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Why Is the Fed Punishing My Parents? – Article by Shawn Ritenour

Why Is the Fed Punishing My Parents? – Article by Shawn Ritenour

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The New Renaissance Hat
Shawn Ritenour
March 29, 2015
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In September 1993, President Bill Clinton reassured his radio audience that “if you work hard and play by the rules, you’ll be rewarded with a good life for yourself and a better chance for your children.” Picking up that theme over eighteen years later, President Barack Obama affirmed that “Americans who work hard and play by the rules every day deserve a government and a financial system that does the same.” The trouble is neither the government nor the financial system backed by the Federal Reserve rewards people like my parents, who have worked hard and played by the rules their entire lives, only to have their savings wither away.

Instead, Federal Reserve officials and the intelligentsia who support them are continuously working to make their lives more difficult, frightening the masses of what shoppers look for every day — lower prices. Price deflation, the cry, is disastrous for the economy. They worry that lower prices will reduce profits, leading to shutdowns and lay-offs and that lower prices make it harder for people to pay their debts. Sound economic theory and history, however, both indicate that price deflation is nothing the social economy needs to fear. If prices fall because the economy is more productive, this is unambiguously positive. However, if prices fall because people spend less, their desire is for larger real cash balances. Falling prices help them achieve their goal, which precisely is the purpose of economic activity.

Lower prices and wages can make it harder to pay fixed debt. This, however, serves as an excellent incentive to stay out of debt in the first place, as my parents have done as a result of significant sacrifice. Before creating even more money out of thin are to ward off lower overall prices, we should at least consider some of the ethical issues involved.

Many men from my father’s generation are not unlike John Adams who wrote to his wife that he “must study politics and war, that our sons may have liberty to study mathematics and philosophy.” My father embarked for twenty years of hard labor in a meat packing plant providing for his family until he lost his job due to his union pricing him and his fellow workers out of a job. When his plant closed in the mid-1980s, he embarked on a second successful career with my mother operating their own barbecue business for another twenty-plus years. I saw firsthand the challenges they faced trying to keep quality up and costs down, while producing top-drawer barbecue meat and sandwiches for a demand that was always uncertain. I saw the stress on my mother’s face one week in the early days when they netted a mere $15 before taxes. My father indeed “studied” meat packing and barbecue, in part, so I could go to college and become an economist and college professor.

Additionally, Mom and Dad had the foresight and character to make the sacrifices necessary to stay out of debt. Indeed, they are Paul Krugman’s worst nightmare — a family determined not to live beyond their means. Now retired, like many in their generation they are enjoying life the best they can on an almost fixed income. Because they have no debt, they have been able to live without tremendous economic hardship thus far. The Federal Reserve’s inflationism, however, increasingly makes life for them more difficult as steady price inflation daily chips away at their livelihood. Since 2009, for example, the Consumer Price Index has increased over 9 percent. This masks, however, significantly larger price increases for important necessities. Prices of dairy products are up almost 17 percent since 2009. Gasoline prices are up almost 11 percent despite the recent decline. Prices for meat, poultry, fish, and eggs have increased a whopping 26 percent since 2009. Higher overall prices do not help people like my parents at all. They instead act as a thief, snatching wealth away from them in the form of diminished purchasing power. What they long for is to see the value of their savings increase. Far from creating economic hardship for them, lower overall prices would be a boon.

Both sound economics and ethics, therefore, demand that we give up the anti-deflation rhetoric and the inflation it fuels. Charity demands that we cease striking fear into the hearts of the masses, softening them up for ever higher prices. The Federal Reserve should stop punishing people like my parents who have worked hard and played by the rules their whole lives. After all, what did they ever do to Greenspan, Bernanke, and Yellen?

Shawn Ritenour teaches economics at Grove City College and is the author of Foundations of Economics: A Christian View.

This article was published on Mises.org and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

Don’t Be Fooled by the Federal Reserve’s Anti-Audit Propaganda – Article by Ron Paul

Don’t Be Fooled by the Federal Reserve’s Anti-Audit Propaganda – Article by Ron Paul

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The New Renaissance Hat
Ron Paul
March 9, 2015
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In recent weeks, the Federal Reserve and its apologists in Congress and the media have launched numerous attacks on the Audit the Fed legislation. These attacks amount to nothing more than distortions about the effects and intent of the audit bill.

Fed apologists continue to claim that the Audit the Fed bill will somehow limit the Federal Reserve’s independence. Yet neither Federal Reserve Chair Janet Yellen nor any other opponent of the audit bill has ever been able to identify any provision of the bill giving Congress power to dictate monetary policy. The only way this argument makes sense is if the simple act of increasing transparency somehow infringes on the Fed’s independence.

This argument is also flawed since the Federal Reserve has never been independent from political pressure. As economists Daniel Smith and Peter Boettke put it in their paper “An Episodic History of Modern Fed Independence,” the Federal Reserve “regularly accommodates debt, succumbs to political pressures, and follows bureaucratic tendencies, compromising the Fed’s operational independence.”

The most infamous example of a Federal Reserve chair bowing to political pressure is the way Federal Reserve Chairman Arthur Burns tailored monetary policy to accommodate President Richard Nixon’s demands for low interest rates. Nixon and Burns were even recorded mocking the idea of Federal Reserve independence.

Nixon is not the only president to pressure a Federal Reserve chair to tailor monetary policy to the president’s political needs. In the fifties, President Dwight Eisenhower pressured Fed Chairman William Martin to either resign or increase the money supply. Martin eventually gave in to Ike’s wishes for cheap money. During the nineties, Alan Greenspan was accused by many political and financial experts — including then-Federal Reserve Board Member Alan Blinder — of tailoring Federal Reserve policies to help President Bill Clinton.

Some Federal Reserve apologists make the contradictory claim that the audit bill is not only dangerous, but it is also unnecessary since the Fed is already audited. It is true that the Federal Reserve is subject to some limited financial audits, but these audits only reveal the amount of assets on the Fed’s balance sheets. The Audit the Fed bill will reveal what was purchased, when it was acquired, and why it was acquired.

Perhaps the real reason the Federal Reserve fears a full audit can be revealed by examining the one-time audit of the Federal Reserve’s response to the financial crisis authorized by the Dodd-Frank law. This audit found that between 2007 and 2010 the Federal Reserve committed over $16 trillion — more than four times the annual budget of the United States — to foreign central banks and politically influential private companies. Can anyone doubt a full audit would show similar instances of the Fed acting to benefit the political and economic elites?

Some fed apologists are claiming that the audit bill is part of a conspiracy to end the Fed. As the author of a book called End the Fed, I find it laughable to suggest that I, and other audit supporters, are hiding our true agenda. Besides, how could an audit advance efforts to end the Fed unless the audit would prove that the American people would be better off without the Fed? And don’t the people have a right to know if they are being harmed by the current monetary system?

