Tag Archives: Money

The H. L. Mencken of Economics

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For centuries the State has committed mass murder and called it “war”; then ennobled the mass slaughter that “war” involves.

While reading biographical accounts of Murray Rothbard, one thing becomes clear to me: He was very true to himself, more than most thinkers I have ever read of. Murray Rothbard was an honorable exception in a profession where even blind idealists find themselves being tempted to play by the rules. There was of course, a terrible price for being the greatest entertainer in the history of economic thought. Because, Manu Joseph’s take on Delhi is all the more true of the Economics profession: “Delhi, often, confuses seriousness with intelligence and humour with flippancy. People will not be taken seriously here if they are not, well, serious.”

If you have to be taken seriously by fellow academics, you have to be as dry, boring and confused. Rothbard’s lectures on the contrary, as Bryan Caplan opined, might as well have been named “The joy of Econ”. One of Bryan’s blog posts had an apt title, “History + Comedy = Rothbard”, because he was “Haha funny”. Then, as someone had said, he’d rather have a good laugh than a Nobel Prize.

Rothbard believed that an individualist born in this world “marked by fraud, folly and tyranny” has three ways to deal with it: Retire into one’s own cocoon, set out to reform the world or take immense delight in the nonsense he sees around. Rothbard , it seems, was among the very few who had a driving desire to reform the world and take delight in the spectacle of folly at the same time. He lacked the pessimism of H.L. Mencken who was not too much of a reformer. Mencken knew that his barbaric fellow beings were hopeless and beyond repair and reform. Even when Rothbard writes about the worst of tyrannies, it appeared that like H.L. Mencken, he felt far more delight than indignation. As readers, we feel nothing but amusement even when he cheerfully quotes the listing of monstrosities in the diary of a slave owner who imagined himself to be a kind taskmaster. Continue reading »

On Hayek

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“At first, I kept wondering how it could be possible that the educated, the cultured, the famous men of the world could make a mistake of this size and preach, as righteousness, this sort of abomination—when five minutes of thought should have told them what would happen if somebody tried to practice what they preached. Now I know that they didn’t do it by any kind of mistake. Mistakes of this size are never made innocently.”-Ayn Rand
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Inflation Is Man Made

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“Food Inflation”, as they have named it, has soured to a decade’s high in India. As usual, speculation and hoarding is being blamed. False remedies are being proposed. It is time to think in terms of fundamental principles. Ayn Rand had pointed out decades back in her essay “Egalitarianism And Inflation” that “Inflation, a man made scourge, is made possible by the fact that most people don’t understand it.” If people were sound on monetary matters, government manipulation of money and credit would not have happened. Ayn Rand asks what would have happened if a person is allowed to trade in paper in a society in which gold has evolved as money. What if such a person claims that he is the best customer and expands the market? The issue, now, must be clearer than crystal to everyone. That person is making a claim on goods for nothing. That’s precisely what the Government does-Counterfeiting, a crime which is punished severely if done by an ordinary citizen. As Ayn Rand had noted, there is only one institution which has the legal power to trade by means of rubber checks: the Government. Counterfeiting is implicit theft. Of course, it is true that the Government doesn’t simply print paper money and circulate in the market. The process is more complicated. But, that doesn’t change the intrinsic picture. The fact remains that the Central Bank, a Government institution, creates money out of thin air. Ayn Rand identifies that there will be two concepts a savage thinking on the range of the moment transported into an Industrial society can’t grasp-“Credit” and “Market”. We, however, can’t make such an excuse. We are capable of long range thought. If we are to stop inflation, we should grasp these concepts and step into action.

The Cure For Inflation

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New Year’s day headlines in many newspapers was that the rise in food prices in India is at 19.83 percent.It is the highest in the decade and shows no sign of subsidence. Interestingly, The Finance Minister Pranab Mukherjee said that keeping a rein on inflation is a huge challenge for the Government. It is easy for the Government to blame businessmen, speculation and hoarding, and pretend that they are fighting inflation and managing “growth”, as money is a highly tangled economic subject. But, the real blame lies elsewhere. Prices would rise in general only if the money supply increases or the supply of goods come down dramatically. It is easy to find the culprit if one grasps the fact that a shortage of goods is an extremely rare occurrence and that it is not easy for an ordinary citizen to print money. Though the media uses loose terms like “food inflation”, inflation is everywhere, an increase in the supply of money and bank credit caused by the Central bank.

