Forecasting Mania Is an Integral Part of “Functional Finance,” the “Multiplier Effect” and the “Acceleration Principle”

The forecasting mania of our time is a natural concomitant of what is called Keynesian economics. It constitutes an integral part of the world of “functional' finance,” of the “multiplier effect” of the “acceleration principle” and similar concepts. If one really believes, as the “inventors” of functional finance do, that a depression can be prevented and a boom prolonged ad libitum [as much or as often as necessary or desired] by government deficit spending, if one fails to see that the elimination of the maladjustments in the price-cost relationship created during the previous boom are necessary conditions of revival, then indeed the economic future appears no longer too uncertain. And if one really believes in the working of the multiplier and the acceleration principle, then the more remote future also appears predictable. For according to the multiplier theory a given amount of spending on investment leads in time to an immediately ascertainable stable amount of spending on consumption; whereas a given amount of spending on consumption leads in time to an immediately ascertainable amount of spending on investment.

—L. Albert Hahn, “Predicting the Unpredictable,” The Freeman: A Fortnightly for Individualists 3, no. 1 (October 6, 1952): 23.

After Seeing Numerous Forecasting Failures in the 1940s and 1950s, Dr. Hahn Proposed a “Law of the Necessity of Errors in Forecasting”

All forecasts of postwar deflation turned out to be entirely wrong, as was to be expected. Almost immediately after the end of hostilities a postwar boom began. But the forecasters, in no way discouraged by their errors, stayed on the job. Now they predicted the continuation of inflation. Just when their forecasts became most articulate, in the spring of 1949, the recession of that year set in. Then deflation was considered here to stay; government intervention was advocated. The second postwar boom, not caused, I think, but accentuated by the outbreak of the Korean war in 1950, led again to predictions of continued and even of runaway inflation. But 1951 was basically a year of deflation, and of inflation only in the areas where it was governmentally fostered.

Clearly the regularity of these errors in forecasting can not be pure chance. Something like a Law of the Necessity of Errors in Forecasting must be at work.

It is seldom realized that belief in the possibility of “scientific” business forecasts, and the forecasting mania of our time, are comparatively new phenomena. Until about 1930 serious economists were not so bold — or so naive — as to pretend to be able to calculate the coming of booms and depressions in advance. It would not have fitted into their general view on the working of a free economy. They considered the economic future as basically dependent on unpredictable price-cost relationships and on the equally unpredictable psychological reactions of entrepreneurs. Predictions of future business conditions would have seemed to them mere charlatanry, just as predictions, say, regarding the resolutions of Congress two years from now.

—L. Albert Hahn, “Predicting the Unpredictable,” The Freeman: A Fortnightly for Individualists 3, no. 1 (October 6, 1952): 23.

To Apply to Economics Methods of Analysis Drawn from Physics Was Itself an Unscientific Procedure

Not all economists were carried away by the tide of equilibrium theory which swept through the profession in the second half of the twentieth century. A tiny handful of dissenters, known as Austrians because they followed the teachings of the late nineteenth-century Austrian economist Carl Menger, refused to accept equilibrium theory. One of their leading members, Friedrich von Hayek, wrote a series of articles during the Second World War which questioned the foundations of equilibrium theory. He pointed out that to apply unthinkingly to a social science like economics, which dealt with the behaviour of human beings, methods of analysis drawn from physics, which dealt with inanimate objects, was itself an unscientific procedure. He warned that it was particularly foolish to suppose that future economic events could be predicted as if the economic system behaved like a machine.

—David Simpson, Rethinking Economic Behaviour: How the Economy Really Works (Houndmills, UK: Macmillan Press, 2000), 23-24.

 

The Method of Reasoning Employed by the Neoclassical School Is Essentially the Same As That Followed by Ricardo

The method of reasoning employed by the neoclassical school is essentially the same as the procedure followed by Ricardo as described by Schumpeter:

This is the method of analysis which proceeds by excluding as many variables as possible. Then, for the rest, piling one simplifying assumption upon another until, having really settled everything by these assumptions, he [Ricardo] was left with only a few aggregative variables between which, given these assumptions, he set up simple one-way relations so that in the end, the desired results emerged almost as tautologies.⁴

Nevertheless, it was hailed by almost all professional economists as being a triumph for economic theory when in 1964 it was shown that, given specified endowments of resources, technology and consumer preferences, a system of competitive markets could in a logical sense be proved to exist. This triumph was only slightly marred by the fact that its proponents themselves were divided on its interpretation. Since it was recognised that the result had been achieved by making such drastic simplifications and such sweeping exclusions as were not remotely attainable in practice, did it mean that a real world market economy could work, or did it mean that it could not work?

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⁴Schumpeter continued: ‘The habit of applying results of this character to the solution of practical problems we shall call “The Ricardian Vice”’.

—David Simpson, Rethinking Economic Behaviour: How the Economy Really Works (Houndmills, UK: Macmillan Press, 2000), 16-17, 213n4.

