I found a reference to a book by Felix Somary called The Raven of Zurich while reading the other day. I was surprised that there is no way to purchase a physical copy of the book due to zero supply - that usually intrigues me, giving Seth Klarman Margin of Safety vibes. However, some kind person was generous enough to scan a copy, which can be found here.
A brief background on Felix Somary can be found on Wikipedia, but I want to quote just this key paragraph below:
After the (first world) war, European banks were long on war bonds, worth absolutely nothing. He realised that the choice was between bankruptcy and hyperinflation, but although he favoured the former it was the latter which ensued. He had argued his viewpoint at a German association for economists called the Verein für Sozialpolitik. He predicted the Great Depression, which began in 1929, as early as September 1926 when he gave a lecture warning of the dangers of relying on the US for credit given the protectionist tendencies of that country. It was because of this prediction that he became known as The Raven of Zurich, the raven being a bird associated with dire omens.He was one of several economists who later expressed the view that the depression might not have occurred if there had not been a conjunction of events, including the election of Hitler in Germany and of Roosevelt in the US. He was in New York City when the stock markets were plummeting and, seeing that fellow bankers were buying recklessly, he sent a wire to Zurich telling his associates there to sell all equity. By 1931 he was so convinced of the economic power exercised by the US that he wrote "It is almost an intolerable thought that the U.S.A. will be the centre of industry, while Europe will act as hotel keeper to Americans."
Let’s qualify Felix a little because I think it adds extra weight to his speech at Harvard in 1956, which I share in full at the end of the post. He predicted Weimar Inflation and a Second World War because of the terrible terms of the Treaty of Versailles, the crash of 1929, the Great Depression, the election of an authoritarian in Germany, and the Cold War. Is he someone worth listening to?
I’ve extracted some of the paragraphs that jumped off the page at me. I’d suggest reading the entire book, but I’ve pulled out the parts that I found most relevant to the situation we find ourselves in.
On meeting Keynes a couple of years before the crash of 1929:
Keynes asked me what I was advising my clients.
"To insulate themselves as much as possible from the coming crisis, and to avoid the markets,' I replied.
Keynes took the opposite view. 'We will not have any more crashes in our time,' he insisted, and asked me in detail for my opinions about individual companies.
'I think the market is very appealing, and prices are low,' said Keynes.
'And where is the crash coming from in any case?'
"The crash will come from the gap between appearances and reality. I have never seen such stormy weather gathering,' I said. But speculation in securities passionately interested Keynes, and despite my obvious refusal to answer, he repeatedly asked questions about which shares on continental markets were attractive purchases.
Keynes's biographer praises him for prescience about the coming crash. I could quite clearly prove the opposite.
He then compares Keynes to John Law, Marx, and Lenin - which made me laugh out loud. Yellen is the latest incarnation of John Law/ Keynes, and the parallels are striking:
After long wars and when a great empire declines, men grasp at miraculous solutions that banish all doubts, especially when these take the form of a new monetary doctrine. At a turning point in French history, after the wars of Louis XIV, John Law had tried to save French finances by mobilising the value inherent in overseas possessions. The idea was brilliant; and if Law had been able to maintain his investments for two hundred years, he might have become the most successful financier in history through developing the American West. Alas, his scheme collapsed. Keynes tried in similar fashion to cure the ills of the British Empire at its turning-point: at a time when people were living far beyond their means, he thought the chief cause of the crisis was excessive saving! John Law ended up in exile, but his intellectual successor in the twentieth century received much better treatment: he was raised to the peerage and founded an entire school of economics. Many years later, before the end of the Second World War, Keynes sent me a confidential draft of his international clearing plan. That surprised me, because Keynes had complained to Melchior that afternoon in Berlin about my harshness to him I felt destructive energy in him, and prefer not to hear of his supposed genius: those great destroyers Rousseau, Marx and Lenin had such gifts in far higher degree.
Then we have this paragraph on the Bank of England leaving the gold standard, marking the death of sound money in the world.
