Interventionism

[This article is excerpted from Conceived in Liberty, volume 1, chapter 6, "The Social Structure of Virginia: Bondservants and Slaves". An MP3 audio file of this article, narrated by Floy Lilley, is available for download.]

Until the 1670s, the bulk of forced labor in Virginia was indentured service (largely white, but some Negro); Negro slavery was negligible. In 1683 there were 12,000 indentured servants in Virginia and only 3,000 slaves of a total population of 44,000. Masters generally preferred bondservants for two reasons. First, they could exploit the bondservants more ruthlessly because they did not own them permanently, as they did their slaves; on the other hand, the slaves were completely their owners’ capital and hence the masters were economically compelled to try to preserve the capital value of their human tools of production. Second, the bondservants, looking forward to their freedom, could be more productive laborers than the slaves, who were deprived of all hope for the future.

As the colony grew, the number of bondservants grew also, although as servants were repeatedly set free, their proportion to the population of Virginia declined. Since the service was temporary, a large new supply had to be continually furnished. There were seven sources of bondservice, two voluntary (initially) and five compulsory. The former consisted partly of “redemptioners” who bound themselves for four to seven years, in return for their passage money to America. It is estimated that seventy percent of all immigration in the colonies throughout the colonial era consisted of redemptioners. The other voluntary category consisted of apprentices, children of the English poor, who were bound out until the age of twenty-one. In the compulsory category were: (a) impoverished and orphaned English children shipped to the colonies by the English government; (b) colonists bound to service in lieu of imprisonment for debt (the universal punishment for all nonpayment in that period); (c) colonial criminals who were simply farmed out by the authorities to the mastership of private employers; (d) poor English children or adults kidnapped by professional “crimps”—one of whom boasted of seizing 500 children annually for a dozen years; and (e) British convicts choosing servitude in America for seven to fourteen years in lieu of all prison terms in England. The last were usually petty thieves or political prisoners—and Virginia absorbed a large portion of the transported criminals.

As an example of the grounds for deporting political prisoners into bondage, an English law in force in the mid-1660s banished to the colonies anyone convicted three times of attempting an unlawful meeting—a law aimed mostly at the Quakers. Hundreds of Scottish nationalist rebels, particularly after the Scottish uprising of 1679, were shipped to the colonies as political criminals. An act of 1670 banished to the colonies anyone with knowledge of illegal religious or political activity, who refused to turn informer for the government.

During his term of bondage, the indentured servant received no monetary payment. His hours and conditions of work were set absolutely by the will of his master who punished the servant at his own discretion. Flight from the master’s service was punishable by beating, or by doubling or tripling the term of indenture. The bondservants were frequently beaten, branded, chained to their work, and tortured. The frequent maltreatment of bondservants is so indicated in a corrective Virginia act of 1662: “The barbarous usage of some servants by cruel masters being so much scandal and infamy to the country... that people who would willingly adventure themselves hither, are through fears thereof diverted”—thus diminishing the needed supply of indentured servants.

Many of the oppressed servants were moved to the length of open resistance. The major form of resistance was flight, either individually or in groups; this spurred their employers to search for them by various means, including newspaper advertisements. Work stoppages were also employed as a method of struggle. But more vigorous rebellions also occurred especially in Virginia in 1659, 1661, 1663, and 1681. Rebellions of servants were particularly pressing in the 1660s because of the particularly large number of political prisoners taken in England during that decade. Independent and rebellious by nature, these men had been shipped to the colonies as bondservants. Stringent laws were passed in the 1660s against runaway servants striving to gain their freedom.

In all cases, the servant revolts for freedom were totally crushed and the leaders executed. Demands of the rebelling servants ranged from improved conditions and better food to outright freedom. The leading example was the servant uprising of 1661 in York County, Virginia, led by Isaac Friend and William Clutton. Friend had exhorted the other servants that “he would be the first and lead them and cry as they went along who would be for liberty and freed from bondage and that there would be enough come to them, and they would go through the country and kill those who made any opposition and that they would either be free or die for it.”Abbot E. Smith, Colonists in Bondage. The rebels were treated with surprising leniency by the county court, but this unwonted spirit quickly evaporated with another servant uprising in 1663.

This servant rebellion in York, Middlesex, and Gloucester counties was betrayed by a servant named Birkenhead, who was rewarded for his renegacy by the House of Burgesses with his freedom and 5,000 pounds of tobacco. The rebel leaders, however,—former soldiers under Cromwell—were ruthlessly treated; nine were indicted for high treason and four actually executed. In 1672 a servant plot to gain freedom was uncovered and a Katherine Nugent suffered thirty lashes for complicity. A law was passed forbidding servants from leaving home without special permits and meetings of servants were further repressed.

One of the first servant rebellions occurred in the neighboring Chesapeake tobacco colony of Maryland. In 1644 Edward Robinson and two brothers were convicted for armed rebellion for the purpose of liberating bondservants. Thirteen years later Robert Chessick, a recaptured runaway servant in Maryland, persuaded several servants of various masters to run away to the Swedish settlements on the Delaware River. Chessick and a dozen other servants seized a master’s boat, as well as arms for self-defense in case of attempted capture. But the men were captured and Chessick was given thirty lashes. As a special refinement, one of Chessick’s friends and abettors in the escape, John Beale, was forced to perform the whipping.

In 1663 the bondservants of Richard Preston of Maryland went on strike and refused to work in protest against the lack of meat. The Maryland court sentenced the six disobedient servants to thirty lashes each, with two of the most moderate rebels compelled to perform the whipping. Facing force majeure, all the servants abased themselves and begged forgiveness from their master and from the court, which suspended the sentence on good behavior.

In Virginia a servant rebellion against a master, Captain Sisbey, occurred as early as 1638; the lower Norfolk court ordered the enormous total of one hundred lashes on each rebel. In 1640 six servants of Captain William Pierce tried to escape to the Dutch settlements. The runaways were apprehended and brutally punished, lest this set “a dangerous precedent for the future time.” The prisoners were sentenced to be whipped and branded, to work in shackles, and to have their terms of bondage extended.

By the late seventeenth century the supply of bondservants began to dry up. While the opening of new colonies and wider settlements increased the demand for bondservants, the supply dwindled greatly as the English government finally cracked down on the organized practice of kidnapping and on the shipping of convicts to the colonies. And so the planters turned to the import and purchase of Negro slaves. In Virginia there had been 50 Negroes, the bulk of them slaves, out of a total population of 2,500 in 1630; 950 Negroes out of 27,000 in 1660; and 3,000 Negroes out of 44,000 in 1680—a steadily rising proportion, but still limited to less than seven percent of the population. But in ten years, by 1690, the proportion of Negroes had jumped to over 9,000 out of 53,000, approximately seventeen percent. And by 1700, the number was 16,000 out of a population of 58,000, approximately twenty-eight percent. And of the total labor force—the working population—this undoubtedly reflected a considerably higher proportion of Negroes.

How the Negro slaves were treated may be gauged by the diary of the aforementioned William Byrd II, who felt himself to be a kindly master and often inveighed against “brutes who mistreat their slaves.” Typical examples of this kindly treatment were entered in his diary:

2-8-09: Jenny and Eugene were whipped.

5-13-09: Mrs. Byrd whips the nurse.

6-10-09: Eugene (a child) was whipped for running away and had the bit put on him.

11-30-09: Jenny and Eugene were whipped.

12-16-09: Eugene was whipped for doing nothing yesterday.

4-17-10: Byrd helped to investigate slaves tried for “High Treason”; two were hanged.

7-1-10: The Negro woman ran away again with the bit in her mouth.

7-15-10: My wife, against my will, caused little Jenny to be burned with a hot iron.

8-22-10: I had a severe quarrel with little Jenny and beat her too much for which I was sorry.

1-22-11: A slave “pretends to be sick.” I put a branding iron on the place he claimed of and put the bit on him.

It is pointless to criticize such passages as only selected instances of cruel treatment, counterbalanced by acts of kindness by Byrd and other planters toward their slaves. For the point is not only that the slave system was one where such acts could take place; the point is that threats of brutality underlay the whole relationship. For the essence of slavery is that human beings, with their inherent freedom of will, with individual desires and convictions and purposes, are used as capital, as tools for the benefit of their master. The slave is therefore habitually forced into types and degrees of work that he would not have freely undertaken; by necessity, therefore, the bit and the lash become the motor of the slave system. The myth of the kindly master camouflages the inherent brutality and savagery of the slave system.

One historical myth holds that since the slaves were their masters’ capital, the masters’ economic self-interest dictated kindly treatment of their property. But again, the masters always had to make sure that the property was really theirs, and for this, systematic brutality was needed to turn labor from natural into coerced channels for the benefit of the master. And, second, what of property that had outlived its usefulness? Of capital that no longer promised a return to the master? Of slaves too old or too ill to continue earning their masters a return? What sort of treatment did the economic self-interest of the master dictate for slaves who could no longer repay the costs of their subsistence?

Slaves resisted their plight in many ways, ranging from such nonviolent methods as work slowdowns, feigning illness, and flight, to sabotage, arson, and outright insurrection. Insurrections were always doomed to failure, outnumbered as the slaves were in the population. And yet the slave revolts appeared and reappeared. There were considerable slave plots in Virginia in 1687, 1709–10, 1722–23, and 1730. A joint conspiracy of great numbers of Negro and Indian slaves in Surry and Isle of Wight counties was suppressed in 1709, and another Negro slave conspiracy crushed in Surry County the following year. The slave who betrayed his fellows was granted his freedom by the grateful master. The 1730 uprising occurred in five counties of Virginia, and centered on the town of Williamsburg. A few weeks before the insurrection, several suspected slaves were arrested and whipped. An insurrection was then planned for the future, but was betrayed and the leaders executed.

Joint flight by slaves and servants was also common during the seventeenth century, as well as joint participation in plots and uprisings. In 1663 Negro slaves and white indentured servants in Virginia plotted an extensive revolt, and a number of the rebels were executed. The colonists appointed the day as one of prayer and thanksgiving for being spared the revolt. Neither slave nor indentured servant was permitted to marry without the master’s consent; yet there is record of frequent cohabitation, despite prohibitory laws.

It has been maintained in mitigation of the brutality of the American slave system that the Negroes were purchased from African chieftains, who had enslaved them there. It is true that the slaves were also slaves in Africa, but it is also true that African slavery never envisioned the vast scope, the massive dragooning of forced labor that marked American plantation slavery. Furthermore, the existence of a ready white market for slaves greatly expanded the extent of slavery in Africa, as well as the intensity of the intertribal wars through which slavery came about. As is usually the case on the market, demand stimulated supply. Moreover, African slavery did not include transportation under such monstrous conditions that a large percentage could not survive, or the brutal “seasoning” process in a West Indies way station to make sure that only those fit for slave conditions survived, or the continual deliberate breaking up of slave families that prevailed in the colonies.

From the earliest opening of the New World, African slaves were imported as forced labor to make possible the working of large plantations, which, as we have seen, would have been uneconomic if they had had to rely, as did other producers, on free and voluntary labor. In Latin America, from the sixteenth century on, Negro slavery was used for large sugar plantations concentrated in the West Indies and on the north coast of South America. It has been estimated that a total of 900,000 Negro slaves were imported into the New World in the sixteenth century, and two and three-quarter million in the seventeenth century.Over the seventeenth and eighteenth centuries, only about one-fifteenth of the total Negro imports into the New World arrived in the territory of what is now the United States. That the slaves fared even worse in the Latin American colonies is seen by the far higher death rate there than in North America.

Negroes came into use as slaves instead of the indigenous American Indians because: (a) the Negroes proved more adaptable to the onerous working conditions of slavery—enslaved Indians tended, as in the Caribbean, to die out; (b) it was easier to buy existing slaves from African chieftains than to enslave a race anew; and (c) of the great moral and spiritual influence of Father Bartolome de Las Casas in Spanish America, who in the mid-sixteenth century inveighed against the enslavement of the American Indians. Spanish consciences were never agitated over Negro slavery as they were over Indian; even Las Casas himself owned several Negro slaves for many years. Indeed, early in his career, Las Casas advocated the introduction of Negro slaves to relieve the pressure on the Indians, but he eventually came to repudiate the slavery of both races. In the seventeenth century two Spanish Jesuits, Alonzo de Sandoval and Pedro Claver, were conspicuous in trying to help the Negro slaves, but neither attacked the institution of Negro slavery as un-Christian. Undoubtedly one reason for the different treatment of the two races was the general conviction among Europeans of the inherent inferiority of the Negro race. Thus, the same Montesquieu who had scoffed at those Spaniards who called the American Indians barbarians, suggested that the African Negro was the embodiment of Aristotle’s “natural slave.” And even the environmental determinist David Hume suspected “the Negroes to be naturally inferior to the whites. There scarcely ever was a civilized nation of that complexion, nor even an individual, eminent either in action or speculation. No ingenious manufacturers amongst them, no arts, no sciences. On the other hand, the most rude and barbarian of the whites... have still something eminent about them.... Such a uniform and constant difference could not happen, in so many countries and ages, if nature had not made an original distinction between these breeds of men.”

Contrary to the views of those writers who maintain that Negroes and whites enjoyed equal rights as indentured servants in Virginia until the 1660s, after which the Negroes were gradually enslaved, evidence seems clear that from the beginning many Negroes were slaves and were treated far more harshly than were white indentured servants.Cf. Winthrop D. Jordan, “Modern Tensions and the Origins of American Slavery,” Journal of Southern History (February 1962), pp. 17-30. No white man, for example, was ever enslaved unto perpetuity—lifetime service for the slave and for his descendants—in any English colony. The fact that there were no slave statutes in Virginia until the 1660s simply reflected the small number of Negroes in the colony before that date.Ibid. Jordan cites many evidences of Negro slavery—including court sentences, records of Negroes, executions of wills, comparative sale prices of Negro and white servants—dating from 1640, before which time the number of Negroes in Virginia was negligible. From a very early date, owned Negroes were worked as field hands, whereas white bondservants were spared this onerous labor. And also from an early date, Negroes, in particular, were denied any right to bear arms. An especially striking illustration of this racism pervading Virginia from the earliest days was the harsh prohibition against any sexual union of the races. As early as 1630 a Virginia court ordered “Hugh Davis to be soundly whipped, before an assembly of Negroes and others for abusing himself to the dishonor of God and shame of Christians by defiling his body in lying with a Negro.” By the early 1660s the colonial government outlawed miscegenation and interracial fornication. When Virginia prohibited all interracial unions in 1691, the Assembly bitterly denounced miscegenation as “that abominable mixture and spurious issue.”“Spurious” in colonial legislation meant not simply illegitimate, but specifically the children of interracial unions.

Other regulations dating from this period and a little later included one that forbade any slave from leaving a plantation without a pass from his master; another decreed that conversion to Christianity would not set a slave free, a fact which violated a European tradition that only heathens, not Christians, might be reduced to slavery.

By the end of the seventeenth century, the growing Virginia colony had emerged from its tiny and precarious beginnings with a definite social structure. This society may be termed partly feudal. On the one hand, Virginia, with its abundance of new land, was spared the complete feudal mold of the English homeland. The Virginia Company was interested in promoting settlement, and most grantees (such as individual settlers and former indentured servants) were interested in settling the land for themselves. As a result, there developed a multitude of independent yeomen settlers, particularly in the less choice up-country lands. Also, the feudal quitrent system never took hold in Virginia. The settlers were charged quitrents by the colony or by the large grantees who, instead of allowing settlers to own the land or selling the land to them, insisted on charging and trying to collect annual quitrents as overlords of the land area. But while Virginia was able to avoid many crucial features of feudalism, it introduced an important feudal feature into its method of distributing land, especially the granting of large tracts of choice tidewater river land to favorite and wealthy planters. These large land grants would have early dissolved into ownership by the individual settlers were it not for the regime of forced labor, which made the large tobacco plantations profitable. Furthermore, the original “settlers,” those who brought the new land into use, were in this case the slaves and bondservants themselves, so it might well be said that the planters were in an arbitrary quasi-feudal relation to their land even apart from the large grants.

Temporary indentured service, both “voluntary” and compulsory, and the more permanent Negro slavery formed the base of exploited labor upon which was erected a structure of oligarchic rule by the large tobacco planters. The continuance of the large land tracts was also buttressed by the totally feudal laws of entail and primogeniture, which obtained, at least formally, in Virginia and most of the other colonies. Primogeniture compelled the undivided passing-on of land to the eldest son, and entail prevented the land from being alienated (even voluntarily) from the family domain. However, primogeniture did not exert its fully restrictive effect, for the planters generally managed to elude it and to divide their estate among their younger children as well. Hence, Virginia land partly dissolved into its natural division as the population grew. Primogeniture and entail never really took hold in Virginia, because the abundance of cheap land made labor—and hence the coerced supply of slaves—the key factor in production. More land could always be acquired; hence there was no need to restrict inheritance to the eldest son. Furthermore, the rapid exhaustion of tobacco land by the current methods of cultivation required the planters to be mobile, and to be ready to strike out after new plantations. The need for such mobility militated against the fixity of landed estates that marked the rigid feudal system of land inheritance prevailing in England. Overall, the wealth and status of Virginia’s large planters was far more precarious and less entrenched that were those of their landowning counterparts in England.

