"The Austrians were
right" is a phrase we hear often now, and for good reason. The housing
bubble and bust were called by the Austrians and, essentially, no one else.
The Austrians were right about the dot-com bubble and bust. The Austrians
were right about the 1970s stagflation and explosion in the price of gold
after the gold window was closed.
You can tick through the
issues and see that the Austrians have been right again and again throughout
history: on price controls, on protectionism, on bailouts, on wars, on
regulation, on prohibitions and civil liberties, and so on.
But issues concerning
fiat money and the business cycle stand out because the Austrians possess
unique insight. Only the Austrians have consistently warned that fiat money
creates the wrong incentives for the banking industry, that central-bank
manipulation of interest rates distorts the structure of production, that the
combination of paper money and central banking leads to economic calamity.
These insights are not
new, though many people are discovering them right now for the first time.
From the moment Mises's 1912 book, The Theory of Money and Credit, made its appearance, and warned
about the grave danger to free enterprise represented by paper money and
central banking, the Austrians have been right.
That's 100 years of
"we told you so."
Right in the middle of
these years, there was a forgotten episode in monetary history that teaches
us lessons today. It concerns the controversial role that Henry Hazlitt
played in battling the Bretton Woods monetary system enacted after the Second
World War.
Under Mises's influence,
Hazlitt used his editorial position at the New York Times to warn
against the plan, predicting correctly that it would lead to world inflation.
For saying what he said, he was pushed out of his position at the Times. He
paid a high price for being right, but this did not stop him. He kept going
in his work of speaking truth to power.
The Times should
offer an official apology, and admit that their one-time editorialist was
100% correct. I'm not expecting that anytime soon.
Let us recount the
events.
At the end of World War
II, the monetary condition of all nations was deplorable. The U.S. faced a
massive debt overhang from the war and yet this country was still a creditor
nation to the world. The U.S. also had huge stockpiles of gold. Most everyone
else was flat-out bankrupt, as only a gargantuan government program can
accomplish. The main currencies had been wrecked and the main economies along
with them.
As was the fashion, world
elites assembled to plan some gigantic coordinated solution. They met from
July 1 to July 22, 1944, at the Mount Washington Hotel in Bretton Woods, NH,
and drafted the Articles of Agreement. It was nearly a year and a half later,
in December 1945, that the agreement was ratified. On March 1947, one of the
monstrosities created during the event, the International Monetary Fund,
began operations.
What was the goal of the
plan? It was the same goal as at the founding of the Federal Reserve and the
same goal that has guided every monetary plan in modern history. The stated
idea was to promote economic growth, encourage macroeconomic stability, and,
most absurdly, tame inflation. Of course, it did none of these things.
There are other analogies
to the Fed. In the same way that the Fed was to serve as a lender of last
resort, a provider of liquidity in times of instability, so too the Bretton
Woods Agreement obligated all member nations to make their currencies
available to be loaned to other countries to prevent temporary
balance-of-payment problems.
There was to be no talk
at all about what created these balance-of-payment problems. The assumption
was that they were like bad weather or earthquakes or floods, just something
that happens to countries from time to time. The unspoken truth was that
monetary problems and the related problems with balance of payment are
created by bad policies: governments that inflate, spend too much, run high
debts, control their economies, impose trade protections, create gigantic
welfare states, fight world wars, and otherwise undermine property rights.
As with all government
plans, Bretton Woods was dealing with symptoms rather than causes, and
treating those symptoms in a way that enables and even encourages the
disease. It pegged currencies at unrealistic levels, provided a bailout
mechanism for governments and banking establishments to continue to do what
they should not be doing, and thereby prolonged the problems and made them
worse in the long run.
Governments have been
throwing our good money after bad for a very long time. The plan, just as
with the latest round of bailouts in the U.S. or Europe, was to dump money on
near-bankrupt countries and thereby encourage them to continue with the very
policies and practices that created the problem to begin with.
The core problem of the
world monetary system after World War II was essentially that the gold
standard had broken down, or rather, government had destroyed what remained
of the old-fashioned gold standard through relentless inflation, debt, and
devaluation. Economists in the Keynesian tradition had encouraged this,
viewing money creation as some sort of panacea for all that ailed the world
economy.