In the autumn of 1931, forced by French withdrawals, the Bank of England left the gold standard. Few then understood the implications of that move: it was in effect a declaration of bankruptcy after more than three centuries of honest money. It was a step taken in peacetime, and it ended London's unique position as the international centre for trade finance and monetary transactions. No other market has since recaptured this position.
Once there was an era when the whole world could rely in difficult times on the experience and courage of the Bank of England, which came to the aid of the markets precisely during crises when other central banks failed to do so.
Now the Bank of England itself had fallen victim to the crisis: with its fall the entire mechanism of discount policy, credit and trade bills disappeared, for the first time in half a millennium. To an age which felt surprise when a debtor paid at all, the demand for punctual payment seemed absurd.
Unfortunately even the English now began to speak the language of all debtors, who make the currency they pay their obligations in, rather than the objective circumstances, responsible for the position in which they find themselves. Moreover, the gold standard became obsolete overnight for a proportion of English economists.
This forward-looking paragraph, in effect, says that the change in economic policy introduced during the New Deal of Keynesian economics would result in monetary inflation of the like seen in the Weimar Republic, but that it would take a lot longer to achieve due to the size and dominance of the US in the global economy:
Either in that autumn of 1936, or one or two years later, when it had become fashionable in America to rent castles and organise hunting parties in Austria and Slovakia, I had a visit one day from Senator Carter Glass of Virginia, who stopped off in Zürich en route to a shooting party. I believe he was travelling with Bernard Baruch. I had not yet arrived, but was expected and meanwhile he was explaining to my colleague Reitler that in his view inflation in America would take the same course as it had in Germany, ultimately leaving the dollar worthless. At that point I came in and said that America's strength was paradoxically also its weakness: what had taken six years to accomplish in Germany would last in the United States five times longer. 'Is that weakness?' asked Senator Glass. I replied that 'in my opinion it was better to experience such a sickness radically and swiftly than to be plagued by it for a lifetime.'
When he had gone, Reitler asked me whether Glass was leader of the opposition in the Senate. I said that, so far as I knew, he was a member of Roosevelt's Democratic Party. 'My God', Reitler cried, 'he spoke of Roosevelt as if he were a criminal! If that's the way his own Party colleagues talk about him, what are we to think of the whole situation there?' 'Carter Glass', I went on 'is the author of the American Federal Reserve system: he initiated the establishment of a few banks of issue instead of countless smaller ones, and wanted to make the currency sound by instituting coverage through a market in bills of exchange instead of the earlier system, through Treasury bonds. Now the market in bills has dried up, the bonds have largely been dumped on the market, and centralisation has made possible a vast extension of inflation. He achieved the precise opposite of what he intended.
Felix moved to the US during the war and commented on the effect the war and the New Deal's inflationary policies had on the country.
My rich experience of the consequences of war and inflation led me to take a different line from the Democratic Party then in power. The United States, which had taken part in the First World War only towards its final phases, was now for the first time experiencing real war; and the same consequences were to be anticipated in America as in the rest of the world.
But here too the broad masses of the people failed for years to understand what issues were really important - just as the Government failed in its understanding of these issues. The Administration gave a handful of labour leaders a monopoly position, and permitted strikes in the middle of war. I as a foreigner was compelled to refrain from any criticism; but after all my European experiences, I often found Washington's policies incomprehensible. It seemed to me that if individuals were given power to paralyse entire vital sectors of the economy, the road to dictatorship lay wide open.
Many developments reminded me of the more sinister chapters in Roman history. One could already see in many places the Catilines springing up: the spenders, the easy-money advocates, or whatever they called themselves.
But the coming Caesar was still invisible in the shadows.
