Printing Our Way to Prosperity

Nelson Hultberg

October 30, 2014

Monetary inflation is an insidiously debilitating evil that destroys all sanity in human societies, and it has been doing so for thousands of years. Human nature in pursuit of “something for nothing” is the major reason why this is so. But there is also another reason why monetary inflation is adopted so persistently over the decades even though it always brings decadence and collapse.

This is because our intellectual authorities refuse to talk about the issue in ethical terms. They consider it only as a pragmatic issue. It is an economic condition that is to be analyzed from the perspective of inputs and outputs. The affect that it has on our country and our lives has no moral connotation.

This refusal to consider a moral connotation is leading us down the path to destruction. Inflation is the number one economic evil afflicting all modern countries today. It transcends in importance all the other economic issues. As each year passes, it corrupts a little more of our integrity, our prosperity, our sanity, our freedom. It works its evil on society because it lulls the populace into the illusion of wealth without effort. It is most decidedly a moral issue, for it is the precursor to economic instability, boom / bust cycles, and ultimately the chaos and breakdown of society that brings on dictatorship.

Inflation 101

Inflation comes about because our politicians and bankers create billions of new paper dollars out of nowhere. It is, in essence, the same thing as counterfeiting, which if done by a private citizen would result in a jail sentence. But because it is done by government-sanctioned officials (with the intellectual backing of important academics), such a crime is somehow considered above the law and ignored.

For years, the inflation of prices in a given country was said to be caused by a wide variety of factors such as historical cycles, weather-induced shortages, greedy businessmen, excessive labor union demands, and generally the nature of modern life. Inflation was basically inevitable, our pundits told us. There was very little we could do about it; we must learn to live with it.

Over the last three decades, however, this manner of thinking has been thoroughly refuted. Numerous free-market economists (Friedrich Hayek, Ludwig von Mises, Milton Friedman, Henry Hazlitt, etc.) have demonstrated that the incessant rise in the general price level is far from inevitable. Price inflation has a distinct cause, and that cause is the monetary inflation of the Federal Government and its central bank.

Both the Austrian and Chicago Schools of economics have demonstrated that central bank expansion of the money supply at a faster rate than the economy’s production of goods and services always results in price inflation, and if not checked, brings about the chaos of runaway inflation. History is replete with such disasters, e.g., Germany of the 1920s, China of the 1940s, and nearly every South American country throughout the 20th century.

The reasoning goes like this: Prices in general always rise when there is an increase in aggregate consumer demand over available supply. But there can be no increase in aggregate consumer demand without an increase in the total money that consumers have to spend (or an increase of trade goods in a barter economy which act as money). Without increased purchasing power consumers may have the desire to buy more things, but they don’t possess the power to do so. Put more money in their pockets, however, and they then have the power. Their desire is transformed into demand, which then bids prices up if the new money is created at a faster rate than the economy’s growth of goods and services.

Since the Federal Government has a monopoly on the creation of money in modern society, it is the culprit whenever prices in general begin escalating throughout the economy. Through its central bank, the government can inflate the money supply at will. When it inflates at too fast a pace, the general price level (CPI) begins rising rapidly.

For example, if we had a primitive island economy where there were 1,000 products and services manufactured every year, and the total money supply on the island amounted to $1,000, the average price of the products and services would be $1.00. But if the chief of the island printed up $200 one year to aid his brother-in-law’s failing bow and arrow business, then the average price of those products and services would rise to $1.20, for there would now be 200 more dollars added to the island’s economy (and thus 20% more demand) to bid for the same supply of goods. The island’s general price level, i.e., the average of all prices of goods and services, would register a 20% inflation rate.

But if at the same time that the chief is printing up the $200 in new money, the whole island increases its total output of products and services by 200 during that year, then the average price of each would remain the same, at $1.00, for there would now be 1200 total products and services, and 1200 total dollars to bid for them. No price inflation would occur.

It is the same principle, no matter how complex the economy, the credit system, and the technological structure involved. America’s general price level keeps rising every year because the Federal Reserve is creating new paper dollars, and pyramiding credit upon them, at a faster rate than Americans are creating products and services.

