“Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some.” – John Maynard Keynes, The Economic Consequences of the Peace, 1919
Inflation has been accepted by many and even promoted by some as a ‘natural phenomenon’, where it is believed that money naturally loses its value over time and prices rise. However, under any serious school of economic thought, no matter what its view on inflation (positive or negative) this is understood to be nonsense. To understand why, you must understand what ‘inflation’ is. Inflation itself is often misidentified. Inflation in the strict sense is the actual expansion (ie. inflation) of the money supply. All things being equal, when the supply of money increases in relation to total goods/services outstanding, the value of said money decreases. This requires more of the same currency to purchase the same unit of wealth (eg. loaf of bread) as it did before . This pricing effect can be seen in exaggerated form in Zimbabwe, where enormous amounts of paper money were printed, causing the value of the currency to plummet, eventually requiring an arm full of money to purchase every day items as each new increase in denomination (adding zeros to the currency) was not enough to keep up with the rapid decline in the value of the currency.
The process of increasing the money supply destroys savings, among other poverty inducing effects. That is not to say that some do not benefit. However, the beneficiaries of inflation are usually the politically connected.
The following example illustrates how the process of inflation confiscates real wealth.
Suppose you have $100 in your saving account and the market value of wheat is $10 per bushel. The value of your savings account can be translated into real wealth of 10 units of wheat.
Now, suppose the money supply is doubled, but your savings account remains the same. All things being equal, the value of your savings will fall by half. It will require twice as many dollars to acquire the same amount of wealth as before. So, the price of wheat will rise to $20 per unit. This means your savings of $100 can now only purchase 5 units of wheat at the new price.
Where did the other 5 units of wheat go? They were confiscated by $100 of the newly created currency which can now buy them at the new price of $20 per unit. Whoever received some of the newly created money can now buy that other 5 units of wheat you used to be able to purchase.
Notice, the dollar amount in your savings account has not dropped, only the purchasing power. The value of your savings in real terms has been cut in half. Without picking a lock, breaking a window or busting down a door, 5 units of wheat were confiscated from your savings account through the process of inflation.
Typically, the money supply is not increased as rapidly as Zimbabwe, but this wealth confiscation and transfer occurs at any rate of inflation, whether it is 3% or 50%. This is known as the ‘secret’ tax. Many argue it is outright theft.
“Specie [hard money] is the most perfect medium because it will preserve its own level; because, having intrinsic and universal value, it can never die in our hands, and it is the surest resource of reliance in time of war.” –Thomas Jefferson to John Wayles Eppes, 1813
“Mr. Ellsworth thought this a favorable moment to shut and bar the door against paper money. The mischiefs of the various experiments which had been made, were now fresh in the public mind and had excited the disgust of all the respectable part of America. By witholding the power from the new Governt. more friends of influence would be gained to it than by almost any thing else. Paper money can in no case be necessary. Give the Government credit, and other resources will offer. The power may do harm, never good.” – Notes on motion to strike out ‘and emit bills on the credit of the United States’ from Article 1, section 8. Motion passed, Constitutional Convention, Philadelphia, PA August 16, 1787
“Paper money has had the effect in your state that it will ever have, to ruin commerce, oppress the honest, and open the door to every species of fraud and injustice.” – George Washington, Letter to Thomas Jefferson on Aug. 1, 1786
“Paper is poverty,… it is only the ghost of money, and not money itself.” –Thomas Jefferson to Edward Carrington, 1788
“Paper money is unjust…Unconstitutional [as it] affects Rights of property as much as taking away equal value in land.” – James Madison, Notes for Speech Opposing Paper Money, 1 Nov. 1786
“That paper money has some advantages is admitted. But that its abuses also are inevitable and, by breaking up the measure of value, makes a lottery of all private property, cannot be denied. –Thomas Jefferson to Josephus B. Stuart, 1817
What got America out of the Great Depression, The New Deal or WWII?
Truly, it was neither.
Each gave some appearances of a recovery, but it wasn’t until our men returned home from WWII, capital was given some time to reset and wealth production resumed, that America saw an actual recovery. However, the effects of the New Deal continue with us to this day, where our Federal government continues to induce artificial prosperity with a perpetual spending dive that is taking us closer to the bottom.