[From chapter 23 of The Case Against the Fed.]

Having examined the nature of fractional reserve and of central banking, and having seen how the questionable blessings of Central Banking were fastened upon America, it is time to see precisely how the Fed, as presently constituted, carries out its systemic inflation and its control of the American monetary system.

Pursuant to its essence as a post-Peel Act Central Bank, the Federal Reserve enjoys a monopoly of the issue of all bank notes. The US Treasury, which issued paper money as Greenbacks during the Civil War, continued to issue one-dollar "Silver Certificates" redeemable in silver bullion or coin at the Treasury until August 16, 1968. The Treasury has now abandoned any note issue, leaving all the country's paper notes, or "cash," to be emitted by the Federal Reserve. Not only that; since the US abandonment of the gold standard in 1933, Federal Reserve Notes have been legal tender for all monetary debts, public or private.

Federal Reserve Notes, the legal monopoly of cash or "standard," money, now serve as the base of two inverted pyramids determining the supply of money in the country. More precisely, the assets of the Federal Reserve Banks consist largely of two central items. One is the gold originally confiscated from the public and later amassed by the Fed. Interestingly enough, while Fed liabilities are no longer redeemable in gold, the Fed safeguards its gold by depositing it in the Treasury, which issues "gold certificates" guaranteed to be backed by no less than 100 percent in gold bullion buried in Fort Knox and other Treasury depositories. It is surely fitting that the only honest warehousing left in the monetary system is between two different agencies of the federal government: the Fed makes sure that its receipts at the Treasury are backed 100 percent in the Treasury vaults, whereas the Fed does not accord any of its creditors that high privilege.

The other major asset possessed by the Fed is the total of US government securities it has purchased and amassed over the decades. On the liability side, there are also two major figures: demand deposits held by the commercial banks, which constitute the reserves of those banks; and Federal Reserve Notes, cash emitted by the Fed. The Fed is in the rare and enviable position of having its liabilities in the form of Federal Reserve Notes constitute the legal tender of the country. In short, its liabilities—Federal Reserve Notes—are standard money. Moreover, its other form of liability—demand deposits—are redeemable by deposit-holders (i.e., banks, who constitute the depositors, or "customers," of the Fed) in these Notes, which, of course, the Fed can print at will. Unlike the days of the gold standard, it is impossible for the Federal Reserve to go bankrupt; it holds the legal monopoly of counterfeiting (of creating money out of thin air) in the entire country.

The American banking system now comprises two sets of inverted pyramids, the commercial banks pyramiding loans and deposits on top of the base of reserves, which are mainly their demand deposits at the Federal Reserve. The Federal Reserve itself determines its own liabilities very simply: by buying or selling assets, which in turn increases or decreases bank reserves by the same amount.

At the base of the Fed pyramid, and therefore of the bank system's creation of "money" in the sense of deposits, is the Fed's power to print legal tender money. But the Fed tries its best not to print cash but rather to "print" or create demand deposits, checking deposits, out of thin air, since its demand deposits constitute the reserves on top of which the commercial banks can pyramid a multiple creation of bank deposits, or "checkbook money."

Let us see how this process typically works. Suppose that the "money multiplier"—the multiple that commercial banks can pyramid on top of reserves, is 10:1. That multiple is the inverse of the Fed's legally imposed minimum reserve requirement on different types of banks, a minimum which now approximates 10 percent. Almost always, if banks can expand 10:1 on top of their reserves, they will do so, since that is how they make their money. The counterfeiter, after all, will strongly tend to counterfeit as much as he can legally get away with. Suppose that the Fed decides it wishes to expand the nation's total money supply by $10 billion. If the money multiplier is 10, then the Fed will choose to purchase $1 billion of assets, generally US government securities, on the open market.

Figures 10 and 11 below demonstrate this process, which occurs in two steps. In the first step, the Fed directs its Open Market Agent in New York City to purchase $1 billion of US government bonds. To purchase those securities, the Fed writes out a check for $1 billion on itself, the Federal Reserve Bank of New York. It then transfers that check to a government bond dealer, say Goldman Sachs, in exchange for $1 billion of US government bonds. Goldman Sachs goes to its commercial bank—say Chase Manhattan—deposits the check on the Fed, and in exchange increases its demand deposits at the Chase by $1 billion.

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Where did the Fed get the money to pay for the bonds? It created the money out of thin air, by simply writing out a check on itself. Neat trick if you can get away with it!

Chase Manhattan, delighted to get a check on the Fed, rushes down to the Fed's New York branch and deposits it in its account, increasing its reserves by $1 billion. Figure 10 shows what has happened at the end of this Step One.

The nation's total money supply at any one time is the total standard money (Federal Reserve Notes) plus deposits in the hands of the public. Note that the immediate result of the Fed's purchase of a $1 billion government bond in the open market is to increase the nation's total money supply by $1 billion.

But this is only the first, immediate step. Because we live under a system of fractional-reserve banking, other consequences quickly ensue. There are now $1 billion more in reserves in the banking system, and as a result, the banking system expands its money and credit, the expansion beginning with Chase and quickly spreading out to other banks in the financial system. In a brief period of time, about a couple of weeks, the entire banking system will have expanded credit and the money supply another $9 billion, up to an increased money stock of $10 billion. Hence, the leveraged, or "multiple," effect of changes in bank reserves, and of the Fed's purchases or sales of assets which determine those reserves. Figure 11, then, shows the consequences of the Fed purchase of $1 billion of government bonds after a few weeks.

Note that the Federal Reserve balance sheet after a few weeks is unchanged in the aggregate (even though the specific banks owning the bank deposits will change as individual banks expand credit, and reserves shift to other banks who then join in the common expansion.) The change in totals has taken place among the commercial banks, who have pyramided credits and deposits on top of their initial burst of reserves, to increase the nation's total money supply by $10 billion.

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It should be easy to see why the Fed pays for its assets with a check on itself rather than by printing Federal Reserve Notes. Only by using checks can it expand the money supply by ten-fold; it is the Fed's demand deposits that serve as the base of the pyramiding by the commercial banks. The power to print money, on the other hand, is the essential base in which the Fed pledges to redeem its deposits. The Fed only issues paper money (Federal Reserve Notes) if the public demands cash for its bank accounts and the commercial banks then have to go to the Fed to draw down their deposits. The Fed wants people to use checks rather than cash as far as possible, so that it can generate bank credit inflation at a pace that it can control.

If the Fed purchases any asset, therefore, it will increase the nation's money supply immediately by that amount; and, in a few weeks, by whatever multiple of that amount the banks are allowed to pyramid on top of their new reserves. If it sells any asset (again, generally US government bonds), the sale will have the symmetrically reverse effect. At first, the nation's money supply will decrease by the precise amount of the sale of bonds; and in a few weeks, it will decline by a multiple, say ten times, of that amount.

Thus, the major control instrument that the Fed exercises over the banks is "open market operations," purchases or sale of assets, generally US government bonds. Another powerful control instrument is the changing of legal reserve minima. If the banks have to keep no less than 10 percent of their deposits in the form of reserves, and then the Fed suddenly lowers that ratio to 5 percent, the nation's money supply, that is of bank deposits, will suddenly and very rapidly double. And vice versa if the minimum ratio were suddenly raised to 20 percent; the nation's money supply will be quickly cut in half. Ever since the Fed, after having expanded bank reserves in the 1930s, panicked at the inflationary potential and doubled the minimum reserve requirements to 20 percent in 1938, sending the economy into a tailspin of credit liquidation, the Fed has been very cautious about the degree of its changes in bank reserve requirements. The Fed, ever since that period, has changed bank reserve requirements fairly often, but in very small steps, by fractions of one percent. It should come as no surprise that the trend of the Fed's change has been downward: ever lowering bank reserve requirements, and thereby increasing the multiples of bank credit inflation. Thus, before 1980, the average minimum reserve requirement was about 14 percent, then it was lowered to 10 percent and less, and the Fed now has the power to lower it to zero if it so wishes.

Thus, the Fed has the well-nigh absolute power to determine the money supply if it so wishes.Traditionally, money and banking textbooks list three forms of Fed control over the reserves, and hence the credit, of the commercial banks: in addition to reserve requirements and open market operations, there is the Fed's "discount" rate, the interest rate charged on its loans to the banks. Always of far more symbolic than substantive importance, this control instrument has become trivial, now that banks almost never borrow from the Fed. Instead, they borrow reserves from each other in the overnight "federal funds" market. Over the years, the thrust of its operations has been consistently inflationary. For not only has the trend of its reserve requirements on the banks been getting ever lower, but the amount of its amassed US government bonds has consistently increased over the years, thereby imparting a continuing inflationary impetus to the economic system. Thus, the Federal Reserve, beginning with zero government bonds, had acquired about $400 million's worth by 1921, and $2.4 billion by 1934. By the end of 1981 the Federal Reserve had amassed no less than $140 billion of US government securities; by the middle of 1992, the total had reached $280 billion. There is no clearer portrayal of the inflationary impetus that the Federal Reserve has consistently given, and continues to give, to our economy.

Welcome to Whose Economy Is It, Anyway?, where the rules are made up and the dollars don’t matter. Or at least that seems to be the view of the Yellen regime.

Original Article: "A Bank Crisis Was Predictable. Was the Fed Lying or Blind?"

This Audio Mises Wire is generously sponsored by Christopher Condon. 

[This article is featured in chapter 79 of Making Economic Sense by Murray Rothbard and originally appeared in the September, 1985 edition of The Free Market] 

It was a scene familiar to any nostalgia buff: all-night lines waiting for the banks (first in Ohio, then in Maryland) to open; pompous but mendacious assurances by the bankers that all is well and that the people should go home; a stubborn insistence by depositors to get their money out; and the consequent closing of the banks by government, while at the same time the banks were permitted to stay in existence and collect the debts due them by their borrowers.

In other words, instead of government protecting private property and enforcing voluntary contracts, it deliberately violated the property of the depositors by barring them from retrieving their own money from the banks.

All this was, of course, a replay of the early 1930s: the last era of massive runs on banks. On the surface the weakness was the fact that the failed banks were insured by private or state deposit insurance agencies, whereas the banks that easily withstood the storm were insured by the federal government (FDIC for commercial banks; FSLIC for savings and loan banks).

But why? What is the magic elixir possessed by the federal government that neither private firms nor states can muster? The defenders of the private insurance agencies noted that they were technically in better financial shape than FSLIC or FDIC, since they had greater reserves per deposit dollar insured. How is it that private firms, so far superior to government in all other operations, should be so defective in this one area? Is there something unique about money that requires federal control?

The answer to this puzzle lies in the anguished statements of the savings and loan banks in Ohio and in Maryland, after the first of their number went under because of spectacularly unsound loans. "What a pity," they in effect complained, "that the failure of this one unsound bank should drag the sound banks down with them!"

But in what sense is a bank "sound" when one whisper of doom, one faltering of public confidence, should quickly bring the bank down? In what other industry does a mere rumor or hint of doubt swiftly bring down a mighty and seemingly solid firm? What is there about banking that public confidence should play such a decisive and overwhelmingly important role?

The answer lies in the nature of our banking system, in the fact that both commercial banks and thrift banks (mutual-savings and savings-and-loan) have been systematically engaging in fractional-reserve banking: that is, they have far less cash on hand than there are demand claims to cash outstanding. For commercial banks, the reserve fraction is now about 10 percent; for the thrifts it is far less.

This means that the depositor who thinks he has $10,000 in a bank is misled; in a proportionate sense, there is only, say, $1,000 or less there. And yet, both the checking depositor and the savings depositor think that they can withdraw their money at any time on demand. Obviously, such a system, which is considered fraud when practiced by other businesses, rests on a confidence trick: that is, it can only work so long as the bulk of depositors do not catch on to the scare and try to get their money out. The confidence is essential, and also misguided. That is why once the public catches on, and bank runs begin, they are irresistible and cannot be stopped.

We now see why private enterprise works so badly in the deposit insurance business. For private enterprise only works in a business that is legitimate and useful, where needs are being fulfilled. It is impossible to "insure" a firm, even less so an industry, that is inherently insolvent. Fractional reserve banks, being inherently insolvent, are uninsurable.

What, then, is the magic potion of the federal government? Why does everyone trust the FDIC and FSLIC even though their reserve ratios are lower than private agencies, and though they too have only a very small fraction of total insured deposits in cash to stem any bank run? The answer is really quite simple: because everyone realizes, and realizes correctly, that only the federal government--and not the states or private firms--can print legal tender dollars. Everyone knows that, in case of a bank run, the U.S. Treasury would simply order the Fed to print enough cash to bail out any depositors who want it. The Fed has the unlimited power to print dollars, and it is this unlimited power to inflate that stands behind the current fractional reserve banking system.

Yes, the FDIC and FSLIC "work," but only because the unlimited monopoly power to print money can "work" to bail out any firm or person on earth. For it was precisely bank runs, as severe as they were that, before 1933, kept the banking system under check, and prevented any substantial amount of inflation.

But now bank runs--at least for the overwhelming majority of banks under federal deposit insurance--are over, and we have  been paying and will continue to pay the horrendous price of saving the banks: chronic and unlimited inflation.

Putting an end to inflation requires not only the abolition of the Fed but also the abolition of the FDIC and FSLIC. At long last, banks would be treated like any firm in any other industry. In short, if they can't meet their contractual obligations they will be required to go under and liquidate. It would be instructive to see how many banks would survive if the massive governmental props were finally taken away.

[An Austrian Perspective on the History of Economic Thought (1995)]

 

Jeremy Bentham (1748–1832) began as a devoted Smithian but more consistently attached to laissez-faire. During his relatively brief span of interest in economics, he became more and more statist. His intensified statism was merely one aspect of his major — and highly unfortunate — contribution to economics: his consistent philosophical utilitarianism. This contribution, which opens a broad sluice-gate for state despotism, still remains as Bentham's legacy to contemporary neoclassical economics.

Bentham was born in London the son of a wealthy lawyer, whiled away his youth at Oxford, and was admitted to the bar in 1772. But it soon became clear that Bentham was not interested in a career as an attorney. Rather, he settled down for life with his inherited wealth to become a cloistered philosopher, legal theorist, and "projector" or crank, eternally grinding out schemes for legal and political reform which he urged upon the great and powerful.

Bentham's first and enduring interest was in utilitarianism (which we shall examine further below), and which he launched with his first published work at the age of 28, the Fragment on Government (1776).

Most of his life, Bentham functioned as the Great Man, scribbling chaotically on endless and prolix manuscripts elaborating on his projected reforms and law codes. Most of the manuscripts remained unpublished until long after his death. The affluent Bentham lived in a capacious house surrounded by flunkies and disciples, who copied revision after revision of his illegible prose to get ready for eventual publication. He conversed with his disciples in the same made-up jargon with which he peppered his writings. While a cheery conversationalist, Bentham brooked no argument from his aides and disciples; as his precocious young disciple John Stuart Mill later recalled with kindly understatement Bentham "failed in deriving light from other minds." Because of this trait, Bentham was surrounded not by alert and knowledgeable disciples but by largely uncomprehending aides who, in the perceptive words of Professor William Thomas, "looked on his work with a certain resigned skepticism as if its faults were the result of eccentricities beyond the reach of criticism or remonstrance." As Thomas continues,

The idea that he was surrounded by a band of eager disciples who drew from his system a searching critique of every aspect of contemporary society, which they were later to apply to various institutions in need of reform, is the product of later liberal myth-making. So far as I know, Bentham's circle is quite unlike that of any other great political thinker. It consisted not so much of men who found in his work a compelling explanation of the social world around them and gathered about him to learn more of his thoughts, as of men caught in a sort of expectant bafflement at the progress of a work which they would have liked to help on to completion but which remained maddeningly elusive and obscure.William E.C. Thomas, The Philosophic Radicals: Nine Studies in Theory and Practice 1817–1841 (Oxford: The Clarendon Press, 1979), p. 25.

What Bentham needed desperately were sympathetic and candid editors of his work, but his relationship with his followers precluded that from happening. "For this reason," adds Thomas, "the steadily accumulating mass of manuscripts remained largely a terra incognita, even to the intimate members of our circle." As a result, for example, such a major work in manuscript, Of Laws in General, astonishingly remained unedited, let alone unpublished, until our own day.

If anyone could have played this role, it was Bentham's outstanding follower, James Mill. In many ways, Mill had the capacity and personality to perform the task, but there were two fatal problems: first, Mill refused to abandon his own intellectual work in order to subordinate himself exclusively to aiding the Master. As Thomas writes, "Sooner or later all Bentham's disciples faced the choice of absorption or independence." Though he was a devoted follower of Benthamite utilitarianism, Mill's personality was such that absorption for him was out of the question.