Symptoms of decadence appeared everywhere, in quite unmistakable forms: the over-emphasis on the erotic, and with it the rampant growth of the pseudo-science that calls itself psychoanalysis; the strong increase in perversion, whose rapidly growing constituency formed a secret society with a powerful social and political influence; the growth of sham religious sects of a strongly aggressive kind, with questionable businessmen as leaders, and devoted and free-spending followers. The spread of everything that was morbid and irrational seemed inexorable, and American powers of resistance appeared to be on the ebb. I was able to admire in my immediate vicinity many great deeds of heroism and willing self-sacrifice, but these became more and more the exception amid a progressive spiritual and moral decline. High-minded Americans stood by unsuspecting while this change in the environment took place; and when after the war I made a presentation at the Institute for Advanced Study in Princeton - at the invitation of Walter Stewart - on the connection between war, sexual decadence, inflation and corruption, I met with overwhelming denial:
'Those views may apply to other countries, but not to us' was the cry. In reality, those insights are more valid for the United States than for any other country, because within American society the influence of family and tradition is less than anywhere else; and also because of the all too eager willingness with which Americans embrace whatever may be the fashion of the day.
From a letter to former President Hoover in 1954.
The economic situation in America today seems to me at least as dangerous as twenty-five years ago. My American friends remind me all too often of the difference. I know it from personal experience: in 1929 the New York big banks paid my bank 19% for call money, and today they pay practically nothing. But this difference does not mean much.
The real cause of the crash of 1930 was the difference between agricultural and industrial prices. Today we have the disparity between peace and war production in addition to that.
Nobody dares to apply the brakes: the Federal Reserve System was established at the time to disconnect the creation of money from the national debt. And what has happened since?
If the present boom continues, there is grave danger for the stability of money values. Can the free world afford that in the present political situation?
A dangerous slogan is sweeping Europe: 'Buy American shares, because there is imminent danger in America of a decline in the dollar.'
Lastly, this is a large section, but I want to include it completely because it hit so hard that I haven’t let it out of my head since reading it.
This was a speech given at Harvard in 1956 on “Do Depressions Belong in the Past” and it’s terrifying.
In the summer of 1954 the Frankfurter Allgemeine Zeitung raised the question whether another crisis like that of 1930 could recur, and appeared to deny that it could. At the time I sent a private letter to one of the editors of the newspaper in which I took the opposite view. The publication of that letter caused a flood of opposition. I refused the many offers I received to discuss the issue in public, because I was urgently requested by official quarters to maintain silence so as not to shake public confidence. Three decades previously I refused to listen to such warnings. This time I wanted to be more cautious, and follow the advice of the Prince de Ligne, who was considered the wisest man of the eighteenth century: he said that he who sees a crisis coming does well to be silent.
My change in attitude cannot be attributed to my being older, nor to increasing cowardice; and also not to the fact that I had well learned the cost of frankness: out of 100 people, one makes enemies of 80 with warnings of a crash - people whose interests or peace are disturbed; and the other 20 usually become enemies if one has been right. But I did want to take account of the very serious political situation abroad, and stayed silent, to the disappointment of many.
Then in December 1955 the New York Times published prominently a statement by Sumner Slichter in which he said: 'The days when this country can experience anything worse than moderate or possibly mild depressions are gone forever.' I myself had not read the article, but was made aware of it from all quarters, sometimes in a questioning and sometimes in an ironic tone. I felt that some sort of answer was required to a statement that had so wide a circulation.
Whatever consequences a warning of a crash may have, they seem to me less significant than the appalling danger of a false sense of security. I have therefore decided to set all agreements aside, and here at the pinnacle of American social science to deal with the question: are depressions a thing of the past?
1. As you know, this question is not a new one. At the turn of the century, when I was seventeen years old, members of the seminar in economics in Vienna argued the same question; several of my then colleagues - Schumpeter, Mises, Lederer - later taught in America. At that time the French economist Juglar's theory of regular fluctuations in the business cycle dominated theoretical discussions. Do not fear that I shall bore you with antiquarian rubbish. Permit me, however, a moment of memory that may perhaps interest you.
