In the modern centralized monetary system, all values are inverted. Debt masquerades as money, the system imposes structural inflation and monetary debasement on everyone, and GDP "growth" is an economic illusion built on that inflation and debasement. Nearly everyone gets fooled into thinking their wages, home values and stock portfolios are "rising"--and this is yet another illusion thanks to the steady debasement of the money.
In such a system, anyone living off wage income, who isn't (yet) an asset owner, gets squeezed a little tighter every year. And this is the primary reason we have a so-called K-shaped economy, where asset owners do well, while those living off their labor value don't. It all comes from steady, deliberate monetary debasement.
Our author believes this is immoral, and he's right. He believes that the institution behind our monetary system (the US Federal Reserve) is immoral, and he's right. Further, he believes the entire politico-juridical framework of centralized money production and legal tender laws is also immoral, because it forces people to participate in a steadily debasing money system. Once again, he's right! The system should not do these things.
And so he's written an earnest but fundamentally delusional short book describing a path, via rapid and painful deflation, to a more moral and ethical monetary framework. The problem--and this is why the book is fundamentally delusional--is this path will never, ever happen. Even the author himself more or less admits it: "There is absolutely no hope that the Federal Reserve or any other fiat money producer of the world will change their policies any time soon." A fiat money system yields tremendous structural power and control to any government. Switching to a hard money system would mean giving up that power and control.
Don't get me wrong, the author is still right in the sense that this should happen. Once you understand all the first- second- and third-order effects of modern inflationary monetary systems, once you understand the tremendous concentration and centralization of power, both political and economic, that occurs over time as a result of such a system, you will also agree with the author too that the system should not do the things it does, that a money system should not impose inflation on the people, that money should be hard, not debasable.
Saying something "should" be a certain way is one thing. But it is a great distance from actually surviving in a system that will continue to function as it functions regardless of your, my, or the author's opinion. The things this author says must be said, but they are not a navigational strategy for the system we have. You have to be a pragmatist and learn to navigate an inflationary economy where "brrrrrrrrrr"[1] is the system's solution to any kind of problem.
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To paraphrase Harry Browne in his wonderful book How I Found Freedom in an Unfree World, people and systems operate in a way that is consistent with their self-interest. To expect anything or anyone to do otherwise is delusional. Thus you have to truly see the system as it is in order to learn to navigate it. Below I've created a reading list to help you understand and navigate this system.
Therefore, use Deflation and Liberty to understand that, yes, there is a path to an alternative monetary system that is more ethical, more fair, and more just. But also remember that we do not, and will not, have such a system. The architecture of the modern monetary system sits outside your and my circle of control: it is how it is.
Years ago I would have considered looking at things this way as cynical, even nihilistic. Now I consider it necessary and the only way to survive. You can't waste too much time thinking about how a system "should" be when you can't change it.[2] You have to navigate it as it is, without delusion.
Reading list for understanding and navigating the modern monetary system as it is [links will take you to book reviews on this site]:
Lyn Alden: Broken Money
Edward Griffin: The Creature from Jekyll Island
Nik Bhatia: Layered Money
Saifedean Ammous: The Bitcoin Standard
Adam Fergusson: When Money Dies
A.D. White: Fiat Money Inflation in France
Jorg Guido Hulsmann: The Ethics of Money Production
William L. Silber: The Story of Silver
Michael Hudson: J is for Junk Economics
Footnotes:
[1] "Brrrrrr" is the sound of a money printer running at full speed: money printer go brrrrrr. Note also that BRRR is also the ticker symbol for one of the Bitcoin ETFs.
[2] Harry Browne would call this the Utopia Trap: the fallacious idea that you should forget about any personal freedoms until society is somehow "fixed" first.
[Readers, what follows are quotes, my notes and my reactions to the book--they are here to help me order my thinking and better remember what I read. They're not too long this time, but as always, please feel free to skim or skip the rest, or just take a quick look at the "To Read" section at the very bottom for some additional reading ideas.]