Second, the slipshod and volatile Bentham desperately needed shaping up, and the brisk, systematic, didactic, and hectoring James Mill was just the man to do the shaping. But, unsurprisingly, Bentham, the Great Man, was not about to be shaped up by anyone. The personality clash was too great for their relationship to be anything but arm's length, even at the height of Mill's discipleship, before Mill achieved economic independence from his wealthy patron. Thus, in exasperation, Mill wrote to a close mutual friend about Bentham: "The pain he seems to feel at the very thought of being called upon to give his mind to the subject, you can have but little conception of." At the same time Bentham, even long afterwards, confided his lingering resentment of Mill to his last disciple, John Bowring:

He will never willingly enter into discourse with me. When he differs he is silent.… He expects to subdue everybody by his domineering tone — to convince everybody by his positiveness. His manner of speaking is oppressive and overbearing.

There is no better way to summarize the personality clash between them.See, ibid., pp. 35–6.

Bentham's first published work, the Fragment on Government (1776), gained young Bentham an entrée into leading political circles, particularly the friends of Lord Shelburne. These included Whig politicians like Lord Camden and William Pitt the younger, and two men who were quickly to become Bentham's close friends and earliest disciples, the Genevan Etienne Dumont and Sir Samuel Romilly. Dumont was to be the main carrier of Benthamite doctrine to the continent of Europe.

While utilitarian political and legal reform continued to be his main interest throughout his life, Bentham read and absorbed The Wealth of Nations in the late 1770s or early 1780s, quickly becoming a devoted disciple. Although Bentham praised practically no other author, he habitually referred to Adam Smith as "the father of political economy," a "great master," and a "writer of consummate genius." In the early 1780s, Bentham's brother Samuel, a wealthy engineer, was engaged by the Empress Catherine the Great to organize various industrial projects. Samuel invited Jeremy to stay with him in Russia, which he did from the mid-1780s to the end of 1787, with a view to presenting an "all-comprehensive [legal] code" to enable that despot to govern her realm more efficiently.

Bentham characteristically never completed the code for Catherine, but, while in Russia he learned — falsely, as it turned out — that William Pitt, now prime minister, was preparing to urge a reduction in the legal maximum rate of interest from 5 to 4 percent. Agitated, Bentham wrote and soon published, in 1787, his first, and only well-known work on economics: the scintillating and hard-hitting Defence of Usury. Trying to bring more consistency into Smithian laissez-faire, Bentham argued against all usury laws whatever. He grounded his view squarely on the concept of freedom of contract, declaring that "no man of ripe years and of sound mind, acting freely, and with his eyes open, ought to be hindered … from making such a bargain, in the way of obtaining money, as he thinks fit." The presumption, in any situation, is for freedom of contract: "You, who fetter contracts; you, who lay restraints on the liberty of man, it is for you … to assign a reason for your doing so." Furthermore, how can "usury" be a crime when it is exchange by mutual consent of lender and borrower? "Usury," Bentham concludes,

if it must be an offence, is an offence committed with consent, that is, with the consent of the party supposed to be injured, cannot merit a place in the catalogue of offences, unless the consent were either unfairly obtained or unfreely: in the first case, it coincides with defraudment; in the other, with extortion.

In his appendix to the Defence of Usury, Bentham restates and sharpens the Turgot-Smith defense of savings. Savings results in capital accumulation: "Whoever saves money, as the phrase is, adds proportionately to the general mass of capital.… The world can augment its capital in only one way: viz by parsimony." This insight leads to the principle that "capital limits trade," that the extent of trade or production is limited by the amount of capital that has been accumulated. In short: "the trade of every nation is limited by the quantity of capital."

The laissez-faire implication, as Bentham saw, is that government action or spending cannot increase the total amount of capital in society; it can only divert capital from free market to less productive uses. As a result, "no regulations nor any efforts whatsoever, either on the part of subjects or governors, can raise the quantity of wealth produced during a given period to an amount beyond what the productive powers of the quantity of capital in hand … are capable of producing."

Defence of Usury had a great impact in Britain and elsewhere. Dr Thomas Reid, the distinguished Scottish "common-sense" philosopher who succeeded Adam Smith to the chair of moral philosophy at Glasgow, strongly endorsed the book. The great Comte de Mirabeau, the leading force in the early stages of the French Revolution, had the work translated into French. And in the United States, the tract went into several editions, and it inspired several states to repeal their laws against usury.

In the course of the Defence, there are hints of valuable analysis. Lending is defined as "exchanging present money for future," and other intimations of time-preference or waiting as a key to saving include such phrases as the saver having "the resolution to sacrifice the present to [the] future." Bentham also intimates that part of interest charged includes a risk premium, a kind of insurance premium for the risk of loss incurred by the lender.

During the 1780s, Bentham was also writing his "Essay on Reward," published only a half-century later as the Rationale of Reward. In it, Bentham expounded enthusiastically on "Competition as rewards," and hailed the "advantages resulting from the most unlimited freedom of competition." It was on this principle of free competition and opposition to governmental monopolies that "the father of political economy" had, in Bentham's over-enthusiastic words, "created a new science."

In his next economic work, the unpublished "Manual of Political Economy" (1795), Bentham continued the laissez-faire theme of "No more trade than capital." The government, he emphasized, can only divert investment funds from the private sector; it cannot raise the total level of investment. "Whatever is given to any one branch, is so much taken from the rest.… Every statesman who thinks by regulation to increase the sum of trade, is the child whose eye is bigger than his belly." Towards the end of the same work, however, a cloud no bigger than a man's hand appeared that would eventually take charge of Bentham's economic analysis. For Bentham began his rapid slide down the inflationist chute. In a kind of appendix to the work, he states that government paper money could increase capital if resources were not "fully employed." There is no analysis, as of course there never is in the inflationist canon, of why these resources were "unemployed" in the first place, i.e., why their owners withheld them from use. The answer must be: because the resource owner demanded an excessively high price or wage: inflation is therefore a means of fooling resource-owners into lowering their real demands.

It did not take long for Jeremy Bentham to slide down the slippery slope from Adam Smith and what would be Say's law back to mercantilism and inflationism. Shortly afterwards, in an unpublished "Proposal for the Circulation of a [New] Species of Paper Currency" (1796), Bentham happily wedded his "projecting" and constructivist spirit to his newfound inflationism. Instead of floating bonds and paying interest on them, the government, he proposed, should simply monopolize all issue of paper notes in the kingdom. It could then issue the notes, preferably non-interest bearing, ad libitum and save itself the interest.

Bentham was scarcely at his best answering the question of what limit there might be to this government paper issue. The limit, he answered, would obviously be "the amount of paper currency in the country." Bentham's modern editor is properly scornful of this patent claptrap: "It is like saying "the sky's the limit" when we do not know how high the sky may be."Werner Stark, "Introduction," in Stark (ed.), Jeremy Bentham's Economic Writings (London: George Allen & Unwin, 1951), II, 18–19.

In his later writings on the subject, Bentham searched for some limits to paper issue, if unsuccessfully. But his commitment to a broadly inflationist course deepened further. In his unfinished "Circulating Annuities" (1800), he developed his government paper scheme further, and hailed the serviceability of inflation in wartime. Indeed, Bentham makes an all-out assault on the Turgot-Smith-Say insights and actually declares that employment of labor is directly proportional to the quantity of money: "No addition is ever made to the quantity of labor in any place, but by an addition made to the quantity of money in that place.… In this point of view, then, money, it should seem, is the cause, and the cause sine qua non, of labor and general wealth." Quantity of money is all; so much for Smithian doctrine! In fact, Bentham went further in Circulating Annuities, heaping scorn on his alleged mentor for denouncing the mercantilist preoccupation with the state's piling up of gold and silver and with a "favorable" balance of trade. There is no absurdity, averred Bentham,

in the exultation testified by public men at observing how [great] a degree of what is called the balance of trade is in favour of this country.… Seduced by the pride of discovery, Adam Smith, by taking his words from the kitchen, has attempted to throw an ill-grounded ridicule on the preference given to gold and silver.

After once again calling for the elimination of bank paper for the benefit of a government monopoly of paper issue (in the fragmentary "Paper Mischief Exposed," 1801), Bentham reached the acme of inflationism in his "The True Alarm (1801). In this unpublished work, Bentham not only continued the full-employment motif, but also grumbled about the allegedly dire effects of hoarding, of money saved from consumption that went into hoards instead of investment. In that case, disaster: a fall in prices, profits and production. Nowhere does Bentham recognize that hoarding and a general fall in prices also means a fall in costs, and no necessary reduction in investment or production. Indeed, Bentham worked around to the Mandeville fallacy about the beneficial and uniquely energizing effects of luxurious spending. In the mercantilist and proto-Keynesian manner, saving is evil hoarding while luxury consumption animates production. How capital can be maintained, much less increased, without saving is not explained in this bizarre model.

James Mill and David Ricardo have been considered loyal Benthamites, and this they were in utilitarian philosophy and in a belief in political democracy. In economics, however, it was a far different story, and Mill and Ricardo, sound as a rock on Say's law and the Turgot-Smith analysis, were firm in successfully discouraging the publication of the "The True Alarm." Ricardo scoffed at almost all of later Benthamite economics and, in the case of money and production, asked the proper questions: "Why should the mere increase of money have any other effect than to lower its value? How would it cause any increase in the production of commodities.… Money cannot call forth goods … but goods can call forth money." Bentham's major theme — "that money is the cause of riches" — Ricardo rejected firmly and flatly.

In his penultimate work of importance on economics, Jeremy Bentham came full circle. He had launched the economic part of his career with a hard-hitting attack on usury laws; he ended it by defending maximum price control on bread. Why? Because the mass of the public would favor cheap bread (assuredly so!), and so there would then be a "rational" and "determinate standard" for the good and moral price of bread, a standard which apparently free contract and free markets cannot set. What would such a standard be? Showing that for Bentham his ad hoc utilitarianism and cost-benefit analysis had totally driven any sound economics out of his purview, he answered that it would have to be empirical and ad hoc. Casting economic logic to the winds, Bentham maintained that the authorities should set a "moderate" maximum price, which would weigh the costs and benefits, the advantages and disadvantages, of each possible price. And Bentham assured his readers of his moderation: he did "not mean it [his proposal] as a whip or scorpion for the punishment of the growers or vendors of corn." But that would be the inevitable result.

Ad hoc empiricism was now rampant in Bentham. Admitting that all previous attempts at maximum price control were disasters, like any later institutionalist or historicist Bentham denied any relevance, since the circumstances of each particular time and place are necessarily different. In short, Bentham denied economics altogether — that is, denied the possibility of laws abstracting from particular circumstances and applying to all exchanges or actions everywhere.

In arguing against the opponents of price control, Bentham often used reasoning that was tortuous and even absurd. For example, to the charge that maximum price control would lead to attempted consumption exceeding supply (one of the greatest problems with price control), Bentham insisted that this could not happen in Britain, where the Poor Law ensured welfare payment to the poor with an increase in the price of bread. The opinion that, at some time or other, the demand curve can be vertical and not falling is in every century the hallmark of an economic ignoramus, and Bentham now passed that test. For centuries, writers and theorists knew that demand increased as price fell, and Bentham was now writing as if economics had never existed — and could never exist.

Since consistency was the realm of despised deductive logic, Bentham denied that his opposition to usury laws had any relation to his defense of price control on bread. But while he still maintained that his earlier analysis had been correct, he now offered a crucial revision: he had overlooked that a notable advantage of a usury law is that the government can then borrow more cheaply (at the expense, of course, of squeezing out marginal private borrowers). And he went on to admit that he now found this "advantage" decisive, so that now he would place usury laws on the governmental agenda: "I should expect to find the advantages of it in this respect predominate over its disadvantages in all others." In short, Bentham, the alleged "individualist" and exponent of laissez-faire, finds that advantage to government outweighs all private disadvantage!

Again treating his earlier views on usury, Bentham denied that he had ever believed in any self-adjusting and equilibrating tendencies of the market, or that interest rates properly adjust saving and investment. He went on in a revealing diatribe against laissez-faire and natural rights, to demonstrate to one and all the incompatibility between utilitarianism on the one hand and laissez-faire or property rights on the other:

I have not, I never had, nor shall have, any horror, sentimental or anarchical, of the hand of government. I leave it to Adam Smith, and the champions of the rights of man … to talk of invasions of natural liberty, and to give as a special argument against this or that law, an argument the effect of which would be to put a negative upon all laws. The interference of government, as often as in my jumbled view of the matter the smallest balance on the side of advantage is the result, is an event I witness with altogether as much satisfaction as I should its forbearance, and with much more than I should its negligence.

One wonders by what mystical standard the "scientific" Bentham managed to weigh the advantages and disadvantages of every particular law.

Three years later, in 1804, Jeremy Bentham lost interest in economics, a fact for which we must be forever grateful. It is only unfortunate that this waning of zeal had not occurred a half-decade before. The case of Jeremy Bentham, however, should be instructive to that host of economists that attempt to weld utilitarian philosophy with free market economics.

One would think that the master of utilitarianism would have contributed to utility analysis in economics, but oddly enough Bentham proved to be interested only in the "macro" realms of economic thought. The only exception came in the largely unfortunate True Alarm (1801), in which Bentham not only declared that "all value is founded on utility," but also enters into a cogent critique of Adam Smith's alleged "value paradox." Water, Bentham noted, can and does have economic value, while diamonds do have value in use as a foundation of its economic value. Continuing on, Bentham approaches the marginalist refutation of the value paradox:

The reason why water is found not to have any value with a view to exchange is that it is equally devoid of value with a view to use. If the whole quantity required is available, the surplus has no kind of value. It would be the same in the case of wine, grain, and everything else. Water, furnished as it is by nature without any human exertion, is more likely to be found in that abundance which renders it superfluous; but there are many circumstances in which it has a value in exchange superior to that of wine.

This article is excerpted from An Austrian Perspective on the History of Economic Thought (1995), volume II, chapter 2.1.

What at first seem like gifts from the state (handouts for some at the expense of others) lead to unfortunate events that cannot be stopped once begun.

Original Article: "Corporate Welfare for Farmers Is Swell until It's Not: The Case of Arizona Reservoirs"

This Audio Mises Wire is generously sponsored by Christopher Condon. 

[This article was written from London and published in Newsweek, June 2, 1947.]

England's major economic troubles today seem not so much the result of its war losses, appalling as these were, as of its postwar policies. Temporary impoverishment was inevitable, but the postwar series of special crises in coal, food, and dollars was not.

The underlying assumption beneath the present strangling network of economic controls is that a free market and price system is at best a fair-weather system, a luxury a country can afford only when it is already well off. It is the precise function of free prices, however, to allocate production among thousands of different commodities and services and to relieve the most serious shortages most quickly by providing the greatest profit and wage incentives precisely where those shortages exist.

A free price system last fall would certainly have signaled the impending shortage of coal long before the Labour government was awake to its existence. It would have encouraged imports of coal from America then, instead of waiting until now. It would have enabled higher wages or bonuses to be paid for increased production. It would have attracted more men to mining. If the miners had been free to spend their money for things they really wanted, higher money wages would have meant higher real production incentives.

On May 7, Emanuel Shinwell, the minister of fuel and power, indiscreetly declared before a meeting of union delegates that "the organized workers of the country are our friends; as for the rest they don't matter a tinker's cuss."

This statement, which has since become a source of great embarrassment to the Labour Party, does supply a key to the real nature and animus of recent British planning. The essentially collectivist and egalitarian philosophy behind it begins to emerge more clearly. A ceiling has been put on imports and particularly on the purchase of so-called luxuries because "dollars are short" and "we cannot afford it." But who are "we"? Certainly not the individual who wishes to buy.

The real principle applied here is "If I can't afford to buy it, you shan't be allowed to buy it. If organized labor cannot have it nobody shall have it." This is most clearly illustrated in food. The overall food supply is not nearly as bad as is commonly supposed. Though it lacks interest and variety, the minister of food estimates in terms of calories it is only 6 percent below the prewar level. But analysis of its distribution is instructive. In April, wage rates in Britain were 68 percent above their 1939 level. Weekly wages were about 80 percent higher. The cost of living index, however, has gone up only 31 percent. Food considered separately had risen only 22 percent. This means that the average British worker is considerably better off in terms of goods than he was before the war.

One can say that this is a very good thing, but one cannot argue at the same time that production is low because nutrition is low (the coal miner in particular gets a much higher than average allotment) and one cannot call it austerity. Austerity is not being imposed on the British nation as a whole; it is being imposed through heavy taxes on the British middle and upper classes to subsidize the British working class.

Food prices are being subsidized to the extent of $1,572,000,000 a year in spite of the fact that the British worker is spending a much smaller percentage of his income for the same amount of food than he did before the war. It is the middle and upper classes who have now been reduced to something approaching the workingman's diet.