At that time, around 1900, people looked back to the crash of 1873 with its market collapse and complete paralysis of economic life as something frightful and unique; and many asserted that such a catastrophe could never be repeated.
2. The crash of 1873 put an end to the 'Gründerjahre', the boom times that Napoleon III inaugurated. In a pamphlet published in 1847, the future Emperor proclaimed four slogans: the elimination of poverty; the sovereignty of the masses; the replacement of the liberal programme by a new social programme based on what the state was to provide its citizens; and finally the financing of all that by incurring debt, for government debt is not deemed a debit but something for the asset side of the economic balance-sheet. I believe we have recently heard similar views as if they were something new. Joly's critique of the time may strike us as even more contemporary. He said that Napoleon was building his personal tyranny on the basis of an economic boom composed of three factors: preparations for war, grandiose public works projects and full employment. Catchwords for the biggest crash of the nineteenth century! And old memories that have a surprisingly new sound.
3. The slogans of the last years of the 1920s also sound as if they had been written today. I shall quote verbatim from the voices of that time: ‘The Stock Exchange is merely reflecting technological progress in all spheres. Poverty will disappear.
The Republican victory means four more years of prosperity. The only requirement is that consumption be broadened: one automobile per household is insufficient, two should be the goal. Surplus income should be invested in shares, and these should never be sold. To give neophytes a chance to invest, investment trusts should be created (in very short order, no fewer than 500 were established).
In order to give opportunities for the middle class to speculate, shares should be split frequently. In order to increase consumption as much as possible, hire purchase trade should be expanded indefinitely.'
Frederick Allen described the period in a humorous vein shortly after it ended:
'The American visioned an America set free from poverty and toil. He saw a magical order built on the new science and the new prosperity, airplanes darkening the skies - and smartly dressed men and women, spending, spending, spending with money they had won by being farsighted enough to foresee, way back in 1929, what was going to happen. The everlastingly reiterated phrase of the day was "Conditions are fundamentally sound.’
And some of you will remember the prediction of the Harvard Economic Society of 29 October 1929: 'We believe that the slump in stock prices will prove an intermediate movement and not a precursor of a business depression. If recession should threaten serious consequences for business (as it is indicated at present), there is little doubt that the Reserve system would take steps to check the movement.'
That all sounds so much like today - just in the past few months, I have received from no fewer than fifteen brokers the unsolicited assurance that 'the situation is sound.' Just as in the 1920s, industry and labour leaders proclaim the same gospel; they consider the upward movement somehow their personal success.
4. Just like a quarter century ago, agriculture is not participating in prosperity.
When I expressed misgivings in 1928 to the Verein für Sozialpolitik in Zürich, they rejected my warnings, saying that the cost of living index had not risen. But now the gap between agricultural and industrial development gets larger - on both sides of the Iron Curtain. Moreover, we now have the difference between peacetime and war industry - 1930 was a time of relative external calm, while today it is the war budgets of both Washington and Moscow that give the business cycle its dynamism.
5. Demand is by definition unlimited when it comes to war matériel; amortisation is short-term, and weapons are replaced as soon as one or another side discovers a better system. Often such weapons become obsolete between the time of procurement and actual delivery. Research and development are nonetheless pursued avidly regardless of cost. In the weapons sector there are more innovations in a few years than used to take place over the course of decades; there are no economic constraints on this growth. Official statistics consider these weapons capital goods, but that is incorrect: they should be carried on the national books as liabilities, for that is what they are in relation to the overall economy.
Let me cite the radical example of aviation. Part of the American aircraft industry works exclusively for defence purposes, and the rest of the industry between 80% and 95% for those purposes. Aircraft production companies are therefore the chief beneficiaries of the boom, but airlines are much further down in the queue.
6. The civilian sector shares the hectic pace that characterises the defence industry: a few weeks ago, all the transatlantic airlines ordered a new model air transport, at enormous prices, that does not yet exist and whose risks are completely untested. It is astonishing how easily people are willing to assume these risks. Since air passengers even now - at least on the routes from Paris or London to New York - lose not one hour of business time, since they leave Europe in the evening and arrive in America in the early morning, shortening the travel period at such enormous cost makes no economic sense. With our mania for setting records, such pressures require all airlines to write off their existing fleets long before they need to.
