Tuesday, March 15, 2005

Economics Lesson No. 4: A Little Bit of History

In the past, every time a nation has abandoned their fiscal measuring stick and begun to issue paper or other currency above the amount very precisely required by the free market (as determined by a combination of that measuring stick and a few tried and true commercial banking practices), sooner or later that nation has perished. Whether or not this abandonment of the measuring standard is a contributing cause or a symptom of a country's decay, in either case it is reason to stir us from our complacency.

Today, the dollar, and indeed all currencies - e.g. the euro, the rupee, or the renminbi (China's "dollar") - have no fixed measuring stick other than the arbitrary ones people and central banks wish to attach to it. (See Economics Lesson No. 3.) Unlike the "pint" of water, or the "yard" in length, the value of currencies is not fixed by law to be equal to a certain amount of this or that, as when they were designated as a specific weight of gold.

How did this happen? How did we get away from our measuring stick standard? The US situation is laid out pretty clearly in my article, How to Save the Dollar, published at the mises.org website. To make a long story short, before World War I, the fiscal discipline imposed by our standard (gold at the time) became an impediment to the governments of several nations. Most particularly, the warring efforts of Germany made everyone feel they needed to divert as much as possible of the working and production force of their people away from the normal market occupations, in order to devote a maximum of effort and wealth towards the war.

As happens in any war, many young working men were sent off to the front, away from factories. This always causes a tremendous slowdown in the normal economy and transfers a lot of investment to military needs. Industry forges full speed ahead with the war machine producing unusual items that are consumed only in time of war and sending them, along with the necessary regular goods, to the front. Those people who remained at home suffered, albeit stoically, from a lowering of their standard of living, for the sake of the cause. The free market had been disrupted, typical of war time.

War bonds were sold; but the money raised for the government's coffers was perhaps insufficient, so on top of that, it was decided that monetary discipline could be temporarily dispensed with, so as to allow our central bank in effect to print dollars in order to "pay" (in promissory notes) for the goods and services required.

I'll jump to the end of the story and tell you that, for reasons that have inspired much conjecture and contrary to past experience, the wrong was never righted; the government has never put a stop to the printing press. Thus since 1913, the US (and the world) decided for some reason that it was not necessary to undergo the usual fiscal hangover that follows wars, that this time we could do better than a market-devised monetary standard in balancing the economy and fiscal matters in general. Typical hubris of man; every time it's been tried, it fails.

The result has been the depth, length and breadth of the Great Depression of the 1930s, the quixotic ups and downs of our business cycles since then, and the trillions of dollars worth of value that has been stolen, without very many of us ever realizing it, directly out of the pockets of our grandparents, our parents and ourselves. My Dad, the sober and unpretentious economist Edward C. Harwood, warned us all back in the 50s: "Stand still, little lambs, to be shorn," by "that legalized embezzlement enslavement process called inflation." His American Institute for Economic Research repeats this published article every year or so; but it's a cry in the dark. The only thing that might stop this surreptitious theft from impoverishing our children for generations to come is a fiscal crisis - unless our politicians wise up; and they won't do that until we demand it.

Apparently we still haven't learned our lesson, and this error could be the beginning of the end of our marvelous American experiment. What is responsible? Politics. Who is responsible? We are, for increasingly putting our faith in a couple of misnamed "economics experts" and allowing a few elected human beings of the political persuasion to take our self determination away. I will try to explain how, in my next lessons.


Anonymous Quigleydoor said...

You wrote: "The only thing that might stop this surreptitious theft from impoverishing our children for generations to come is a fiscal crisis - unless our politicians wise up; and they won't do that until we demand it."

It almost sounds like you recommend a fiscal crisis, to prevent our society from stealing from the unborn. I think what is implicit in your article is that a fiscal crisis would create poverty in the present time, for the relief of future unborn generations.

In any case, I'm enjoying your work, and encourage you to keep going.

5:01 PM  

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