It Is “In Principle” Impossible to Use Economic Theory and Statistics to Make Economic Forecasts

Morgenstern set out to show the impossibility of making any complete forecast of the state of the economy given the complexity of the mechanisms that shape economic events. He came against economic prediction from several angles, even contradicting himself in the process.

Thus was it “in principle” impossible to use economic theory and statistics to make economic forecasts. He based this claim on arguments concerning economic data, processes, and actors. The lack of homogeneity and the small size of samples made data wholly inadequate for statistical induction. Contrary to in the natural sciences, the data problems of economics were so significant as to render futile any attempt to apply probability methods. As for economic processes, Morgenstern held that attempts to understand the business cycle based on statistical considerations alone could never facilitate economic forecasting. For that, one needed to look to the underlying processes, of which prices were the surface phenomena. These mechanisms, however, lacked the regularity necessary to make them useful for any kind of prediction: only loose and inexact laws could be discovered. Finally, even when predictions were made, their effect was to create anticipations on the part of consumers, the reactions of whom would only serve to make the original forecast false. Unlike astronomy or medicine, the social sciences had the peculiarity of being able to affect their object of study. The prediction of the astronomer could have no effect on the movement of the stars, but that of the economist could change economic events. Morgenstern’s criticism of static theory is thoroughly Misesian: “In the static economy, nobody acts economically any more, and that means that they no longer ascribe value, and that no more acts of choice are made, and no decisions are made, because everything stands still.”

—Robert Leonard, Von Neumann, Morgenstern, and the Creation of Game Theory: From Chess to Social Science, 1900-1960, Historical Perspectives on Modern Economics (New York: Cambridge University Press, 2010), 101.

Equilibrium Theory Might Be Appropriate for a Planned or a Primitive Economy, But Is Not Appropriate for a Modern Market Economy

Equilibrium theory might well be appropriate for a planned economy, or perhaps for a very primitive subsistence economy, where little changes, and one year is much like the next. But it is quite unhelpful in understanding how a modern market economy works. Some of the most important elements of the contemporary economy, such as institutions, entrepreneurship and profits, are missing, while some extreme assumptions which contradict experience, such as perfect knowledge, optimising behaviour and constant returns to scale, have been introduced into the theory in order to achieve predictability. The justification of equilibrium theory therefore rests not on its explanatory power but on its predictive ability. On this point the evidence is overwhelming. All surveys of forecasting accuracy come to the same conclusion: economic forecasts based on equilibrium theory perform no better than naive forecasts which assume that next year’s values will be the same as this year’s.

—David Simpson, introduction to Rethinking Economic Behaviour: How the Economy Really Works (Houndmills, UK: Macmillan Press, 2000), 3. 

The Austrian Aversion to Macroeconomic Aggregates Pertains to Laws Devoid of Reference to Individual Choice

The last 30 years saw the ascent of macroeconomics and a temporary eclipse of Austrian thought. What attitude should Austrian economists adopt today towards macroeconomic aggregates? We spoke above of skepticism engendered by a distrust of all formalizations of economic experience which do not have an identifiable source in the mind of an economic actor. But a more positive attitude is called for. Austrian economists must attempt, wherever possible, to impart a measure of subjectivism to the products of macroeconomic thought.

We may note that Austrian aversion does not pertain to these aggregates as such. Austrian economists, after all, did discuss the balance of payments of the Habsburg Empire. It pertains to the construction of an economic model in which these aggregates move, undergo change, and influence each other in accordance with laws which are devoid of any visible reference to individual choice. Like the bodies of a planetary system, each aggregate is affected by changes in other aggregates, but never, it appears, by changes taking place within itself. It is this conception of the mode of relationships among aggregates, rather than the existence of the aggregates themselves, which defies subjectivism.

—Ludwig M. Lachmann, “An Austrian Stocktaking: Unsettled Questions and Tentative Answers,” in New Directions in Austrian Economics, ed. Louis M. Spadaro (Kansas City: Sheed Andrews and McMeel, 1978), 8-9.

According to Marget, Keynes Misrepresents the History of Monetary Theory; Therefore, Progress Involves Escaping the Keynesian “Blind Alley”

Arthur William Marget (1899-1962) was a respected American monetary theorist and scholar who received his doctorate from Harvard in 1926 and taught for the next fifteen years at the University of Minnesota. His best known work, The Theory of Prices (2 vols: 1938, 1942), had three goals. Marget sought to demonstrate that Keynes misrepresented the history of monetary theory, to reveal the shortcomings of Keynes’s own approach, and to show that progress required an escape from the Keynesian “blind alley” and a return to the “high road” of earlier tradition.