Higher prices are helped along by various other government interventions into the marketplace, such as protective price legislation extended to certain industries, monopolistic labor laws, Arab oil cartels (and also by non-governmental factors such as weather-induced shortages). But it is important to understand that all these factors merely cause isolated price rises for the specific goods and services involved. If not accompanied by government monetary expansion, such price rises will only result in money being drawn away from the purchase of other products, thus lowering demand for them and creating a drop in their prices, which prohibits any rise in the general price level, i.e., the CPI. Without expansion of the money supply on the part of the Fed, the economy’s general price level will remain steady no matter what the Arabs, the weather, the corporations, or the unions are doing.

For 60 years from 1920 to 1980, the big government apologists in Congress, the media, and our universities very subtly attempted to deny all this being so. They twisted their denials into diversionary arguments about the “unstable nature” of modern times, or the “wage pressure” of labor unions, or the “greed” of businessmen, or the “flaws” of capitalism being responsible for our rising prices. But by 1980, such evasions were seen for what they were, and the Federal Government’s expansionary monetary policy is now held to be the cause of price inflation.

This is why America and all the Western democracies are caught up in inflationary spirals. Their political leaders and central bankers refused for 60 years to face up to the fact that it was their inflationary monetary policies that were responsible for the relentless rise in their general price levels.

The brilliant work of Hayek, Mises, Friedman, and Hazlitt has forced home the truth of the government’s culpability in the matter. By 1980, their work and theoretical perspective had gained considerable acceptance. No doubt there still exist diehards who link price inflation to things like “consumer greed” and “product shortages,” but the general body of scholars and pundits in society knows better. No reputable intellect attempts anymore to deny that the Federal Government causes price inflation through excessive central bank expansion of the currency and credit built upon it.

The Crime of Inflation

Now that we understand the cause of price inflation, we need to grasp the crime of it. The reason government induced inflation is wrong is that the nation’s currency is debased annually. Our money buys less and less every year because of this debasement (a nice house that cost $25,000 in the 1960s costs $250,000 today). In other words, the government is stealing our money from us because inflation acts as a hidden tax on our wealth.

For example, if the government inflates the money supply by 5% during the year, it means that our money will be worth 5% less at year’s end. A frugal saver with $100,000 in the bank now has only $95,000 worth of buying power. The Federal Government in Washington, however, has $5,000 extra in buying power because it printed the new money out of thin air. Multiply this times millions of savers in America, and we are talking about hundreds of billions of dollars that are being stolen from the people every year. The politicians and federal bankers become richer and more powerful, and we the people become poorer because of this theft. The government is stealing our wealth just as surely as if it was to come into our banks every year and physically steal 5% of every personal account in America. Unfortunately very few citizens are able to perceive this hidden form of taxation, which allows governments to get away with their criminality.

It should be obvious that the Federal Government is going to continue its arbitrary credit and currency expansion in a large scale way, and thus continue to dangerously inflate the size of the money supply until we, as a people, put a stop to it.

Why? 1) Because large scale credit expansion allows our politicians to buy voter support with more subsidies and political spending, and thus to claim during election time that they have brought prosperity to the people. 2) Such a practice gives to all bankers extra profits via interest charges that they would not normally be able to gain. 3) Injecting large amounts of money and credit into an economy acts in the same way that heroin injected into a human body acts; it makes the voting public feel temporarily better off.

Politicians evade all this because their jobs are determined by the voting public. Bankers comply with it all because their monetary interests are enhanced. And statist intellectuals justify it all because their collectivist yearnings for larger government are realized. The losers are those Americans who believe in honest productivity and saving the proceeds of their work for their families and loved ones.

Recessions and Depressions

We now need to turn to the danger of all this, which is why America is in such trouble economically and politically. Due to the vice-grip that Keynesian and neo-Keynesian economic theories have had on the Western mindset since 1936, the public still perceives recessions and depressions as “capitalist-spawned evils” in need of powerful intervention on the part of the Federal Government to combat them. This, however, is a fallacy. Government is the problem, not the solution.