Insofar as austerity has been imposed on the whole British people, it consists in refusing to permit either consumers or producers freedom of choice. The consumer is not free to spend his money on things he himself wants but only on things government officials think are good for him. The producer is not free to make what he wishes but only what government officials think is good for the country.

The whole system of priorities, allocations, quotas, and licenses causes endless delays, keeps efficient concerns from expanding, and keeps inefficient concerns in business. Production is lost all around not merely because an army of men is created to issue orders rather than produce, but because producers themselves must spend so much of their time trying to get licenses and allocations instead of finding out how to reduce costs and prices and make the goods consumers really want.

[Originally published August 13, 2008]

It's been 75 years since the federal government, on the spurious grounds of fighting the Great Depression, ordered the confiscation of all monetary gold from Americans, permitting trivial amounts for ornamental or industrial use. This happens to be one of the episodes Kevin Gutzman and I describe in detail in our new book, Who Killed the Constitution? The Fate of American Liberty from World War I to George W. Bush. From the point of view of the typical American classroom, on the other hand, the incident may as well not have occurred.

A key piece of legislation in this story is the Emergency Banking Act of 1933, which Congress passed on March 9 without having read it and after only the most trivial debate. House Minority Leader Bertrand H. Snell (R-NY) generously conceded that it was "entirely out of the ordinary" to pass legislation that "is not even in print at the time it is offered." He urged his colleagues to pass it all the same: "The house is burning down, and the President of the United States says this is the way to put out the fire. [Applause.] And to me at this time there is only one answer to this question, and that is to give the President what he demands and says is necessary to meet the situation."

Among other things, the act retroactively approved the president's closing of private banks throughout the country for several days the previous week, an act for which he had not bothered to provide a legal justification. It gave the secretary of the Treasury the power to require all individuals and corporations to hand over all their gold coin, gold bullion, or gold certificates if in his judgment "such action is necessary to protect the currency system of the United States."

The Emergency Banking Act reached back in time to amend the Trading with the Enemy Act of 1917, which had originally been intended to criminalize economic intercourse between American citizens and declared enemies of the United States. One provision of the act granted the president the power to regulate and even prohibit "under such rules and regulations as he may prescribe … any transactions in foreign exchange, export or earmarkings of gold or silver coin or bullion or currency … by any person within the United States." In 1918, the act was amended to extend its provisions two years beyond the conclusion of hostilities, and to allow the president to "investigate, regulate, or prohibit" even the "hoarding" of gold by an American.

After those two years elapsed, people generally assumed that the Trading with the Enemy Act had passed into desuetude. But the Supreme Court later explained that the act's provisions were not limited merely to World War I and the two years that followed — it "stood ready to meet additional wars and additional enemies" and could be called into service once again under those circumstances. (Little did anyone suspect in 1917 that these "additional enemies" would turn out to be the American people themselves.) As amended by the Emergency Banking Act of 1933, the Trading with the Enemy Act no longer said that simply "during time of war" could the president prohibit the export of gold or take action against "hoarding" (i.e., holding on to one's money). Now these actions could be taken during time of war or "during any other period of national emergency declared by the President."

A month later, claiming authority from the Emergency Banking Act and its amendment to the Trading with the Enemy Act, the president ordered all individuals and corporations in America to hand over their gold holdings to the federal government in exchange for an equivalent amount of paper currency. The paper currency they were receiving in exchange for the gold had always been redeemable in gold in the past, so few saw anything amiss in this coerced transaction, and most trusted the government's assurances that this was somehow necessary in order to combat the Depression. Only later would they discover that they weren't getting that gold back, and that the paper dollars they were being given in exchange would be devalued. Soon only foreign governments and central banks would be able to convert dollars into gold — and even that link to gold would be severed in 1971.

On June 5, 1933, at the behest of the president, Congress took the next step, passing a joint resolution making it illegal to "require payment in gold or a particular kind of coin or currency, or in an amount in money of the United States measured thereby." Any provision in a private or public contract promising payment in gold was thereby nullified. Payment could be made in whatever the government declared to be legal tender, and gold could not be used even as a yardstick for determining how much paper money would be owed.

For the next six months President Roosevelt pursued an erratic monetary course. Every day a new gold price was declared, on a basis no one could figure out. Private lending in effect came to a halt, with the value of the dollar in constant flux amid the prospect of ongoing devaluation. As Senator Carter Glass (D-VA) put it, "No man outside of a lunatic asylum will loan his money today on a farm mortgage." And thus the government could triumphantly announce that since the private sector was cruelly depriving Americans of credit, it would have to step in and provide relief.

Meanwhile, Senator William Borah was assuring his countrymen that when it came to the nation's monetary system, "there is no limitation upon the power of Congress. It is not circumscribed in any respect whatever. It is given full and plenary power to deal with that subject; and therefore it is the same as if there were no Constitution whatever." Borah also tried to argue that "when an individual takes an obligation payable in gold" he does so "with the full understanding that the Government may change its monetary policy at any time and that he must accept whatever the Congress says at a particular time shall constitute money."

The general rule (to which there are occasional exceptions) that no senator should ever be listened to on anything holds here: the power of Congress over money is in fact very limited. It has the power to "coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures."

Coining money simply refers to the process of taking a precious metal, converting it into coins, and stamping those coins with an indication of their metal content. The power to regulate the value of money does not involve a power to dilute the value of money by inflation, an absurd and self-serving rendering. Regulation of the value of money is a power of declaration and comparison, whereby some monetary standard is compared to other coins in circulation and an exchange rate for these various kinds of currency established according to the amounts of precious metals (with due allowance for the distinct values of different precious metals) in each. In other words, if Congress were to declare by statute what the prevailing market exchange rate between gold and silver was, and thus to "regulate" gold and silver coins vis-à-vis one another — or, more precisely, vis-à-vis the Spanish silver dollar that constituted the American monetary standard — then it would be properly exercising its constitutional power, which consists of nothing more than this.

That is why this power appears in the same clause with the power to "fix the Standard of Weights and Measures," which involves the measurement of fixed standards in order to assure uniformity throughout the nation. That power does not give Congress the power to declare that one-tenth of a pound shall now be declared a pound, but to take an already-existing standard and codify it. Every single monetary statute enacted from the ratification of the Constitution until the 1930s understood the congressional power to regulate the "value" of money not in the sense of declaring money to possess some arbitrary value that suits the whims of politicians or central bankers, but in the sense of establishing the relative values of gold and silver coins in terms of the ever-shifting relative values of those metals on the free market. (Needless to say, the market is perfectly capable of doing this on its own.)

Moreover, the "dollar" was not an arbitrary term at the time the Constitution was drafted. In the late 18th century, everyone knew what the "dollar" referred to: the silver Spanish milled dollar, which was in widespread use in the United States. The Constitution twice refers to the dollar — in Article I, Section 9, Clause 1 (a clause that everyone understood to involve a tax on the import of slaves), and in the Seventh Amendment (which protected the right to a jury trial in civil cases involving at least twenty dollars). If the dollar had been something that Congress could manipulate at will, or if "dollar" had been merely a generic term to refer to whatever Congress should arbitrarily choose to recognize as currency, the South would never have accepted that clause — or the Constitution itself. Congress might have manipulated the dollar so as to make the tax on slave imports prohibitively expensive. It could also have effectively abolished trial by jury in civil cases by making twenty "dollars" an astronomically high amount of money.

The Court never pronounced upon the constitutionality of the gold seizure (for reasons we speculate on in our book), the legality of which it simply took for granted. The cases it chose to hear involved the cancellation of gold clauses in public and private contracts. Known as the Gold Clause Cases, Norman v. Baltimore & Ohio Railroad Co., Nortz v. United States, and Perry v. United States were argued in January 1935 and decided the following month. In each case Chief Justice Charles Evans Hughes wrote the opinion for the Court; Justice McReynolds composed a single dissent that he applied to all three.

The Court declared in the first two cases that the federal government had been entitled to cancel all private contracts in gold. The perpetuation of gold clauses would have amounted to the "attempted frustration" of "the constitutional power of the Congress over the monetary system of the country…. [T]hese clauses interfere with the exertion of the power granted to the Congress." Not a stitch of evidence existed for any aspect of this argument.

Perry, the third case, involved a man who had purchased in gold a US bond that was payable in gold, and was seeking payment either in gold or in the equivalent in paper currency. Since the government intended to pay in depreciated dollars, he believed he was receiving far less than he was entitled to under the terms of the bond. The bond's face value was $10,000 in gold. In the inflated dollars of post-gold-standard America, it would have taken nearly $17,000 in paper currency in order to satisfy what the government had contracted to pay him.

The Court declared that the plaintiff was indeed entitled to his gold, since the government had an obligation to live up to its promises. But in not paying him his gold, the government wasn't really wronging him, since gold was now illegal to hold. In other words, if the government paid him in gold, it would then have to confiscate that gold from him anyway since holding gold was against the law.

Speaking for the minority, Justice McReynolds declared:

Just men regard repudiation and spoliation of citizens by their sovereign with abhorrence; but we are asked to affirm that the Constitution has granted power to accomplish both. No definite delegation of such a power exists; and we cannot believe that the farseeing framers, who labored with hope of establishing justice and securing the blessings of liberty, intended that the expected government should have authority to annihilate its own obligations and destroy the very rights which they were endeavoring to protect. Not only is there no permission for such actions; they are inhibited. And no plenitude of words can conform them to our charter.

To the argument that the bondholder had suffered no damage in being denied payment in gold since it was now illegal for people to own gold, the dissent replied: "Obligations cannot be legally avoided by prohibiting the creditor from receiving the thing promised…. There would be no serious difficulty in estimating the value of 25.8 grains of gold in the currency now in circulation." The contract to pay in gold having been broken, the holder was at least morally entitled to receive in currency not just the nominal amount of the bond but an amount in paper dollars equivalent to what he would have earned if the payment could have been made in gold. "For the government to say, we have violated our contract but have escaped the consequences through our own statute, would be monstrous. In matters of contractual obligation the government cannot legislate so as to excuse itself." Suppose a private individual tried to do the same thing, "secreting or manipulating his assets with the intent to place them beyond the reach of creditors." Any such attempt "would be denounced as fraudulent, wholly ineffective."

"Loss of reputation for honorable dealing," the dissent concluded, "will bring us unending humiliation; the impending legal and moral chaos is appalling."

By the 1970s the federal government had once again permitted Americans to hold gold coins. But when it came time to actually mint them again, it made sure that gold coins could never circulate and displace the constantly depreciating paper currency printed by the US government: the law required that such coins could circulate with a face value only a tiny fraction of their market value.

The full story of the gold confiscation is actually much worse than this, and we tell it in Who Killed the Constitution? What this episode teaches us is not so much that we need to "return to the Constitution," though that would be an improvement over what we have now, but rather that pieces of paper that governments themselves interpret cannot be expected to prevent governments from doing what they think they can get away with.

Lysander Spooner once said that he believed "that by false interpretations, and naked usurpations, the government has been made in practice a very widely, and almost wholly, different thing from what the Constitution itself purports to authorize." At the same time, he could not exonerate the Constitution, for it "has either authorized such a government as we have had, or has been powerless to prevent it. In either case, it is unfit to exist." It is hard to argue with that.

[This essay, which exposes the big-government policies of the Hoover administration, was first published in the Saturday Evening Post, June 25, 1932.]

In the minutes of the Chicago City Council, May 12th last, is the perfect example of how commonly we regard public credit. From bad taxation, reckless borrowing and reckless spending, the city of Chicago had so far prejudiced its own credit that for months it had been unable to meet its municipal payrolls either out of revenues or by discounting its notes at the bank. Therefore, it knew what could happen to the public credit of a city. But with the public credit of a nation it was different. On that day the City Council adopted two resolutions: One called upon Congress to reduce the federal government's expenditures one-fifth; the other called upon Congress to vote a Government bond issue for as many billions as might be necessary and spend the money "to make possible the American citizen's inalienable right to earn an honest living for himself and his family."

As if the taxpayer were willing, for the sake of some immediate relief, to increase the load of those who come next. And of course he is. Hence the passion for public borrowing.

Not only are all these ideas of refuge and solution in public credit to some degree plausible; very often they are of good and wistful intention. This is notably so in the present. There is a crisis in the economics of human welfare. The intention is to overcome it. If truly it could be overcome by the use of public credit, no objection on the ground of precedent or political theory would long prevail. Public credit belongs to the people as a whole and they may do anything with it they like. Therefore, as to these ideas—any and all of them—there are only two questions:

First, will they work? Nobody can answer that. Nobody knows what lies in the future. Sometime the tide, of itself, will rise again. We take that for granted. Therefore these unprecedented uses of the public credit now being made, and proposed to be made, are to meet a crisis that must soon pass. President Hoover says:

I have no taste for any such emergency powers in the Government. But we are fighting the economic consequences of overliquidation and unjustified fear as to the future of the United States. The battle to set our economic machine in motion in this emergency takes new forms and requires new tactics from time to time. We used such emergency powers to win the war; we can use them to fight the depression.

But the risk is real. If the natural level of economic recovery were long delayed, then all these measures would very soon fail in the total ruin of public credit.

Yet suppose differently. Suppose they did work, the tide rising to save and redeem them, and that we should be able to perform the terrific gymnastic feat of getting back our equilibrium. What then?

Well, in that case we should have established certain things in the way anything is established—by the fact of its having once been done before, such as these:

That when the industrial rhythm breaks and there is an crisis in employment, it becomes a function of government to provide people with work; thus responsibility for unemployment comes at rest not upon industry, where we had thought it belonged, but upon government—the state—and must be charged to the public credit.

That when from bad banking, wild speculation, senseless credit inflation, or no matter from what cause, the private banking structure seems about to fall, it becomes a function of government to support it with public credit, not particularly to save the banks, but to save depositors. Thus responsibility for the solvency of banking as a whole passes to the government.

That when railroads, in a crisis, are unable to meet their interest charges, it becomes a function of government to save them with loans of public credit, as through the Reconstruction Finance Corporation, not for the sake of any railroad as such, but because if the railroads go bankrupt the savings banks, the insurance companies and many thousands of investors who hold railroad bonds will be hurt.

That when liquidation of commodities and securities has gone too far it becomes the business of government to stop it, using public credit by such means as it may think fit.

That when prices are too low—prices taken all together—it becomes a function of government to manipulate them back to where they belong. This it will do by inflating money and credit.

And it follows by necessity that certain functions of government are assumed, as, for example, the wisdom to know when a crisis is such a crisis, to know when liquidation has gone far enough, when prices are too low, when they are high enough again, how many bank failures constitute a crisis in banking, how many railroad failures constitute a crisis in railroad credit, and so on.

Whether this would be all for the best, or otherwise, is not yet the point. There cannot even be a discussion of it until we see clearly where we are going. It may be that industry cannot accept responsibility for unemployment; if so, perhaps the government must. It may be that in a crisis finance cannot any longer be responsible for its own solvency, nor business for its own continuity. It may be that we are done with the anarchy of prices which we have so long justified by supposing a law of supply and demand.

But if these things are true, and if now in any crisis such responsibilities must pass to the government, we have gone far unawares toward an experimental state we know nothing of by experience, almost nothing of by theory. That is to say, we have not consciously intended it. We have not considered what kind of state that would be, much less to decide if we want it. It is clear, however, that in passing these responsibilities to government we should be exchanging freedom for something else as yet unnamed.

Hilaire Belloc, in his book The Servile State, defined that something else as economic status. Security according to the economic status of persons, classes and groups, in place of freedom.

And we shall have done another thing. If only such ideas as these now current do prevail, and if they work, we shall have enormously increased the power of self-extension which is already inherent in government.

There are many aspects of government. The one least considered is what may be called the biological aspect, in which government is like an organism with such an instinct for growth and self-expression that if let alone it is bound to destroy human freedom—not that it might wish to do so but that it could not in nature do less. No government ever wants less government—that is, less of itself. No government ever surrenders power, even its emergency powers—not really. It may mean to surrender them, but on the first new occasion it will take them all back. One of the American Government's wartime powers was the War Finance Corporation. The present Reconstruction Finance Corporation is a revival of that power in time of peace. And so it goes.

Observe that in time of prosperity government is bound to extend itself because revenues are plenty and there is always a purblind demand for special benefits to be conferred by public credit.

If now it is established that in time of depression government must extend itself even faster, prodigiously, in order to meet the responsibilities which we are so willing to pass to it by default, then the growth of government will be uninterruptible, without time or season, and the last problem of all is how people shall defend themselves against it.

Already the cost of government is absorbing, roughly, one-quarter of the total national income. One day's work in every four belongs to government. We speak here of all government—national, state, city and local—from Washington above down to the counties, townships, boroughs and districts, all exercising the tax power.

As the total national income falls, the proportion of it absorbed by government will rise. It must rise because government is the one thing that cannot be liquidated or deflated in time of economic depression. To the contrary, as we have seen, it must extend itself to meet new responsibilities. Therefore, taxes must be increased, first in order to provide as much public revenue as before, and then further increased to provide more revenue than before. Thus, in bad times like these, the proportion of the total national income absorbed by government will rise in a special manner. Nevertheless, the rise, irrespective of the state of the times, is continuous. The cost of government rises faster than the national income when the national income is rising. It rises even faster when the national income is falling.