The book was either behind its time, ahead of it, or (as I suspect) both. The doctrinal revolution that Marget opposed swept The Theory of Prices aside. Perhaps it was imprudent of him to pursue three ambitious goals at once, for even the book’s supporters found it long and arduous. Nicholas Kaldor, a non-supporter whose review managed to misstate the book’s subtitle, called Prices I “mid-Victorian,” with its “leisurely repetitiousness, elaborate style, pompous exactitude, and . . . exhaustive scholarship,” reminding him “of the bourgeois solidity and spaciousness of that bygone age” (1939, pp. 495-6).²

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²Marget’s response (1942, p. vii): “I, on the contrary, rest my case on the proposition that if the qualities of ‘exactitude,’ ‘solidity,’ and ‘exhaustive scholarship’ are indeed characteristic only of a ‘bygone age,’ that fact constitutes a condemnation of our own age and a commentary on our current needs.”

—John B. Egger, “Arthur Marget in the Austrian Tradition of the Theory of Money,” Review of Austrian Economics 8, no. 2 (1995): 3-4, 4n.

Doubting the Validity of Aggregates and Averages Is a Dagger Aimed Straight at the Heart of Statistical Analysis in Economics

In an interesting, though apparently neglected, aside, Professor Hayek has remarked that “. . . neither aggregates nor averages do act upon one another, and it will never be possible to establish necessary connections of cause and effect between them as we can between individual phenomena, individual prices, etc. I would even go so far as to assert that, from the very nature of economic theory, averages can never form a link in its reasoning. . . .”

Now, any serious doubt concerning the validity of aggregates and averages is a dagger aimed straight at the heart of much current empirical research and statistical analysis in economics. Therefore it deserves close and systematic attention, even if this involves, in the opinion of some dedicated empiricists, an annoying interruption of the “front-line” activity of measurement for the mere purpose of “armchair” discussion of methodological issues. Yet such is our contemporary spirited march on “objective data” that one who begins to suspect that a wrong turn may have been made sometime back almost naturally feels guilty for harboring this traitorous thought, and, if he expresses it at all, must expect to be regarded as a ruminant obstructionist in the company of men of action.

—Louis M. Spadaro, “Averages and Aggregates in Economics,” in On Freedom and Free Enterprise: Essays in Honor Ludwig von Mises, ed. Mary Sennholz (Auburn, AL: Ludwig von Mises Institute, 2008), 140.

For Frank Knight, John Maynard Keynes Succeeded in Carrying Economic Thinking Well Back to the Dark Age

The Keynesian avalanche soon swept away virtually all the competing approaches, ideas, or theories with which to explain the business cycle. Indeed, there was hardly a voice in the mainstream of the economics profession that was willing or able to directly question or challenge the near Keynesian monopolization of economic thinking on problems of economy-wide fluctuations in employment, output, and prices.

When Frank H. Knight declared in his 1951 presidential address before the American Economic Association that in his view “The latest ‘new economics’ and in my opinion rather the worst, for fallacious doctrine and pernicious consequences, is that launched by the late John Maynard (Lord) Keynes, who for a decade succeeded in carrying economic thinking well back to the dark age” (Knight, 1951, p. 2) it must have created shock and disbelief among many who heard these words spoken. Few besides Frank Knight could have been so blunt without permanently risking their reputation and standing in the economics profession of that time.

What was this “dark age” back to which Keynes took economic thinking? At its core, I would suggest, was its focus on macroeconomic aggregate building blocks: Aggregate Demand, Aggregate Supply, Total Output and Employment, and the average Price Level and Wage Level.

—Richard M. Ebeling, “The Misdirection of Keynesian Aggregates for Understanding Monetary and Cyclical Processes,” in What’s Wrong with Keynesian Economic Theory? ed. Steven Kates (Cheltenham, UK: Edward Elgar Publishing, 2016), 79.

If We Want to Recover from a Depression, We Need to Restore Genuine Profits, NOT the Phony Profits of a Bubble

Keynesian analysis tells us that what is lacking during a depression is demand. Since private savings (in this view) will lie fallow, will not be invested, the only effective demand comes from consumer or government spending. But what really drives an economy is not demand; it is production. And what really drives production is profits. If we want to restore the economy, we need to restore profits, genuine profits, not the phony profits of a bubble.

A collapse of profits tells us that the price and profit system of the market has been damaged, usually by government interventions to reduce interest rates, increase wages, increase consumption, subsidize some sectors and enforce cartels in others. It is not the savers who have wrecked the economy, it is government interventions that have penalized savers and ultimately destroyed profits.

Even Keynes must have known how important profits are. In his Treatise on Money, he acknowledged that

the engine which drives enterprise is . . . profit.

By the time he wrote The General Theory, Keynes often used jargonish circumlocutions to sidestep the word profit, terms such as “the marginal efficiency of capital.” But the inescapable truth is that profit is the key to prosperity. And the way to rebuild genuine profit is to allow all prices, including interest rates and currencies, to tell the truth about the economy. In an environment of free prices, hard work, production, and saving will do all that is required, just as John Stuart Mill said they would almost two hundred years ago.