Keynes, the maestro of
the Bretton Woods Conference, himself had recommended this and celebrated the
results. To him, a flexible and standard-less currency was the key to
macroeconomic manipulation of his beloved aggregates. In a perverse way, he
was right about this. A government on the gold standard is seriously
constrained. It can't take a sledgehammer to aggregate supply and aggregate
demand. It can't spend beyond its means. It must pay for the programs it
creates through taxation, which means having to curb the appetite for welfare
and warfare. There can be no such thing as a Keynesian state on the gold
standard, any more than a cocaine addict or compulsive gambler can be on a
strict budget.
Keynes's message at
Bretton Woods, in Mises's summary, was that the world elites could turn
stones into bread. And so under the influence of Keynes, the target at the
Bretton Woods meeting was liberalism itself, which was widely assumed to have
failed during the Great Depression. The elites also came out of World War II
with a more profound appreciation for the role of central planning. They had
reveled in it.
The Bretton Woods plan
for monetary reconstruction did not go as far as Keynes would have liked. He
proposed a full-scale world central bank and a single paper currency for all
nations, which he wanted to be called the "bancor," so there could
be no escaping inflation. That plan is still awaiting implementation. As it
was, the Bretton Woods conferees, under pressure from the U.S. � which wanted
the dollar to be the bancor � took a compromise position. They would create
not a gold standard, though it was called that for reasons of credibility.
Instead it was a global gold dollar standard, or, more precisely, a phony
gold standard.
The Bretton Woods system
established a gold dollar that was fixed at $35 per ounce. But it was the
only currency so fixed. Every other currency could be a fiat currency based on
the dollar. What this obligated the U.S. to do, as the main creditor nation
to the world, was ship out dollars to the world while somehow maintaining the
dollar's connection to gold. It was a prescription for disaster, as should be
obvious.
To be sure, there is
nothing wrong with the gold standard in one country. The United States could
do that now. But that was not what Bretton Woods established. The dollar was
not convertible into gold at the domestic level. You could not go into your
bank and exchange dollars for gold. It was only convertible on an
international level, and only for governments, so that the U.S. was obligated
to ship out gold instead of paper when it was so demanded. This established
some limit on credit expansion at home but not enough of one. Few were
courageous enough to demand gold from the empire. Yet it is clear just from
this description of the plan that the pressure to spend and redeem would
eventually lead the U.S. to go back on its word. It took some twenty years,
long after the original crafters of the deal had left the scene, but economic
logic could not be gainsaid.
The breakdown really
began soon after the plan was implemented. But most of the effects were
disguised through currency controls. Once the 1960s came, and the expenses of
LBJ's welfare-warfare state mounted, the Fed played its traditional role as
the financier of big government. Pressure on the dollar mounted, foreign
governments became more interested in the gold than the paper, and the whole
cockamamie scheme unraveled under Nixon's welfare-warfare state. When the
world entered the all-paper money regime, most economists said that the price
of gold would fall from $35. The Austrians predicted the opposite.
From the very beginning,
Henry Hazlitt saw it all coming, and warned against Bretton Woods. He took
the job of editorial writer for the New York Times in 1934, after
having been drummed out of the editorial spot at the post-Mencken American
Mercury because he was Jewish. (Mencken, who had hired Hazlitt, had
called him "the only economist who can really write.") The NYT
job was a good position for him, one for which he was well prepared. He would
write mostly unsigned editorials, speaking for the paper and not for himself.
In fact, when many years
later his editorials were collected in a book edited by George Koether called
From Bretton Woods to World
Inflation,
his archives were the only place that revealed his authorship. Because he was
writing them in an institutional voice, his tone was moderated to some
extent, a fact he later regretted. Even so, anyone today has to stand in
amazement to read the New York Times editorializing against loose
money, paper currency, central banking, and the like. But that was what
Hazlitt accomplished.
He began his editorials
in 1934 with a major call for the reinstitution of the gold standard. He
urged that the U.S. and Britain jointly agree to a fixed gold standard. He
said that this action would "symbolize a return to international
collaboration in a world that has been drifting steadily toward a more and
more intense nationalism." And truly, if one thinks about it, a world
that had heeded Hazlitt's advice might have avoided the incredible calamity
of World War II, the 50 million dead, the communization of Europe, and the
bankruptcy and horrors that followed. And why? Because the nationalism about
which he warned in 1934 would have abated, and all governments would have
sought diplomatic rather than murderous solutions.
Of course, his advice was
not heeded, and the drive to destroy money and prosperity continued, all the
way to the globalized holocaust of World War II.