To understand inflation, one should first understand how money originated. In the past, a commodity (mostly gold or silver) evolved naturally as money through barter. For convenience, people kept the commodity in a deposit bank, which issued redeemable warehouse receipts, and these receipts started circulating as substitutes for commodity money. The Government seized the commodity and left people with fiat money which was made irredeemable through the abolition of gold standard, in course of time. As Ayn Rand wrote in Atlas Shrugged, “Whenever destroyers appear among men, they start by destroying money, for money is men’s protection and the base of a moral existence. Destroyers seize gold and leave to its owners a counterfeit pile of paper.”

Money is manufactured in a complex process, in which government securities are purchased by the Reserve Bank of India (RBI), which is accompanied by the creation of new and additional checking deposits for the treasury. When the quantity of money is increased in this manner, too much money starts chasing too few goods and the purchasing power of money decreases, which leads to a rise in prices. It should be kept in mind that the rise in prices is merely an effect of inflation and the real cause is that the money supply has been “blown-up”, or overextended.

Inflation is purely a monetary phenomenon, no matter how hard the statists try to evade that fact. Intellectuals and politicians would want the public to believe that inflation is an act of God, over which we humans have but no control. Inflation however is a policy, and as any policy, it can be halted. Our government goes on with its inflationary policies because it wants to tax the public, but lacks the temerity to resort to it in so explicit a manner. Inflation is in fact a hidden tax everyone pays irrespective of their incomes. It is a tax, which hits the poor more than it hits the rich. The sections hit most by inflation are orphans, widows and the elderly who live on the buying power of life insurance policies, pensions and annuities. Inflation leads to a re-distribution of wealth from the poor to the state and its parasites.

If the gold standard and a free banking system were instituted, which means, if paper money were redeemable in gold specie, it would have put a rein on inflation. A century back, almost all economists believed in the gold standard. The governments all over the world have however, abolished the gold standard long ago to finance their policies of lavish spending and bribing the voters. The abolition of the gold standard led to the printing of currency recklessly, without any objective standards where the gold could have been the objective standard. The gold standard is the hallmark of a free society. If there was a gold standard in place, credit expansion would lead to an unfavorable balance of trade, and flow out of gold for the inflating country. The claim that gold standard is not flexible is just another way of saying that it prevents currency debasement. The fact that it is not flexible is precisely its merit. There is a long running propaganda from the part of economists of the establishment to make people believe that the gold standard has collapsed, and what we need is efficient monetary management. In the words of John Maynard Keynes, gold is out-dated, old-fashioned, a barbarous relic, an ancient fetish. What people failed to realize was that all this was mere propaganda fed by court jesters in order to persuade people not to use gold in real life. Gold standard did not collapse. It was destroyed using brute force and coercion.

Monetary management is simply a euphemism for continuous currency debasement. There would be no such thing as monetary policy in a world of sound, honest money. A year back, the Planning Commission deputy chairman Montek Singh Ahluwalia had said that there is no ’magic bullet’ to cure inflation. What he didn’t mention was that inflation was caused by the Central bank itself and that it could be cured to the extent it could be, through a free banking system and objective laws to make currency redeemable in specie. Nothing can be more ridiculous than the notion that the Reserve Bank of India, the institution that has created inflation in the first place has taken upon itself the task of taming inflation.

If one understands the real cause of inflation, the cure should be obvious. It is to halt the money printing press and institute the gold standard as soon as possible. The Reserve Bank of India should be abolished and a free banking system should be allowed to come into being. People often refer to Thomas Tooke’s dictum that “Free trade in banking is free trade in swindling.” Sadly, they are unable to see the apparent fact that a free banking system based on objective laws would put a halt to the inflation process. From the mid-eighteenth century to the first part of the 20th Century, when the United States was on a Gold Standard (It was not a fully consistent gold standard) prices steadily fell, year after year. If we are to adopt the Gold Standard, prices will fall continuously and boom-bust cycles would come to an end.

Inflation Myths

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As food prices are soaring in India, quack economists are in the process of reinstating certain myths on inflation. Many are proposing false remedies. Such fallacies should be dealt with in some detail:

1)Finance Minister should fix the value of the Rupee.