The increase in the past few years has been such that if it should continue at the same rate, the cost of government fifty years hence would absorb the whole national income. Then we should all be working for government, either directly as state employees or indirectly to support the employees of the state.

Already of those above ten years of age gainfully employed in the whole country, male and female, about one in ten is directly employed in government service.

The per capita cost of all government has increased as follows:

In 1880 it was$13.56In 1903 it was$19.39In 1913 it was$30.24In 1923 it was$88.94In 1929 it was$107.37

In 1932 it will be, approximately $124.00

The first thought will be that the war did it—the war itself and the after costs of the war in such things as veterans' relief, pensions and national defense. But these are Federal expenditures, and they have much less to do with the rise in the cost of all government than you would suppose. By the figures of the National Industrial Conference Board, the per-capita costs of government separately stated, are:

 19131929Federal$7.17$32.36State$3.97$16.38Local$19.10$58.64

Half the total cost of all government is the cost of city and local government, and that per-capita cost in 1929 was three times what it was in 1913.

Taxes have risen to a point at which they begin to devour people's possessions, and the taxpayer is wild for relief. What relief does the taxpayer imagine? This—that the cost of government shall be reduced.

How shall the cost of government be reduced? By economy, by the elimination of graft and needless waste, by a consolidation of government's competitive parts, by a reform of its structure to limit the number of local and civic units because duplication is costly. In brief, government shall find ways to do what it does for less money. Not less government, you see; the same amount of government for less money.

And all this intelligent uproar is in a sense superficial and probably delusive. It is superficial wherein it aims only to abate a very acute pain in the taxpayer's pocket, and if anyone supposes that reducing the cost of government by economy and greater efficiency will limit government itself, it is elusive at the crucial point. More than that, reducing the cost of government by measure tends to serve the most potent forces now acting to extend government.

Why? The explanation is simple. The more efficient government is, the less it costs per measure, all the faster it may be extended without producing that very acute pain in the taxpayer's pocket. This pain is the terror of government because it arrests its growth.

And now you will see a selective struggle taking place within government itself. The impulse is to select the more extensible forms.

The structure of government is by strata, beginning with innumerable small local units, such as boroughs, townships, school districts, improvement districts, and so on, each one exercising the tax power; rising thence to counties, cities and states. At the top is the federal government. In the whole country there are approximately 500,000 separate units of government. This is the estimate of the tax commissioner of the state of New York, writing an essay in Community Service magazine on the preposterous duplication of parts, offices and powers in government.

"Take the case of New York," he says.

That state has sixty-two counties and sixty cities … In addition there are 932 towns, 507 villages, and, at the last count, 9,600 school districts … Just try to render efficient service … amid the diffused identities and inevitable jealousies of, roughly, 11,000 independent administrative officers or boards!

This extreme of home rule is not good for government. The tax power, in so many hands, is much less effective than it might be. So now there is a movement—a movement within government, independent of the taxpayer—to rationalize the structure from the bottom up, each next higher stratum with an impulse to absorb the powers of the one below, or, where they cannot be absorbed, to divide them reasonably. And at the top the federal government, with no authority over the sovereign states, would very much like to come to an understanding about taxation, because more and more Federal and state taxes collide at the same source, as with the income tax, which now some states are using in competition with the federal government. Such competition is embarrassing and unscientific from the common point of view of government seeking revenue. It is well known that a cow milked by a few expert hands in a regular manner will give more milk than the same cow milked in a haphazard manner by the neighborhood.

Certainly if the structure of government were rationalized, we could easily have as much government as before for less money. But there is the specious point again. Not less government; only as much government as before for less money. The cost of government by measure is one thing; the quantity of government, at any cost, is another.

Tax rates have been rising by necessity because the national income has been shrinking. It takes a higher rate of taxation to produce a given amount of revenue. At the same time, new taxes have been invented. There is yet everywhere a deficit in the public revenue because the shrinkage in everything taxable was so sudden and violent.

Now suppose that under stress of abnormal public revenue the structure of government is somewhat rationalized and that by such means as economy and efficiency the cost of government by measure is much reduced. Suppose it. Then what will happen when the national income rises to normal again?

There will be an enormous increase of public revenue, as there was after the war from the carry-over of the wartime taxes. All the public treasuries will be rich. And there is bound to be, again as it was after the war, a terrific extension of government.

The rise in the cost of government is not from increase of graft and corruption, for these evils in a relative sense are diminishing; nor is it from an increase of waste, for of this the ratio has probably been fairly constant. What it means is extension of government—not bad government only but good and bad together.

Let it be asked: What are the political and social forces now acting to absorb the national income for purposes of government—acting, that is, to increase taxation? First by habit one thinks of those for which we have traditional images: The machine, the boss, the pork barrel, the spoils system, the politician everywhere in his popular character, acquiring merit and power by spending public money; doing things for his people with the money of other people, taking care at the same time to do enough for himself with everybody's money. The spender of public money will never want followers.

"Of course," said the Secretary of the Treasury2 recently, in a speech before the New York City Bar Association,

the people are in a large measure themselves to blame. They have not only tolerated but given encouragement to an ever-expanding cost of government. The spenders were the ones elected to office and bond issues voted with cheerful alacrity.

One who remembers a Southern senator shouting out loud that he would steal for his people a hog every time a Yankee got a ham may be indignant, but the feeling is not personal. The senator was only human. These predatory, parasitic, more or less shameless forces are inseparable from government. They do increase the cost of popular government. Nevertheless, they are limited. That is to say, corrupt government tends to limit and defeat itself. Moreover, these forces are thoughtless. They have no theory among them. They do not want to redistribute wealth; they want only to prey upon it.

Now, much more potent are the forces acting upon a definite political doctrine. Such are the extreme liberals, the Socialists, the radicals, themselves perfectly honest, all haters of graft and corruption in government, yet who are for increasing popular taxes on any pretense of public benefit because that is one way of redistributing wealth downward, according to their doctrine.

What are popular taxes? The Secretary of the Treasury, in the speech just referred to, tells what they are: "the income and inheritance taxes, because they are so levied as to reach comparatively few people." The income tax is popular because fewer than 2 percent of the people pay income taxes. Why should not everyone pay an income tax? The principal reason, from the point of view of government, is that a universal income tax would be a powerful restraint upon the expansion of government.

And now observe how it is that on one side, the government—even a conservative government—and on the other side, all the forces moving to effect a redistribution of wealth downward by political theory, are bound for different reasons to favor popular taxes. The government favors them naturally—"the most feathers for the least squawk." And those radical forces, who may have nothing else in common with this government, favor them on the ground of doctrine.

Observe another strange bedfellowship. When the railroads throw themselves on the hands of the government and demand public credit to save them from bankruptcy, these radical forces do not protest, or, if they do, it is in an academic sense only; and the reason for this is that they believe in the public ownership of railroads, and see, perhaps more clearly than the others, that such use of public credit tends to bring the experiment of state ownership to pass. For the same reason they protest lightly or not at all against the use of public credit to save the private banking structure, for that will tend to bring about state control of credit. They are for anything that tends directly or indirectly to get the government into business, for that leads to state ownership of the means of production. If taxation meanwhile has to be heavily increased, so much the better, so long as the increase is, as it certainly will be, in the field of popular taxes, for thereby wealth is redistributed downward and capitalist society, in which they disbelieve, is on its way to trouble.

A third formation of forces moving in a parallel manner to absorb the national income by extension of government is made up of practical reformers, idealists, good-government people, with or without any political theory. What they have in common is a certain reaction to the sight of human misery, squalor, discomfort, disadvantage or what they believe to be curable wretchedness.

They preach a gospel of the responsibility of the state to administer happiness, not because the state should, not because they themselves would prefer the kind of state that does, but simply that the state can. Thus, government responsibility for old-age security, child life, tonsils, widows, backward mentalities, employment insurance, better maternity, public nursing, recreation, adult play, plumbing, housing, right nurture, infant feeding, vocational guidance, the use of leisure, everything of the good life for everybody, as a responsibility of the state, to procure it, provide it, superintend it. Everyone knows that impulse. How many times, on looking at slum dwellings or some other distasteful human spectacle, have you yourself said, "There ought to be a law," and so forth? Well, but "a law" means in every case to interfere by power of government, backed by the public credit.

Demands upon the public credit for social service are most difficult to resist. There is the emotional appeal, and to this is added the practical suggestion that, after all, it will pay, or that it will be cheaper in the end.

Two children in every nine are so far handicapped physically or mentally as to need special treatment and training. Who so mean that he will not himself be taxed, who so mindful of wealth that he will not favor increasing the popular taxes, in aid of these defective children?

Moreover, as the report of the White House Conference on Child Health and Protection said,

It is unquestionably better policy to spend more money today in helping the handicapped child to help himself than it is to spend many times as much tomorrow in supporting him at public expense.

At the recent national conference of the American Association for Old Age Security, Representative Connery,4 who is moving an old-age pension bill in Congress, said,

Evidence was introduced before the House Committee to show that the cost of old-age pensions would be much less to the states and municipalities than is the present cost of the workhouse institutions. It is my hope that the Congress, which has seen fit to provide $2 billion to protect the banking interests of the United States, will see the necessity of passing this legislation to protect the old people.

Fourteen states now have old-age pension laws, and 100 other old-age security measures are pending in forty state legislatures. The Assistant Commissioner of the Department of Social Welfare reported on the first year of old-age pensions in the state of New York, saying the protest against them came mainly from people in the rural districts where the pensioners were visible to those who were struggling to pay the taxes out of which old-age pensions are provided; and the delegate representing the corresponding work in California complained that the operation of the old-age pension law in that state was hampered by the two conditions that to be eligible one must be a citizen and of good character.

The very acute pain in the taxpayer's pocket is the terror of government because it arrests its growth.

Whether old-age pensions would be cheaper than poorhouses is a question which, even if it is permissible, cannot be determined as a matter of fact. The same spirit that moves old-age pensions has been improving the poorhouses. Trenton, for example, has made the word taboo. Its poorhouse is a municipal colony, governed by the idea, says the magazine of the New Jersey League of Municipalities, that as a refuge for the unfortunate it differs from people's homes "only in its larger facilities and the greater number of its inhabitants. Every resource to soften its institutional features has been used, including motion-picture shows, concerts, an extensive library, pool tables, newspapers, magazines." It is really a better place to live than many of the private homes taxed to support it.

The cost of social service, exclusive of education, now is representing one-fifth or more of the total expense of cities. In enlightened states it runs even higher. For Massachusetts the cost of it is nearly two-fifths of all state outlay.

The effects and works of social service are very flattering to our sense of benignity; we are doing well by the less fortunate. Yet this unction is by most of us undeserved; it comes after the fact, with some sourness in it. Very little social service is really spontaneous, straight from the taxpayer's heart. The promotion of it for many is an avocation, for increasing numbers it is a profession, and for a very great number of more or less trained men and women it is employment and livelihood.

"But where do many of these governmental elaborations come from?" asks the secretary of the Des Moines Bureau of Municipal Research.

Many originate with educational, recreational and sociological enthusiasts … These enthusiasts usually start by stating that such and such neighboring city has a certain public service or improvement; therefore, we ought to have it. And so these ideas spread like wildfire from community to community. But when one expresses a timid doubt regarding the necessity for such and such a project because of the expense, these boosters argue, "The public demands it," when, as a matter of fact, they themselves originated the scheme… Further tax-boosting influences emanate from the "per capita" or "model" standards. Certain national groups, particularly in the field of education, recreation, health or sociology, have set up per-capita targets toward which they assert every city in a certain population range should aim. Then these enthusiasts return home from their national gatherings, and if they find that their city spends less for such service, they make it their business to see that it soon attains such a standard.

There is another reason why the taxpayer himself is not entitled to that unctuous feeling in the presence of social service. Now the oldest object of his animosity—namely, the political boss—has annexed the idea. Formerly the benefactions of the boss were intimate and personal, but to these he now adds the more diffuse benefactions of social service, and his base is wider. Such a boss as this now commands the support, first, of all the beneficiaries of social service; secondly, of all who promote and live by social service; thirdly, of those whose doctrine is to take and give; and he has still his machine as it was before. He is fairly secure.

"Cities have assumed new obligations," writes Lent Upson, director of the Detroit Bureau of Governmental Research. "Increased wealth, with its higher standard of living, creates a demand for public services not known a generation ago."

In twenty years, 135 new activities were added to the responsibilities of government in Detroit, such as high-school evening classes, children's clinic, child-welfare nurses, transportation of the crippled, classes for mental defectives, training library personnel, testing gas, testing materials, health-education nurses, camps for tubercular children, public-health education, medical college, college evening classes, college summer classes, employment bureau, symphony concerts, cancer clinic, cancer nurses, human antiserum nurses, cooperative high school and the use of radio in schools.

The radicals are for anything that tends directly or indirectly to get the government into business, for that leads to state ownership of the means of production.

Results, typical: Taxes in the same twenty years have increased from $14 to $53 per capita; public debt has increased from $15 to $175 per capita. A great deal of that admirable work was not paid for; the people could not afford to pay for it. They borrowed the money, and now the problem of Detroit is what to do about its debt. Bankers are loath to lend it any more money because investors are reluctant to buy any more of its bonds. Creditors are hard, yes; only, suppose there had been no creditors to borrow from. Out of the city's own resources, unaided by creditors, the people of Detroit could not have enjoyed these benefits of social service.

What should or should not be is a question that belongs to argument. Here is the intent only to show how unlike and differently motivated forces, economic, social and political, are tending together not only to swallow up the national income in government but also to produce a result which some intend and some do not.

The loss of public credit, the complete ruin of it, would be the least of the consequences.

In a recent report on the "new poor," made by the Welfare Council of New York City, there is a reference to "the mental infection of dependency." This was upon the investigation of unemployment relief. But taking refuge in public credit will cause that same infection to attack business, banking, industry, agriculture, the entire body of private enterprise. Increasingly, as it may seem, irresistibly, we are using public credit to create an indigent caste, indigence becoming more and more comfortable until for many it may seem a goal; then a very great dependent caste referred to as people in the "lower income ranges," who, without being indigent at all, are yet dependent upon public credit for security, for modern housing, for care in illness, protection in health, economic insurance, amusement and guidance; then a social-service caste to mind the indigent and oversee the dependent. In all of these ways we are exchanging freedom for something else—for security, for status, for refuge from the terrors of individual responsibility. The last may go very deep.

Émile Faguet, a Frenchman, in a book entitled The Dread of Responsibility, wrote,

We like to surrender ourselves to the state while allowing it to impose even heavy tasks upon us. The basis of this paradoxical inclination is the lack of personal will, and this lack of personal will itself comes from the horror of responsibility … We imagine today that everything is done by the aggregate without the will to act of any of the individuals composing the aggregate.

He was writing about French people, and he supposed this weakness in them was from having lived so long under a crown that did everything for them. But what of American individualism? Was it a myth? That you will be hearing. Has the modern circumstance overwhelmed it? The city, of course, is an important factor. The modern city is a new form of life, really, and one that we have no science for; in that form individual helplessness is a rising social liability.

Whatever else may go by conjecture, this will be evident in itself—namely, that a rise in the cost of government, suddenly in one generation, from a traditional basis to a point at which it begins to absorb one-quarter of the total national income, is a political and social omen of great significance. It will be evident in the same way that taxation has reached a point where it represents an active redistribution of wealth by hand and power of government. No particular kind of state is sacred, nor is any particular doctrine of wealth, but it is all the more dangerous to be going this road with no theory of either the kind of state it leads to or what shall be the status of private wealth within it.

Until about 1910, excepting only the period of the Civil War, the cost of the federal government was met almost entirely by customs duties and the tobacco and liquor taxes; and until about 1910 the cost of state and local government was met by the property tax, supplemented somewhat by corporation taxes, license fees and death duties.

Since 1910," says the Secretary of the Treasury, "the picture has materially changed … The Federal Government adopted a full-fledged income tax in 1913, and estate tax in 1916 … Beginning with Wisconsin, in 1911, state after state adopted an income tax, though at very moderate rates, until today there are twenty-two with this form of taxation. The states have also invaded the field of consumption taxes formerly used almost exclusively by the Federal Government. Today every state imposes a gasoline tax, and thirteen make use of taxes on tobacco or cigarettes…

And he cites, for example, one state where the state income tax, which has just been doubled, plus the new and higher Federal income tax, will amount to more than one-fifth of a personal income above $12,000 a year, rising to more than three-fifths of a personal income above $100,000 a year. In the same state the levy upon corporation income, state and federal taxes together, will be one-fifth or more. This is the income tax alone! And thus the national income is absorbed.