Notes:
Preface:
5 "It is my great pleasure to see this little essay in print. Written and presented more than five years ago, it was welcomed at the time by scholars with a background in Austrian economics. However, it was not understood and was rejected by those who did not have this background." [Ergo Upton Sinclair's famous quote (which I'm probably butchering): "It is impossible to convince a man of something if his salary depends on him not understanding it." Usually non-Austrian/orthodox economists's careers only exist because of their orthodoxy, thus they are effectively a class of Cantillon-adjacent insiders, carrying intellectual water for the fiat monetary system and its moneyprinting.]
5 The author is tilting at windmills on his very first page (this doesn't mean he's wrong!), saying the government "should not produce money, nor should it appoint a special agency to produce money. It should not force the citizens to use fiat money by imposing legal tender laws." [Yes, these "shoulds" should be, but they aren't. Few governments will give up this extraordinary and self-perpetuating power.]
5-6 Still more hopeful delusion, followed by realism: "It should not regulate banking and should not regulate the financial markets. It should not try to fix the interest rate, the prices of financial titles, or commodity prices. Clearly, these measures are radical by present-day standards, and they are not likely to find sufficient support. But they lack support out of ignorance and fear." The next step in the argument here is the system as it stands periodically produces crises like 2008 or 1929, and then of course the response of the government is to take still more power and use still more money printing.
6-7 "A paper money system is not beneficial from an overall point of view. It does not create real resources on which our welfare depends. It merely distributes the existing resources in a different manner; some people gain, others lose... Why hold any substantial cash balances [he's speaking here of banks or too-big-too-fail institutions] if the central bank stands ready to lend you any amount that might be needed, at a moment’s notice? Why use your own money if you can finance your investments with cheap credit from the printing press? To raise these questions is to answer them. The crisis did not hit us despite the presence of our monetary and financial authorities. It hit us because of them."
7 [On a "half-truth" we are told]: "If we follow a hands-off policy, the majority of experts tell us, the banking industry, the financial markets, and much of the rest of the economy will be wiped out in a bottomless deflationary spiral. The present essay argues that this is a half-truth." The author says here that yes, there would be deflation, but it would not wipe out everything, nor be a threat; rather, it would destroy the companies and entities that live parasitically at society's expense "and which owe their existence to our present fiat money system." "We should not be afraid of deflation. We should love it as much as our liberties." [The problem here is the vast majority of people are also locked in to the system as it is, and if any serious deflation ever happened in their home values, their 401ks, etc.--to say nothing of their wages!--the people as a collective would beg for all the government intervention and money printing possible. The vast majority of voters have been well-fooled: they don't see the system for what it is and thus support its continuation as much as elites and Cantillon insiders do.]
Chapter 1:
9 On the growth of increasingly "omnipotent" government: "Its most conspicuous manifestations are the welfare state and of the warfare state." Neither would be possible without inflation.
10 Note that any past book agonizing over the quantity of public/government debt in the USA always looks naive when you look at current debt levels! The book here cites the increase in debt from 2T in the early 1980s to 6.2T in 2008 (when this book was published), numbers that today appear hilariously paltry compared to today's 39T in government debt: back in 2008-2009 everybody made a huge deal that the number was approaching $10T, when now we are four times that, while the debt/GDP ratio has doubled from 60% to 120%! (And with debt to GDP, note that Japan is saying "hold my beer" to the USA.) I think the more disturbing thing to think about is what happens when you play this out another 20-25 years, as the debt numbers today will seem paltry when we look back on them after still more monetary debasement--and this will imply quite a lot more inflation. You really have to look downfield and you also have to "add a zero" to everything to really wrap your arms around what the future is going to look like.]
10-11 "The link between the paper dollar and the exponential expansion of public debt is well known. From the point of view of the creditors, the federal government controls the Federal Reserve--the monopoly producer of paper dollars--and it can therefore never go bankrupt. If necessary, the federal government can have any quantity of dollars printed to pay back its debt. Buying government bonds is thus backed up with a security that no other debtor can offer. And the federal government can constantly expand its activities and finance them through additional debt even if there is no prospect at all that these debts will ever be paid back out of tax revenues. The result is seemingly unchecked growth of those governments that control the production of paper money." [You have to spend some time rolling these ideas over in your mind, but it will show you the future.]