7. When higher military expenditure is required because of enemy pressure, it should be an elementary economic rule that other expenditure must be drastically curtailed. But the direct opposite is taking place. Governments attempt to accelerate the pace of development in all important sectors of the economy. For example there are the enormous sums spent on guarantees for veterans' housing which do not appear in the budget - long-term credits for cheaply built houses, with mortgages for practically the entire value of the property, and granted without any real investigation of the homeowner's creditworthiness. And that is only one of many cases. If you add all the off-budget guarantees, I am convinced it is no exaggeration to say that they will nearly reach the total of the national debt.There are two dangers that lurk in this artificial stimulation of a peacetime economy through subsidies and guarantees: the financial advantage America has compared with Russia is diminishing; and if an arms limitation agreement should be concluded, it will not be easy to cut back defence industries and integrate excess capacity into a peacetime economy.
8. The policy of cheap money is more dangerous for the general economic situation than the growth of subsidies and guarantees. Low interest rates drive share prices and property prices upwards. In 1955 share prices in New York rose by an average of 25%, and mortgages were between 3% and 4%. Property speculators were not ashamed to press for even lower rates; they demanded cheap credit as their right.
9. How did the money market grow so fast? It was fed primarily by that part of the Second World War national debt that was short-term. Today, ten years after the end of the war, that debt still has not been redeemed, and the attempt to consolidate even 1% of it into longer-term bonds was a failure. This debt lives on as Treasury Bills, a euphemism for bills that are automatically rolled over; their ultimate redemption can only take place if there is a very sharp reduction in the value of money.
10. Who today recalls the period when the Federal Reserve System was created?
Banknotes were issued at the time by individual state banks on the basis of public debt (not of the Federal Government) and the Government wanted for good reasons to base the money issue on trade bills. Now we see that the same debt that was then outlawed as the basis of money issue has become the very foundation of the issuing system, but one hundred times the volume of 1910, and even with a theoretical justification for such issue. Like the Dutchman Pinto in the eighteenth century and Napoleon III in the nineteenth, many newly prominent economists see the national debt as somehow on the asset side of the balance sheet.
In addition to these Treasury bills, whose interest rates fluctuate between 1½% and 2½ %, and which are really interest-bearing notes, we have a tremendous volume of commercial paper: industrial acceptances of individual companies in the amount of several billions. This form of financing has always been regarded as exceptionally dangerous, because commercial paper has only the appearance but not the true nature of a trade bill: commercial paper is really cheap creation of money, without justification. We thus have a money market of a quite different character from heretofore: vastly extended, and built on debt. It is like skyscrapers that are built on swampy ground. That is a very serious simile, and please believe that I do not make it lightly.
Hans Freyer came to a remarkable conclusion in his theory of current geology: the world's surface has changed more in the past thirty years than in millions of years previously. I do not wish to claim as much for the economy. But after presenting an analogy to the last depression, I must devote some attention to the shape of things to come, which appears scarcely to have reached the consciousness of most of our contemporaries.
11. Those directly benefitting from boom times have always been a large group: they include entrepreneurs, labour unions, a large part of the mercantile class and above all debtors of all kinds.
Here we find a paradox: one might assume that the volume of debt grows in a depression and declines in times of good business. But in reality the opposite is true, since the more overheated the economy the greater the gap between profit expectations and interest rates. People who owe money - margin traders, property speculators, instalment buyers - form an enormous group directly interested in debasing the currency.
It was the government that used to oppose such groups - in England, from a centuries-long tradition of solid money that was to benefit all classes. On the same sound-money side were those who had large or medium-sized fortunes, in addition to savings, insurance and pension funds. Also belonging to this group were the independent middle classes and the farmers.