—Hunter Lewis, Where Keynes Went Wrong: And Why World Governments Keep Creating Inflation, Bubbles, and Bust (Edinburg, VA: Axios Press, 2011), Kindle e-book.

Keynes Tells Us to Praise the Mercantilist “Army of Heretics and Cranks” Who Argued for Lower Interest Rates

We should pay our respects to the “army of heretics and cranks” who in earlier periods argued for lower interest rates.

In The General Theory, Keynes acknowledged that he was refurbishing and updating

sixteenth and seventeenth century . . . [economic writers generally known as] Mercantilists.

This was ironic, because Keynes’s teachers in Britain, and Keynes himself early in his career, had regarded Mercantilist thought as a “fallacy” long since exploded.

Now Keynes saw an

element of scientific truth in Mercantilist doctrine, [especially in their view] that an unduly high rate of interest was the main obstacle to the growth of wealth [and in their] preoccupation . . . [to] increase . . . the quantity of money [in order to] . . . diminish the rate of interest.

In addition to the Mercantilists, Keynes acknowledged his debt to the economist Thomas Malthus (1766–1834), a few other economists, and even some 20th century figures, Sylvio Gesell and Major C. H. Douglas, whom he had previously dismissed as

no better than . . . crank[s].

In The General Theory, he described Gesell, best known for advocating stamped money whose value would expire if not spent by a certain date, as

an unduly neglected prophet . . . [with] flashes of deep insight.

Douglas, another proponent of what is sometimes called easy money, he somewhat backhandedly praised as

at least . . . not wholly oblivious of the outstanding problem of our economic system.

These people together Keynes called his

brave army of heretics

in which classification he happily included himself.

—Hunter Lewis, Where Keynes Went Wrong: And Why World Governments Keep Creating Inflation, Bubbles, and Bust (Edinburg, VA: Axios Press, 2011), Kindle e-book. 

Keynes’s First Claim: The Free Market’s Chronic State of Depression Is Caused by Too Much Saving and Not Enough Consumption and/or Investment

To Keynes, a state of high unemployment is a part of the normal conditions of a free market. He claims, “the evidence indicates that full, or even approximately full, employment is of rare and short-lived occurrence.” He also says, “it [the economic system] seems capable of remaining in a chronic condition of sub-normal activity for a considerable period.” To understand what Keynes means by a “condition of sub-normal activity,” one must keep in mind that he wrote The General Theory when economies were still recovering from the Great Depression and he was referring to an economy that was in a state of depression.

This chronic state of “sub-normal activity,” according to Keynes, is caused by too much saving and not enough consumption and/or investment. In Keynes’s words, “If the propensity to consume and the rate of new investment result in a deficient effective demand, the actual level of employment will fall short of the supply of labour potentially available.” . . . 

The problem of too much saving and the chronic state of depression is especially true for a wealthy society, according to Keynes. He states:

The richer the community, the wider will tend to be the gap between its actual and its potential production. . . . [A] poor community will be prone to consume by far the greater part of its output, so that a very modest measure of investment will be sufficient to provide full employment.

—Brian P. Simpson, Remedies and Alternative Theories, vol. 2 of Money, Banking, and the Business Cycle (New York: Palgrave Macmillan, 2014), 18-19.

The Problem Is Not One of “Aggregate Demand” Or “Overproduction” But Rather One of Cost-Price Differentials

But, these theorists may object, “we do not claim that all desires have ceased. They still exist, but the people lack the money to exercise their demands.” But some money still exists, even in the steepest deflation. Why can’t this money be used to buy these “overproduced” goods? There is no reason why prices cannot fall low enough, in a free market, to clear the market and sell all the goods available. If businessmen choose to keep prices up, they are simply speculating on an imminent rise in market prices; they are, in short, voluntarily investing in inventory. If they wish to sell their “surplus” stock, they need only cut their prices low enough to sell all of their product. But won’t they then suffer losses? Of course, but now the discussion has shifted to a different plane. We find no overproduction, we find now that the selling prices of products are below their cost of production. But since costs are determined by expected future selling prices, this means that costs were previously bid too high by entrepreneurs. The problem, then, is not one of “aggregate demand” or “overproduction,” but one of cost–price differentials. Why did entrepreneurs make the mistake of bidding costs higher than the selling prices turned out to warrant? The Austrian theory explains this cluster of error and the excessive bidding up of costs; the “overproduction” theory does not. In fact, there was overproduction of specific, not general, goods. The malinvestment caused by credit expansion diverted production into lines that turned out to be unprofitable (i.e., where selling prices were lower than costs) and away from lines where it would have been profitable. So there was overproduction of specific goods relative to consumer desires, and underproduction of other specific goods.

—Murray N. Rothbard, America's Great Depression, 5th ed. (Auburn, AL: Ludwig von Mises Institute, 2000), 56-57.