For over a century, the Federal Reserve has operated in secrecy, to the benefit of the elites and the detriment of the people. It is time to finally bring transparency to monetary policy by auditing the Federal Reserve.

Ron Paul, MD, is a former three-time Republican candidate for U. S. President and Congressman from Texas.

This article is reprinted with permission from the Ron Paul Institute for Peace and Prosperity.

If the Fed Has Nothing to Hide, It Has Nothing to Fear – Article by Ron Paul

If the Fed Has Nothing to Hide, It Has Nothing to Fear – Article by Ron Paul

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The New Renaissance Hat
Ron Paul
January 19, 2015
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Since the creation of the Federal Reserve in 1913, the dollar has lost over 97 percent of its purchasing power, the US economy has been subjected to a series of painful Federal Reserve-created recessions and depressions, and the federal government has grown to dangerous levels thanks to the Fed’s policy of monetizing the debt. Yet the Federal Reserve still operates under a congressionally-created shroud of secrecy.No wonder almost 75 percent of the American public supports legislation to audit the Federal Reserve.

The new Senate leadership has pledged to finally hold a vote on the audit bill this year, but, despite overwhelming public support, passage of this legislation is by no means assured.

The reason it may be difficult to pass this bill is that the 25 percent of Americans who oppose it represent some of the most powerful interests in American politics. These interests are working behind the scenes to kill the bill or replace it with a meaningless “compromise.” This “compromise” may provide limited transparency, but it would still keep the American people from learning the full truth about the Fed’s conduct of monetary policy.

Some opponents of the bill say an audit would somehow compromise the Fed’s independence. Those who make this claim cannot point to anything in the text of the bill giving Congress any new authority over the Fed’s conduct of monetary policy. More importantly, the idea that the Federal Reserve is somehow independent of political considerations is laughable. Economists often refer to the political business cycle, where the Fed adjusts its policies to help or hurt incumbent politicians. Former Federal Reserve Chairman Arthur Burns exposed the truth behind the propaganda regarding Federal Reserve independence when he said, if the chairman didn’t do what the president wanted, the Federal Reserve “would lose its independence.”

Perhaps the real reason the Fed opposes an audit can be found by looking at what has been revealed about the Fed’s operations in recent years. In 2010, as part of the Dodd-Frank bill, Congress authorized a one-time audit of the Federal Reserve’s activities during the financial crisis of 2008. The audit revealed that between 2007 and 2008 the Federal Reserve loaned over $16 trillion — more than four times the annual budget of the United States — to foreign central banks and politically influential private companies.

In 2013 former Federal Reserve official Andrew Huszar publicly apologized to the American people for his role in “the greatest backdoor Wall Street bailout of all time” — the Federal Reserve’s quantitative easing program. Can anyone doubt an audit would further confirm how the Fed acts to benefit economic elites?

Despite the improvements shown in the (federally manipulated) economic statistics, the average American has not benefited from the Fed’s quantitative easing program. The abysmal failure of quantitative easing in the US may be one reason Switzerland stopped pegging the value of the Swiss Franc to the Euro following reports that the European Central Bank is about to launch its own quantitative easing program.

Quantitative easing is just the latest chapter in the Federal Reserve’s hundred-year history of failure. Despite this poor track record, Fed apologists still claim the American people benefit from the Federal Reserve System. But, if that were the case, why wouldn’t they welcome the opportunity to let the American people know more about monetary policy? Why is the Fed acting like it has something to hide if it has nothing to fear from an audit?

The American people have suffered long enough under a monetary policy controlled by an unaccountable, secretive central bank. It is time to finally audit — and then end — the Fed.

Ron Paul, MD, is a former three-time Republican candidate for U. S. President and Congressman from Texas.

This article is reprinted with permission from the Ron Paul Institute for Peace and Prosperity.

Janet Yellen’s Christmas Gift to Wall Street – Article by Ron Paul

Janet Yellen’s Christmas Gift to Wall Street – Article by Ron Paul

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The New Renaissance Hat
Ron Paul
December 21, 2014
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Last week we learned that the key to a strong economy is not increased production, lower unemployment, or a sound monetary unit. Rather, economic prosperity depends on the type of language used by the central bank in its monetary policy statements. All it took was one word in the Federal Reserve Bank’s press release — that the Fed would be “patient” in raising interest rates to normal levels — and stock markets went wild. The S&P 500 and the Dow Jones Industrial Average had their best gains in years, with the Dow gaining nearly 800 points from Wednesday to Friday and the S&P gaining almost 100 points to close within a few points of its all-time high.

Just think of how many trillions of dollars of financial activity that occurred solely because of that one new phrase in the Fed’s statement. That so much in our economy hangs on one word uttered by one institution demonstrates not only that far too much power is given to the Federal Reserve, but also how unbalanced the American economy really is.

While the real economy continues to sputter, financial markets reach record highs, thanks in no small part to the Fed’s easy money policies. After six years of zero interest rates, Wall Street has become addicted to easy money. Even the slightest mention of tightening monetary policy, and Wall Street reacts like a heroin addict forced to sober up cold turkey.

While much of the media paid attention to how long interest rates would remain at zero, what they largely ignored is that the Fed is, “maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.” Look at the Fed’s balance sheet and you’ll see that it has purchased $25 billion in mortgage-backed securities since the end of QE3. Annualized, that is $200 billion a year. That may not be as large as QE2 or QE3, but quantitative easing, or as the Fed likes to say “accommodative monetary policy” is far from over.

What gets lost in all the reporting about stock market numbers, unemployment rate figures, and other economic data is the understanding that real wealth results from production of real goods, not from the creation of money out of thin air. The Fed can rig the numbers for a while by turning the monetary spigot on full blast, but the reality is that this is only papering over severe economic problems. Six years after the crisis of 2008, the economy still has not fully recovered, and in many respects is not much better than it was at the turn of the century.

Since 2001, the United States has grown by 38 million people and the working-age population has grown by 23 million people. Yet the economy has only added eight million jobs. Millions of Americans are still unemployed or underemployed, living from paycheck to paycheck, and having to rely on food stamps and other government aid. The Fed’s easy money has produced great profits for Wall Street but it has not helped — and cannot help — Main Street.

An economy that holds its breath every six weeks, looking to parse every single word coming out of Fed Chairman Janet Yellen’s mouth for indications of whether to buy or sell, is an economy that is fundamentally unsound. The Fed needs to stop creating trillions of dollars out of thin air, let Wall Street take its medicine, and allow the corrections that should have taken place in 2001 and 2008 to liquidate the bad debts and malinvestments that permeate the economy. Only then will we see a real economic recovery.