With the exception of the last two groups, all others have leapt into the ranks of the inflationists, and particularly is this true of governments.
The power that now dominates the world, the United States, has never - in contrast to England - had any tradition of sound money. Odd as it sounds, debtors since the eighteenth century have always been a majority in America, and they are more so now than ever. However, the Federal Government, which till the beginning of this century was relatively unburdened with debt, has since taken on a national debt of such gigantic proportions that it must share the interests of all debtors. Here and there one hears official assertions to the contrary; but they are only well-meaning paper threats, and the reality is quite different.
Thus the currency has lost its real support. Chicanery and inflation have lost their negative connotations and become respectable. And a large part of the fraternity of economists have twisted their theory to conform with that new respectability. Even those who possess large fortunes are on the side of inflation, and that is a result of tax legislation.
The Federal income tax leaves a person whose income is $100,000 with only $25,000; and of every further $100,000 he gets, he is able to keep only $8,000.
Therefore, investment capital can only come from profit reserves retained by corporations and investment institutions; while the individual capital-owner is practically forced to look to gains on securities transactions if he wants to increase his income or fortune. If that source dries up, he can retain only a small fraction of his income to live on, and that is all.
12. Thus in addition to the rigidity imparted to the economy by the wage factor - wages, as is well known, can only be increased, never reduced - we have another, the need for gains on securities transactions. They are practically the sole remaining element of individual capitalism. In half a generation, income tax has been developed practically to the point of confiscation.
Government, individual citizens, entrepreneurs, workers, all are interested in the continuation of inflation; and parliaments and governments obey them.
Government is supposed to ward off depressions, but that is not enough; it must also assure the stability of the economy. Then that too is not enough - it must also guarantee full employment. Not enough again: government must make eternal prosperity for everyone. It must do it, it can do it, therefore it will do it.
Those are the catchwords of our time. There is not much difference now between East and West in their belief in the omnipotence and omniscience of the state. But if we strip it of window-dressing, what the programme comes down to is assuring the stability of the economy by constant downgrading of the currency.
And since depression is taboo, inflation has become the great fashion of the day.
13. It is usual to reproach the men of 1930 because they failed to deal with the crash by tinkering with the money supply. Now we know much better how to manage these things: we just overcome all dangers by injecting a little inflation into the economy. We claim that people in those days were just a bit timid about inflation, and did not know quite how much of it was helpful.
I have no reason to defend the men who ran world governments at that time; but the reproach heard against those men of 1930 is as unjustifiable as, unfortunately, the confidence that present-day statesmen enjoy.
On the European continent we know the price of inflation all too well.
Inflation led to Bolshevism in Russia, and Lenin prided himself on asserting that Communism no longer had to wage war: inflation alone could do the destructive work quite adequately. Inflation destroyed the middle classes in three great Continental countries, and that is still fresh in all our memories. You can present inflation as a panacea to Britons and Americans who believe the experiences of others do not apply to them; but you cannot fool people who have personally experienced the dubious blessings of permanent money debasement. They reject the 'remedy' of inflation not because they are ignorant, but precisely because they know it so well. That this 'contagious plague', as Mirabeau once called it, should have overwhelmed the one country of all our hopes is one of the most painful elements of the situation we are living through.
14. Many Americans will, of course, object to the foregoing.
(a) Some deny the fact of inflation by referring to the stability of food prices. The same was true in 1928. Agriculture in most areas cannot imitate the rapid growth of industry, especially war industry. That is so not merely for the obvious technological reasons, but also for another reason that may at first appear paradoxical: demand for agricultural products is limited by the purchasing power of the population, but the demand for war matériel is by definition infinite.
One demand is conditioned by economic factors, the other not. And so for the second time in the same generation, farmers on either side of the Iron Curtain have become victims of the business cycle; that is a development tending toward depression, not strength.