Short of the Garden of Eden, There Is No Such Thing As General “Overproduction”

“Overproduction” is one of the favorite explanations of depressions. It is based on the common-sense observation that the crisis is marked by unsold stocks of goods, excess capacity of plant, and unemployment of labor. Doesn’t this mean that the “capitalist system” produces “too much” in the boom, until finally the giant productive plant outruns itself? Isn’t the depression the period of rest, which permits the swollen industrial apparatus to wait until reduced business activity clears away the excess production and works off its excess inventory?

This explanation, popular or no, is arrant nonsense. Short of the Garden of Eden, there is no such thing as general “overproduction.” As long as any “economic” desires remain unsatisfied, so long will production be needed and demanded. Certainly, this impossible point of universal satiation had not been reached in 1929.

—Murray N. Rothbard, America's Great Depression, 5th ed. (Auburn, AL: Ludwig von Mises Institute, 2000), 56.

To Most of the Classical Economists, the Theory of General Over-production Was a Heresy

It is one thing to deny the existence of demand deficiency and another to provide a theory of the cycle. Classical economists, because of their acceptance of the law of markets, had to do both. Those who accepted the validity of the law of markets had to explain the fact of recession without reference to demand deficiency or over-production. This was done by explaining recessions as resulting from misdirected production or other factors which drove demand and supply out of alignment.¹ This theory of recession must be seen as an integral part of the matrix of ideas associated with the law of markets since it was this which explained the existence of recession while denying the possibility of deficient demand or overproduction. The two concepts, in fact, evolved together and are part of a unified conception of the operation of an economy.

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¹ Cf. Wesley Mitchell (1927: 8) who wrote, ‘to most of the classical economists, the theory of general over-production was a heresy, which they sought to extirpate by demonstrating that the supply of goods of one sort necessarily constitutes demand for goods of other sorts. But maladjusted production they allowed to be possible, and their brief references to crises usually aimed to show how production becomes maladjusted through the sinking of capital in unremunerative investments.’

—Steven Kates, Say's Law and the Keynesian Revolution: How Macroeconomic Theory Lost its Way (Cheltenham, UK: Edward Elgar Publishing, 2009), 75, 75n.

Opting to Support the Union or the Confederacy Was NOT Simple for the Major British Banks Who Could NOT Remain Neutral

However, unlike the preceding decades when statesmen on both sides of the Atlantic took the views of transatlantic financiers into account, the pleas of the financial lobby fell upon deaf ears in 1860–1. The roots of the conflict were too deep and passions on both sides were too high for economic rationales for conciliation to carry the day—a lesson that Wall Street leaders similarly learned when their support of compromise proposals failed to forestall war. When the sectional conflict turned into all-out war, many European financiers, particularly Anglo-American banking houses, were forced to choose a side. Although neutrality was a feasible policy for the Palmerston government, many British financiers were too intimately involved in the American economy to remain on the sidelines and the warring parties would bring them into the conflict by requesting war loans. Opting to support the Union or the Confederacy was not simple as the major banks were deeply divided in their sympathies. The two American partners of Baring Brothers were split on which side to support. Joshua Bates staunchly advocated the cause of the Union, while Russell Sturgis, though a New Englander, supported the South. The firm’s loyalty to the Union was tested as early as the autumn 1861 when Governor Francis Pickens of South Carolina requested a loan for the procurement of arms. The Rothschilds were also split on which side to support. Their American agent, August Belmont, vowed to ‘‘stand by the Government at any sacrifice in order to subdue this atrocious heresy of secession,’’ while Salomon de Rothschild, who was visiting the United States from Paris during the secession controversy, urged his family to ‘‘recognize the Republic of the Southern Confederacy as quickly as possible.’’ George Peabody and partner J. S. Morgan, though New Englanders and sympathetic to the Union, doubted the North’s ability to conquer the South and feared the economic consequences of a protracted war.

—Jay Sexton, Debtor Diplomacy: Finance and American Foreign Relations in the Civil War Era, 1837-1873 (New York: Oxford University Press, 2014), 80-81.

British Pro-South Sympathizers Made Sure that the Tariff Argument Remained Prominent for Many Months

The South’s governmental and nongovernmental free-trade diplomacy was paying propagandistic dividends, compounded by the Union government’s initial unwillingness to declare slavery the primary issue of secession and reunion. Confederate diplomat Edwin de Leon wrote a letter to the editors of the London Times in late May that slavery was “a mere pretext” for secession, as shown by continued northern defenses of the institution through its guarantee of slavery where it existed and through its enforcement of the fugitive slave law. The Preston Guardian even asserted that when northerners cried “no slavery,” they really meant “protection.” William H. Gregory called for British recognition in the House of Commons. He argued that it would bring an end to the slave trade; keep the states from fighting a “fratricidal, needless war”; and provide retaliation against the North’s “selfish, short-sighted, retrograde” protectionist policy. The Union minister to England, Charles Francis Adams, Sr., after meeting with Britain’s foreign secretary, Lord John Russell, noted that the Morrill Tariff and the conflict’s seeming nonissue of slavery yet left southern recognition on the table.