A proposition of Amar Singh, the general secretary of the Samajwadi Party was that the Government should fix the Rupee-Dollar exchange rates. “If the rate is brought down to Rs 39 to $1 from Rs 43 now, inflation could be reduced by two to four percentage points swiftly.”, says he. Fixing of exchange rates can work only if the economy is on a Gold Standard. Amar Singh is talking of an entirely different kind of fixing the exchange rates-Fixed exchange rates in fiat money. Fluctuating fiat money is bad enough. How bad is fixed exchange rates in fiat money? The Government doesn’t have the information to fix exchange rates in fiat money. If left free, the exchange rate of fiat currencies would depend on the supply and demand of currencies in terms of other. Fluctuating fiat currency has its own demerits, like crippling international trade and not providing a check against inflation. But, it is any time better than fixed exchange rate in fiat money.

Under the Gold Standard, all currencies will be tied to gold, and exchange rates will be fixed at a particular rate and they would be fixed for ever. Each currency would bear a fixed relationship to gold and every other currency. It would be convertible at that rate whenever a conversion is demanded. The result of introducing the gold standard would be an international currency system. Under a gold standard, each currency would be defined in terms of gold. Gold is money and money is gold. One might ask why the government should define the currency as a particular weight of gold. The gold lying in the vaults of the central bank can’t be denationalized without redefining the currency as a particular weight of gold. Who should denationalize the gold? Definitely, it should be the Government as the Gold lies in the vaults of the central bank.

2) An increase in food subsidy would ensure low prices

As Henry Hazlitt and Ayn Rand had noted, “Government “aid” to business is sometimes as much to be feared as government hostility.” It is forgotten that the Government doesn’t create wealth. All it gives away is what it had taken in, whether directly or indirectly. By giving subsidies, the Government subsidizes the incompetent at the expense of the competent, and as a result, the whole society is made worse off.

3)In India, inflation was mostly caused by droughts.

Some Indian Economists with inadequate knowledge of the subject were pointing out in the past that inflation is not always a monetary phenomenon and in India, inflation has always occurred after major droughts. But, it is well known that the prices have been rising continuously in India for the past several decades. Their argument would imply that there were droughts continuously and material civilization is slowly disappearing, which, obviously isn’t true. It should be apparent now that it is utterly illogical to blame inflation on droughts and famines. It should also be kept in mind that famines are created by Governments.

4)A decrease in supply of goods is the cause of price rise.

Whatever be the popular perception, in reality, the tendency has been that the supply increases each and every year. If so, the real effect has to be that the prices should fall every year. (It happened in the United States when the country was more or less on a Gold Standard.)

Even in cases when supply has come down, as in Chile in 1970’s and Uruguay in 1960’s the role of falling supply has been minor in the price rise. The supply had only fallen to a certain extent, but the prices rose thousands of times. Moreover, if we take falling supply as a cause for general price rise, it would imply that the supply has been falling through out every year, as prices have been rising at an amazing pace. That would imply the general disappearance of human civilization, which obviously isn’t happening. Such an analysis would make it obvious that the falling supply is not the reason and something else is wrong. Moreover, if there was free trade, goods would move in to the country where there is falling supply. That would have solved the problem. It should be kept in mind that it is the Governments which are the biggest enemy of free trade.

It should also be taken in to account that supply would fall if there is an extreme rise in aggregate demand. It means that supply would fall with an increase in paper money, which obviously is one of the causes for a fall in supply in many of the cases. Every time inflation occurs, people scream that there is a fall in supply going on. It is so ridiculous. It was pointed out by Henry Hazlitt that “In Germany of 1923, after priced had soared hundreds of billions of times, high officials and even the people were blaming it on the shortage of goods and at the same time foreigners were buying German products at a price lower than what would they have had paid in their home country with their own currency or gold. Even in conditions of war, we do not see a general rise in prices due to a decrease in supply.”

A fall in supply also can’t explain the debtor/creditor effects of inflation. During an inflation, the debtors gain at the expense of creditors. A fall in supply of goods can’t explain this. Only an exorbitant rise in the amount of paper money can be an adequate explanation for this. Moreover, the argument that a fall in supply is the cause of inflation would imply that a rise in supply would lead to deflation and depression. It is obvious that a rise in supply would lead only to prosperity and this alone would be enough for us to reject a fall in supply as the cause of inflation.