Neither WWII nor The New Deal created prosperity. WWII was arguably necessary, depending on your study of history, but we will save that for another debate. The New Deal, however, was a massive waste of money that began America on its perpetual debt binge.
There is prevalent hypothesis that WWII got America out of the Great Depression because it reduced unemployment and stimulated the economy by creating demand for tanks, ammunition, guns, and so on. Yes, this is all true, however, regarding the unemployment rate in the US, when most of your men are overseas fighting a war, what do you expect to happen to the unemployment rate? Furthermore, where did all of this money come from to pay for the troops, necessary equipment and armament? It was borrowed or came directly out of the real production of the economy through taxes.
War is sometimes a necessary expense, but to argue that it somehow produces prosperity is a complete fallacy. To illustrate this, let’s use an example given by Thomas Woods from his book “Meltdown”. If War Time Prosperity is true, then Japan and the US should agree to duke it out in the Pacific Ocean. Only, to avoid the loss of human life, let’s build the most sophisticated, advanced and expensive remote controlled navies the world has every known. Let’s agree to meet in the middle of the Pacific and watch the remote controlled fireworks begin. Win or Lose…we both lose economically.
Consider all of the time, resources, and energy involved , all of which are paid for using “money”. After the end of this battle, all of that capital invested in the destroyed navies will be at the bottom of the Pacific Ocean. If War Time Prosperity were true, Japan and America would be economic superpowers overnight and our recession would be over!
What is unseen here is all of the wealth that could have been produced with the same capital inputs now resting at the bottom of the ocean. How many cars, tools, TV’s, computers, etc. could be made with the same energy, manpower, natural resources and time used to produce the now destroyed navies?
WWII did not make America prosperous. The idea that destruction creates prosperity is to commit the broken window fallacy. War is an expense, sometimes a necessary expense, but the economic destruction that it causes because of the destruction of wealth that occurs is devastating.
THE NEW DEAL
The New Deal was simply a modern day “Stimulus Package”. It was birthed from the ideas of John Maynard Keynes who suggested that a central government could induce economic prosperity by “priming the pump”. He suggested that if the government simply spends money, that will create demand for products and services and it will jump start the economy. He famously boiled his theory down to this simple example: you can pay a man to dig a hole and another person to fill it. The fact that nothing productive is taking place doesn’t matter, the spending alone will stimulate the economy. He argued that debt spending was the best way to go, because taxes can damage an economic recovery by taking real capital out of the economy, thus defeating the purpose.
In some ways Keynes was right, but that is a complicated argument to make and filled with caveats that in the end, actually debunk his theory. One particular caveat is “time” itself. When Keynes introduced his theories there were other prominent economists, including F.A. Hayek, who would offer one damning criticism in the form of a question – “What about the long run?” To which Keynes famously replied, “In the long run, we are all dead”. As if this is some sort of clever joke. John Maynard Keynes theory is not sustainable, but there seems to be a natural tendency to underestimate long term affects, even to consider them irrelevant if they will not be realized in your lifetime. The problem for us today is that you and I have reached the long run. We are paying for his misguided economic theories. Our economy is not based on the only sustainable path to prosperity, which is wealth creation, but instead, it is corporatism (crony capitalism) which uses massive amounts of subsidization and central planning that are administered by the Federal Government and Federal Reserve, which are ultimately funded by the US taxpayer, now and in the future.
Direct Farm Subsidies
Corporate Welfare – including bailouts (TARP)
Loan subsidies and guarantees – (homes [FNMA, FMAC HUD], education, business loans)
Direct government spending, “stimulus”
Tax “Credits” – Cash for Clunkers, Home Buyer Tax Credits
Central Capital Planning:
Interest Rates (FED)
Money Supply (FED)
What we saw during the New Deal Era was a fake recovery built upon debt, much like we are seeing now. It wasn’t until capital was allowed to reset, in spite of the New Deal, that real investment and subsequent production of real wealth returned. The problem is that we have been left with this legacy of economic manipulation that is ultimately making us poorer. When the Federal government intervenes and acts outside of its Constitutionally limited role, it takes wealth, whether from the present through taxes or the future through debt and diverts it as a central planning agent. This diversion of capital causes booms and busts, like what caused the housing bubble that burst in 2008.