All the while, Britain’s maintenance of neutrality appeared to benefit the South and antagonize the North. The 1862 construction in British ports of Confederate war vessels like the Alabama further outraged the Union, many of whom viewed their construction as a covert act of war by the British against the North. The issue would remain a source of Anglophobic ire for years to come. Alongside northern protectionism, British neutrality heightened Anglo-Union animosity.

British pro-South sympathizers made sure that the tariff argument remained prominent for many months to come. James Spence, Liverpool’s pro-Confederate merchant and London Times writer, spent but one chapter on slavery in his influential publication The American Union (1861). He spent the other seven on the Morrill Tariff, the right to secession, and why he thought a future reunion was culturally and philosophically impossible. After a close reading of Spence in late 1861, Charles Dickens himself became decidedly pro-South, and argued in the pages of All the Year Round that the Morrill Tariff had “severed the last threads which bound the North and South together.” John Bright wrote to Charles Sumner that the subject of the tariff was of such “great importance” that little “would more restore sympathy between England and the States than the repeal of the present monstrous and absurd Tariff,” as it gave “all the speakers and writers for the South an extraordinary advantage in this country.”

Northern attempts to acquire loans from England further illustrated the tariff’s unfavorable transatlantic traction. Following the southern rout of northern troops at Bull Run in July 1861, New York banker August Belmont sought a Union loan from the British. As leverage, he reminded Prime Minister Palmerston of the South’s continued maintenance of slavery, to which Palmerston retorted: “We do not like slavery, but we want cotton and we dislike very much your Morrill tariff.”

—Marc-William Palen, The “Conspiracy” of Free Trade: The Anglo-American Struggle over Empire and Economic Globalisation, 1846-1896 (Cambridge, UK: Cambridge University Press, 2016), 44-45.

The Republican Party Was In Favor [!] of Slavery Because They Feared Emancipated Slaves Residing in Northern States

Lincoln did not launch a military invasion of the South to free the slaves. No serious student of history could deny this fact. In 1861 Lincoln’s position—and the position of the Republican Party—was that Southern slavery was secure: He had no intention of disturbing it; and even if he did, it would be unconstitutional to do so. This is what he said in his First Inaugural Address. The Republican Party, led by Lincoln, was in favor of Southern slavery because its leaders feared the spectacle of emancipated slaves residing in their own Northern states. Lincoln’s own state of Illinois had recently amended its constitution to prohibit the emigration of black people into the state, as had several other Northern states. Most Northern states had adopted Black Codes that discriminated in the most inhumane ways against freed blacks. Such discriminatory laws existed in the North decades before they were adopted in the South. There were very few blacks in the North in 1861, and most Northern voters wanted it to remain that way.

As of 1861 Lincoln and the Republicans were opposed only to the extension of slavery into the new territories. One reason they gave for this opposition was that they wanted to preserve the territories as the exclusive domain of the white race. A second reason articulated by Lincoln was the desire to avoid the further artificial inflation of Southern (i.e., Democratic Party) representation in Congress that was created by the three-fifths clause of the Constitution. The few abolitionists in the party undoubtedly believed that prohibiting slavery in the territories would quicken its overall demise.

—Thomas J. DiLorenzo, The Real Lincoln: A New Look at Abraham Lincoln, His Agenda, and an Unnecessary War (New York: Three Rivers Press, 2003), 257-258.

Let the South Adopt the Free-Trade System and the North’s Commerce Must Be Reduced to Less Than Half What It Now Is

In the mid-nineteenth century, newspapers were openly associated with one political party or another, and numerous Republican newspapers in the North had been calling for the bombardment of the Southern ports in order to destroy the South’s free-trade policy long before Fort Sumter.

On December 10, 1860, the Daily Chicago Times candidly admitted that the tariff was indeed a tool used by Northerners for the purpose of plundering the South. The editor of the newspaper warned that the benefits of this political plunder would be threatened by the existence of free trade in the South:

The South has furnished near three-fourths of the entire exports of the country. Last year she furnished seventy-two percent of the whole . . . we have a tariff that protects our manufacturers from thirty to fifty percent, and enables us to consume large quantities of Southern cotton, and to compete in our whole home market with the skilled labor of Europe. This operates to compel the South to pay an indirect bounty to our skilled labor, of millions annually. 

 “Let the South adopt the free-trade system,” the Chicago paper ominously warned, and the North’s “commerce must be reduced to less than half what it now is.” In addition “[o]ur labor could not compete . . . with the labor of Europe” and “a large portion of our shipping interest would pass into the hands of the South,” leading to “very general bankruptcy and ruin.” . . .