Obviously we cannot continue in this direction without consequences either disastrous in fact or revolutionary in principle. A total ruin of the public credit would be a disaster in fact. We might then wipe the slate and begin all over. Any alternative would be revolutionary in principle, such, for example, as for the state to appropriate all wealth and administer it directly.

With a national income of not more than $60 billion this year, we are obliged to buy more government than we bought with a national income of nearly $90 billion in 1929; moreover, in this depression we are obliged to buy a good deal of it on the deferred-payment plan. That is what it means to sell bonds. All of it has sometime to be paid out of taxes; and even those who may not pay these future taxes directly will pay them indirectly in the cost of the houses they rent, the food they eat, the clothes they wear, the gas they burn in their motor cars—in every item of the cost of getting born, growing up, growing old, even dying. It is imperative to reduce the cost of government by measure—that is, to make the tax dollar buy more than before. But that will be only like pruning the tree, for lustier growth hereafter, unless we settle what public credit is for in principle and limit in a drastic manner the ferocious growth of government.

I'm sure that you have had this experience before, or something similar to it. You are sitting at lunch in a nice restaurant or perhaps a hotel. Waiters are coming and going. The food is fantastic. The conversation about all things is going well. You talk about the weather, music, movies, health, trivialities in the news, kids, and so on. But then the topic turns to economics, and things change.

You are not the aggressive type so you don't proclaim the merits of the free market immediately. You wait and let the others talk. Their biases against business appear right away in the repetition of the media's latest calumny against the market, such as that gas station owners are causing inflation by jacking up prices to pad their pockets at our expense, or that Walmart is, of course, the worst possible thing that can ever happen to a community.

You begin to offer a corrective, pointing out the other side. Then the truth emerges in the form of a naïve if definitive announcement from one person: "Well, I suppose I'm really a socialist at heart." Others nod in agreement.

On one hand there is nothing to say, really. You are surrounded by the blessings of capitalism. The buffet table, which you and your lunch partners only had to walk into a building to find, has a greater variety of food at a cheaper price than that which was available to any living person—king, lord, duke, plutocrat, or pope—in almost all of the history of the world. Not even 50 years ago would this have been imaginable.

All of history has been defined by the struggle for food. And yet that struggle has been abolished, not just for the rich but for everyone living in developed economies. The ancients, peering into this scene, might have assumed it to be Elysium. Medieval man conjured up such scenes only in visions of Utopia. Even in the late 19th century, the most gilded palace of the richest industrialist required a vast staff and immense trouble to come anywhere near approximating it.

We owe this scene to capitalism. To put it differently, we owe this scene to centuries of capital accumulation at the hands of free people who have put capital to work on behalf of economic innovations, at once competing with others for profit and cooperating with millions upon millions of people in an ever-expanding global network of the division of labor. The savings, investments, risks, and work of hundreds of years and uncountable numbers of free people have gone into making this scene possible, thanks to the ever-remarkable capacity for a society developing under conditions of liberty to achieve the highest aspirations of the society's members.

And yet, sitting on the other side of the table are well-educated people who imagine that the way to end the world's woes is through socialism. Now, people's definitions of socialism differ, and these persons would probably be quick to say that they do not mean the Soviet Union or anything like that. That was socialism in name only, I would be told. And yet, if socialism does mean anything at all today, it imagines that there can be some social improvement resulting from the political movement to take capital out of private hands and put it into the hands of the state. Other tendencies of socialism include the desire to see labor organized along class lines and given some sort of coercive power over how their employers' property is used. It might be as simple as the desire to put a cap on the salaries of CEOs, or it could be as extreme as the desire to abolish all private property, money, and even marriage.

Whatever the specifics of the case in question, socialism always means overriding the free decisions of individuals and replacing that capacity for decision making with an overarching plan by the state. Taken far enough, this mode of thought won't just spell an end to opulent lunches. It will mean the end of what we all know as civilization itself. It would plunge us back to a primitive state of existence, living off hunting and gathering in a world with little art, music, leisure, or charity. Nor is any form of socialism capable of providing for the needs of the world's 6 billion people, so the population would shrink dramatically and quickly and in a manner that would make every human horror ever known seem mild by comparison. Nor is it possible to divorce socialism from totalitarianism, because if you are serious about ending private ownership of the means of production, you have to be serious about ending freedom and creativity too. You will have to make the whole of society, or what is left of it, into a prison.

In short, the wish for socialism is a wish for unparalleled human evil. If we really understood this, no one would express casual support for it in polite company. It would be like saying, you know, there is really something to be said for malaria and typhoid and dropping atom bombs on millions of innocents.

Do the people sitting across the table really wish for this? Certainly not. So what has gone wrong here? Why can these people not see what is obvious? Why can't people sitting amidst market-created plenty, enjoying all the fruits of capitalism every minute of life, see the merit of the market but rather wish for something that is a proven disaster?

What we have here is a failure of understanding. That is to say, a failure to connect causes with effects. This is a wholly abstract idea. Knowledge of cause and effect does not come to us by merely looking around a room, living in a certain kind of society, or observing statistics. You can study roomfuls of data, read a thousand treatises on history, or plot international GDP figures on a graph for a living, and yet the truth about cause and effect can still be evasive. You still might miss the point that it is capitalism that gives rise to prosperity and freedom. You might still be tempted by the notion of socialism as savior.

Let me take you back to the years 1989 and 1990. These were the years that most of us remember as the time when socialism collapsed in Eastern Europe and Russia. Events of that time flew in the face of all predictions on the Right that these were permanent regimes that would never change unless they were bombed back to the Stone Age. On the Left, it was widely believed, even in those times, that these societies were actually doing quite well and would eventually pass the United States and Western Europe in prosperity, and, by some measures, that they were already better off than us.

And yet it collapsed. Even the Berlin Wall, that symbol of oppression and slavery, was torn down by the people themselves. It was not only glorious to see socialism collapse. It was thrilling, from a libertarian point of view, to see how states themselves can dissolve. They may have all the guns and all the power, and the people have none of those, and yet, when the people themselves decide that they will no longer be governed, the state has few options left. It eventually collapses amid a society-wide refusal to believe its lies any longer.

When these closed societies suddenly became open, what did we see? We saw lands that time forgot. The technology was backwards and broken. The food was scarce and disgusting. The medical care was abysmal. The people were unhealthy. Property was polluted.

It was also striking to see what had happened to the culture under socialism. Many generations had been raised under a system built on power and lies, and so the cultural infrastructure that we take for granted was not secure. Such notions as trust, promise, truth, honesty, and planning for the future—all pillars of commercial culture—had become distorted and confused by the ubiquity and persistence of the statist curse.

Why am I going through these details about this period, which most of you surely do remember? Simply to say this: most people did not see what you saw. You saw the failure of socialism. This is what I saw. This is what Rothbard saw. This is what anyone who had been exposed to the teachings of economics—to the elementary rules concerning cause and effect in society—saw.

But this is not what the ideological Left saw. The headlines in the socialist publications themselves proclaimed the death of undemocratic Stalinism and looked forward to the creation of a new democratic socialism in these countries.

As for regular people neither attached to the socialist idea nor educated in economics, it might have appeared as nothing more than a glorious vanquishing of America's foreign-policy enemies. We built more bombs than they did, so they finally gave in—the way a kid says "uncle" on a playground. Maybe some saw it as a victory of the US Constitution over weird and foreign systems of despotism. Or perhaps it was a victory for the cause of something like free speech over censorship, or the triumph of ballots over bullets.

Now, if the proper lessons of the collapse had been conveyed, we would have seen the error of all forms of government planning. We would have seen that a voluntary society will outperform a coerced one anytime. We might see how ultimately artificial and fragile are all systems of statism compared to the robust permanence of a society built on free exchange and capitalist ownership. And there is another point: the militarism of the Cold War had only ended up prolonging the period of socialism by providing these evil governments the chance to stimulate unfortunate nationalist impulses that distracted their domestic populations from the real problem. It was not the Cold War that killed socialism; rather, once the Cold War had exhausted itself, these governments collapsed of their own weight from internal rather than external pressure.

In short, if the world had drawn the correct lessons from these events, there would be no more need for economic education and no more need even for the bulk of what the Mises Institute does. In one great moment of history, the contest between capitalism and central planning would have been decided for all time.

I must say that it was more of a shock to my colleagues and me than it should have been, that the essential economic message was lost on most people. Indeed, it made very little difference in the political spectrum at all. The contest between capitalism and central planning continued as it always had, and even intensified here at home. The socialists among us, if they experienced any setback at all, bounded right back, strong as ever, if not more so.

If you doubt it, consider that it only took a few months for these groups to start kvetching about the horrible onslaught that was being wrought by the unleashing of capitalism in Eastern Europe, Russia, and China. We began hearing complaints about the rise of a hideous consumerism in these countries, about the exploitation of workers at the hands of capitalists, about the rise of the garish super rich. Piles and piles of news stories appeared about the sad plight of unemployed state workers, who, though loyal to the principles of socialism their entire lives, were now being turned out onto the streets to fend for themselves.

Not even an event as spectacular as the spontaneous meltdown of a superpower and all its client states was enough to impart the message of economic freedom. And the truth is that it was not necessary. The whole of our world is covered with lessons about the merit of economic liberty over central planning. Our everyday lives are dominated by the glorious products of the market, which we all gladly take for granted. We can open up our web browsers and tour an electronic civilization that the market created, and note that government never did anything useful at all by comparison.

We are also inundated daily by the failures of the state. We complain constantly that the educational system is broken, that the medical sector is oddly distorted, that the post office is unaccountable, that the police abuse their power, that the politicians have lied to us, that tax dollars are stolen, that whatever bureaucracy we have to deal with is inhumanly unresponsive. We note all this. But far fewer are somehow able to connect the dots and see the myriad ways in which daily life confirms that the market radicals like Mises, Hayek, Hazlitt, and Rothbard were correct in their judgments.

What's more, this is not a new phenomenon that we can observe in our lifetimes only. We can look at any country in any period and note that every bit of wealth ever created in the history of mankind has been generated through some kind of market activity, and never by governments. Free people create; states destroy. It was true in the ancient world. It was true in the first millennium after Christ. It was true in the Middle Ages and the Renaissance. And with the birth of complex structures of production and the increasing division of labor in those years, we see how the accumulation of capital led to what might be called a productive miracle. The world's population soared. We saw the creation of the middle class. We saw the poor improve their plight and change their own class identification.

The empirical truth has never been hard to come by. What matters are the theoretical eyes that see. This is what dictates the lesson we draw from events. Marx and Bastiat were writing at the same time. The former said capitalism was creating a calamity and that abolition of ownership was the solution. Bastiat saw that statism was creating a calamity and that the abolition of state plunder was the solution. What was the difference between them? They saw the same facts, but they saw them in very different ways. They had a different perception of cause and effect.

I suggest to you that there is an important lesson here as regards the methodology of the social sciences, as well as an agenda and strategy for the future. Concerning method, we need to recognize that Mises was precisely right concerning the relationship between facts and economic truth. If we have a solid theory in mind, the facts on the ground provide excellent illustrative material. They inform us about the application of theory in the world in which we live. They provided excellent anecdotes and revealing stories of how economic theory is confirmed in practice. But absent that theory of economics, facts alone are nothing but facts. They do not convey any information about cause and effect, and they do not point a way forward.

Think of it this way. Let's say you have a bag of marbles that is turned upside down on the ground. Ask two people their impressions. The first one understands what numbers mean, what shapes mean, and what colors mean. This person can give a detailed account of what he sees: how many marbles, what kinds, how big they are, and this person can explain what he sees in different ways potentially for hours. But now consider the second person, who, we can suppose, has absolutely no understanding of numbers, not even that they exist as abstract ideas. This person has no comprehension of either shape or color. He sees the same scene as the other person but cannot provide anything like an explanation of any patterns. He has very little to say. All he sees is a series of random objects.

Both these people see the same facts. But they understand them in very different ways, owing to the abstract notions of meaning that they carry in their minds. This is why positivism as pure science, a method of assembling a potentially infinite series of data points, is a fruitless undertaking. Data points on their own convey no theory, suggest no conclusions, and offer no truths. To arrive at truth requires the most important step that we as human beings can ever take: thinking. Through this thinking, and with good teaching and reading, we can put together a coherent theoretical apparatus that helps us understand.

Now, we have a hard time conjuring up in our minds the likes of a man who has no comprehension of numbers, colors, or shapes. And yet I suggest to you that this is precisely what we are facing when we encounter a person who has never thought about economic theory and never studied the implications of the science at all. The facts of the world look quite random to this person. He sees two societies next to each other, one free and prosperous and the other unfree and poor. He looks at this and concludes nothing important about economic systems because he has never thought hard about the relationship between economic systems and prosperity and freedom.

He merely accepts the existence of wealth in one place and poverty in the other as a given, the same way the socialists at a lunch table assumed that the luxurious surroundings and food just happened to be there. Perhaps they will reach for an explanation of some sort, but absent economic education, it is not likely to be the correct one.

Equally as dangerous as having no theory is having a bad theory that is assembled not by means of logic but by an incorrect view of cause and effect. This is the case with notions such as the Phillips Curve, which posits a tradeoff relationship between inflation and unemployment. The idea is that you can drive unemployment down very low if you are willing to tolerate high inflation; or it can work the other way around: you can stabilize prices provided you are willing to put up with high unemployment.

Now, of course this makes no sense on the microeconomic level. When inflation is soaring, businesses don't suddenly say, hey, let's hire a bunch of new people! Nor do they say, you know, the prices we pay for inventory have not gone up or have fallen. Let's fire some workers!

This much is true about macroeconomics: It is commonly treated like a subject completely devoid of any connection to microeconomics or even human decision making. It is as if we enter into a video game featuring fearsome creatures called Aggregates that battle it out to the death. So you have one creature called Unemployment, one called Inflation, one called Capital, one called Labor, and so on until you can construct a fun game that is sheer fantasy.

Another example of this came to me just the other day. A recent study claimed that labor unions increase the productivity of firms. How did the researchers discern this? They found that unionized companies tend to be larger with more overall output than nonunionized companies. Well, let's think about this. Is it likely that if you close a labor pool to all competition, give that restrictive labor pool the right to use violence to enforce its cartel, permit that cartel to extract higher-than-market wages from the company and set its own terms concerning work rules and vacations and benefits—is it likely that this will be good for the company in the long run? You have to take leave of your senses to believe this.

In fact, what we have here is a simple mix-up of cause and effect. Bigger companies tend to be more likely to attract a kind of unpreventable unionization than smaller ones. The unions target them, with federal aid. It is no more or less complicated than that. It is for the same reason that developed economies have larger welfare states. The parasites prefer bigger hosts; that's all. We would be making a big mistake to assume that the welfare state causes the developed economy. That would be as much a fallacy as to believe that wearing $2,000 suits causes people to become rich.

I'm convinced that Mises was right: the most important step economists or economic institutions can take is in the direction of public education in economic logic.

There is another important factor here. The state thrives on an economically ignorant public. This is the only way it can get away with blaming inflation or recession on consumers, or claiming that the government's fiscal problems are due to our paying too little in taxes. It is economic ignorance that permits the regulatory agencies to claim that they are protecting us as versus denying us choice. It is only by keeping us all in the dark that it can continue to start war after war—violating rights abroad and smashing liberties at home—in the name of spreading freedom.

There is only one force that can put an end to the successes of the state, and that is an economically and morally informed public. Otherwise, the state can continue to spread its malicious and destructive policies.

Do you remember the first time that you began to grasp economic fundamentals? It is a very exciting time. It is as if people with poor eyesight have put on glasses for the first time. It can consume us for weeks, months, and years. We read a book like Economics in One Lesson and pore over the pages of Human Action, and for the first time we realize that so much of what other people take for granted is not true, and that there are exciting truths about the world that desperately need to be spread.

To consider just one example, look at the concept of inflation. For most people, it is seen the way primitive societies might see the onset of a disease. It is something that sweeps through to cause every kind of wreckage. The damage is obvious enough, but the source is not. Everyone blames everyone else, and no solution seems to work. But once you understand economics, you begin to see that the value of the money is more directly related to its quantity, and that only one institution possesses the power to create money out of thin air without limit: the government-connected central bank.

Economics causes us to broaden our minds to look at the commerce of society from many different points of view. Instead of just looking at events and phenomena from the perspective of a single consumer or producer, we begin to see the interests of all consumers and all producers. Instead of thinking only about the short-run effects of certain policies, we think about the long run, and the spin-off effects of certain government policies. This is the essence of Hazlitt's first lesson in his famed book.

By the way, let me interrupt here to make an exciting announcement. This book was written more than 60 years ago, and it remains the most powerful first book on economics anyone can read. Even if it is the last book on economics you read, it will stick with you for a lifetime.

It is a hugely important tool, and though I'm glad that it has stayed in print, I've not been happy with the edition that has long been distributed. We had long hoped for a hardback version of this amazing classic to make available at a very low price. Now we have it.