The reason why is because government-induced inflation is the beginning of the interventionist chain of events that leads ultimately to an economic depression. As we saw above, price inflation is brought on by government monetary inflation in excess of the nation’s production of goods and services. Recessions and depressions are simply the inevitable reaction to the excessive monetary inflation by government.

An economic recession is a massive cutting back of production, employment, expansion and credit by businessmen, corporations, and banks. It is brought about when the Federal Reserve deflates (decreases) the quantity of money circulating throughout the banking system, for if suddenly there is less money floating around, then everyone has to tighten their belts, loans have to be called in, less efficient businesses go under, workers get laid off, etc.

Technically speaking the Federal Reserve doesn’t actually “deflate” the quantity of the nation’s money supply. If such a quantitative deflation was enacted, it would bring on a total collapse of the economy or a full-scale depression. What the Fed does is merely slow the rate of increase of the money supply, which is enough to cause a recession. M2 or M3 is expanded by a smaller amount this month than last. So the correct term to use here is not “deflation” (a lessening of the actual quantity of the nation’s money supply), but “disinflation” (a lessening of the rate of increase each month in the money supply throughout the banking system). This is enough to bring on a recessionary period.

What is important to grasp, however, is that the recessionary period becomes necessary only in order to cool the economy down after government monetary inflation has heated the economy up. A recession is not due to any “inherent failing of the free-market process.” It is the Federal Government’s prolonged and unwarranted inflationary policies over the previous years or decades that eventually force it to disinflate the money supply, so as to bring back some semblance of price stability. Because the Federal Government (via the ¬Federal Reserve) has inflated the money supply inordinately over a prolonged period, a rapid price increase has resulted for all goods and services throughout the country, and it needs to be stifled or chaos ensues. Thus, a lessening of the rate of monetary expansion is enacted. The main danger in such manipulation of the money supply is that if the “disinflation” enacted by the Fed gets out of hand then “deflation” takes over, and the country is plunged into not just a recession, but a full-scale depression, which is what happened in 1929.

Contrary to what we were taught in school, it was not the so called “forces of the marketplace” that brought on the Depression of the 1930s. It was government intervention into the forces of the marketplace, specifically into the money and banking system through the institution of the Federal Reserve in 1913, that caused the crash by first creating excessive credit expansion throughout the 1920s and then the inevitable necessity of rapid disinflation in 1929 as the only salvation from the dangers of an out of control price structure, which backfired into a severe deflation and its resultant economic depression.

If we would think of inflation and deflation of the economy’s money supply as the same thing that happens to a drug addict consuming heroin, then the mystery of an economic depression wouldn’t be so mysterious. When an addict shoots a dose of heroin into his bloodstream, he is doing to his body what the government is doing to our economy by injecting excessive money and credit into the marketplace. A psychological high results from the heroin, and an economic boom results from the new money and credit.

In order for an addict to come off his drug-induced high, he has to stop injecting the drug into his system; but when he does so, his system collapses, and he goes through withdrawal symptoms. In other words, he experiences a severe depression (the degree of the severity depending upon the degree of the high and the degree with which he withdraws the heroin).

Increasing an economy’s money supply works the same way, only economic¬ally instead of psychologically. Inflation’s false prosperity is the high. Excessive money and credit is the drug. The Federal Reserve is the needle. And politicians and bankers are the pushers. In order to come off the high of the inflationary spiral, we have to stop injecting money and credit into the system. But when we do so, the economy collapses and goes through a recession or a depression (the severity of which depends upon the degree of the preceding inflation and the degree with which we withdraw the drug of excessive credit and the fiat currency it is pyramided upon).

The way for a heroin addict to avoid going through the hell of drug withdrawal is never to begin taking heroin in the first place. The same principle applies to an economy also. The way to avoid deflation and its potential for creating a depression is simply never to begin inflation in the first place. And the way to never begin inflation is to prohibit the Federal Government from tampering with the money supply.