Capital goods are of infinitely greater importance than goods for consumption; and for this category of goods, prices have risen incredibly and in a very short time. That, by the way, is true throughout the Western countries. Typical manifestations of a boom economy - high prices and poor quality - will persist for a long time.
(b) Another objection to the fact of inflation will be made by those who argue the proportional rise in actual production of goods. But people also include war matériel in that category of total production; and war products are not goods in our sense. Furthermore, the essential thing is not physical production of goods but whether they can be sold - an entirely different notion. But even if, for the sake of understanding my argument more easily, we assume growth in production, we must compare it with the rise in share prices in order to measure inflation.
American production rose some 7% in 1955, after we deduct defence-related production of about 5½%. In the same period the level of shares quoted on the New York Stock Exchange - without preferred shares - rose no less than 24%. Such a rise cannot be explained solely by reference to transfers from the money market to share investments, or switching from bonds to common stocks.
It is here, at the most delicate point in the economy, that the traces of inflation are unmistakable.
(c) Two further groups concede the fact of inflation, but consider it either not dangerous or indeed useful.
Some say America with its dominant world position can afford inflation; others say that the Government can monitor inflation with a range of sophisticated techniques at its disposal.
Inflation in other countries, they maintain, means a creeping loss of currency to other countries; but for America that is out of the question. With what other country could America possibly have a disadvantageous balance of payments?
There was once a deficit in payments with Canada, but that was temporary and never very high, and subsequently disappeared. In Switzerland, the only country with which the United States could suffer a negative trade balance, export interests would make quite sure such a development could not occur. They argue moreover that the entire West will be drawn along by American boom times; and in any event that gold no longer determines the value of the dollar, but vice versa.
Then the others say that the American Government can intervene at will, pumping in liquidity when a recession threatens: it can either put on the brakes if the boom threatens to run away, or prevent any downward slide. The weapon for this is the discount rate, to be maintained at easy-money levels, say between 1½% and 2¾%. The same people say how splendid a contrast this affords to those 'dark ages', 1929 or 1907, when the rate for call money was 20% or even 100%.
Above all, however, this group believes that it is government that can so influence the economy through wage rises, subsidies and guarantees of all kinds that nobody need suffer any adverse consequences from inflation. If that were true, however, nobody need start an inflation! Inflation is effective as it expropriates large or small groups within the economy.
Only the future can tell us if the balance of payments position of the United States is rock-solid; its political leadership implies that the balance of payments cannot be strong enough. And people appear not to have noticed that Switzerland, Holland and West Germany together, with only 40% of America's population, have as much gold as the United States - if we deduct foreign holdings.
(d) The largest group is the fifth, whom we might call the realists. They agree that inflation exists, but do not trouble themselves over whether it is a blessing or a plague - they simply consider it unavoidable. It it easy, and politically popular, to start an inflation, but very unpopular and hard to slam on the brakes when it has taken hold. In former days one could rely on Republicans to hold down inflation, but now both parties continue this easy-money policy. Inflation will take the same course in America as everywhere else; only because of America's underlying strength, it will take longer: that is why people of seventy see the period as lasting ten years, people of sixty, twenty years, and people of fifty some thirty years. None wants to be around to witness the bitter end.
This fifth group is guided by the idea that the solution is to liquidate cash and bonds; and to invest the proceeds in industrial enterprises and shares. They assume high burdens of debt to make these purchases, in the confident assumption of repayment in devalued currency. In short, they merely follow the old usage of Vienna, Berlin and Paris.
For those who look forward to the continuing erosion of the currency, no share price is too high. The people of this group not only contribute to the artificial stimulation of prices, but to the rapid increase in share turnover and the velocity of money supply: they are literally afraid of money: as soon as some comes their way, they hastily invest it. Money that a debtor himself lends has the fastest velocity of all, as everyone knows.
This group does not often express its opinions, but it is very widespread; and up till now it has had the greatest successes. Great fortunes have been made in a very short time, and that has increased the numbers of people interested in the success of inflation. People of this persuasion have one powerful argument in their favour: as long as large sections of the population wallow in inflation and benefit from it, it takes great courage to lead them out of their illusion into reality.