Now let us jump ahead,
ten years after Hazlitt had written his first blast. Hazlitt was still
advocating the same thing, not a system in which strong currencies subsidize
bad policies, but a system in which each nation maintains the integrity of
its own currency. That requires not centrally planned integration but the
opposite. Instead of promising to intervene to bail out bad debt, nations
should swear not to intervene. Only this path prevents moral hazard and maintains
the gold standard.
He wrote as follows:
"the belief that only a rich nation can afford a gold standard is a
fallacy." Gold is suitable for every nation, he explained, provided it
has something to sell. He concludes with these words before the Bretton Woods
conferees gathered: "The greatest single contribution the United States
could make to world currency stability after the war is to announce its
determination to stabilize its own currency. It will incidentally help us, of
course, if other nations as well return to the gold standard. They will do
it, however, only to the extent that they recognize that they are doing it
not primarily as a favor to us but to themselves."
It is remarkable to
realize that these words appeared as a New York Times editorial! We
have here a world far removed from the Keynesian drivel of Paul Krugman. Put
simply, there is no justice in this world when Hazlitt, who was correct, gets
shoved out and his successors are of a school of thought that was completely
wrong.
Keep in mind, too, that
this was written one month before the opening of the conference. In the weeks
that followed, Hazlitt was hot on the trail for news on what was coming. He
seized on the statements of principles. It expressly permitted a change in
the gold value of member currency on a unanimous vote from government.
Hazlitt spoke with a
passion as follows: "this is a provision which would permit world
inflation. Experience has shown that it is extremely unlikely that any
government will wish to raise the unit gold value of its currency.... the
political pressures from time immemorial, and particularly in the last three
decades, have been in the direction of devaluation and inflation."
Even before the delegates
met, he correctly saw that the uniformity provision was not a limit to
inflation but rather a license. If one country devalues, it sees the value of
its currency fall on international exchange. But if this is done in
cooperation with everyone else, the country can avoid the penalty. This is
precisely what accounts for the decades-old drive for international
cooperation in monetary affairs. It is the same driving force behind why the
Fed was concocted. So long as the system is decentralized, each bank or each
country must deal with the fallout from its own bad policies. But if you
centralize the system, bad policies can be more easily swept under the rug,
with the costs widely dispersed throughout the system.
Or as Hazlitt wrote,
"it would be difficult to think of a more serious threat to world
stability and full production than the continual prospect of a uniform world
inflation to which the politicians of every country would be so easily
tempted."
Two days later, still
before the conference opened, Hazlitt nailed it and explained precisely why
Bretton Woods could not last. Under the plan, the creditor nations � meaning
the U.S. and Britain � would pledge themselves to buy the currency of net
debtor nations in order to keep the currency value at parity. Even if other
countries devalue their currencies, the U.S. would be on the hook for buying
it to maintain the fixed paper-to-gold ratio. This is precisely what led to
the undoing of the entire system from 1969 to 1971. This, my friends, is
prophetic.
Hazlitt was not just
speaking for a sector of opinion here. So far as he could tell, and so far as
anyone has been able to discern since these days, Hazlitt was completely
alone in speaking these truths. No one else joined him, at least not in the
U.S. France had Jacques Rueff, who famously denounced the entire scheme.
Switzerland had Michael Heilperin, who stood firm for the gold standard.
Hayek in London actually submitted to the Bretton Woods delegates a draft
plan for a real gold standard for every nation. It was completely ignored.
Only Hazlitt was on the front
lines in the U.S., by himself, writing constantly and passionately day by day
to make a difference. More remarkable still, he was able to voice these lone
opinions via the institutional voice of the New York Times. That was
quite the accomplishment, a real testament to his own power to persuade.
All of his thoughts that
I've so far reported were penned before the monetary conference had even met.
He had already spotted the core problems of the proposed plan and explained
how it would unravel.
On July 1, 1944, when the
representatives first gathered, he greeted them with a punch in the nose. He
questioned their competence, employing what would later be called the
Hayekian knowledge problem. Here are his words from the editorial written the
day the conference opened: "it would be impossible to imagine a more
difficult time for individual nations to decide at what level they can fix
and stabilize their national currency unit. How could the representatives of
France, of Holland, of Greece, of China, make any but the wildest guess at
this moment of the point at which they could hope to stabilize?"