Thus economic recessions and depressions are not “capitalist spawned.” They are government created, and then government exacerbated. As Professor Gene Smiley of Marquette University tells us in his book, Rethinking the Great Depression:

“The Great Depression is often said to demonstrate the instability of market economies and the need for government oversight and direction. The evidence can no longer support such assumptions. Government efforts to control and direct the gold standard for national purposes brought on the depression. Once it began, government actions, particularly in the United States, caused it to be much longer and much more severe. When the contraction finally ended, government interference in U.S. markets made the recovery unbearably slow and in 1937-1938 brought on a ‘depression within a depression.’ The 1930s economic crisis is tragic testimony to government interference in market economics.” [1]

The Origin of the Boom / Bust Cycle

All well and good. Inflation and deflation are governmentally induced and can be likened to the experiences of a drug addict, but how did America get onto the inflation-deflation roller coaster anyway? How did it all get started?

It all began with the numerous attempts to nationalize America’s banking system during the 19th century by powerful interest groups that favored inflationary monetary policy for America (i.e., fiat paper money over gold). This necessitated a means to implement such a nationwide inflation (i.e., a national bank). These attempts at nationalization were an on-going process that began with Alexander Hamilton at the Constitutional Convention in 1787 and ultimately culminated with the inception of the Federal Reserve in 1913. This gave federally appointed bankers, in collusion with the Federal Government, certain regulatory capacities that enabled them to greatly increase the nation’s money supply in excess of the growth of goods and services. And this the new federal bankers proceeded eagerly to do with full scale monetary inflation throughout the 1920s, created by excessively low reserve requirements for bank loans and various other government manipulations of the marketplace.

Substantial increases in the money supply were brought about from 1920 on. Benjamin M. Anderson, in Economics and the Public Welfare, [2] clearly chronicles the process and how it took place. It is this government induced inflation of the 1920s that brought on the inevitable need to disinflate, which tumbled into actual deflation, which caused the crash of 1929 and the Great Depression of the 1930s.

The government, through its maneuverings with the Federal Reserve, had made money and credit so plentiful in the late 1920s that the entire country was in a buying frenzy. Stock prices were soaring out of sight, and everyone thought they were richer than they really were. Permanent prosperity was presumed to finally be here, via the benevolent wisdom of the new government money managers. The bubble had to burst eventually, though, because paper economic booms, like heroin highs, cannot be sustained forever. The Federal Reserve had to finally disinflate the money supply in order to bring back price stability. As a result, there was the inevitable recession, which morphed into a full-scale depression.

It should be pointed out here that the price inflation of the 1920s took place in the stock market because this is where the money and credit injections of the Fed flowed to bid up prices of equities. Consumer goods, measured by the CPI, were relatively tame during this time, which is why so many economists remain confused as to the real reason for the Depression. Since the CPI was not rising, they assume there was no inflation. Thus the reason for the crash could not have been inflationary monetary policy by the Fed.

On the contrary, the Fed’s egregious monetary expansion was indeed the primary cause of the Depression. Excessive government monetary inflation always results in price inflation somewhere. The new money will flow where the public wishes it to go. During the 1920s, it went into the Dow. During the 1970s, it went into consumer goods and real estate. During the 1990s, it went into the Nasdaq.

The Fed’s wild expansion of the money supply in the 1920s, of course, was not the only cause of the Depression and its damage. But it was, far and away, the main cause. As Professor Smiley points out in Rethinking the Great Depression, there were other contributing factors such as Hoover’s myopic employment of wage and price controls, Congress’ Smoot-Hawley Tariff Act, and Roosevelt’s moonshine economic programs, which all added up to stultify an economy that desperately needed to be free to purge the massive debt and malinvestment built up by the Fed’s prior inflation policies. It was not to be, however. Big government spread over America like mange on a dog’s skin. And it now threatens us with another economic crisis of gigantic proportions.

After the crash of 1929 there was a whole bevy of theoretical proposals put forth by scholars as to why it happened. None of these “experts,” though, were willing to observe that it was not free enterprise that had failed at all, but actually government-managed enterprise that had crashed. It was not the absence of controls, but the presence of them that had brought on the rapid inflation and then the necessity of disinflation which backfired into deflation. But to propose such an unpopular idea as this in contradiction to an intellectual establishment that was growing increasingly socialist minded, was something that few scholars were capable of doing. Those few independent ones who did were not powerful enough to overcome the swelling herd of anti-capitalists who wanted to believe that free enterprise had “had its day” and that what was now needed was a new age of government-managed economics.