Ron Paul, MD, is a former three-time Republican candidate for U. S. President and Congressman from Texas.

This article is reprinted with permission from the Ron Paul Institute for Peace and Prosperity.

Cryptocurrencies and a Wider Regression Theorem – Article by Peter St. Onge

Cryptocurrencies and a Wider Regression Theorem – Article by Peter St. Onge

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Peter St. Onge
December 18, 2014
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The debate whether or not cryptocurrencies are “money” has put a spotlight on the Menger-Mises Regression Theorem. As stated, the theorem posits that a non-fiat money must have had value before it became a money. Some have used currencies’ lack of antecedent value as knocking it off the money pedestal or as forcing cryptocurrencies to ignominiously piggyback on fiat currencies’ own regressions.

In a 2013 post Konrad Graf makes the excellent point that such critiques misread the Regression Theorem. In reality, Graf argues, the theorem is not a hypothesis to be tested, rather the theorem tells us that cryptocurrencies such as Bitcoin indeed had some antecedent value. At which point our task is to discover what that antecedent value was. Graf suggests several alternatives, including utility of Bitcoin as a geek toy, as art, or as social marker. Because of these non-monetary uses, Graf writes, bitcoin and the theorem do not threaten each other, but “merely gaze across the intellectual landscape at one another with knowing smiles.”

While I agree with Graf on his main point that the theorem implies cryptocurrencies did have antecedent value, I believe that both the original critique and Grafs’ response fall into a trap of misreading the theorem as requiring non-monetary and previously realized (“bought and sold”) benefits.

Money Is a Useful Good

Among Menger’s greatest contributions in his Principles is the realization that money is fundamentally a good like any other — demanded for its usefulness in enabling transactions and store of value — with an actual price dictated by its scarcity.

If money, like any other good, derives its value from the benefits it offers, it’s hard to see why the money, even those benefits, require an antecedent. Just as the internet can be valuable without a “pre-internet,” a cryptocurrency enabling anonymous, irreversible, low-regulation transactions and savings can be valuable without a precursor. [1] If there is no regression requirement for value in any other good, why does money alone bear this burden?

Must Money Have a Non-Monetary Use?

Instead, I would argue for a reading of the Regression Theorem with two important liberalizations. First, benefits provided by a money needn’t be non-monetary. That is, the benefits can reside in the good’s use as money itself — no need for geek-chic art. Second, antecedent demand needn’t have been realized — the use needn’t have actually occurred. It’s the antecedent demand, even latent, not the previous buying and selling, which counts in importing value via the Regression Theorem.

To give an example that satisfies both liberalizations, a benefit such as anonymous wire transfers is both a money-related benefit and is also a service that didn’t previously exist. In a liberalized Regression Theorem, this benefit would count as the antecedent demand giving the spark of life to a scarce cryptocurrency.

A concrete historical example of a currency offering both mainly monetary value and offering it only at moment of birth is Tang China’s paper money. Called “flying cash,” paper offered the key benefit of portability, set against its other risks compared with bullion coins (flammability, uncertain redemption). We could surely seek out non-monetary antecedent value for Tang cash — toilet paper comes to mind. But it seems a stretch to reach for artistic or hygiene uses, compared to the natural conclusion that flying cash was demanded because of its monetary benefits. The fact that demand for portable money was unrealized would simply increase paper money’s value to the unfortunate customer who lacked alternative light-weight money.

This mistaken focus on non-money-related and realized antecedent value is understandable, since even Mises seems to be mixing historical and praxeological discussion in Human Action (chapter 17, sec. 4) where Mises writes, “No good can be employed for the function of a medium of exchange which at the very beginning of its use for this purpose did not have exchange value on account of other employments.”

Here Mises seems to clearly state that Menger’s Regression Theorem requires a currency to have historically represented a commodity having non-money use. This is a natural interpretation, especially in context of Mises’s subsequent discussion of precious metals, clearly useful commodities that you can flash at parties.

But we must take care here to separate Mises’s historical generalization from the praxeological core of his statement. Because Mises has metal on his mind, he suggests the “other employments” must have been antecedent (“did not have”) and, in his subsequent discussion of metals, seems to imply the commodities should be both concrete and previously in use (realized) for non-money purposes.

Money Benefits Are as Useful as Non-Money Benefits

Again, praxeologically, none of these requirements are essential. Money benefits are as useful as non-money benefits, and a useful commodity could conceivably be created and become a medium of exchange at the same moment. So long as the commodity offers “employments” in the form of benefits to users. Cryptocurrencies’ anonymity, regulatory treatment, algorithmically fixed rate of growth, fee structure, and irreversibility of transfer are all money-related benefits, many unrealized before cryptocurrencies came along.

On this reading, and in agreement with Graf, cryptocurrencies are not at all a challenge to the Regression Theorem. They are a confirmation. At birth, cryptocurrencies offered useful features. These benefits function as “employments,” giving cryptocurrencies demand via transaction and store of-value benefits, which in turn import durable purchasing power.

Perceptions Are Important

That “seed” of demand can then be amplified by marketing — by framing the subjective benefits of the currency. Again like any other good, if individuals exert effort to communicate and frame the benefits of a cryptocurrency, then we might expect demand to increase. These individuals may be the owners of businesses that benefit from the currency, or they simply may be enthusiasts.

Now we can simply match these subjective benefits to scarcity to yield a price of a cryptocurrency. Below zero and the currency isn’t “good enough” — it’s not perceived to offer enough benefits. It’s not cool and it’s not art. Above zero and a currency is born: now Satoshi Nakamoto t-shirts are all the rage.

As technology lowers the costs of producing cryptocurrencies, broadening the Regression Theorem’s value requirement to accept novel money-related benefits opens up enormously the range of currencies that are possible in the future. It should be an exciting few decades in the world of currency innovation.

Notes

1. Cryptocurrencies benefit from a perception of anonymity, although whether or not there is actual anonymity in practice is another matter.

Peter St. Onge is an assistant professor at Taiwan’s Fengjia University College of Business. He blogs at Profits of Chaos.

This article was published on Mises.org and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

Contrasting the Roles of World-Transforming Business Enterprises in the Novels of Hazlitt, Heinlein, and Istvan – Article by G. Stolyarov II

Contrasting the Roles of World-Transforming Business Enterprises in the Novels of Hazlitt, Heinlein, and Istvan – Article by G. Stolyarov II

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The New Renaissance Hat
G. Stolyarov II
December 17, 2014
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Henry Hazlitt’s Time Will Run Back, Robert Heinlein’s Methuselah’s Children, and Zoltan Istvan’s The Transhumanist Wager each portray a different path by which business enterprises can dramatically improve the human condition, catalyzing paradigm shifts in the societies around them. (Follow the hyperlinks above to read my detailed analyses of each novel.) Far from being concerned solely with immediate profits or meeting quarterly earnings goals, the entrepreneurs depicted in these novels endeavor to thrive despite political persecution and manage to escape and overcome outright dystopias.