The Newark Daily Advertiser was clearly aware that the free-trade doctrines of Adam Smith had taken a strong hold in England, France, and the Southern states. On April 2, 1861, the paper warned that Southerners had apparently “taken to their bosoms the liberal and popular doctrine of free trade” and that they “might be willing to go . . . toward free trade with the European powers,” which “must operate to the serious disadvantage of the North,” as “commerce will be largely diverted to the Southern cities.” “We apprehend,” the New Jersey editorialists wrote, that “the chief instigator of the present troubles—South Carolina—have all along for years been preparing the way for the adoption of free trade,” and must be stopped by “the closing of the ports” by military force.

—Thomas J. DiLorenzo, The Real Lincoln: A New Look at Abraham Lincoln, His Agenda, and an Unnecessary War (New York: Three Rivers Press, 2003), 242-243.

The North Had Neo-Mercantilism, But the South Embraced State Socialism with Forced Industrialization Like in Stalinist Russia

While the Civil War saw the triumph in the North of Republican neo-mercantilism, it saw the emergence in the South of full-blown State socialism. Nowhere did the Confederacy have greater disadvantages than in industrial output. A single county in Connecticut manufactured firearms in 1860 worth ten times more than that produced in all southern states. Except for the Tredegar Iron Works in Richmond, the South did not even have a cannon foundry. With little native industry to call upon, the Rebel government moved immediately and directly into its own war production.

General Josiah Gorgas, the Pennsylvania-born Chief of Confederate Ordnance, took the lead in establishing government-owned facilities. By 1863 his diary revealed justifiable pride in this forced industrialization: “It is three years ago today since I took charge of the Ordnance Department. . . . I have succeeded beyond my utmost expectations. . . . Large arsenals have been organized at Richmond, Fayetteville, Augusta, Charleston, Columbus, Macon, Atlanta and Selma, and smaller ones at Danville, Lynchburgh, and Montgomery. . . . A superb powder mill has been built at Augusta. . . . Lead smelting works were established by me at Petersburg, and turned over to the Nitre and Mining Bureau, when that Bureau was at my request separated from mine. A cannon foundry established at Macon for heavy guns, and bronze foundries at Macon, Columbus, Ga., and at Augusta; a foundry for shot and shell at Salisbury, N.C.; a large shop for leather work at Clarksville, Va.; besides the Armories here and at Fayetteville, a manufactory of carbines has been built up here; a rifle factory at Asheville; . . . a new and very large armory at Macon, including a pistol factory; . . . a second pistol factory at Columbus, Ga. . . . Where three years ago we were not making a gun, pistol nor a sabre, no shot nor shell (except at the Tredegar Works)—a pound of powder—we now make all these in quantities to meet the demands of our large armies.”

In addition to the powder mill, chemical plant, small-arms factories, and foundries belonging to Gorgas’s Ordnance Bureau, the Confederate Navy set up its own cannon foundry and powder mill, as well as numerous shipyards. The Nitre and Mining Bureau extracted and refined coal, iron, copper, nitre, and lead. The Confederate Quartermaster Bureau ran its own clothing, shoe, and wagon factories. The southern state governments also operated arsenals, powder mills, textile mills, flour mills, saltworks, and a variety of other enterprises.

When the authorities did purchase supplies from private firms, they dictated prices and profits. The Rebel government sometimes loaned one-half the start-up capital to businesses, which in turn had to sell two-thirds of their production to the government. Because rigid regulations and soaring inflation made genuine profits impossible, private owners, one after another, turned their factories over to the public officials. Right from the conflict’s beginning, the Confederacy had violated its constitution by loaning money for the completion of strategic railway links. Seven-eighths of the freight and two thirds of the passengers transported on the Virginia Central Railroad during one year, to cite just one example, were for the government’s account. Toward the very end, President Davis took possession of all un-captured southern railroads, steamboats, and telegraph lines outright, incorporating their employees and officers into the military.

—Jeffrey Rogers Hummel, Emancipating Slaves, Enslaving Free Men: A History of the American Civil War, 2nd ed. (Chicago: Open Court Publishing Company, 2014), e-book.

The Major Accomplishment of the Jacksonian Democrats Was Divorcing the Central Government from the Banking System

At the war’s close the United States could boast higher taxation per capita than any other nation. But all the new and old taxes combined were just sufficient to cover about one-fifth of the Civil War’s monetary cost. Chase therefore borrowed some money directly from the general public, with the aid of an extravagant publicity campaign handled by private financier, Jay Cooke. The Union had to go to the banks for most of its loans, however. And this required that Congress undermine the restraints built into the country’s prewar financial structure.

That structure was the ideological handiwork of the Jacksonian Democrats. Its major accomplishment was divorcing the central government from the banking system. There was no nationally chartered central bank, and the Treasury, as much as possible, avoided dealing with the many state-chartered banks. The only legally recognized money was specie, that is, gold or silver coins. The economy’s currency consisted solely of bank notes redeemable in specie on demand. Private competition thus regulated the circulation of paper money.