11ff On orthodox economists fearing deflation more than inflation, even supporting "reflation" which is just a phony word for further inflation.
12-13 On how even Austrian economists like von Mises, Rothbard, all fully against inflation and monetary debasement, are hesitant to embrace deflation: "Mises and Rothbard championed deflation only to the extent it accelerated the readjustment of the economy in a bust that followed a period of inflationary boom. But they explicitly (Mises) and implicitly (Rothbard) sought to avoid deflation in all other contexts." [Interesting. I didn't know this. Even the hardcore Austrians don't really get it, and don't "get" the moral/ethical framework here.]
14 On the structural flaw that the deflationary reform process will be directed by the same institutions and people who put us in this inflationary system. [Thus more indications that the system cannot change, the new boss is the same as the old boss.]
14 "...what is actually wrong with deflating the money supply, from an economic point of view?... The truth is that deflation has become the scapegoat of the economics profession. It is not analyzed, but derided. One hundred years of pro-inflation propaganda have created a quasi-total agreement on the issue." [Note also the footnote here]: "The main engines of the propaganda have been the state universities of the West, as well as an exaggerated faith in the authority of monetary 'experts' in the service of the IMF, the World Bank, the Federal Reserve, and other government agencies charged with the technical details of spreading inflation."
14ff "Economists who otherwise cannot agree on any subject are happy to find common ground in the heart-felt condemnation of deflation. In their eyes, the case against deflation is so clear that they do not even bother about it. The libraries of our universities contain hundreds of books splitting hairs about unemployment, business cycles, and so on. But they rarely feature a monograph on deflation. Its evilness is beyond dispute. Yet this silent accord stands on shaky ground. A frank and enthusiastic endorsement of deflation is, at any rate in our time, one of the most important requirements to safeguard the future of liberty."
Chapter 2
16 The author poses a central question: "Can one improve or deteriorate the state of an economy by increasing or decreasing the quantity of money?"
16 Interesting comment about Aristotle: "Aristotle said that money was no part of the wealth of a nation because it was simply a medium of exchange in inter-regional trade, and the authority of his opinion thoroughly marked medieval thought on money. Scholastic scholars therefore spent no time enquiring about the benefits that changes of the money supply could have for the economy." [This is yet another example where we are collectively fooled by Enlightenment and modern ideas about something when prior thinking from the pejoratively-called "Dark Ages" was much closer to the truth. For more on how the Enlightenment has caused us to forget things we'd be better off remembering, see the flawed but useful book Living in Wonder by Rod Dreher.]
17 "And after the birth of economic science in the eighteenth century, the classical economists too did not deny this essential point. David Hume, Adam Smith, and Étienne de Condillac observed that money is neither a consumers’ good nor a producers’ good and that, therefore, its quantity is irrelevant for the wealth of a nation. This crucial insight would also inspire the intellectual battles of the next four or five generations of economists--men such as Jean-Baptiste Say, David Ricardo, John Stuart Mill, Frédéric Bastiat, and Carl Menger--who constantly made the case for sound money." On the idea that since money was actual gold and silver coinage it made citizens "sovereign in monetary affairs." [Another important point: the system today does not want you to be self-sovereign!]
18 On the romanticism with which modern libertarians view the classical gold standard era; note that even then governments monopolized coinage, they imposed price controls (of a sort) via "bimetalism"; they actively promoted fractional reserve banking which increases the money supply, and they promoted the emergence of central banking. "The overall result of these laws was to facilitate the introduction of inflationary paper currencies and to drive specie out of circulation. At the beginning of the nineteenth century, most of Europe, insofar as it knew monetary exchange at all, used paper currencies."
19-20 On Hume, Smith, Say and Ricardo all willing to live with, or even encourage, inflation to varying degrees: "...eventually a new generation of students, infected with the virus of statism--worship of the state--brushed over that central insight, and thus the errors of the classical economists, rather than their science, triumphed in the twentieth century."
20 "Men such as Irving Fisher, Knut Wicksell, Karl Helfferich, Friedrich Bendixen, Gustav Cassel, and especially John Maynard Keynes set out on a relentless campaign against the gold standard. These champions of inflation conceded the insight of the classical economists, that the wealth of a nation did not depend on its money supply, but they argued that this was true only in the long run. In the short run, the printing press could work wonders. It could reduce unemployment and stimulate production and economic growth. Who could reject such a horn of plenty? And why?"