The delegates must have
read that passage with their morning coffee, spewing it around the table. Too
bad that more of them didn't choke on their crumpets.
Hazlitt further said that
the conference was planning to solve a problem by not realizing what the
problem was. The issue, he said, is not a lack of currency value parity but
rather the policies that are driving down the value of the currency in weak
countries. He writes that it is of course possible to temporarily fix any
price. But in the long term, it proves impossible.
He offers an analogy to a
stock share that is worthless but nonetheless sells for $100 each. It is
possible to maintain a high price, but when the resources of the buyer run
out, the stock price will drop. There is no force on the planet that can keep
a falling price from dropping once the resources to maintain it are gone.
Of course this insight is
a short summary of nearly all economic policy of our times. Whether the
subject is houses, stocks, or wages, the goal of the stimulation packages has
been to maintain high prices that cannot be maintained. As for the resources
to make the high prices stick, in our day, the answer is to create ever more
phony money to engage in this make-believe program.
In the midst of the
Bretton Woods proceedings, Hazlitt hit the American delegates with another
punch in the nose. He made fun of how the Americans in particular are under
the impression that they can solve any problems in the world by setting up
machinery in the form of an organization. It could be an organization to make
water run uphill or to keep rocks from falling but the Americans are under
the belief that if the president is behind anything, anything can be
accomplished. He states the contrary truth very bluntly. The restoration of
peace and prosperity will not come from setting up another organization but
rather by abandoning protectionism, capital export restrictions, import
quotas, and competitive depreciation of currencies. America's greatest
contribution, he wrote, would be to further balance its budget and halt
deficit financing.
As for the American love
of machinery he writes: "genuine international economic cooperation
after the war will be possible only if there is a profound change from the
ideology of the Thirties."
As the proceedings
dragged on, Hazlitt turned out to have foreshadowed the newest development.
The delegates had not only planned to create the IMF but also create what was
then the predecessor to the World Bank: the International bank for
Reconstruction and Development. The whole project, wrote Hazlitt, "rests
on the assumption that nothing will be done right unless a grandiose formal
intergovernmental institution is set up to do it. It assumes that nothing
will be run well unless governments run it."
Toughening his rhetoric,
Hazlitt goes after Keynes by name, drawing attention to his preposterous
claim that it would be invidious to discriminate between member
nations based on their credit worthiness. Hilariously, Hazlitt sums up the
plan for the World Bank with this general observation: "world economic
revival will not necessarily flow from a plan under which taxpayers are
saddled by their own governments with losses from huge foreign loans made
regardless of their soundness."
After the meetings
closed, the debate on ratification began. Hazlitt made it clear what was
really at stake: the freedom of the individual vs. the plans of government.
"These agreements presuppose," he wrote, "a world in which the
type of government controls developed in the twenties and thirties are to be
expanded and systemized. What is contemplated is a world in which
international trade is state-dominated."
Hazlitt must have felt
intense pressure in these days. There are times in politics when the state
and its paid experts make everyone feel as if some proposed plan is
absolutely necessary for survival, and to be against it is tantamount to
treason. In our own times, it was this way during the Nafta debate, the WTO
debate, and the debate on the creation of such bureaucratic monstrosities as
the Department of Homeland Security and the Transportation Security
Administration, or the drive for wars in the Middle East, or the hysteria for
TARP et al. To be the outlier is to elicit heaps of scorn and derision.
It was the same with
Bretton Woods during 1944 and 1945. No one ever found a logical problem or a
factual error in what Hazlitt was writing. They didn't bother to. The point
was that this was a mega-priority for the international elite and no
respectable paper could really oppose the plan.
As a way of showing that
he was not a lone critic, Hazlitt began to write about other critics, which
were very few in number. He seized on a small criticism offered by any
journal or any association and highlighted it. But the critics were thinning
and every time one reared its head, he was summarily slapped down. All the
while, the defenses of Bretton Woods were getting more extreme, with claims
that if it didn't pass, the world would fall apart. The supporters were more
and more open about their anti-market ideology, as when Secretary Morgenthau
openly said that business can't run foreign exchange. It is up to the
governments of the world to do it.
Hazlitt drew attention to
these statements and also the opening statements by Keynes that Bretton Woods
amounted to the opposite of a gold standard. Hazlitt wrote his most poignant
rhetoric in these days, claiming that the result of the monetary plans would
be world inflation and massive economic instability. The internal pressures
were increasing on him, as letters started arriving from London and D.C. to
object to what the paper was saying. Hazlitt clearly saw the writing on the
wall but still stuck to his guns all throughout the spring of 1945 as
Congress was debating and preparing ratification.
