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Session 9
Mises’s Warnings
Ludwig von Mises was born
on Sept. 29, 1881 in Lemberg. His parents came from prominent Viennese families
and served in the Austrian Parliament. Mises followed the Austrian proponents of
free markets Eugen von Bohm-Bawerk and Carl Menger and was the mentor to
Freidrich Hayek. Mises established a research organization for the study of
business cycles with himself as president and Hayek as manager. Hayek then
emigrated to London where he became engaged with a long inconclusive argument
with Keynes over economic theory at the London School of Economics. Mises was
known as the head of the “Austrian school” of economics. He was fro twenty-five
yrars Professor of Economics at the University of Vienna and from 1934 to 1940
Professor of International Economic Relations at the Greduate Institute of
International Studies in Geneva Mises emigrated to the United States in 1940
after time in the Austrian army. Mises and Hayek formed the Mount Pelerin
society in 1947. Mises died in New York at age 92 after involvement with various
libertarian organizations. In 1982 the Ludwig von Mises Institute was formed to
promote free market books and education.
Austrian economist Ludwig von Mises proclaimed the benefits of free markets
along with issuing passionate warnings that the benefits would be wasted unless
the principles were observed:
| The body of economic knowledge is an essential
element in the structure of human civilization; it is the
foundation upon which modern industrialism and all the moral,
intellectual, technological, and therapeutical achievements of
the last centuries have been built. It rests with men whether
they will make the proper use of the rich treasure with which
this knowledge provides them or whether they will leave it
unused. But if they fail to take the best advantage of it and
disregard its teachings and warnings, they will not annul
economics; they will stamp out society and the human race |
One example that Mises
delineated in 1912 was the deliberate devaluation of currency by the government
of Great Britain after the Napoleonic Wars. The government and the financial
establishment conspired to slow economic growth by choking off the supply of
money. The bankers and politicians knew that this action would hurt most of the
people through unemployment, lower wages, and higher prices for food, but it
accomplished the mission of restoring the asset value of the wealthy to pre-war
levels. The human injustice of this action is obvious; the economic principles
violated were the neutrality of money and broad distribution of wealth. Mises
commented on this brutal practice:
| When, after the Napoleonic Wars, the United
Kingdom had to face the problem of reforming its currency, it
chose the return to the pre-war gold parity of the pound and
gave no thought to the idea of stabilizing the exchange ratio
between the paper pound and gold as it had developed on the
market under the impact of the inflation. It preferred deflation
to stabilization and to the adoption of a new parity consonant
with the state of the market. Calamitous economic hardships
resulted from this deflation; they stirred social unrest and
begot the rise of an inflationist movement as well as the
anticapitalistic agitation from which after a while Engels and
Marx drew their inspiration. [75] |
Marx’s theory, that
society is dominated by class conflict, was confirmed by this type of greedy
action by the wealthy class against poor people. Marxism drew its strength from
these actions, but then Marxists proceeded to make their own egregious mistakes
that set the stage for the 20th-century catastrophes that Mises had warned
about..
This devaluation by the
British that deliberately sacrificed the livelihood of the people for the riches
of the few attracted Americans with the same greedy instincts. After the Civil
War, dominant finance capitalists persuaded Presidents Andrew Johnson and U.S.
Grant to control currency in a similar devaluation to restore the asset value of
the wealthy to pre-war levels. This technique, copied from the British, caused
unemployment, dropping wages, and rising prices in the economic disaster of
1873.
The rich and powerful
distinguish between asset inflation and price inflation. Asset inflation in real
estate and stock prices has been the source of concentrated wealth for two
centuries. Although Smith warned that speculators would deflect capital away
from the job growth economy and although economists have warned that money must
be neutral and that easy credit causes recessions the establishment has not
listened. In Great Britain as well as in America they protected their
opportunities to speculate with borrowed money at the same time they protected
price stability in order to protect the value of their assets. This was the
philosophy at the time the Federal Reserve was founded and has been the
philosophy since.
John Locke, physician,
philosopher, statesman, humanist, returned to England after the Glorious
Revolution of 1688. Locke was one of the original inspirations to both the
French and American Enlightenment who promoted individual freedom through his
theory of inalienable human rights but also advised governments on the need for
monetary control. Locke was concerned about coin-clipping because lightweight
coin was circulating at higher value than its metallic value, and a provision
for surrender of lightweight coin at high value enriched the fast-moving, well
informed, urban speculator to the detriment of the rural, work-preoccupied
farmer. [12] Locke described the conflict in capitalism:
| This is evident, that the multiplying of
brokers hinders the Trade of any Country, by making the Circuit,
which the Money goes, larger, and in that Circuit more stops, so
that the Returns must necessarily be slower and scantier, to the
prejudice of Trade: Besides that, they Eat up too great a share
of the Gains of Trade, by that means Starving the Labourer, and
impoverishing the Landholder. [13] |
1873, 1884, 1893, 1907: Widespread money panics occurred at the height of
the crop season when large amounts of money were needed to bring crops to
market. This seasonal need could not be met except by paying out limited
reserves, causing the whole money supply to contract. [22] When the surge of
demand hit New York banks, their choices were either to draw on reserves at
higher rates or form syndicates to pool resources and meet demand or borrow gold
from Europe to support more lending. Eventually they did none of this, which
resulted in local farmers’ banks not having liquidity to make loans. This
uncertainty caused people to take their money out of the banks, and that in turn
caused bank runs and bank failures. At root, the system did not have the
flexibility to fund short-term working-capital needs of the most basic industry,
agriculture.
1913: Financial
panics spawned the Federal Reserve. The Fed was founded to provide the liquidity
needed to prevent a repetition of the bank panics, and to prevent the damaging
boom/bust cycles by representing the public interest. Roger Lowenstein described
this responsibility as follows: “The Federal Reserve System was created, in
1913, for many reasons, but the underlying one was that people no longer trusted
private bankers to shepherd the financial markets.” From the beginning, however,
Lowenstein added: “The Fed is supposed to regulate banking but not to shelter
banks.” [23]
Although money had to be
neutral for free markets to work, the Federal Reserve was organized with an
agenda that protected the asset value of the wealthy while carefully calculating
how many people should be out of work to maintain price stability.
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