Among these three novels, Methuselah’s Children shows the tamest business-based route to reform. For centuries the Howard Foundation aims not to transform the broader society, but rather to protect its own beneficiaries and encourage incrementally greater longevity with each subsequent selectively bred generation. The Howard Families adapt to existing legal and cultural climates and prefer keeping a low profile to instigating a revolution. But even their mild outreach to the general public – motivated by the hope for acceptance and the desire to share their knowledge with the world – brings upon them the full force of the supposedly enlightened and rights-respecting society of The Covenant. Rather than fight, the Howard Families choose to escape and pursue their vision of the good life apart from the rest of humanity. Yet the very existence of this remarkable group and its members’ extraordinary lifespans fuels major changes for humanity during the 75 years of the Howard Families’ voyage. By remaining steadfast to its purpose of protecting its members, the Howard Foundation shows humankind that radical life extension is possible, and Ira Howard’s goal is attained for the remainder of humanity, whose pursuit of extended longevity cannot be stopped once society is confronted with its reality.

The path of incremental and experimental – but principled – reform through the use of business is illustrated in Time Will Run Back. Even though Peter Uldanov does not intend to embark on a capitalist world revolution, he nonetheless achieves this outcome over the course of eight years due to his intellectual honesty, lack of indoctrination, and willingness to consistently follow valid insights to their logical conclusions. Peter discovers the universality of the human drive to start small and, later, large enterprises and produce goods and services that sustain and enhance human well-being. Once Peter begins to undo Wonworld’s climate of perpetual terror and micro-regimentation, his citizens use every iota of freedom to engage in mutually beneficial commerce that allows scarce resources to be devoted to their most highly valued uses. Peter, too, must escape political persecution at the hands of Bolshekov, but, unlike the Howard Families, he does not have the luxury of completely distancing himself from his nemesis. Instead, he must form a competing bulwark against Wonworld’s tyranny and, through the superiority in production that free enterprise makes possible, overthrow the socialist dystopia completely. Where Wonworld experienced a century of technological stagnation, Peter’s Freeworld is able to quickly regain lost ground and experience an acceleration of advancement similar to the one that occurred in the Post-World War II period during which Hazlitt wrote Time Will Run Back. Because human creativity and initiative were liberated through free-market reforms, the novel ends with a promise of open-ended progress and a future of ever-expanding human flourishing.

The most explicitly revolutionary use of business as a transformative tool is found in The Transhumanist Wager. Jethro Knights conceives Transhumania specifically as a haven for technological innovation that would lead to the attainment of indefinite lifespans and rapid, unprecedented progress in every field of science and technology. Transhumania is an incubator for Jethro’s vision of a united transhumanist Earth, ruled by a meritocratic elite and completely guided by the philosophy of Teleological Egocentric Functionalism. Like Lazarus Long and the Howard Families, Jethro finds it necessary to escape wider human society because of political persecution, and, like them, he plans an eventual return. He returns, however, without the intent to re-integrate into human society and pursue what Lazarus Long considers to be a universal human striving for ceaseless improvement. Rather, Jethro considers unaltered humanity to be essentially lost to the reactionary influences of Neo-Luddism, religious fundamentalism, and entrenched political and cronyist special interests. Jethro’s goal in returning to the broader world is a swift occupation and transformation of both the Earth and humankind in Jethro’s image.

Jethro’s path is, in many respects, the opposite of Peter Uldanov’s. Peter begins as an inadvertent world dictator and sequentially relinquishes political power in a well-intentioned, pragmatic desire to foster his subjects’ prosperity. Along the way, Peter discovers the moral principles of the free market and becomes a consistent, rights-respecting minarchist libertarian – a transformation that impels him to relinquish absolute power and seek validation through a free and fair election. Jethro, on the other hand, begins as a private citizen and brilliant entrepreneurial businessman who deliberately implements many free-market incentives but, all along, strives to become the omnipotender – and ends up in the role of world dictator where Peter began. The two men are at polar opposites when it comes to militancy. Peter hesitates even to wage defensive war against Bolshekov and questions the propriety of bringing about the deaths of even those who carry out repeated, failed assassination attempts against him and Adams. Jethro does not hesitate to sweep aside his opposition using massive force – as he does when he obliterates the world’s religious and political monuments in an effort to erase the lingering influence of traditional mindsets and compel all humankind to enter the transhumanist age. Jethro’s war against the world is intended to “shock and awe” governments and populations into unconditional and largely bloodless surrender – but this approach cannot avoid some innocent casualties. Jethro will probably not create Wonworld, because he still understands the role of economic incentives and individual initiative in enabling radical technological progress to come about. However, the benefits of the progress Jethro seeks to cultivate will still be disseminated in a controlled fashion – only to those whom Jethro considers useful to his overall goal of becoming as powerful and advanced as possible. Therefore, Jethro’s global Transhumania will not be Freeworld, either.

All three novels raise important questions for us, as human society in the early 21st century stands on the cusp of major advances in biotechnology, nanotechnology, robotics, artificial intelligence, space travel, and hopefully radical life extension. However, reactionary political and cultural forces continue to inflict massive suffering worldwide through brutal warfare, sweeping surveillance and humiliation of innocent people, policies that instill terror in the name of fighting terror, and labyrinthine obstacles to progress established by protectionist lobbying on behalf of politically connected special interests. Indeed, our status quo resembles the long, tense stagnation against which Jethro revolts to a greater extent than either the largely rights-respecting society of The Covenant or the totalitarian regimentation of Wonworld. But can the way toward a brighter future – paved by the next generation of life-improving technologies – be devised through an approach that does not exhibit Jethro’s militancy or precipitate massive conflict? Time will tell whether humankind will successfully pursue such a peaceful, principled path of radical but universally benevolent advancement. But whatever this path might entail, it is doubtless that the trailblazers on it will be the innovative businessmen and entrepreneurs of the future, without whom the development, preservation, and dissemination of new technologies would not be possible.

References

Hazlitt, Henry. [1966.] 2007. Time Will Run Back. New York: Arlington House. Ludwig von Mises Institute. Available at http://library.freecapitalists.org/books/Henry%20Hazlitt/Time%20Will%20Run%20Back.pdf. Accessed December 13, 2014.

Heinlein, Robert A. [1958] 2005. Revolt in 2100 & Methuselah’s Children. New York: Baen.

Istvan, Zoltan. 2013. The Transhumanist Wager. San Bernardino: Futurity Imagine Media LLC.