20-1 On the costs of inflation, typically thought of in terms of purchasing power, which in the case of the dollar is down 98% since the Federal Reserve took over managing the money supply; but note other, less well known effects such as financial crises; on how paper money "has completely transformed the financial structure of the western economies" as companies, governments and individuals have unprecedented levels of debt [debt is a short position on the currency!] and "has become the technical foundation for the totalitarian menace of our days."
21 The author further makes the case that even the short term benefits of inflation are outweighed by the long term drawbacks. [The problem here is the people do not see the mechanism or the connection, and also people in general have short time horizons, so this is a perfect technique to use the people's proclivities against them in a system that seems like it's "for" them and that they actually want. It's evil as well as evil genius.]
21 On how even the short-term benefits are illusory! "The main impact of inflation is to bring about a redistribution of resources. There are therefore short-run benefits for certain members of society, but these benefits balanced by short-run losses for other citizens." [Inflation helps asset owners, owners of anything scarce, debtholders with artificially low borrowing costs, anyone short the currency, etc. It screws people living off their labor value.] Discussion here on how some benefit from money printing, especially those who receive that money [cantillon insiders], but holders of money are harmed by loss of purchasing power.
22-3 Also on how inflation really doesn't increase employment either, it just reduces the purchasing power of each money unit: "Only if [workers] do not know that the quantity of money has been increased to lure them into business at current wage rates will they consent to work rather than remaining unemployed. All plans to reduce unemployment through inflation therefore boil down to fooling the workers--a childish strategy, to say the least." [Childish yes, but it works amazingly, and has worked for a century. We all know our government hates us and condescends to us anyway.]
23 Note also the footnote here on page 23: "The long-standing presence of mass unemployment in Germany, France, and other European countries seems to be a smashing refutation of the Keynesian hypothesis."
24 On inflation and sticky wages: "Inflation can overcome the problem of sticky wages only to the extent that the paper money producers can surprise the labor unions. To the extent that the latter anticipate the moves of the masters of the printing press, inflation will either not reduce unemployment at all, or even increase it further." [Note the mention of various books here by William Harold Hutt]
Chapter 3
24 "From the standpoint of the commonly shared interests of all members of society, the quantity of money is irrelevant."
25 "In light of the principle discovered by the classical economists, we can say that deflation is certainly not what it is commonly alleged to be: a curse for all members of society. Deflation is a monetary phenomenon, and as such it does affect the distribution of wealth among the individuals and various strata of society, as well as the relative importance of the different branches of industry. But it does not affect the aggregate wealth of society. Deflation is a drastic reduction of the quantity of money or of money substitutes, and it entails a precipitous decline of money prices [the value of money goes up relative to things money buys, thus prices decline, things cost less]. Such an event, be it ever so dramatic for a great number of individuals, is most certainly not a mortal threat for society as a whole." [What the author misses here is the incredible uncertainty that will overwhelm markets, and that will impact prices in addition to the price declines due to the reduction in money supply. Imagine the fear that will take over everyone as their 401ks deflate, as their home prices deflate, etc.]
25 "Imagine if all prices were to drop tomorrow by 50 percent. Would this affect our ability to feed, cloth[e], shelter, and transport ourselves? It would not, because the disappearance of money is not paralleled by a disappearance of the physical structure of production." [It is incredible to imagine this, and you can't help think about how much uncertainty would increase for everybody, how many indebted businesses would fail, how many overleveraged consumers would have to wash through bankruptcy, etc. It just seems like it would be impossible for the people and their leadership to look past the harsh medicine part of this process to get to what comes after. That said, there are certain businesses that function amazingly well in deflationary pricing environments: see the semiconductor industry, see Amazon/Walmart, etc.]
