-- Posted Monday, 25 May 2009 | | Source: GoldSeek.com
By Howard S. Katz
Ludwig von Mises was the greatest economist of the 20th century. The idiots walking around today calling themselves economists do not come up to his bootstraps. However, there are a few fine points connected with Austrian economics which have to be ironed out. A reader writes:
“Howard are you saying that despite the awful policies of FDR during the Great Depression, the average person benefited? How?”
You are darn right that this is what I am saying. During what is (incorrectly) called the Great Depression the average person benefited. But first let us do a little theoretical work.
Von Mises was great for strongly emphasizing that economics is a science of human action. Indeed, one of his books has that title. This was meant to counter the pseudo-mathematics of 20th century economists. These economists throw mathematics into their writings to sound scientific and to impress those who do not understand the subject. (A good example here were Robert Merton and Myron Scholes, who won what is called the Nobel Prize in Economics for their option pricing theories in 1997. They were so confident that their theories were true that they associated with a hedge fund, Long Term Capital Management, formed to trade on the theories. In 1998, Long Term Capital Management went belly up and lost $4 billion dollars. Von Mises, had he been alive in ’98, would have had a good laugh.)
But politics is also a science of human action. And this means that economics and politics are sister subjects. When human beings act, they do not stop to divide their behavior into categories. They just do their thing. It is only intellectuals who come afterward and classify their behavior into subjects. Indeed, the subject a few centuries ago was called political economy because politics and economics were so intertwined.
If you study politics throughout history, you find that an awful lot of people want to live off the labor of their fellows. Giant social systems have been erected on the basis of this immoral desire. During the Middle Ages a small class of men had seized control of the arable land of the world and reduced the average person to serfdom. The average guy toiled for a pittance, and the aristocrat lived in (relative) luxury in the castle.
As the Middle Ages were breaking down, banking became legalized. However, it was not well understood. The Middle Ages had argued that interest (called usury at the time) was immoral and should be banned. Gradually this ban was overturned on the recognition that it was a victimless crime, and banks came into existence. (There was a bitter battle over this which lasted from the mid-16th century to shortly after the American Revolution. The institution of the American neighborhood bank only began in the 1780s.)
The way a bank ought to operate was the way that savings banks later operated when they came into existence in the early 19th century. Such a bank gets its capital by paying interest to depositors. It then lends this capital to borrowers, charging them a higher rate. It thus acts as a middle man between saver and borrower, and its job is to select responsible borrowers, who have a high rate of paying their loans back. But the commercial bank was based on an important mistake. It charged interest when it lent its capital. But it did not get its capital by paying interest. It got its deposits by telling people that it was a money warehouse and would give their capital back on demand. People brought their money to the commercial bank for convenience.
It was only a little fib, and the first bankers probably did not intend to lie. In those days, the world was young, and there was much about banking and interest which was not understood. But it had the result that this large and important institution was founded on a lie. Commercial bankers could not give people their money on demand – not if too many of them asked at once.
It is not taught in American history that the country got into war with Britain in 1812 precisely because of this defect in the banking system. The Government avoided a tax increase by borrowing from the commercial banks to pay for the war. These banks created money in the form of bank notes, each of which promised that it could be redeemed for gold or silver. But the banks issued a lot more notes than they had gold or silver available for redemption. When the British burned Washington in 1814, the bank depositors got scared and ran to their banks demanding repayment. But the banks could not pay. They had run out of hard money. The value of the bank notes fell, and Daniel Webster reports that a typical Washington D.C. one dollar bank note was actually trading for 75¢.
At that time, the Government was gearing up for another big war effort (a surge if you will). They went to the bankers and asked for more money. “Just one more loan and we can win this war.” But the bankers said, “We can’t do it. Our notes are already down to 75¢. If we make another big loan with no gold or silver to back it up, our notes will plunge. It will show bad faith. You will see bank notes at 50¢. Unable to get its money the Government made peace.
So sound money is a force for peace. Why isn’t this historical fact taught in American history classes? Why don’t you go down to your local high school and ask the history teachers to teach real American history? It would be a good idea to teach our children the truth.
As a result of this bad system, a nexus developed between the bankers and the government (the most recent example of which was the bank bailout of October 2008). The bankers would issue more money to make loans and would get in trouble when their depositors asked to be repaid in gold (or silver). There would be a cycle of money/credit expansion followed by money/credit contraction. This came to be called the business cycle and was thought to be inherent in a free market economy.
It further had the effect of corrupting the science of economics. The bankers began to reward the careers of economists who defended their privilege to create money. They thus created a class of pseudo-economists, who came to dominate the subject in the 20th century. For example, prior to the American Civil War no one in this country talked about inflation. An inflation is a going up, as when you inflate a balloon. If the word is going to be used in economics, shouldn’t it be used to indicate a going up? When U.S. money dropped from $1.00 to 75¢ during the War of 1812, it was called a depreciation of the currency. However, when U.S. money dropped from $1.00 to 50¢ during the Civil War, this was called an inflation.
The reason for this is that the pseudo-economists of that time were trying to persuade people that printing money did not cause a fall in the value of the money. “The problem,” they said, “is not that money is going down. The problem is that goods are going up. The problem lies with goods. We can’t fix it by stopping the printing of money.” The latest variant of this argument occurred in the 1970s. Nixon abandoned our last tie to the gold standard and began to print money at a rapid rate. When prices started to rise, the media blamed OPEC and oil for the general rise in all goods (“double digit inflation” in the media hype of the day). Actually, if there had been something peculiar to oil causing its rise, then the public would have been left with less money (after buying their gas) and had less money to spend on other items. The price of most of these items would, therefore, have declined, and the general price level would have remained unchanged. But if you have ever tried to convince someone of the obvious truth that increasing the supply of money causes a general rise in prices, then your problem is that he is thinking of the banker-concept of inflation. He has the banker-premise (that goods are going up), and so he comes to the banker conclusion. If you simply say, “increasing the supply of money depreciates its value,” then you will win rapid agreement. QED.
