Tuesday, June 05, 2007

Why Isn't the US Economy Vigorous?

The answer to this question is simple: It is that the cleverer entrepreneurs have turned their sights towards speculation.

This is a phenomenon of fiat money times (i.e. times like now, when the currency is not standardized, for instance by some ratio to a weight of gold. For more information on this, read my earliest posts.)

French money 1793
[French paper "livre" from the 1790s. Thanks to www.atsnotes.com for the image.]

After all, how many adventurous whippersnappers can resist the carrot of gambling winnings now offered in hedge funds and take-over companies, over a nose-to-the-grindstone industrial or service sector job right now?

History is full of times like these. One was the 1920s. Another was the 1790s in revolutionary France.

In rereading Andrew Dickson White's classic, Fiat Money Inflation in France, I was struck by the following passage, and by the similarities between conditions today and those of France at the time:

"They knew too well, from that ruinous experience, seventy years before, in John Law's time, the difficulties and dangers of a currency not well based and controlled. They had then learned how easy it is to issue it; how difficult it is to check its overissue; how seductively it leads to the absorption of the means of the workingmen and men of small fortunes; how heavily it falls on all those living on fixed incomes, salaries or wages; how securely it creates on the ruins of the prosperity of all men of meagre means a class of debauched speculators, the most injurious class that a nation can harbor,—more injurious, indeed, than professional criminals whom the law recognizes and can throttle [emphasis added]; how it stimulates overproduction at first and leaves every industry flaccid afterward; how it breaks down thrift and develops political and social immorality. All this France had been thoroughly taught by experience. Many then living had felt the result of such an experiment—the issues of paper money under John Law, a man who to this day is acknowledged one of the most ingenious financiers the world has ever known; and there were then sitting in the National Assembly of France many who owed the poverty of their families to those issues of paper. Hardly a man in the country who had not heard those who issued it cursed as the authors of the most frightful catastrophe France had then experienced.

"It was no mere attempt at theatrical display, but a natural impulse, which led a thoughtful statesman, during the debate, to hold up a piece of that old paper money and to declare that it was stained with the blood and tears of their fathers."

(The whole work can be downloaded from the mises.org website.)

Do any of these words touch you? The difficulty of checking the "overissue" of fiat money? The "absorption" of the working man's purchasing power through inflation? The toll it takes on "fixed incomes," people like your grandmother? The trillions of dollars being made today in speculative finance?

The over-stimulation and then "flaccid" letdown in industry? The "breakdown" of savings? The "blood" of the unsuspecting victims of the recent sub-prime mortgage debauchery?

The outcome of the French experiment with fiat money was a catastrophe. There are those who will say that times have changed, that with today's electronic communication systems and current data, such a tragedy is impossible. I say watch out, because history has a nasty habit of repeating itself.

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