26 "...our tools, our machines, the streets, the cars and trucks, our crops and our food supplies--all this is still in place. And thus we can go on producing, and even producing profitably, because profit does not depend on the level of money prices at which we sell, but on the difference between the prices at which we sell and the prices at which we buy. In a deflation, both sets of prices drop, and as a consequence for-profit production can go on." [On one level he's right, but the problem here is that people have a unit bias, they think in terms of today's dollars not in the future changes to the unit of account. Thus this is pretty much inconceivable if you intend to be pragmatic about reality.]
26 Note here in the very next paragraph he explains the mechanics of what will happen--and this shows us precisely why it can't happen: there's way, way too many interests that would be harmed by it: "There is only one fundamental change that deflation brings about. It radically modifies the structure of ownership. Firms financed per credits [sic., he means debt-financed] go bankrupt because at the lower level of prices they can no longer pay back the credits they had incurred without anticipating the deflation. Private households with mortgages and other considerable debts to pay back go bankrupt, because with the decline of money prices their monetary income declines too whereas their debts remain at the nominal level. The very attempt to liquidate assets to pay back debt entails a further reduction of the value of those assets, thus making it even more difficult for them to come even with their creditors. In the memorable words of Irving Fisher: 'The more the debtors pay, the more they owe.'" [Clearly we would also have massive numbers of banks that failed in such a scenario, and the government response would be predictable: printy mcprintpint.]
26-7 Next a criticism of Fisher's "fallacious statement" that such a liquidation "defeats itself": Hulsmann argues that bankruptcies "do not affect the real wealth of the nation, and in particular that they do not prevent the successful continuation of production. The point is that other people will run the firms and own the houses--people who at the time the deflation set in were out of debt and had cash in their hands to buy firms and real estate. These new owners can run the firms profitably at the much lower level of selling prices because they bought the stock, and will buy other factors of production, at lower prices too." [And the media and the government will call these people "profiteers" and malign them, possibly even prosecute them. Once again, the system typically can't handle the harsh medicine.]
27 The author makes the good point that a deflation doesn't hide the redistribution, whereas an inflation does hide how wealth is redistributed: "This starkly contrasts with inflation, which creates anonymous winners at the expense of anonymous losers. Both deflation and inflation are, from the point of view we have so far espoused, zero-sum games. But inflation is a secret rip-off and thus the perfect vehicle for the exploitation of a population through its (false) elites, whereas deflation means open redistribution through bankruptcy according to the law."
Chapter 4
28 "Deflation creates a great number of losers, and many of these losers are perfectly innocent people who have just not been wise enough to anticipate the event. But deflation also creates many winners, and it also punishes many 'political entrepreneurs' who had thrived on their intimate connections to those who control the production of fiat money." [Once again, Cantillon insiders.]
28 "The point is that any monetary policy has redistributive effects. In particular, once a deflation of the supply of money substitutes sets in, the only way to combat this is through inflation of the supply of base money, and this policy too involves redistribution and thus creates winners and losers."
29 "But there is also another point of view that merits consideration and which is in fact decisive for our problem. It results from the fact that, in practice, there are at any point in time two, and only two, fundamental options for monetary policy. The first option is to increase the quantity of paper money. The second option is not to increase the paper money supply. Now the question is how well each of these options harmonizes with the basic principles on which a free society is built."
Chapter 5
29 "How would money be produced in a free society? Let us first observe that the fact that the quantity of money is irrelevant for the wealth of a nation must not be confused with the ideal of stabilizing the quantity of money. The latter ideal is in fact a spurious ideal and does not follow from the aforementioned fact. There is nothing wrong with increases or decreases of the quantity of money."
30 The foundation question here isn't to what end we modify the supply of money, the question is "Who has the right to modify the quantity of money?" "And in a free society, the obvious answer is: all producers of money have the right to produce more money, and all owners of money have the right to use their property as they see fit. In a truly free society, the production of money is a matter of private initiative. Money is produced and sold just as any other commodity or service. And this means in particular that in a free society the production of money is competitive." [And in a competitive monetary environment, Thiers' Law sets in: the best money wins out. This is basically the opposite of Gresham's Law.]
30 "What kind of money would prevail in a free society? Theoretical considerations and historical experience all point to the same answer: A free society would use precious metals as money. Payments would be made in coins made out of gold, silver, platinum, copper, or whatever other substance would combine scarcity with the physical advantages of these metals. By contrast, paper money has always been fiat money, that is, it has always been imposed by the coercive power of the state. It is not the money of the free market, but the money of a partially enslaved society."
