctrine, and won leading American university posts as a consequence.

But now the once arch-Keynesian London Economist has recently proclaimed that “Keynes is Dead.” After over a decade of facing trenchant theoretical critiques and refutation by stubborn economic facts, the Keynesians are now in general and massive retreat. Once again, the money supply and bank credit are being grudgingly acknowledged to play a leading role in the cycle. The time is ripe – for a rediscovery, a renaissance, of the Mises theory of the business cycle. It can come none too soon; if it ever does, the whole concept of a Council of Economic Advisors would be swept away, and we would see a massive retreat of government from the economic sphere. But for all this to happen, the world of economics, and the public at large, must be made aware of the existence of an explanation of the business cycle that has lain neglected on the shelf for all too many tragic years.

This essay was originally published as a minibook by the Constitutional Alliance of Lansing, Michigan, 1969.

Reprinted from Mises.org.

Schiff Elaborates…