Henry Hazlitt’s “Time Will Run Back”: Unleashing Business to Improve the Human Condition – Article by G. Stolyarov II

Henry Hazlitt’s “Time Will Run Back”: Unleashing Business to Improve the Human Condition – Article by G. Stolyarov II

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G. Stolyarov II
December 13, 2014
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The free-market economist, journalist, and editor Henry Hazlitt wrote his novel The Great Idea in 1951; the book was re-released under the title Time Will Run Back in 1966 in order to emphasize the rediscovery of the lost ideas of free-market capitalism by the novel’s protagonists. In addition to being the most rigorous work of fiction available for the teaching of economic ideas, Time Will Run Back highlights the role of business in taking a society from a condition of destitution, misery, and brutality to one of widespread prosperity, progress, and personal fulfillment.

The novel’s hero, Peter Uldanov, is the son of Stalenin, the dictator of Wonworld – a socialist dystopia that, in the year 2100 (282 A.M. – After Marx) spans the entire globe. Peter, raised away from politics by his mother, has not been indoctrinated into Wonworld’s ideology of totalitarian central planning of all aspects of its citizens’ lives. While completely new to politics, Peter is highly intelligent and an accomplished pianist and mathematician. Stalenin is dying and, out of paternal affection, seeks to engineer Peter’s succession. Peter is intellectually honest and is perplexed at the widespread poverty, famines, and shortages of Wonworld, as well as the constant climate of terror in which its subjects live – even though the regime claims to have “liberated” them from oppression by the capitalists of old. Peter attempts to introduce a series of reforms to allow criticism of the government and free elections, but his goal of achieving human liberation fails to take hold so long as the economy remains completely centrally planned. Peter’s nemesis is Stalenin’s second-in-command Bolshekov, who zealously defends the system of command and control while he is the main agent of torture, execution, and mismanagement within it. Peter enlists the assistance of Thomas Jefferson Adams – the third-highest official in Wonworld. Adams is disillusioned with the socialist system and gropes for alternatives but, like Peter, does not have the benefit of the lessons of history – since any works of literature, economics, philosophy, and political theory that disagreed with Marxism-Leninism were purged after Wonworld’s establishment a century earlier. Adams has become cynical by observing decades of attempted “reforms” within Wonworld, which tinkered with specific policies and plans but never challenged the overarching fact of total central planning. Peter, as an outsider with a fresh perspective, is more willing to overhaul the system’s most fundamental features. In the genuine search for greater prosperity and more humane treatment for Wonworld’s population, he begins to dismantle the socialist system piece by piece, at first without even recognizing that this is the effect of his actions.

Much of the novel depicts Peter and Adams groping toward a system of incrementally freer markets and greater individual liberty as they discuss possible reforms and attempt to understand both their direct and secondary, unintended consequences. As a result of their stepwise sequence of liberalizations, Peter and Adams inadvertently rediscover the old system of capitalism that Wonworld sought to stamp out. Adams often acts as a foil to Peter, proposing modified central plans or mixed-economy systems and attempting to posit the arguments made by inflationists and protectionists that emerge as milder obstacles to liberalization once private property, money, and decentralized economic planning by individuals are restored. Peter, however, is sufficiently wise to be able to perceive the secondary consequences of these proposals and to consistently espouse and act in favor of unhampered individual economic liberty.

Peter’s first successful reform is to permit people to exchange ration coupons which they were allocated for various specific commodities. Previously, each citizen of Wonworld received ration coupons that were limited to his personal use, and there was no way to realize any value from coupons for goods that the individual did not wish to personally consume. Initially, the citizens of Wonworld – terrorized for generations – are reluctant to exchange coupons for fear of being tricked into showing disloyalty, but after a few months of encouragement by Peter’s government, exchanges begin to occur:

At first individuals or families merely exchanged ration tickets with other persons or families living in the same room with them. Then in the same house. Then in the same neighborhood or factory. The rates at which the ration tickets exchanged was a matter of special bargaining in each case. They at first revealed no describable pattern whatever. In one tenement or barracks someone would be exchanging, say, one shirt coupon for five bread coupons; next door one shirt coupon might exchange for fifteen bread coupons.

But gradually a distinct pattern began to take form. The man who had exchanged his shirt coupon for five bread coupons would learn that he could have got fifteen bread coupons from someone else; the man who had given up fifteen bread coupons for one shirt coupon would learn that he might have got a shirt coupon for only five bread coupons. So people began to “shop around,” as they called it, each trying to get the highest bid for what he had to offer, each trying to get the greatest number of the coupons he desired for the coupons with which he was willing to part. The result, after a surprisingly short time, was that a uniform rate of exchange prevailed at any given moment between one type of coupon and another. (Hazlitt 1966, 103)

This reform inaugurates a price system, which facilitates rational planning by individuals and the effective allocation of goods to their most highly valued uses. It also leads to the emergence of markets where large volumes of exchanges can take place:

Then another striking thing happened. People had at first shopped around from house to house and street to street, trying to get the best rate in the kind of coupons they valued most for the kind of coupons they valued least. But soon people anxious to trade their coupons took to meeting regularly at certain places where they had previously discovered that they found the most other traders and bidders and could get the best rates in the quickest time. These meeting points, which people took to calling coupon “markets,” tended to become fewer and larger.

Two principal “markets” gradually established themselves in Moscow, one in Engels Square and the other at the foot of Death-to-Trotsky Street. Here large crowds, composed in turn of smaller groups, gathered on the sidewalk and spread into the street. They were made up of shouting and gesticulating persons, each holding up a coupon or sheet of coupons, each asking how much he was bid, say, in beer coupons for his shirt coupon, or offering his shirt coupon for, say, twelve beer coupons, and asking whether he had any takers. (Hazlitt 1966, 103-104)

As markets take hold, professional brokers emerge to handle large numbers of transactions for ordinary people in exchange for a percentage of ration coupons. The brokers quickly become adept at spotting and eliminating discrepancies among exchange rates between any two types of coupons:

Their competitive bids and offers continued until the relationships were ironed out, so that no further profit was possible for anybody as a result of a discrepancy. For the same reason, Peter found, the ratios of exchange in the market at Engels Square were never far out of line for more than a very short period with the ratios of exchange on Death-to-Trotsky Street; for a set of brokers were always running back and forth between the two markets, or sending messengers, and trying to profit from the least discrepancy that arose between the markets in the exchanges or quotations.