Chapter 6
31 "The production of money in a free society is a matter of free association... Things are completely different once we turn to money production in interventionist regimes, which have prevailed in the West for the better part of the past 150 years. Here we need to mention in particular two institutional forms of monetary interventionism: (fraudulent) fractional-reserve banking and fiat money. The common characteristic of both these institutions is that they violate the principle of free association. They enable the producers of paper money and of money titles to expand their production through the violation of other people’s property rights."
31-2 "Banking is fraudulent whenever bankers sell uncovered or only partially covered money substitutes that they present as fully covered titles for money... The producer of fiat money (in our days typically: paper money) sells a product that cannot withstand the competition of free-market monies such as gold and silver coins, and which the market participants only use because the use of all other monies is severely restricted or even outlawed. The most eloquent illustration of this fact is that paper money in all countries has been protected through legal tender laws. Paper money is inherently fiat money; it cannot thrive but when it is imposed by the state."
32 "In both cases, the production of money is excessive because it is no longer constrained by the informed and voluntary association of the buying public."
33 [A good working definition--and ethics-based definition--of inflation here.] "This excessive production of money and money titles is inflation by the Rothbardian definition, which we have adapted in the present study to the case of paper money. Inflation is an unjustifiable redistribution of income in favor of those who receive the new money and money titles first, and to the detriment of those who receive them last. In practice the redistribution always works out in favor of the fiat-money producers themselves (whom we misleadingly call 'central banks') and of their partners in the banking sector and at the stock exchange. And of course inflation works out to the advantage of governments and their closest allies in the business world. Inflation is the vehicle through which these individuals and groups enrich themselves, unjustifiably, at the expense of the citizenry at large."
33 "If there is any truth to the socialist caricature of capitalism--an economic system that exploits the poor to the benefit of the rich--then this caricature holds true for a capitalist system strangulated by inflation. The relentless influx of paper money makes the wealthy and powerful richer and more powerful than they would be if they depended exclusively on the voluntary support of their fellow citizens." [Well put!]
34 "...inflation puts a brake on social mobility. The rich stay rich (longer) and the poor stay poor (longer) than they would in a free society." [Note also this footnote here!]: "In this regard, inflation works in an unholy alliance with the tax code. The main advantage of the successful newcomer is that he has high revenues. But present-day corporate and income tax rates effectively prevent him from accumulating capital quickly enough to sustain the competition of the establishment." [Again, well put: very few people see the second-order effect of the modern tax code: it drastically limits the creation of new rich who would otherwise threaten the position of the already-rich.]
35 [Another money quote here, beautifully put]: "It would not be uncharitable to characterize inflation as a large-scale rip-off, in favor of the politically well-connected few, and to the detriment of the politically destitute masses. It always goes in hand with the concentration of political power in the hands of those who are privileged to own a banking license and of those who control the production of the monopoly paper money. It promotes endless debts, puts society at the mercy of 'monetary authorities' such as central banks, and to that extent entails moral corruption of society."
Chapter 7
36 On inflation (in the form of fractional reserve banking and fiat money) carrying with it the seeds of its own destruction. The author says this "destruction" plays out in "three scenarios of the halt of inflationary processes."
36ff The first scenario: "...a liquidity crisis of the fractional reserve banking system that ends up in a bank run, that is, in a sharp decline of the demand for money substitutes." The reduction of the money supply drives a decline in prices; then you have a cycle where some creditors aren't paid back, which means they can't pay back their creditors; this brings about a general financial meltdown. "After the deflation has cleaned up the economic landscape [note that this is a standard phrase also from "goldbug" hard money types: somehow the meltdown "cleans up" everything--exactly how and in what way is never really discussed. It's sort of an armwaving argument], fractional-reserve banking and other forms of financial intermediation will play a less significant role in the economy. Firms and individuals will, at the margin, turn to financing whatever purchases they make through personal savings. In short, financial decision-making will be even more conservative and more decentralized than before." [This part always amuses me, the economist always thinks that there will be some Utopia that follows the crisis that "cleans" everything up and everything will be better somehow. What really happens during a crisis like this is the government takes even more control and centralizes even more power, and the system gets further from Utopia.] The author claims that this scenario was common in the 19th century up to the Great Depression. [Also note the standard gold bug quote here]: "...in the Great Depression deflation was not allowed to complete its work."