Another way in which the banker-economists succeeded in corrupting the language was with the concepts of boom and depression. In reality there are no booms or depressions, or perhaps it would be more accurate to say that the “booms” are depressions, and the “depressions” are booms. All there really are in the U.S. economy are expansions and contractions of money and credit by the banks. It was the banker economists who labeled the expansions as booms and the contractions as depressions/recessions.
Here is another interesting point. From the end of the Civil War to 1896 there were repeated, severe credit contractions. These were named by the economists of the day, the Depression of 1866, the (Great) Depression of 1873-79, the Panic of 1884, the Depression of 1893 and the Silver Campaign Depression of 1896. If these “depressions” had actually been depressions, then how come this period ranks as: the greatest period of economic growth in American history; the greatest period of economic growth in the 19th century; and the greatest period of economic growth in the history of the world.
Why was it that people from all over the world flocked to America during this period? Why was it that the real wages of the average American worker rose by 90% over this 30 year period? Why did America, which had just been ravaged by a bitter Civil War, rebound with vigor at this time to become the richest and most powerful nation in history? There have been many other nations with giant untamed wildernesses: Argentina, Brazil, Russia, Mongolia, China’s Gobi Desert. In most cases, these wilderness areas remain wildernesses to this day. Their peoples have never had the energy and productivity to build roads, dam rivers and make the desert bloom, let alone establish trans-continental jet transportation and land men on the moon.
Von Mises predicted the “depression” of the 1930s in the late 1920s. Modern economists are so confused by the lies they preach to apologize for the bankers that they completely missed it. Indeed, this period of history was one of massive lies. It should be noted that the Germans elected Adolf Hitler dictator just 2 months after the Americans elected F.D.R. President. (And Walter Lippmann was urging him to seize dictatorial powers.) You have all heard about the wave of suicides following the stock market crash of October 1929. It is a complete and total lie. There is not a shred of evidence for this in the suicide statistics, which remained normal during November and December of that year. All that happened was that the media spun a few of the suicides which did occur (normal in any age) and tried to link them to the stock market crash.
Neither was Herbert Hoover the great defender of laissez faire. As early as 1920, there was a campaign to make him President, and it was said of him:
He [Hoover] is certainly a wonder and I wish we could make him President of the United States. There could not be a better one.”
The author of that statement was Franklin Delano Roosevelt. Hoover caused the stock market crash of 1929 by making the Federal Reserve deny margin loans to stock market speculators. These speculators were forced to sell in massive quantities. Their selling caused the crash. Hoover was against the freedom to speculate and also against the freedom to lend money at interest. When freedom was defeated in 1932, it had no horse in the race.
The standard argument to prove that the period 1930-34 was a depression is, “Just ask the unemployed.” There was a great deal of unemployment at that time (about 25% at the worst), but of course 25% of the country was not 100%, or even 51%. The Republican policy was to reduce the money supply to return the price level back to that of 1914. As prices came down, nominal wages fell, but real wages rose. If prices fall from 100 to 70 and wages fall from 100 to 80, then you can buy 8/7 (114%) as much with your paycheck. This overpayment of wages was the principal cause of the unemployment of that time. The Republicans were dealing with the problems of the whole country (not just the unemployed). The greater problem was the loss in the real value of the people’s savings during WWI. 98% of the American people were savers, and the value of their savings had fallen in half. The value of these savings were restored, partly in 1921 but mostly in 1930-32. If you had asked one of the unemployed of the day, he would probably have told you that he was holding out for higher wages, and he was better off because the value of his savings was being restored. All this had happened in 1873-79 and was well known to the people of that day. The unemployment had been temporary, and the value of the people’s savings had been restored. It was the best policy for the country as a whole.
Some Austrians are puzzled by the fact that there was no increase in the nation’s money supply during the 1920s. No, the increase occurred from 1914-1919. During the 1920s the Government was paying off its war loans. As these loans were repaid, the bankers relent the money to business, thus creating the “boom” of the ‘20s.
The Austrians, following von Mises, have been too much the gentlemen not realizing that they have been dealing with goons and thugs like John Kenneth Galbraith and John Maynard Keynes. These people were leading the world back toward the system of the Middle Ages. And their first goal was to legalize stealing, meaning to legalize the counterfeiting of money by the commercial bankers. Today this is the policy of both Democrats and Republicans (called “stimulation of the economy”). Once the bankers have become dependent on the wealth they steal from us, they will have to start chipping away at our legal/political freedoms. If you study the way in which the will of the people was overridden by the bank bailout bill of October 2008, you realize that there is an irreconcilable conflict between the people who create the wealth and the counterfeiters who steal it. If the people get their way, the bankers (and their associated vested interests) will have to go bankrupt. It is therefore essential for the bankers that our democratic rights must be overridden. All this has happened (in a slightly different fashion) before. The late Roman Empire depreciated her silver currency by mixing it with copper. Then they imposed price controls (enforced by the death penalty). People stopped using money. The economy collapsed. Disease and famine swept the Roman world, and people turned to the barbarians hoping for something better.
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-- Posted Monday, 25 May 2009 | Digg This Article
| Source: GoldSeek.com