For a person who has read in economics, and absorbed its essential lessons, the world around us becomes vivid and clear, and certain moral imperatives strike us. We know now that commerce deserves defense. We see entrepreneurs as great heroes. We sympathize with the plight of producers. We see unions not as defenders of rights but as privileged cartels that exclude people who need work. We see regulations not as consumer protection but rather as cost-raising rackets lobbied for by some producers to hurt other producers. We see antitrust not as a safeguard against corporate excess but as a bludgeon used by big players against smarter competitors.

In short, economics helps us see the world as it is. And its contribution lies not in the direction of the assembly of ever more facts, but in helping those facts fit a coherent theory of the world. And here we see the essence of our job at the Mises Institute. It is to educate and instill a systematic method for understanding the world as it is. Our battleground is not the courts, nor the election polls, nor the presidency, nor the legislature, and certainly not the wicked arena of lobbying and political payoffs. Our battleground concerns a domain of existence that is more powerful in the long run. It concerns the ideas that individuals hold about how the world works.

As we get older and see ever more young generations coming up behind us, we are often struck by the great truth that knowledge in this world is not cumulative over time. What one generation has learned and absorbed is not somehow passed on to the next one through genetics or osmosis. Each generation must be taught anew. Economic theory, I'm sorry to report, is not written on our hearts. It was a long time in the process of being discovered. But now that we know, it must be passed on—and in this way, it is like the ability to read, or to understand great literature. It is the obligation of our generation to teach the next generation.

And we are not merely talking here of knowledge for knowledge's sake. What is at stake is our prosperity. It is our standard of living. It is the well-being of our children and all of society. It is freedom and the flourishing of civilization that stand in the balance. Whether we grow and thrive and create and flourish, or wither and die and lose all that we have inherited, ultimately depends on these abstract ideas we hold concerning cause and effect in society. These ideas do not usually come to us by pure observation. They must be taught and explained.

But who or what will teach and explain them? This is the crucial role of the Mises Institute. And not only to teach but to expand the base of knowledge, to make new discoveries, to broaden the reach of the literature, and to add ever more abundantly to the corpus of freedom. We need to expand its proponents in all walks of life, not only in academia but in all sectors of society. This is an ambitious agenda, one that Mises himself charged his descendants with.

You are helping us take up this task, and for this we are so grateful.

This talk was delivered at the Mises Circle in Seattle on May 17, 2008.

Its Significance

Fifty years ago, an exuberant American people knew little and cared less about economics. They understood, however, the virtues of economic freedom, and this understanding was shared by the economists, who supplemented common sense with sharper tools of analysis.

At present, economics seems to be the number one American and world problem. The newspapers are filled with complex discussions of the budget, wages and prices, foreign loans, and production. Present-day economists greatly add to the confusion of the public. The eminent Professor X says that his plan is the only cure for world economic evils; the equally eminent Professor Y claims that this is nonsense—so whirls the merry-go-round.

However, one school of thought—the Keynesian—has succeeded in capturing the great majority of economists. Keynesian economics—proudly proclaiming itself as "modern," though with its roots deep in medieval and mercantilist thought—offers itself to the world as the panacea for our economic troubles. Keynesians claim, with supreme confidence, that they have "discovered" what determines the volume of employment at any given time. They assert that unemployment can be readily cured through governmental deficit spending, and that inflation can be checked by means of government tax surpluses.

With great intellectual arrogance, Keynesians brush aside all opposition as being "reactionary," "old-fashioned," etc. They are extremely boastful of having gained the allegiance of all the young economists—a claim that has, unfortunately, a good deal of truth. Keynesian thinking has flourished in the New Deal, in the statements of President Truman, his Council of Economic Advisers, Henry Wallace, labor unions, most of the press, all foreign governments and United Nations committees, and, to a surprising extent, among "enlightened businessmen" of the Committee for Economic Development variety.

Against this onslaught, many sincere liberal-minded citizens have been swayed by the Keynesians—particularly by their argument that the wide governmental intervention they advocate will "solve the problem of unemployment." The most dismaying aspect of the situation is that the Keynesian arguments have not been countered effectively by the liberal economists, who have generally been helpless in the tidal wave. Liberal economists have confined their attacks to the political program of the Keynesians—they have not dealt adequately with the economic theory on which this program is based. As a result, the Keynesians' claim that their program will insure full employment has largely gone unchallenged.

The reason for this weakness on the part of liberal economists is understandable. They were brought up on "neoclassical economics," which is grounded on careful analysis of economic realities and based on the actions of individual units in the economic system. The Keynesian theory is based on a model of the economic system—a model that drastically oversimplifies reality and yet is extremely complex because of its abstract and mathematical nature. For this reason, liberal economists found themselves confused and bewildered by this "new" economics. Since Keynesians were the only economists equipped to discuss their system, they were easily able to convince the younger economists and students of its superiority.

To launch a successful counterattack against the Keynesian invasion, therefore, requires more than righteous indignation toward the proposals for government action in the Keynesian program. It requires a well-informed citizenry who thoroughly understand the Keynesian theory itself, with its numerous fallacies, unrealistic assumptions, and faulty concepts. For this reason it will be necessary to tread a difficult path through a complex maze of technical jargon in order to examine the Keynesian model in some detail.

Another difficulty in the task of examining Keynesianism is the sharp difference of opinion between various branches of the movement. All shades of Keynesians, however, agree in sharing a common attitude towards the function of the State, and all accept the Keynesian model as a basis for analyzing the economic situation.

All Keynesians conceive of the State as a great potential reservoir of benefits, ready to be tapped. The prime concern for the Keynesian is to decide on economic policy—what should be the economic ends of the State and what means should the State adopt to achieve them? The State is, of course, always synonymous with "we": What should "we" do to insure full employment? is a favorite query. (Whether the "we" refers to the "people" or to the Keynesians themselves is never quite made clear.)

In medieval and early modern times, the ancestors of the Keynesians who advocated similar policies also proclaimed that the State could do no wrong. At that time, the king and his nobles were the rulers of the State. Now we have the dubious privilege of periodically choosing our rulers from two sets of power-thirsty aspirants. That makes it a "democracy."This does not imply that democracy is evil. It means that democracy should be considered as a desirable technique for choosing rulers competitively, so long as the power of these rulers is strictly limited. So, the rulers of the State, being "democratically elected" and therefore representing the "people," are allegedly entitled to control the economic system and coerce, cajole, "influence," and redistribute the wealth of their reluctant subjects.

A recent important illustration of Keynesian political thinking was the Truman message vetoing income tax reduction. The main reason for the veto was that high taxes are necessary to "check inflation," since a "boom" period calls for a budget surplus to "drain off excess purchasing power."

Superficially, this argument seems convincing, and it is supported by almost all economists, including many non-Keynesian conservatives. They are all very proud of the fact that they are opposing the "politically easy" route of reducing taxes in the interests of scientific truth, national welfare, and the "fight against inflation."

It is necessary, however, to analyze the problem more closely. What is the essence of inflation? It consists of rising prices—some prices rising more rapidly than others.The cause of rising prices is generally an abundance of fiat money created by past or present government deficits. What is a price? It is a sum of money (general purchasing power) paid voluntarily by one individual to another in exchange for a definite service rendered by the second individual to the first. This service may be in the form of a tangible commodity or an intangible benefit.

On the other hand, what is a tax? A tax is the coercive expropriation of the property of an individual by the rulers of the State. The rulers use this property for whatever purposes they desire—usually the rulers will distribute it in such a manner as to insure their continuance in office, i.e., by subsidizing favored groups. In addition, the rulers decide which individuals will pay the taxes—the decision consisting of expropriating the property of groups disliked by the rulers.

A price, therefore, is a free act of voluntary exchange between two individuals, both of whom benefit by the exchange (else the exchange would not be made!). A tax is a compulsory act of expropriation, with no benefit accruing to the individual (unless he happens to be on the receiving end of property expropriated by the State from someone else).

In the light of this distinction, advocating high taxes to prevent high prices is similar to a highway robber assuring the victim that his robbery is checking inflation, since the robber doesn't intend on spending the money for quite some time or that the robber might use it to repay his own debts. When will the American people wake up to the realization that robbery only benefits the robber, and that the edict "thou shalt not steal" applies to rulers (and Keynesians) as well as to anybody else?

The Model Explained

The Keynesian theory (or model) highly oversimplifies the real world by dealing with a few large aggregates, lumping together the activity of all individuals in a nation.

The basic concept used is aggregate national income, which is defined as equal to the money value of the national output of goods and services during a given time period. It is also equal to the aggregate of income received by individuals during the period (including undistributed corporate profits).

Now, the fundamental equation of the Keynesian system is aggregate income = aggregate expenditures. The only way any individual can receive any money income is for some other individual to spend an equal sum. Conversely, every act of expenditure by an individual results in an equivalent money income for someone else. This is obviously, and always, true. Mr. Smith spends one dollar in Mr. Jones's grocery—this act results in one dollar of income for Mr. Jones. Mr. Smith receives his annual income as a result of an act of expenditure by the XYZ Company; the XYZ Company receives its annual income as a result of expenditures made by all its customers, etc. In every case, expenditures, and only expenditures, can create money income.

Aggregate expenditures are classified into two basic types: (1) final expenditure for goods and services that have been produced during the period equals consumption, and (2) expenditure on the means of production of these goods equals investment. Thus, money income is created by decisions to spend, consisting of consumption decisions and investment decisions.

Now, an individual, upon receiving his income, divides it between consumption and saving. Saving, in the Keynesian system, is defined simply as not spending on consumption. A fundamental Keynesian tenet is that, for any particular level of aggregate income, there is a certain definite, predictable amount that will be consumed and a definite amount that will be saved. This relationship between aggregate income and consumption is considered to be stable, fixed by the habits of consumers. In the mathematical Keynesian jargon, aggregate consumption (and therefore aggregate savings) is a stable, passive function of income (the famous consumption function). For example, we shall use the consumption function: consumption = 90 percent of income. (This is a highly simplified function, but it serves to illustrate the basic principles of the Keynesian model.) In this case, the savings function would be savings = 10 percent of income.

Consumption expenditures are, therefore, passively determined by the level of national income. Investment expenditures, however, are, according to the Keynesians, effected independently of the national income. At this stage, what determines investment is not important—the crucial point is that it is determined independently of the income level.

We have left out two factors that also determine the level of expenditures. If exports are greater than imports, the total amount of expenditures in a country is increased, hence national income increases. Also, a government budget deficit increases aggregate expenditures and income (provided that other types of expenditure can be assumed to be constant). Setting aside the foreign trade problem, it is obvious that government deficits or surpluses are, like investment, decided independently of the level of national income.

Thus, income = independent expenditures (private investment + government deficit) + passive consumption expenditures. Using our illustrative consumption function, income = independent expenditures + 90 percent of income. Now, by simple arithmetic, income equals ten times independent expenditures. For every increase in independent expenditures, there will be a ten-fold increase in income. Similarly, a decrease in independent expenditures will lead to a ten-fold drop in income. This "multiplier" effect on income will be achieved by any type of independent expenditure—whether private investment or government deficit. Thus, in the Keynesian model, government deficits and private investment have the same economic effect.

Let us now examine in detail the process whereby an equilibrium income is determined in the Keynesian model. The equilibrium level is the level at which national income tends to settle.

Let us assume that aggregate income = 100, consumption = 90, savings = 10, and investment = 10. Also assume that there is no government deficit or surplus. For the Keynesians, this situation is a position of equilibrium—income tends to remain at 100. A position of equilibrium is reached because both main groups in the economy—business firms and consumers—are satisfied. Business firms, in the aggregate, pay out 100. Of this 100, 10 is invested in capital and 90 is paid out while producing consumers' goods. Aggregate business firms expect this 90 to be returned to them through the sale of consumers' goods. The consumers fulfill the expectations of business firms by dividing the income of 100 into consuming 90 and saving 10. Thus, aggregate business firms are just satisfied with the situation, and aggregate consumers are satisfied because they are consuming 90 percent of their income and saving 10 percent.

Now, let independent expenditures increase to 20, either because of an increase in private investment or because of a government deficit. Now, income payments to consumers is 90 + 20 = 110. Consumers, receiving 110, will wish to consume 90 percent of it, or 99, and save 11. Now, business firms, who had expected a consumption of 90, are pleasantly surprised to see consumers bidding up prices and reducing merchants' stocks in an effort to consume 99. As a result, business firms expand their output of consumer goods to 99 and pay out 99 + 20 = 119, expecting a return of 99 in consumption sales. But again they are pleasantly surprised, since consumers will wish to spend 90 percent of 119, or 107. This process of expansion continues until income is again equal to ten times investment—when consumption is again equal to 90 percent of income. The point will be reached when income = 200, investment = 20, consumption = 180, and saving = 20.

It is important to notice that equilibrium was reached in both cases when aggregate investment = aggregate saving. The above equilibrium process can be described in terms of saving and investment: When investment is greater than saving, the economy expands and national income rises until aggregate saving equals aggregate investment. Similarly, the economy contracts if investment is less than saving, until they are again equal.

Note that two very important things must remain constant in order that equilibrium be reached. The consumption function (and therefore the savings function) is assumed to be constant throughout while the level of investment is constant at least until equilibrium is reached. The question now arises: what is so important about aggregate money income that it should be the continual focus of attention? Before this question can be answered, it is necessary to make certain assumptions.

Assume that the following things be considered as given (or constant): the existing state of all techniques, the existing efficiency, quantity, and distribution of all labor, the existing quantity and quality of all equipment, the existing distribution of national income, the existing structure of relative prices, the existing money wage rates (!), and the existing structure of consumer tastes, natural resources, and economic and political institutions.

Then, given these assumptions, for every level of national money income, there corresponds a unique, definite volume of employment. The higher the national income, the greater will be the volume of employment, until a state of "full employment" is reached. (We can define full employment as simply a very low level of unemployment.) After the full-employment level is reached, a higher money income will represent only a rise in prices, with no rise in physical output (real income) and employment.

Summing up the above model, known as the Keynesian theory of underemployment equilibrium: To each level of national income there corresponds a unique level of employment. There is, therefore, a certain level of income to which corresponds a state of full employment, without a great rise in prices. An income below this "full-employment" income will signify large-scale unemployment; an income above will mean large price inflation.

The level of income, in a private enterprise system, is determined by the level of independent investment expenditures and consumption expenditures that are a passive function of the income level. The resulting level of income will tend to settle at the point where aggregate investment equals aggregate saving.

Now (and here is the grand Keynesian climax), there is no reason whatsoever to assume that this equilibrium level of income determined in the free market will coincide with the "full-employment" income level—it may be more or less.

This is the model of the private economy accepted by all Keynesians. The State, assert the Keynesians, has the responsibility of keeping the economic system at the "full-employment" income level, since "we" cannot depend on the private economy to do so.

The Keynesian model furnishes the means by which the State can fulfill this task. Since government deficits have the same effects on income as does private investment, all that the State must do is to estimate the expected equilibrium income level of the private economy. If it is below the "full-employment" level, the State can engage in deficit spending until the desired income level is reached. Similarly, if it is above the desired level, the State can engage in budget surpluses through high taxes. The State, if it so desires, can also stimulate or discourage private investment or consumption via taxes and subsidies, or impose tariffs if it desires to create an export surplus. The favorite Keynesian prescription for stimulating consumption is progressive income taxation, since the "rich" do most of the saving. The favorite method of "encouraging private investment" is to subsidize "progressive" and "enlightened" industrialists as against "Tory big business."

The Model Criticized

We remember that for the Keynesian model to be valid, the two basic determinants of income, namely, the consumption function and independent investment, must remain constant long enough for the equilibrium of income to be reached and maintained. At the very least, it must be possible for these two variables to remain constant, even if they are not generally constant in actuality. The core of the basic fallacy of the Keynesian system is, however, that it is impossible for these variables to remain constant for the required length of time.

We recall that when income = 100, consumption = 90, savings = 10, and investment = 10, the system is supposed to be in equilibrium, because the aggregate expectations of business firms and the public are fulfilled. In the aggregate, both groups are just satisfied with the situation, so that there is allegedly no tendency for the income level to change. But aggregates are meaningful only in the world of arithmetic, not in the real world. Business firms may receive in the aggregate just what they had expected; but this does not mean that any single firm is necessarily in an equilibrium position. Business firms do not make earnings in the aggregate. Some firms may be making windfall profits, while others may be making unexpected losses. Regardless of the fact that, in the aggregate, these profits and losses may cancel each other, and each firm will have to make its own adjustments to its own particular experience. This adjustment will vary widely from firm to firm and industry to industry. In this situation, the level of investment cannot remain at 10, and the consumption function will not remain fixed, so that the level of income must change. Nothing in the Keynesian system, however, can tell us how far or in what direction any of these variables will move.