37 Note the comment here on deposit insurance, "which for all practical purposes established 100 percent reserve banking in the U.S. [Interesting point!]
38 The Great Depression "first scenario" "could have some relevance, however, in explaining the more recent financial crises in Russia, Brazil, Argentina, and certain Asian countries, in particular if the currencies of these countries at the time of the crisis could be interpreted as money substitutes for U.S. dollars." [Again, interesting]
38ff The second scenario: with "intertemporal misallocations of resources when fraudulent fractional-reserve banks increase the money supply and thereby depress market interest rates below their equilibrium level. Then entrepreneurs invest too many of the available resources high up in the physical production chain, and not enough resources in the lower stages of the structure of production. The result becomes visible after some time, when a more or less great number of firms must file bankruptcy. This in turn jeopardizes their creditors, in particular fractional-reserve banks, and leads to the chain of events we described above. The difference between the second and the first scenario is in the causation of the bank run. In the former, the bank run starts more or less by accident, when one major market participant--be it out of negligence or due to unforeseeable contingencies--fails and pulls down a house of cards. By contrast, in the scenario we are now considering, the bank run is the necessary consequence of a previous misallocation of resources that resulted from a fraudulent increase of the money supply." The result of this second scenario is basically the same: money-substitute deflation [now that I think about it, Nik Bhatia calls this "scrambling up the money pyramid" as people try to escape money substitutes for harder money], a deflationary meltdown, a reduction in banking and financial intermediation, and a new period of financial conservatism and decentralization.
DONE TO HERE
40ff Finally the third scenario, which occurs "in the case of paper money" where the economic system returns to barter. Note that the author himself argues here that "it is very unlikely that there will ever be a rapid deflation in our definition--a reduction of the money supply. The reason is that paper money is protected through legal tender laws and other legislation. That leaves barter as the only legal alternative to using paper money, and barter is so much less beneficial than monetary exchange that market participants typically prefer using even very inflationary monies rather than turning to barter. In all known cases, it was only under extreme duress--when the purchasing power of their paper money holdings dwindled within hours, so that indirect exchange became impracticable--that the market participants finally ignored the laws and started using other monies than the legal tender."
40 "If we tie this up with our comparative analysis of free and compulsory production of money and money substitutes, we come to the conclusion that deflation is not a mere redistribution game that benefits some individuals and groups at the expense of other individuals and groups. Rather, deflation appears as a great harbinger of liberty. It stops inflation and destroys the institutions that produce inflation. It abolishes the advantage that inflation-based debt finance enjoys, at the margin, over savings-based equity finance. And it therefore decentralizes financial decision-making and makes banks, firms, and individuals more prudent and self-reliant than they would have been under inflation [again, Harry Browne would call this the Utopia Trap]. Most importantly, deflation eradicates the re-channeling of incomes that result from the monopoly privileges of central banks. It thus destroys the economic basis of the false elites and obliges them to become true elites rather quickly, or abdicate and make way for new entrepreneurs and other social leaders."
40ff Comments on the 1931 Macmillan Report on the 1930s-era worldwide financial crisis, which also saw "that deflation was foremost a political problem. They clearly saw that deflation brings down the politico-economic establishment, which thrives on inflation and debts, and that it therefore brings about some circulation of the elites."
41 "Deflation puts a brake--at the very least a temporary brake--on the further concentration and consolidation of power in the hands of the federal government and in particular in the executive branch... It not only brings the inflated monetary system back to rock bottom, it brings the entire society back in touch with the real world, because it destroys the economic basis of the social engineers, spin doctors, and brain washers. In light of these considerations, deflation is not merely one fundamental policy option next to the fundamental alternative of re-inflation. Rather, if our purpose is to maintain and--where necessary--to restore, a free society, then deflation is the only acceptable monetary policy." [If it weren't for the making society go through a politically inconceivable "rock bottom"-type situation, he's totally right. The modern economic system, built on tremendous amounts of debt and structurally designed to take off wealth via inflation, is genuinely fake on several levels.]