Although traditional historians have subjected this era of unregulated banking to trumped-up charges of financial instability, many economists are coming to agree that it was probably the best monetary system the United States has ever had. The alleged excesses of the fraudulent, insolvent, or highly speculative “wildcat” banks were highly exaggerated. Total losses that bank note holders suffered throughout the entire antebellum period in all states that enacted free-banking laws would not equal the losses for one year from today’s rate of inflation (2 percent), if superimposed onto the economy of 1860. Moreover, most of these losses resulted from too much regulation, not too little.

—Jeffrey Rogers Hummel, Emancipating Slaves, Enslaving Free Men: A History of the American Civil War, 2nd ed. (Chicago: Open Court Publishing Company, 2014), e-book. 

The Era of Free Banking Ended when the neo-Hamiltonians (Republicans) Established Their “Unqualified Government Monopoly”

The era of free banking was abruptly ended when the neo-Hamiltonian Republicans passed three Legal Tender Acts, beginning in February 1862. These acts of legislation permitted the treasury secretary to issue paper currency (greenbacks) that was not immediately redeemable in gold or silver. Then they passed the National Currency Acts of 1863 and 1864, which created a system of nationally chartered (and regulated) banks that could issue currency. A punitive 10 percent tax was placed on state-chartered banks in order to drive them into bankruptcy. The neo-Hamiltonians were candid about their intention to create an “unqualified government monopoly,” though they rather absurdly claimed that this would allow “all Americans to share in the advantages of the monopoly.” In reality, monopoly is bad for consumers, whether it is a monopoly in steel production, computers, petroleum, or currency. There is no such thing as a “good” monopoly from the consumers’ perspective.

—Thomas J. DiLorenzo, Hamilton’s Curse: How Jefferson’s Archenemy Betrayed the American Revolution—and What It Means for America Today (New York: Crown Forum, 2008), 127.

According to Hummel and Timberlake, the “Free Banking Era” Was the Most Stable Banking System in American History

Despite all the Hamiltonians’ efforts, the Jeffersonians more or less prevailed for decades. The government remained relatively small and decentralized. By the mid-1850s tariff rates were as low as they would be for the entire nineteenth century, and federal subsidies for “internal improvements” were all but nonexistent. The Bank of the United States was dismantled in the 1830s. The American banking system was dominated by state-chartered banks that issued currency backed by gold and silver on demand and that therefore did not inflate their currency beyond what their specie reserves justified. It was not a perfect system, of course, but two highly reputable economic historians, Jeffrey Hummel and Richard Timberlake, have made compelling cases that it was the most stable banking system the United States has ever had. . . .

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A nationalized banking system was one key element of Alexander Hamilton’s agenda that the Lincoln regime resurrected. It did not seem to matter that such a system had been tried twice, with the First and Second Banks of the United States, and each time had created economic instability and corruption. Nor did it matter that during what economists call the “free banking era,” which began when the Second Bank of the United States was dissolved in the 1830s, the purchasing power of American currency remained stable. This stability resulted precisely because the money supply was denationalized. State governments took a more or less laissez-faire attitude toward banking; about half did not even require a state government charter for individuals who wanted to start a bank, accept deposits, and issue banknotes. Banks, then, were “regulated” mainly by competition in the marketplace: a bank that printed too much currency and did not hold sufficient specie reserves would eventually fail. Such failures did occur, but they remained localized and never caused a national bank panic or depression, as has been the case with nationalized banking systems. Panics and depressions are what economists refer to as “contagion effects” of centralized or nationalized banking.

—Thomas J. DiLorenzo, Hamilton’s Curse: How Jefferson’s Archenemy Betrayed the American Revolution—and What It Means for America Today (New York: Crown Forum, 2008), 124, 126-127.

Canada's First Bank, the Bank of Montreal, Was Modeled After the Second Bank of the United States

Canadian bank charters, if not other aspects of the banking system, were modelled explicitly on American examples, a fact that is emphasized by W.T. Easterbrook and Hugh G.J. Aitken in Canadian Economic History. The first Bank of the United States, based on principles enunciated by Alexander Hamilton, served as the model for the stillborn Bank of Lower Canada in 1808. The articles of association that led to the charter of the Bank of Montreal also followed American examples, particularly that of the second Bank of the United States, which began operation only six months before the Bank of Montreal. The latter bank sent its officers to New York to study banking procedures in effect there, and it employed experienced American bankers during its early years. Easterbrook and Aitken saw strong parallels between the centralist organization, branch systems, and uniform stable currency of Hamiltonian principles, and the legislative framework of Canadian banking. Some nineteenth century opinion supports this view. In 1877 Sir Francis Hincks offered the generalization that the Canadian banking system was modelled on the one that formerly prevailed in the United States. He was referring to the first and second Banks of the United States and their branch systems.

—Stephen Edward Thorning, “Hayseed Capitalists: Private Bankers in Ontario” (PhD diss., McMaster University, 1994), 25.