A special name—”arbitrage business”—sprang up for this sort of transaction. Its effect was to unify, or to universalize, price relationships among markets between which this freedom of arbitrage existed. (Hazlitt 1966, 105)

By allowing free exchange and permitting private entrepreneurs to take advantage of arbitrage opportunities, Peter enables a solution to emerge for Wonworld’s previously intractable problem of how to make the best use of scarce resources to fulfill as many human needs as possible. Peter recognizes that, even though the adjustments to prices that guide this process of rational resource allocation may appear automatic, they are in fact the effect of the actions of businesspeople seeking to earn a profit:

They took place solely because there was an alert group of people ready to seize upon the slightest discrepancy to make a transaction profitable to themselves. It was precisely the constant alertness and the constant initiative of these specialists that prevented any but the most minute and short-lived discrepancies from occurring. (Hazlitt 1966, 105)

Allowing free exchange of ration tickets leads to the spontaneous emergence of a monetary system as exchange rates begin to be quoted in terms of only a few leading types of coupons and eventually only in terms of cigarette coupons. These are superseded by packages of cigarettes themselves, which are in turn eventually replaced by gold.

The power struggle between Peter and Bolshekov escalates until Bolshekov engineers Stalenin’s assassination and seizes power in Wonworld. Peter and Adams flee to North America, assisted by their loyal Air Force, and establish their own country – Freeworld – where Peter’s economic reforms continue. Private ownership of land and capital goods is introduced, and large factories are privatized through the issuance of transferable shares to their workers, entitling them to receive a percentage of the profits from the enterprise. This greatly raises the incentives for production, responsibility, and prudent management of resources, as the newly empowered citizens inform Peter:

When he asked one of these new peasant-proprietors about his changed attitude, his explanation was simple: “The more work I and my family put into the farm, the better off we are. Our work is no longer offset by the laziness and carelessness of others. On the other hand, we can no longer sit back and hope that others will make up for what we fail to do. Everything depends on ourselves.”

Another farmer-owner put it this way: “The greater the crop we raise this year, the better off my family will be. But we also have to think of next year and the year after that, so we can’t take any risk of exhausting the soil. Every improvement I put into the farm, whether into the soil or into the buildings, is mine; I reap the fruits of it. But there is something that to me is more important still. I am building this for my family; I am increasing the security of my family; I will have something fine to turn over to my children after I am gone. I don’t know how I can explain it to you, Your Highness, but since my family has owned this land for itself, and feels secure in its right and title to stay here undisturbed, we feel not only that the farm belongs to us but that we belong to the farm. It is a part of us, and we are a part of it. It works for us, and we work for it. It produces for us, and we produce for it. You may think it is just a thing, but it seems as alive as any of us, and we love it and care for it as if it were a part of ourselves.” (Hazlitt 1966, 131)

The ability of individuals to own and run their business and earn a profit turns Freeworld into an economic powerhouse. Whereas Wonworld had, for a century, remained at the level of technological advancement approximately resembling that of 1918-1938, Freeworld becomes a haven for invention, the benefits of which disseminate rapidly to the population. Freeworld’s development appears to rapidly catch up to the condition of Hazlitt’s 1950s and 1960s America:

Constant and bewildering improvements were being made in household conveniences, in fluorescent lighting, in radiant heating, in air-conditioning, in vacuum cleaners, in clothes-washing machines, in dishwashing machines, in a thousand new structural and decorative materials. Great forward leaps were now taken in radio. There was talk of the development, in the laboratories, of the wireless transmission, not merely of music and voices, but of the living and moving image of objects and people.

Hundreds of new improvements, individually sometimes slight but cumulatively enormous, were being made in all sorts of transportation—in automobiles and railroads, in ships and airplanes. Inventors even talked of a new device to be called “jet-propulsion,” which would not only eliminate propellers but bring speeds rivaling that of sound itself.

In medicine, marvelous new anesthetics and new lifesaving drugs were constantly being discovered …

“In our new economic system, Adams,” said Peter, “we seem to have developed hundreds of thousands of individual centers of initiative which spontaneously co-operate with each other. We have made more material progress in the last four years, more industrial and scientific progress, than Wonworld made in a century.” (Hazlitt 1966, 153)

Instead of dreading work and needing to be terrorized into toil, the people begin to welcome and yearn for productive innovation:

Peter was struck by the startling change that had come over the whole spirit of the people. They worked with an energy and zeal infinitely greater than anything they had shown before. Peter now found people everywhere who regarded their work as a pleasure, a hobby, an exciting adventure. They were constantly thinking of improvements, devising new gadgets, dreaming of new processes that would cut costs of production, or new inventions and new products that consumers might want. (Hazlitt 1966, 139)

Peter explains to Adams that this “is precisely what economic liberty does. It releases human energy” (Hazlitt 1966, 139). Whereas, previously, only the Central Planning Board could decide how to direct resources,

Now everybody can plan. Now everybody is a center of planning. The worker can plan to shift to another employer or another line of production where the rewards are higher. He can plan to train himself in a new skill that pays better. And anybody who can save or borrow capital, or who can get the co-operation of other workers or offer them more attractive terms of employment than before, can start a new enterprise, make a new product, fill a new need. And this puts a quality of adventure and excitement into most people’s lives that was never there before. In Wonworld, in effect, only the Dictator himself could originate or initiate: everybody else simply carried out his orders. But in Freeworld anybody can originate or initiate. And because he can, he does. (Hazlitt 1966, 139)

Hazlitt frequently emphasizes the connection between the economic empowerment that freedom in business offers and the resulting surge in the quality of life and daily experience – a sense of responsibility, opportunity, self-direction, and the ability to chart one’s own future that permeates an economy where individuals are their own economic masters. While under central planning, no progress occurs unless initiated by the exceptionally rare enlightened rulers at the top, in a free market every businessman and worker can be an agent of human progress. Peter observes that a free-market system is meritocratic and tends to reward contributions to human well-being: “Everyone tends to be rewarded by the consumers to the extent that he has contributed to the needs of the consumers. In other words, free competition tends to give to labor what labor creates, to the owners of money and capital goods what their capital creates, and to enterprisers what their co-ordinating function creates” (Hazlitt 1966, 139). Adams responds that, to the extent a free-market system is able to achieve this, “no group would have the right to complain. You would have achieved an economic paradise” (Hazlitt 1966, 139). In a later discussion, Peter notes that the profits realized by businesspeople in a free-market system cannot be maintained on the whole except in a growing economy where consumers are increasingly better off; a free-market system cannot be called a profit system “in a declining or even in a stationary economy. It is, of course, a profit-seeking system” (Hazlitt 1966, 150), but the search for profit in a free economy will only succeed if human needs are fulfilled by the entrepreneur in the process.