42-3 "The case of Japan might serve as a warning counter-example. The severe Japanese recession of the early 1990s was both an economic and a political threat to the establishment. In Japan, the process of consolidation and centralization of power started right after World War II, when the 'economic experts' within the U.S. occupation forces imposed Keynesian and socialist policies on their former enemy. By the late 1980s, the process had advanced to such an extent that it was politically impossible to allow deflation to cleanse the economy and politics. The Japanese governments of the 1990s sought to 'fix' the economic crisis through increasingly heavy doses of inflation. But the only result of this policy was to give a zombie life to the hopelessly bureaucratic and bankrupt conglomerates that control Japanese industry, banking, and politics. After almost fifteen years of mindless inflation, Japan’s economic crisis has turned into a fundamental political crisis that sooner or later will bring the country onto the verge of revolution. [These are strong words here, but it sure doesn't seem like the Japanese are in any way looking to cast off their economic chains at all.] This is also what will happen to the West, if the citizens of our countries let their governments have a free hand in monetary affairs." [I think this is as delusional as the author's belief that deflation will be permitted to occur in the first place: the people may revolt, but they won't know that their problems are because of the money system. And they'll revolt their way right into a different kind of tyranny, likely using the same extractive monetary system, thinking it's somehow better. Hence even Keynes said: "By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens... The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."]
Chapter 8
43 "In conclusion let us restate the main points: Deflation is far from being inherently bad. Quite to the contrary, it fulfills the very important social function of cleansing the economy and the body politic from all sorts of parasites that have thrived on the previous inflation. In a word: the dangers of deflation are chimerical, but its charms are very real. There is absolutely no reason to be concerned about the economic effects of deflation--unless one equates the welfare of the nation with the welfare of its false elites. There are by contrast many reasons to be concerned about both the economic and political consequences of the only alternative to deflation, namely, re-inflation--which is of course nothing but inflation pure and simple."
43-4 "The purpose of these pages is not to appeal to the reason of our monetary authorities. There is absolutely no hope that the Federal Reserve or any other fiat money producer of the world will change their policies any time soon. But it is time that the friends of liberty change their minds on the crucial issue of deflation. False thinking on this point has given our governments undue leeway, of which they have made ample and bad use. Ultimately we need to take control over the money supply out of the hands of our governments and make the production of money again subject to the principle of free association. The first step to endorsing and promoting this strategy is to realize that governments do not--indeed cannot--fulfill any positive role whatever through the control of our money."
To Read:
Robert Higgs: Crisis and Leviathan: Critical Episodes in the Growth of American Government
Murray N. Rothbard: Man, Economy, and State
Murray N. Rothbard: The Mystery of Banking
Hans Sennholz: The Age of Inflation
Jean-Baptiste Say: A Treatise on Political Economy
John Wheatley: An Essay on the Theory of Money and Principles of Commerce
Jacques Rueff: The Monetary Sin of the West [free PDF here]
William Harold Hutt: The Strike-Threat System
William Harold Hutt: The Theory of Collective BargainingWilliam Harold Hutt: The Keynesian Episode
A.G. Shilling: Deflation: Why It’s Coming, Whether It’s Good or Bad, and How It Will Affect Your Investments, Business, and Personal Affairs
A.G. Shilling: Deflation: How to Survive and Thrive in the Coming Wave of Deflation
Robert R. Prechter: Conquer the Crash: You Can Survive and Prosper in a Deflationary Depression
Ludwig von Mises: Theory of Money and Credit
Vilfredo Pareto: Manual of Political Economy [see chaps 2 and 7 on "circulation of elites"]
***Thomas Mann: "Disorder and Early Sorrow" [short story]
Paul A. Cantor: “Hyperinflation and Hyperreality: Thomas Mann in the Light of Austrian Economics" [1994 paper]
Edward Lincoln: Arthritic Japan: The Slow Pace of Economic Reform
Mancur Olson: The Rise and Decline of Nations