Similarly, in the Keynesian theory of the adjustment process toward the level of equilibrium, if aggregate investment is greater than aggregate saving, the economy is supposed to expand toward the level of income where aggregate saving equals aggregate investment. In the very process of expansion, however, the consumption (and savings) function cannot remain constant. Windfall profits will be distributed unevenly (and in an unknown fashion) among the numerous business firms, thus leading to varying types of adjustments. These adjustments may lead to an unknown increase in the volume of investment. Also, under the impetus of expansion, new firms will enter the economic system, thus changing the level of investment.

In addition, as income expands, the distribution of income among individuals in the economic system necessarily changes. It is an important fact, usually overlooked, that the Keynesian assumption of a rigid consumption function assumes a given distribution of income. Therefore, the change in the distribution of income will cause change of unknown direction and magnitude in the consumption function. Furthermore, the undoubted emergence of capital gains will change the consumption function.

Thus, since the basic Keynesian determinants of income—the consumption function and the level of investment—cannot remain constant, they cannot determine any equilibrium level of income, even approximately. There is no point toward which income will move or at which it will tend to remain. All we can say is that there will be a complex movement in the variables of an unknown direction and degree.

This failure of the Keynesian model is a direct result of misleading aggregative concepts. Consumption is not just a function of income; it depends, in a complex fashion, on the level of past income, expected future income, the phase of the business cycle, the length of the time period under discussion, on prices of commodities, on capital gains or losses, and on the cash balances of consumers.

Furthermore, the breakdown of the economic system into a few aggregates assumes that these aggregates are independent of each other, that they are determined independently and can change independently. This overlooks the great amount of interdependence and interaction among the aggregates. Thus, saving is not independent of investment; most of it, particularly business saving, is made in anticipation of future investment. Therefore, a change in the prospects for profitable investment will have a great influence on the savings function, and hence on the consumption function. Similarly, investment is influenced by the level of income, by the expected course of future income, by anticipated consumption, and by the flow of savings. For example, a fall in savings will mean a cut in the funds available for investment, thus restricting investment.

A further illustration of the fallacy of aggregates is the Keynesian assumption that the State can simply add or subtract its expenditures from that of the private economy. This assumes that private investment decisions remain constant, unaffected by government deficits or surpluses. There is no basis whatsoever for this assumption. In addition, progressive income taxation, which is designed to encourage consumption, is assumed to have no effect on private investment. This cannot be true, since, as we have already noted, a restriction of savings will reduce investment.

Thus, aggregative economics is a drastic misrepresentation of reality. The aggregates are merely an arithmetic cloak over the real world, where multitudes of firms and individuals react and interact in a highly complex manner. The alleged "basic determinants" of the Keynesian system are themselves determined by complex interactions within and between these aggregates.

Our analysis is confirmed by the fact that the Keynesians have been completely unsuccessful in their attempts to establish an actual, stable consumption function. Statistics bear out the fact that the consumption function shifts considerably with the month of the year, the phase of the business cycle, and over the long run. Consumer habits have definitely changed over the years. In the short run, a change in family income will only lead to a change in consumption after a lag of a certain period of time. In other cases, changes in consumption may be induced by expected changes in income (e.g., consumer credit). This instability of the consumption function eliminates the possibility of any validity of the Keynesian model.

Still another fundamental fallacy in the Keynesian system is the assumed unique relation between income and employment. This relation depends, as we have noted above, upon the assumption that techniques, the quantity and quality of equipment, and the efficiency and wage rate of labor are fixed. This assumption leaves out factors of basic importance in economic life and can only be true over an extremely short period. Keynesians, however, attempt to use this relation over long periods as a basis for predicting the volume of employment. One direct result was the Keynesian fiasco of predicting eight million unemployed after the end of the war.

The most important device that insures the unique relation between income and employment is the assumption of constant money wage rates. This means that in the Keynesian model, an increase in expenditures can only increase employment if money wage rates do not rise. In other words, employment can only increase if real wage rates fall (wage rates relative to prices and to profits). Also, there cannot be an equilibrium level of large-scale unemployment in the Keynesian model unless money wage rates are rigid and are not free to fall.

This result is extremely interesting, since classical economists have always maintained that employment will only increase if real wage rates fall, and that large-scale unemployment can only persist if wage rates are prevented from falling by monopolistic interference in the labor market. Both Keynesians and liberal economists recognize that money wage rates, particularly since the advent of the New Deal, are no longer free to fall due to monopolistic governmental and trade-union control of the labor market.

Keynesians would remedy this situation by deceiving unions into accepting lower real wage rates, while prices and profits rise via government deficit spending. They propose to accomplish this feat by relying on trade-union ignorance, coupled with frequent appeals to a "sense of responsibility by the labor leadership." In these days when unions emit cries of anguish and threaten to strike at every sign of higher prices or larger profits, such an attitude is incredibly naive. Far from having a sense of responsibility, the aim of most unions seems to be wage rates that increase rapidly and continuously, lower prices, and nonexistent profits.

It is evident that the liberal solution of reestablishing a freely competitive labor market through the elimination of union monopolies and governmental interference is an essential requisite for the rapid disappearance of unemployment as it arises in the economic system.

Keynesians, particularly those who are rabid partisans of the "liberal-labor movement", attempt to refute this solution by contending that cuts in money wage rates would not 1ead to a reduction of unemployment. They claim that wage-incomes would be reduced, thereby reducing consumer demand, and lowering prices, leaving real wage rates at their previous level.

This argument rests on a confusion between wage rates and wage incomes. A reduction in money wage rates, particularly in industries where wage rates have been most rigid, will lead immediately to an increase in hours worked and the number of men employed. (Of course, the amount of the increase will vary from industry to industry.) In this way, the total payroll is increased, thus increasing wage incomes and consumer demand. A fall in money wage rates will have an especially favorable employment effect in the construction and capital-goods industries. It is just these industries that now have the strongest unions.

Furthermore, if wage incomes are reduced, then the incomes of entrepreneurs and others will be increased and total "purchasing power" in the community will not decline.

The "Mature Economy"

It is important to recall that Keynesianism was born and was able to capture its widespread following under the impetus of the Great Depression of the thirties, a depression unique in its length and severity, and, especially, in the persistence of large-scale unemployment. It was its attempt to furnish an explanation for the events of the thirties that gained Keynesianism its popular following. Using a model with assumptions that restrict its application to a very short period of time, and completely fallacious in its dependence on simple aggregates, all Keynesians confidently ordered government deficits as the cure.

In interpreting the significance of the Depression, however, Keynesians part company. "Moderates" maintain that it was simply a severe depression in the familiar round of business cycles. "Radical" Keynesians, headed by Professor Hansen of Harvard, assert that the thirties ushered in an era in the United States of "secular (long-run) stagnation." They claim that the American economy is now mature, that opportunities for investment and expansion are largely ended, so that the level of investment expenditures can be expected to remain at a permanently low level, at a level too low to ever provide full employment. The cure for this situation, according to the Keynes-Hansenites, is a permanent government program of deficit expenditures on long-range projects, and heavy progressive income taxation to permanently increase consumption and discourage savings.

Where the Hansen stagnation thesis goes beyond the Keynesian model is in its attempt to explain the determinants of the level of investment. Investment is supposed to be determined by the "extent of investment opportunities" that are, in turn, determined by (1) technological improvement, (2) the rate of population growth, and (3) the opening of new territory. The Hansenites go on to draw a gloomy picture of private investment opportunities in the modern world.

The decade of the thirties was the first in American history with a decline in population growth, and there is no new territory to develop—the "frontier" is closed. Consequently, we can rely only on technological progress to provide investment opportunities, opportunities that have to be much greater than in the past to "make up" for the unfavorable changes in the other two factors. As for technological progress, that too is slowing down. After all, the railroads have already been built and the automobile industry has reached maturity. Whatever minor improvements there might be will probably be withheld by "reactionary monopolists," etc.

Let us examine each of Hansen's alleged determinants of investment. The gloom concerning the lack of new lands to develop—the vanishing of the "frontier"—can be dispelled quickly. The frontier disappeared in 1890 without appreciably affecting the rapid progress and prosperity of America; obviously it can be no source of trouble now. This is borne out by the fact that, since 1890, investment per head in the older sections of America has been greater than in the recent frontier sections.

It is difficult to see how a decline in population growth can adversely affect investment. Population growth does not provide an independent source of investment opportunity. A fall in the rate of population growth can only affect investment adversely if

All the wants of existing consumers are completely satisfied. In that case, population growth would be the only additional source of consumer demand. This situation clearly does not exist; there are an infinite number of unsatisfied wants.

The decline would lead to reduced consumer demand. There is no reason why this should be the case. Will not families use the money that they otherwise would have spent on their children for other types of expenditures?

In particular, Hansen claims that the catastrophic drop in construction in the thirties was caused by the decline in population growth, which reduced the demand for new housing. The relevant factor in this connection, however, is the rate of growth in the number of families; this did not decline in the thirties. Furthermore, Manhattan has had a declining total population (not merely the rate of growth) since 1911, yet in the 1920s Manhattan had the biggest residential building boom in its history.

Finally, if our malady is underpopulation, why has no one suggested subsidizing immigration to cure unemployment? This would have the same effect as a rise in the rate of growth of population. The fact that not even Hansen has suggested this solution is a final demonstration of the absurdity of the "population growth" argument.

The third factor, technological progress, is certainly an important one; it is one of the main dynamic features of a free economy. Technological progress, however, is a decidedly favorable factor. It is proceeding now at a faster rate than ever before, with industries spending unprecedented sums on research and development of new techniques. New industries loom on the horizon. Certainly there is every reason to be exuberant rather than gloomy about the possibilities of technological progress.

So much for the threat of the mature economy. We have seen that of the three alleged determinants of investment, only one is relevant, and its prospects are very favorable. The Hansen mature-economy thesis is at least as worthless an explanation of economic reality as the rest of the Keynesian apparatus.

So ends our lengthy analysis of the most successful and pernicious hoax in the history of economic thought—Keynesianism. All of Keynesian thinking is a tissue of distortions, fallacies, and drastically unrealistic assumptions. The vicious political effects of the Keynesian program have only been briefly considered. They are only too obvious: the rulers of the State engaging in direct robbery through "progressive" taxation, creating and spending new money in competition with individuals, directing investment, "influencing" consumption—the State all-powerful, the individual helpless and throttled under the yoke. All this is in the name of "saving free enterprise". (Rare is the Keynesian who admits to being a socialist.) This is the price we are asked to pay in order to put a completely fallacious theory into effect!

The problem of the explanation of the Great Depression, however, still remains. It is a problem that needs thorough and careful investigation; in this context, we can only indicate briefly what appear to be promising lines of inquiry. Here are some of the facts: during the decade of the thirties, new investment fell sharply (particularly in construction); consumer expenditures rose; tariffs were at a record high; unemployment remained at an abnormally high level throughout the decade; commodity prices fell; wage rates rose (particularly in construction); income taxes rose greatly and became much more sharply progressive; strikes and trade-union membership increased greatly, especially in the capital-goods industries. There was also a huge growth of federal bureaucracy, burdensome "social legislation," and the extremely hostile antibusiness attitude of the New Deal government.

These facts indicate that the Depression was not the result of an economy that had suddenly become "mature," but of the policies of the New Deal. A free economy cannot successfully function under the constant attacks of a coercive police power. Investment is not decided according to some mystical "opportunity." It is determined by the prospects for profit and the prospects of keeping that profit. Prospects for profit depend on costs being low in relation to expected prices, and the prospects for retaining the profit depend on the lowest possible level of taxation.

The effect of the New Deal was to drastically increase costs through building up a monopoly union movement, which led directly to increasing wage rates (even when prices were low and falling) and to lowered efficiency via "make-work," slowdowns, strikes, seniority rules, etc. Security of property was jeopardized by the continual onslaughts of the New Deal government, especially by the confiscatory taxation that dried up the needed flow of savings and left no incentive to invest productively the savings that remained. These savings, instead, found their way into purchasing government bonds to finance all types of boondoggling projects.

Economic well-being, therefore, as well as the basic principles of morality and justice, lead to the same necessary political goal: the reestablishment of the security of private property from all forms of coercion, without which there can be no individual freedom and no lasting economic prosperity and progress.

This report was written in 1947, and first published in 2008 by the Mises Institute.

Some principles for understanding environmental issues. Can government steer energy use decisions to improve outcomes?

Download the slides from this lecture at Mises.org/MU22_PPT_37.

Recorded at the Mises Institute in Auburn, Alabama, on 29 July 2022.

Inequality is a good thing in the free market. Economic equality is a disastrous government policy that leads to economic ruin for all—including the poor and workers.

Download the slides from this lecture at Mises.org/MU22_PPT_36.

Recorded at the Mises Institute in Auburn, Alabama, on 29 July 2022.

High CPI inflation, popular explanations and their problems, and M1 vs. M2.

Download the slides from this lecture at Mises.org/MU22_PPT_33.

Recorded at the Mises Institute in Auburn, Alabama, on 28 July 2022.

Terrell discusses impacts of price controls, occupational licensure, the FDA, and more.

Download the slides from this lecture at Mises.org/MU22_PPT_29.

Recorded at the Mises Institute in Auburn, Alabama, on July 28, 2022.

"Seniors hurt in Ponzi scam" headlined the story of elderly Southern Californians bilked in a pyramid scheme. While sad, the story reminded me of Social Security, since it is also a Ponzi scheme involving those older, with high payoffs to early recipients coming from pockets of later participants. With Social Security, however, it benefits those older at others' expense.

Pyramid scams collapse when they run out of enough new "investors" to pay earlier promises. Some use this fact to deny that Social Security is really a massive redistribution scheme, since it has lasted over 70 years. That assertion misses two substantial differences between Social Security and other Ponzi schemes however: Social Security involves far longer generations, with people collecting on current promises far into the future; and it has been not one, but a series of Ponzi schemes.

Since Social Security began, each of the many times it has been expanded, those in or near retirement got benefits far exceeding their costs. Those already retired paid no added taxes, and those near retirement paid more for only a few years. But both groups received increased benefits for the rest of their lives. However, such "generosity" must be paid for by someone else, forcing later generations not only to finance their own retirements, but also to cover the unfunded benefits given early retirees. Therefore, the good deal Social Security has given retirees (e.g., Ida Fuller, Social Security's first retiree, received benefits 924 times her contributions) does nothing to prove it is not a Ponzi scheme; instead, it demonstrates why it is.

Social Security has been sustained only by repeated expansion. Originally applied only to private-sector workers, it has been expanded to farmers, self-employed workers, non-profit workers, the military and government workers, with each expansion starting a new Ponzi cycle benefiting older Americans, while leaving the tab to later generations.

Disability and dependents' benefits were added by 1960. Medicare was added in 1965, and benefits have been expanded (e.g., Medicare Part B, three quarters financed by others, and the new prescription drug benefit).

Social Security benefits have been dramatically increased. They doubled between 1950 and 1952. They were raised 15% in 1970, 10% in 1971, and 20% in 1972 in a competition to buy the elderly vote. Benefits were tied to a measure that effectively double-counted inflation, and even now, benefits are indexed to the CPI, which overstates inflation, raising real benefit levels over time.

The massive expansion of Social Security is evident from the increased tax burden since its $60 per year initial maximum. Tax rates have risen and been applied to more earnings, so that Social Security and Medicare took 15.3% of earnings up to $97,500 in 2007 (Medicare taxes also apply beyond that income level), with further increases scheduled and still more proposed.

Social Security's good deal for retirees has resulted from a series of Ponzi schemes to benefit those then older at the expense of later generations. That is why the system is in perpetual crisis now, always seeking new sources of money to keep the system of massive overcommitments from imploding. And with expansion tricks nearly exhausted and baby boom retirements starting, it will only get worse.

Social Security's "success" for seniors consists only in multiple expansions that have resulted in a fourteen-digit unfunded liability, imposing a very bad deal on the rest of us. And those burdens grow each year. But even worse than private Ponzi schemes, government has required each generation of "suckers" to participate.

The fact that Social Security's generational highjacking is politically well established doesn't make it ethically legitimate. We send private Ponzi scheme organizers to prison for good reason. The puzzle is why people laud government for doing the same thing on a far greater scale—why we see no headlines reading, "Seniors hurt others in Ponzi scam."

Originally published March 12, 2008.

Is it all bad news? There is still entrepreneurship. There is still innovation. 

Download the slides from this lecture at Mises.org/MU22_PPT_27.

Recorded at the Mises Institute in Auburn, Alabama, on 28 July 2022.

Free trade allows for maximizing total number of mutually beneficial exchangers and promotes economic progress.

Download the slides from this lecture at Mises.org/MU22_PPT_22.

Recorded at the Mises Institute in Auburn, Alabama, on 27 July 2022.

Less and less and less?

Download the slides from this lecture at Mises.org/MU22_PPT_17.

Recorded at the Mises Institute in Auburn, Alabama, on 26 July 2022.

There is no clear basis in economics, ethics, efficiency, or fairness for Minimum Wage Laws. 

Download the slides from this lecture at Mises.org/MU22_PPT_16.

Recorded at the Mises Institute in Auburn, Alabama, on 26 July 2022.