Ludwig von Mises’ great work in Austria on the nature of the business cycle, and the inevitable nationwide depression that must come from government inflation of the money supply, had not yet been translated into English. Outside the German speaking world, it was relatively unknown. Had it been more widely circulated, the history of the past 80 years would be considerably different.

Naturally, the politicians in power bought the idea of a government managed economy immediately, for politicians are always putty in the hands of intellectuals that advocate giving them more control over the affairs of men. FDR actually had no set convictions one way or the other toward business and free enterprise. He was simply a political opportunist. He craved power, and the intellectuals of the day who were clamoring for more controls offered him the excuse to seize such power.

The Keynesian Paradigm

The most notable of all the prominent economists proposing the ideas of government planning was John Maynard Keynes. It was his theories (along with men such as Rexford Tugwell and Alvin Hansen) that most influenced Roosevelt and led us into the welfare state age of big government, deficit spending, inflation, regulation, and controls.

In essence, Keynes’ message to a bewildered 1936 world was this: What needs to be done is to create vast amounts of government investment so as to stimulate and perpetually maintain consumer demand at a high level. If this is done, the problems of poverty and business cycles will be alleviated. The weakness of capitalism is that, in its mature stage of development, it lacks the ability to produce enough “purchasing power,” i.e., demand among the people. The government must step in and take control of the monetary system, for Say’s Law of Markets is no longer valid.

Say’s Law of Markets is the brain-child of J.B. Say, an early 19th century French economist. It states that production is the precursor of consumption, or that the people’s productivity determines their purchasing power. For example, if a man plants and harvests a ten-acre field of corn, his purchasing power in the marketplace will then be whatever that corn is worth in trade to his fellow man. The extent of his supply of corn has created the level of his demand for clothes, transportation, entertainment, etc. This means that no amount of paper money, injected into an economy in excess of the growth of goods and services, will increase the “purchasing power” of the people. This is because the prices of those goods and services rise in direct relation to the increase in the money supply. This negates the effect of the extra paper money in the people’s pockets and eventually even creates a situation where overall purchasing power dissipates because of the inevitable runaway aspect of all inflationary economies.

If Say’s Law is valid, then the way we should have handled the Great Depression would have been to let the economy deflate by letting prices and wages seek their own level and allow Say’s Law to operate. Businesses would then have been able to hire workers. A day’s wages would have been low, but prices of goods and services would also have been lowered. This would have allowed the market to clear with prosperity returning in a year or so. If this had been done, the natural productivity of the people would have created the necessary purchasing power to climb out of the Depression. The reason we didn’t handle it in this way is because Keynes was supposed to have “refuted” Say’s Law showing it to be unworkable under modern-day conditions.

But as economist, Mark Skousen, has recently pointed out, Keynes gravely distorted Say’s Law in order to refute it. He created a straw man, and then reviled it. Such intellectual legerdemain allowed Keynes to pose as some sort of modern day savant with a brilliant new theoretical insight into how the world works. [3]

Many years ago economist Henry Hazlitt also saw the foolishness of Keynes, pointing out in The Failure of the “New Economics” that Keynes’ allegedly brilliant refutation consisted of declaring Say’s Law invalid because it is invalid. This is akin to a physicist suddenly declaring that the Law of Gravity is no longer applicable to humans because it is no longer applicable, and then expecting men to suddenly be able to flap their arms as wings and fly through the sky upon the utterance of such a declaration.

“Why it all sounds absolutely marvelous,” one can imagine FDR replying to his Brain Trust when informed of the wonders to be worked with Keynes’ new economics. “If capitalism has reached its mature stage and can no longer produce enough purchasing power, then we in Washington must step in and get the system going again. If people don’t have enough money, then all we have to do is print up more and our problems will be solved. It’s really all very simple, isn’t it? Our growth can actually be as great as we want it to be. Our wealth will be unlimited. We will usher in the millennium. Oh, happy day! How could we not have thought of this before?”