Cultural and esthetic progress, too, are facilitated by the actions of Freeworld’s entrepreneurs. Hazlitt points out that “it was not merely in material progress that Freeworld achieved such amazing triumphs. No less striking were the new dignity and breadth that individual freedom brought about in the whole cultural and spiritual life of the Western Hemisphere” (Hazlitt 1966, 155). By contrast with Wonworld’s regime-monopolized “art” designed to praise the ruling ideology, the outpouring of creativity and variety in Freeworld “showed itself in novels and plays, in criticism and poetry, in painting, sculpture and architecture, in political and economic thinking, in most sciences, in philosophy and religion” (Hazlitt 1966, 155). Even though freedom in artistic production results in catering “to the presumed tastes of a mass public; and the bulk of what was produced was vulgar and cheap” (Hazlitt 1966, 155), there also emerges the opportunity for some artists to pursue lasting greatness:

What counted, as Peter quickly saw, was that each writer and each artist was now liberated from abject subservience to the state, to the political ruling clique. He was now free to select his own public. He did not need to cater to a nebulous “mass demand.” He could, if he wished, write, build, think, compose or paint for a definite cultivated group, or for his fellow specialists, or for a few kindred spirits wherever they could be found. And plays did have a way of finding their own special audience, and periodicals and books of finding their own special readers.

In contrast with the drabness, monotony and dreariness of Wonworld, the cultural and spiritual life of Freeworld was full of infinite variety, flavor, and adventure. (Hazlitt 1966, 155)

The intellectual honesty of Peter Uldanov enables him to transform the role of inadvertent world dictator to that of guardian of individual freedom. Freeworld overcomes Bolshekov’s Wonworld in a largely bloodless military campaign, due to Freeworld’s overwhelming superiority in production and the eagerness of Wonworld’s citizens to throw off Bolshekov’s totalitarian rule. At the novel’s end, Peter decides to hold free elections and subject his own position to the people’s approval. Running against the mixed-economy “Third Way” advocate Wang Ching-li, Peter narrowly wins the election and becomes the first President of Freeworld, even though his preference would be to devote his time to playing Mozart. Peter has the wisdom to unleash the productive forces of free enterprise and then to step aside, except in maintaining a system that punishes aggression, protects private property, and provides a reliable rule of law. The ending of Time Will Run Back is a happy one, but it is made possible by one key tremendously fortunate and unlikely circumstance – the ability of a fundamentally decent person to find himself in a position of vast political power, whose use he deliberately restrains and channels toward liberalization instead of perpetuating the abuses of the old system. Peter is, in effect, a “philosopher-king” who reasons his way toward free-market capitalism, unleashing private business to bring about massive human progress. Without such an individual, Wonworld could have lingered in misery, stagnation, and even decline for centuries. In our world, however, where the vestiges of free enterprise and the history of economic thought are much stronger, we do not need to rediscover sound economic principles from whole cloth, so perhaps existing societies could eventually muddle through toward freer economies, even though no philosopher-kings are to be found. Hazlitt gave us Peter Uldanov’s story to enable us to understand which reforms and institutions can improve the human condition, and which can only degrade it.

Reference

Hazlitt, Henry. [1966.] 2007. Time Will Run Back. New York: Arlington House. Ludwig von Mises Institute. Available at http://library.freecapitalists.org/books/Henry%20Hazlitt/Time%20Will%20Run%20Back.pdf. Accessed December 13, 2014.

G. Stolyarov II and xpallodoc Discuss the Future – Video Interview

G. Stolyarov II and xpallodoc Discuss the Future – Video Interview

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On November 30, 2014, Mr. Stolyarov was interviewed by YouTube user xpallodoc, and the wide-ranging discussion encompassed subjects from visions of the future, indefinite life extension and the concept of I-ness, the future of money and economies, technological progress, virtual worlds, political barriers to progress, artificial intelligence, marriage and family, and being part of the push toward radical abundance and technological breakthroughs within our lifetimes.

References
– “Individual Empowerment through Emerging Technologies: Virtual Tools for a Better Physical World” – Video by G. Stolyarov II
– “How Can I Live Forever?: What Does and Does Not Preserve the Self” – Video by G. Stolyarov II

The Fed and the “Salvador Dali Effect” – Article by Dante Bayona

The Fed and the “Salvador Dali Effect” – Article by Dante Bayona

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The New Renaissance Hat
Dante Bayona
November 28, 2014
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There is a story about the great Catalan surrealist painter Salvador Dali. It is said that in the last years of his life, when he was already famous, he signed checks knowing that they would not be submitted to the bank for payment. Rather, after partying with his friends and consuming the most expensive items the restaurants had to offer, he would ask for the bill, pull out one of his checks, write the amount, and sign it. Before handing over the check, he quickly turned it around, made a drawing on the back and autographed it. Dali knew the owner of the restaurant would not cash the check but keep it,put it in a frame, and display it in the most prominent place in the restaurant: “An original Dali.”

It was a good deal for Dali: his checks never came back to the bank to be cashed, and he still enjoyed great banquets with all of his friends. Dali had a magic checkbook.

But what would have happened if one day art collectors concluded that Dali’s work really did not capture the essence of surrealism, and therefore that his art was not of great value? If that had happened, every autographed check would have come back to the bank (at least in theory), and Dali would have had to pay up. If Dali had not saved enough money, he would have had to find a job painting houses.

While the analogy is not perfect, we may find that something similar can happen with the Fed and the dollar. For now, The Fed has a magic checkbook that allows it to spend without paying the bill because it thinks the checks will never come back to be cashed.

Dali died long before people stopped valuing his art, but the US economy does not enjoy such a convenient escape. What if, as in the case of art collectors who might no longer see great value in Dali’s work, the world loses faith in the quality of the dollar and stops using it for large international transactions? If that happens, in the same way Dali would have had to pay his bills, the US would also have to make good on the checks it signed. Would the US be able to pay its checks with more checks?

Since each country has its own currency, every central bank around the world has to print more of its national currency to buy the excess of dollars entering the country whenever the US expands its money supply. Thus, in the 1970s, in the wake of the Nixon Shock, members of OPEC accused the US of exporting inflation.

Recall that during the mid-1960s, the US central bank was financing a war in Vietnam and as well as funding Lyndon B. Johnson’s programs of “The Great Society”that supposedly would eliminate poverty. As the Fed was printing money, OPEC members had to inflate their currencies to buy the excess of dollars.