Many point to increases in GDP under the New Deal and other economic indicators to say that it “worked”, much like we are seeing today. The misleading thing about GDP is that it is only a good indicator if it is solely a result of free market activity. As soon as intervention is introduced, there is no way to compare GDP or use it or any other economic indicator as a measure of real economic productivity since government spending can artificially inflate this figure. Also, under the New Deal, there were prices floors which were implemented. This temporarily caused an increase in GDP for more inelastic goods such as food and vital raw materials. Furthermore, when much of the spending is debt based and coming from the government in the first place, the GDP is inflated beyond its true level.
Keynesian economics is a sort of pyramid scheme. It can work or give the appearance of working until either a.) the government can no longer borrow (see Greece) or b.) capital has been so miss-allocated that a massive economic collapse occurs as a result. Yet, we continue down the same road building new bubbles and subsequent busts, each successive bust is worse than the one before it.
Is Money Wealth?
The most common misconception dealing with wealth is that money = wealth. This is not true. Wealth can be measured in money, but that does not mean that the unit of measurement is wealth itself. If money equals wealth, countries could simply print wealth and their citizens would just sit around all day drinking beer. One problem, where is that beer going to come from? The only way to true and sustainable prosperity is through wealth creation (production). We know this by this simple example: Which country is more wealthy? The one who is producing bread, shoes, clothes, tools, cars, etc. Or the one who produces “bank notes”?
What good is money if there is no bread to buy? The one temporary exception to this is an economy based upon debt, like ours. 70% of the US economy is based upon consumer spending. That is why following the 9/11 attacks President Bush told everyone to go shopping. Why didn’t he tell us to go produce wealth? Because that is not how our economy has been constructed. America has been producing some wealth, but not nearly enough to justify its rate of consumption. We could be as wealthy, if not more wealthy than we currently appear. But we have allowed the Federal government to squander and destroy our wealth and that of future generations through the justification of Keynesian economics.
Spending/Consuming is Not the Basis of Prosperity
Government spending does not create prosperity. Government is an expense to any nation, it is a necessary expense when it is confined to its legitimate role of simply protecting natural rights from legitimate foreign enemies and domestic criminals, but when it ventures beyond this role and takes on the powers of economic manipulation, it destroys wealth which is the basis of prosperity. Instead of making us richer, it actually makes us poorer for it.
In both cases, whether dealing with the New Deal or WWII, a point should be made clear. Most of the money that was used to pay for these activities came from debt spending. It was from this era that perpetual debt was no longer something to be avoided, it was something to be embraced. Not only is perpetual debt unsustainable, it is immoral. Thomas Jefferson felt that it was immoral for one generation to create debt which it was unable to pay off itself.
Prosperity doesn’t come from government spending, even when it comes from the illusion that is created by debt spending. One day, someone will have to pay up. This is the generational version of a ponzi scheme, it really is a scam and irresponsible. We are not leaving posterity with a better life, we are leaving them poorer.
“I sincerely believe… that the principle of spending money to be paid by posterity under the name of funding is but swindling futurity on a large scale.” –Thomas Jefferson to John Taylor, 1816
“[Using], for instance, the table of M. de Buffon, [it can be determined that] the half of those of 21 years and upwards living at any one instant of time will be dead in 18 years, 8 months, or say 19 years as the nearest integral number. Then 19 years is the term beyond which neither the representatives of a nation nor even the whole nation itself assembled can validly extend a debt… With respect to future debts, would it not be wise and just for [a] nation to declare in [its] constitution that neither the legislature nor the nation itself can validly contract more debt than they may pay within their own age, or within the term of 19 years? And that all future contracts shall be deemed void as to what shall remain unpaid at the end of 19 years from their date?”
–Thomas Jefferson to James Madison, 1789.