Stripped of all the eloquent conceptualizations and slick technical jargon, this was the great “innovation,” the great “revolutionary insight” of Keynes: If we want to become wealthier as a nation and avoid economic recessions, then all we need to do is print up more money.

The overall folly of such a proposal and the willingness of learned men to fall for its lure when encased in sophisticated verbiage, are terribly embarrassing when one thinks through the basic principles involved and projects into the future what the long-run ramifications will be. Nevertheless, the most powerful office of the most powerful country in the world accepted such fiscal flimflammery as valid economic theory. And every administration since FDR has been doing the same thing – printing up more money to make us all more “prosperous.” But as any economist knows, money itself is not wealth. If money was wealth, the government could just print up a million dollars for everybody and wipe poverty off the face of the earth. Money is just a substitute for wealth. True wealth is the goods and services that we have produced. It can never be created with a printing press.

Contrary to all the technocratic government wizards and advocates of “new economics” that have descended on us since 1936, Say’s Law of Markets has not been refuted, and it will never be refuted as long as there is a universe and a thing called human nature to exist within it.

Actually the Keynesian intellectuals knew all this. They just conned themselves into believing that Say’s Law would not work quickly enough to get us out of the Depression, and that they would only print up a little bit of money whenever they needed it (to prime the pump so to say) and always keep the boom of prosperity going whenever it was showing signs of slipping into a recession.

This is the reasoning of the drug addict, though. He also cons him¬self into believing that he will only take a little bit of his drug when¬ever he needs it (to pep himself up so to say), and always keep the boom of a pleasant high going, whenever it is showing signs of slipping into a depression.

The problem with such self-deception is that neither drug addicts nor federal bankers can ever stop with just a little bit of the drug to which they have become accustomed. They always need ever increasing doses to maintain their high, and invariably they continue such injections to the breaking point of either death or massive depression.

A Dangerous and Perplexing Problem

This then is why we got onto the inflation-deflation roller coaster. Ideologically misguided intellectuals and politicians, with grandiose dreams of ushering in a utopian economic order, have succeeded in convincing Americans that their economy is danger¬ous if left alone, that it needs the regulatory guidance of government’s “benevolent” hand to smooth out the rough spots and continually “increase” the purchasing power of the consumer through inflation of the money supply, so as to create a prolonged boom of prosperity.

What we have done to our economy under the name of Keynesian economics is to inject the heroin of excessive credit (euphemistically termed “liquidity”) into its bloodstream and then consider ourselves cured from the Depression of the 1930s. The truth is, we never did get out of the Depression genuinely because we didn’t produce our way out – we didn’t have the where¬withal to let Say’s Law of Markets operate. Instead, we rid ourselves of our economic malaise with nothing but a giant fix. We stimulated into being a huge economic boom of technological might and false prosperity on a foundation of collapsible paper money and credit.

This has created our monstrous debt, both public and private, in America today, much of which must be liquidated in order to restore healthy growth and genuinely solve the world economic crisis now unfolding around us.

The crime and immorality of it all lie in the horrendous consequences that our professors and politicians are shutting their eyes to. Blanking out on the evil ramifications of one’s policies is a choice that men and women make, and evil choices are what criminality and immorality are all about. Until these ethical elements of inflation are taught to our youth in the schools, monetary inflation will continue to plague human society. Printing our way to prosperity is most decidedly a moral issue. The academics and politicians who preach the lure of such “wealth without effort” need to be condemned for the charlatans and looters that they are. They possess no honor, only a veiled and despicable infamy.

 

Notes

1. Gene Smiley, Rethinking the Great Depression (Chicago: Ivan R. Dee, 2002), p. x.

2. Benjamin M. Anderson, Economics and the Public Welfare: Financial and Economic History of the United States, 1914-1946 (Princeton, NJ: D. Van Nostrand Co., 1949).

3. Mark Skousen, “Say’s Law Is Back,” The Freeman, August 1999, pp. 54-55.


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