Governments - the American and most others - seldom have that courage.
15. Three and a half decades ago, I had a sharp controversy with several European governments because I advocated an immediate adoption of strict financial measures to control inflation. Arguments that were made against my view were unsound; the true reason for opposition was that such measures would have to be carried out by the governments of the day, but they would not have survived to reap the benefits. In an election year, no government was going to undergo the risks.
Very few governments of themselves admit the true situation; but they drag in the spectre of Communism to avoid any effort at putting on the brakes. Even in the great depression, I said that that alleged danger was nonsense; and subsequently Bolshevism has lost its appeal, since it has amply proved its inability to solve any problems. Who in America could seriously advocate Communism, and sharing the fate of the Asian and African masses?
16. Why then, ask the optimists, should one bring on a depression precisely out of fear of a depression? Is not inflation preferable, since we now have it in such delicately calibrated dosages that we only feel its good effects? And may not America continue inflation until 1970, as Professor Baudouin, or most recently Professor Slichter maintain?
Such policies have the merit of popularity; he who goes against the feelings of the street mob ends up a martyr, and nowhere is there less appetite for martyrdom than in America. So why not let things go on as they have been, because after all most people feel pretty good about it? Most people believe in any event that the political situation will continue more or less as it is: we shall go on indefinitely arming for a war that will never come, and therefore the situation is much more secure than at anytime previously in a boom period. That appears to be the public opinion of our day.
But I ask, is it really so advantageous when a boom is caused by political instead of economic factors? Can we really predict outcomes more easily when they are dependent on the whims of a few individuals whom nobody really knows?
The coming years depend on the fate of the Russian Revolution. No possibility can be excluded; but the West must be ready for anything, whether it requires arms limitation agreements or indeed a war. It is surely not good that the market has the jitters every time there is a possibility of real arms-reduction agreements. If war should come, the speculator's psychology, with its avoidance of both cash and bonds, makes for the worst possible combination: having an inflation before a conflict means throwing away the most useful wartime weapon, merely in order to win some election.
Introducing inflation is easy; stopping it is hard, especially for a democracy.
One may argue about whether inflation is permissible only in case of extreme need; but surely we have hardly ever seen it introduced at so untimely a season as the present.
But since sound currency is no less important in warfare than modern weapons systems, the American Government cannot simply let the dollar slide: it must intervene, before mistrust has infected even wider circles within the population.
The later it does so, the higher the price it will have to pay since maintaining the value of a currency costs something. And I fear it will be a high price even today.
And now in conclusion you will ask me: is a depression unavoidable? Under the present circumstances: Yes! Not because depression is innate in the capitalist system, as the Marxists say. It could be avoided, under one condition: that governments renounce their fear of the electorate and find the courage to speak up for their convictions and carry them out. That does not seem to me possible any more in the democracies of the present day.
(a) With every inflationary wave, the arrogance of the employers and the greed of labour leaders grows; both let themselves be swept along without troubling over the final reckoning.
(b) Governments are merely the obedient servants of the inflation-mongers, and at each upward notch merely cluck with alarm, like nannies who say to the children in their charge: 'All right, just once more but that's an end to it!'
© The dangers in the situation are heightened by ungrounded fears of Communism, and any attempts to cool inflation are systematically sabotaged.
(d) The universal demand for full employment has been raised to the status of economic theory. That is the case everywhere, not just in America; but America leads the West.
If nothing stands in the way of our contemporaries’ leap into the abyss, we must at least be quite clear about who is responsible for the coming catastrophe. If the man in the street lacks insight, then those who should give him guidance lack courage.
Mephistopheles:
Why work and worry to increase our treasures?
Why not use means more apt to give us pleasures?
The printed page, on which our plan's unfurled
Is worth as much as money round the world.
Let mints sweat blood to mint gold if they please,
But let us print, and we can take our ease.