Finally, the publisher of
the New York Times had had enough. Arthur Sulzberger came to him and
said "when 43 governments sign an agreement, I don't see how the Times
can any longer combat this."
Hazlitt began to pack his
bags. After he left, his revenge was a massive article on the subject in the American
Scholar, published later that year. Then he wrote the book that would
become the biggest selling economics book of all time: Economics in One Lesson. His goal with this book was to
propagate the core principles of economics, so that anyone could do what he
had done, which was see the fallacies of the logic behind crazy government
schemes. He wrote the book in record time, and got it out the door as soon as
possible. Of course it was a blockbuster. It remains to this day our best-selling
book.
In 1967, Hazliltt also
had a last laugh, if it is a laughing matter to see your worst predictions
come true. Hazlitt was now a syndicated columnist with the Los Angeles
Times. He wrote about the unraveling of the system, which finally happened
in 1969. By 1971, the entire world was on a fiat money paper standard and the
result has been nothing short of catastrophic for societies and economies,
which have been thrown into unrelenting chaos.
To be sure, Hazlitt was
not, as he said, the "seventh son of the seventh son." He wasn't
born with some amazing prophetic power. What Hazlitt did was read Mises and
come to understand monetary economics. It sounds easy until you realize just
how rare these talents were in his day and in ours.
There is another aspect
to what Hazlitt did. He could have very easily relented or just stayed
silent. It took moral courage and incredible intellectual stamina to tell the
truth as he did when the whole world seemed to be against him. But so far as
he was concerned, this was why he was put on the earth and why he got into
writing in the first place: to tell the truth. He wasn't threatened with jail
or violence. The only thing he had to fear was the derision of his
colleagues. What truth teller in the history of the world hasn't faced that?
We might ask ourselves:
why is it important to revisit this history now? As regards the details of
Bretton Woods, it is extremely important to understand that this was not a
genuine gold standard. It was a fake gold standard managed by an unworkable
plan cobbled together by governments. It is the height of absurdity that
supply-siders and others have for years been pining for a return to Bretton
Woods and calling it a return to the gold standard. A new Bretton Woods would
fail as surely as the first one did. It would certainly not be a step in the
right direction to re-institute Bretton Woods.
That Bretton Woods was
called a gold standard was an exercise in obfuscation. It happened for the
same reason that NAFTA was called free trade or the FTC is said to protect
competition. The state has long used the language of liberalism and the
market economy as a plow to push through its opposite. The gold standard was
an early victim in this war over words.
A genuine gold standard
is implemented currency by currency. It provides for domestic, on-demand
convertibility. It allows for banks to fail on their own. It has no central
banks. It surely has no international monetary institutions for lending
bankrupt governments money. This is the only way toward real stability.
Hazlitt said it in the New York Times and it remains true today.
If we want to go further
with an impenetrable system of money and banking, we would follow Rothbard
(Hazlitt once told me that the greatest achievement of the Mises Institute
was to give Murray a "suitable platform") and completely privatize
the system, permitting private coinage of any money. This would be all the
more viable in our own times, with digital payment systems and global
communication. In fact, I'm quite sure that had the state not intervened, the
internet would have already put together a competitive system of currency and
banking that would exist completely outside the state's purview. A very
viable means of reform we could undertake right now is for the state to
simply do nothing. The dollar might be beyond salvation at this point, but
money itself is not, of course. Money is an essential part of the market
economy, so therefore let us let the market make it and manage it.
The stakes are impossible
to overstate. Fiat paper money is destroying civilization right now. It has
fueled the predator state. It has destabilized markets. It has wrecked
balance sheets and distorted financial markets. It has wrecked the culture by
leading the whole world to believe that prosperity can come as if by magic,
that stones can be turned into bread. It might yet unleash a ravaging
inflation that will be welcomed by dictators, despots, and cruel tyrants.
How important is sound
money? The whole of civilization depends on it. We must accept no compromise.
Down with government plans. Down with international commissions. Down with
attempts to manipulate and control that always end in robbing us and making
us poorer than we would otherwise be. We should embrace no more and no less
than what the old liberals of the 18th and 19th centuries championed. All
we ask is laissez-faire.
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