Central banks around the world have to buy excess of dollars entering their countries so their exports do not lose competitiveness. Thus, a double inflation is imposed on every country in the world, one created by its own domestic central bank, because all central banks inflate on their own, and another created by the US central bank. Hans-Hermann Hoppe wrote about the perils of monetary imperialism:

The dominating state will use its superior power to enforce a policy of internationally coordinated inflation. Its own central bank sets the pace in the process of counterfeiting, and the central banks of the dominated states are ordered to use its currency as their own reserves and inflate on top of them. Thus, along with the dominating state and as the earliest receivers of the counterfeit reserve currency, its associated banking and business establishment can engage in an almost costless expropriation of foreign property owners and income producers. A double layer of exploitation of a foreign state and a foreign elite on top of a national state and elite is imposed on the exploited class in the dominated territories, causing prolonged economic dependency on and relative economic stagnation in comparison with the dominant nation. It is this — very uncapitalist — situation that characterizes the status of the United States and the US dollar and that gives rise to the — correct — accusations concerning US economic exploitation and dollar imperialism. 1

While it is true that in the 1970s the dollar enjoyed a worldwide hegemony — given that all European countries had their currencies separated, and given that China and Russia were outside the capitalist world — now the situation is different. Vladimir Putin recently stated that “The international monetary system itself depends a lot on the U.S. dollar, or, to be precise, on the monetary and financial policy of the U.S. authorities. The BRICS countries (Brazil, Russia, India, China and South Africa) want to change this.” 2

Salvador Dali had devised an ingenious method for not paying his bills. Similar stories are told about Pablo Picasso. But the Fed does not produce tangible items that people would rather hold on to, like an original Salvador Dali. The Fed does not produce work or items of value. The Salvador Dali effect, i.e., the ability to prevent checks from being cashed by creating something of real value, does not apply to the Fed. That is why it is good to remind the Fed, and the government, to be careful with the expenditures when partying, just in case the magic checkbook disappears.

  • 1. See Hans-Hermann Hoppe, “Marxist and Austrian Class Analysis.” Journal of Libertarian Studies 9, no. 2 (Fall 1990). www.mises.org/journals/jls/9_2/9_2_5.pdf
  • 2. See Vladimir “Putin, No plans for BRICS military, political alliance.” Russia: RT. Retrieved 16 July 2014. www.rt.com/politics/official-word/172768-putin-brics-economies-alliance

Dante Bayona received his master’s degree in Austrian economics under the direction of Jesús Huerta de Soto in Spain. He was a 2014 Summer Fellow at the Mises Institute, works in the banking sector in New York, and collaborates with MisesHispano.org.

This article was published on Mises.org and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

How Wilson and the Fed Extended the Great War – Article by Brendan Brown

How Wilson and the Fed Extended the Great War – Article by Brendan Brown

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The New Renaissance Hat
Brendan Brown
November 9, 2014
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As the world reflects on the incomprehensible horror of the Great War which erupted 100 years ago there is a question which goes unasked in the media coverage. How was there no peace deal between the belligerents in 1915 or at latest 1916 once it became clear to all — especially after the Battle of the Somme — that the conflict had developed into a stalemate and holocaust of youth?

While there had been some early hopes for peace in 1916, they quickly evaporated as it became clear that the British government would not agree to a compromise deal. The political success of those who opposed compromise was based to a considerable degree on the argument that soon the US would enter the conflict on the Entente’s (Britain and France) side.

Although the US had allowed the Entente (but not the Central Powers) to access Wall Street without restriction during the first two years of the war, the historical evidence shows that President Wilson had been inclined to threaten Britain with the ending of its access to vital US market financing for its war effort if it failed to negotiate seriously for peace. But Wilson was dissuaded from urging peace on the negotiators by his political adviser Colonel House.

A less well-known story is the role of the then-newly created Fed (which opened its doors in 1914) and its allies within the Wilson administration in facilitating Entente finance. Two prominent Fed members — Paul Warburg and Adolph Miller — had fought a rear-guard campaign seeking to restrict their new institution from discounting trade bills or buying acceptances (largely financing munitions) issued by the belligerents (in practice, the Entente Powers). But, they had been thwarted by the persistence of the New York Fed chief Benjamin Strong (closely allied to J.P. Morgan and others who were gaining tremendously from arranging loans to France and Britain) and the Treasury Secretary McAdoo, the son-in-law of President Wilson. (McAdoo, whose railroad company had been bailed out personally by J.P. Morgan, was also a voting member of the Federal Reserve Board).

Milton Friedman has argued that the creation of the Federal Reserve made no difference to the US monetary and economic outcomes during the period of neutrality (up until March 1917) or during the US participation in the war (to November 1918). The difference, Friedman contended, came afterward when the Fed allowed rapid monetary growth to continue for a further year. Under the pre-Fed regime, Friedman argues, the US would also have experienced huge inflows of gold during the period of neutrality and under existing procedures (for official US gold purchases), and these would have fueled rapid growth of high-powered money and hence inflation. In the period of war participation, the Treasury would have printed money with or without the Fed (as indeed had occurred during the Civil War).

There are two big caveats to consider about Friedman’s “the Fed made no difference” case. The first is that the administration and Wall Street’s ability to facilitate the flow of finance to the Entente would have been constricted in the absence of backdoor support (via trade acceptances and bills) by the new “creature of Jekyll Island” (the Fed). The second is that both camps within the Fed (Benjamin Strong on the one hand, and Paul Warburg and Adolph Miller on the other) were united in welcoming the accumulation of gold on their new institutions’ balance sheet. They saw this as strengthening the metallic base of the currency (both were concerned that the Fed’s creation should not be the start of a journey toward fiat money) and also as a key factor in their aims to make New York the number-one financial center in the world, displacing London in that role.

Without those hang-ups it is plausible that the US would have trodden the same path as Switzerland in dealing with the flood of gold from the belligerents and its inflationary potential. That path was the suspension of official gold purchases and effective temporary floating of the gold price. The latter might have slumped to say $10–14 per ounce from the then official level of $21 and correspondingly the dollar (like the Swiss franc) would have surged, while Sterling and the French franc come under intense downward pressure. In effect the Entente Powers would not have been able to finance their war expenditures by dumping gold in the US and having this monetized by the Fed and Treasury — a process which effectively levied an inflation tax on US citizens.

This suspension of gold purchases would have meant a better prospect of there being a gold-standard world being recreated in the ensuing peace. The exhaustion of British gold holdings during the war ruled out the resurrection of Sterling as gold money. Its so-called return to gold in 1925 was in fact a fixed exchange rate link to the US dollar. The US would have been spared much of the cumulative wartime inflation. The Fed would not have been so flush with gold that it could have tolerated the big monetary binge through 1919 before ultimately being forced by a decline in its free gold position to suddenly tighten policy sharply and induce the Great Recession of 1920–21. That episode led on to the Fed focusing during the 1920s on modern monetary management (counter-cyclical policy changes and price stabilization). The consequences of that focus, ultimately fatal to the gold order, were the Great Boom and the Great Depression.

Brendan Brown is an associated scholar of the Mises Institute and is author of Euro Crash: How Asset Price Inflation Destroys the Wealth of Nations and The Global Curse of the Federal Reserve: Manifesto for a Second Monetarist Revolution. See Brendan Brown’s article archives.

This article was published on Mises.org and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.