The Main Nazi Newspaper, the Völkischer Beobachter, Praised Roosevelt’s “New Deal” for Its Affinity with National Socialist Philosophy

The National Socialists hailed the emergency relief measures undertaken during Roosevelt’s first hundred days in office as fully consistent with their own revolutionary program. On May 11, 1933, the main Nazi newspaper, the Völkischer Beobachter, offered its commentary in an article with the headline “Roosevelt’s Dictatorial Recovery Measures.” The author wrote, “What has transpired in the United States since President Roosevelt’s inauguration is a clear signal of the start of a new era in the United States as well.” The tone on January 17, 1934, was much the same: “We, too, as German National Socialists are looking toward America. . . . Roosevelt is carrying out experiments and they are bold. We, too, fear only the possibility that they might fail.” And on June 21, 1934, the paper drew its initial conclusion about the success of the New Deal: “Roosevelt has achieved everything humanly possible in light of his narrow, insufficient basis.”

Just as National Socialism superseded the decadent “bureaucratic age” of the Weimar Republic, the Völkischer Beobachter opined, so the New Deal had replaced “the uninhibited frenzy of market speculation” of the American 1920s. The paper stressed “Roosevelt’s adoption of National Socialist strains of thought in his economic and social policies,” praising the president’s style of leadership as being comparable to Hitler’s own dictatorial Führerprinzip. “If not always in the same words,” the paper wrote, “[Roosevelt], too, demands that collective good be put before individual self-interest. Many passages in his book Looking Forward could have been written by a National Socialist. In any case, one can assume that he feels considerable affinity with the National Socialist philosophy.” The newspaper admitted that Roosevelt maintained what it called “the fictional appearance of democracy,” but it also proclaimed that in the United States “the development toward an authoritarian state is under way.” The author added, “The president’s fundamental political course still contains democratic tendencies but is thoroughly inflected by a strong national socialism.”

—Wolfgang Schivelbusch, Three New Deals: Reflections on Roosevelt’s America, Mussolini’s Italy, and Hitler’s Germany, 1933-1939, trans. Jefferson Chase (New York: Metropolitan Books, 2006), e-book.

Hjalmar Horace Greeley Schacht Accepted Hitler’s Offer of the Position of President of the Reichsbank on March 17, 1933

Hitler also showed his pragmatic side when Hjalmar Schacht was called into his first meeting with the new chancellor. After all, Schacht was not a party member, and although he had more than demonstrated his willingness to be helpful, he was distrusted by most of the party establishment, who still saw Schacht as a collaborator of the Jewish bankers.

It was middle of March 1933.

Herr Schacht, I am sure we are agreed that the most urgent task for the new government is to end unemployment. That will need a lot of money. Do you think it can be obtained without the Reichsbank?

Schacht agreed with the immediate need to end unemployment but told Hitler it could not be done without the Reichsbank. When pressed for the amount of money needed, Schacht hedged.

Herr Chancellor, all I can tell you is that the Reichsbank should be ready to lend all assistance until the last unemployed citizen is back at work. 

 Then came Hitler’s pivotal question.

Would you be willing to resume leadership of the Reichsbank? 

 Later, Schacht remembered his reaction. Could he accept the offer from a leader “whose political methods and individual acts he found difficult to accept”? Or should he overcome his scruples “for the sake of the six and a half million unemployed”? Besides, he was quite aware that Luther, who had held the Reichsbank presidency since Schacht had resigned, had already met with Hitler and had given an unsatisfactory answer to Hitler’s question. Schacht told Hitler that he would not find it “fair” — he used the English term — to fire Reichsbank president Luther, but Hitler reassured him that Luther had already been slated for another position. Schacht then decided on the spot.

“If that is so, then I am ready, once again, to take the presidency of the Reichsbank;” and “on March 17, almost exactly three years after I had left it, I went back to work at the Reichsbank.”

He insisted that it was not out of personal ambition or agreement with the National Socialist Party or personal greed. It was for the “welfare of the broad masses of our people.”

—John Weitz, Hitler’s Banker: Hjalmar Horace Greeley Schacht (Boston: Little, Brown and Company, 1997), 142-143.

As a Sure Indication of the Disintegration of the State, Tax Revenues in Greece Covered Less Than 6% of Government Spending

Relatively mild in the Protectorate and Slovakia, inflation was a far more serious problem in Belgium, and worse still in Serbia, Croatia and Greece. Hyper-inflation was caused by the government’s inability to raise more than a small fraction of its needs from taxation and the huge increase in the money supply caused by the central bank’s printing of banknotes. By the end of the war, tax revenues in Greece covered less than 6 per cent of government spending, a far smaller proportion than anywhere else, and a sure indication of the disintegration of the state. Gold sovereign prices rose fifteen-fold in the first two years of the occupation and soared again as it neared its end.

Greece stood as a warning of what could happen when occupation economics went badly wrong and when German demands could only be met by printing money. In July 1942 Finance Minister von Krosigk warned Göring that ‘in Greece … a legal market no longer exists, nor a price mechanism which could act as a basis for stabilization and reorganization … If the war drags on, it will be necessary to prevent the countries whose potential we are exploiting, from premature economic ruin.’ A few months later, when the German commissar at the Belgian central bank wrote of dangerous inflationary pressures because of the difficulty of controlling the black market, he highlighted the risk of making ‘a monetary “Greece” out of Belgium’. German administrators did not care too much one way or the other about Greece itself, which they had not really wanted to invade, and whose value to the war effort was minimal, but they knew that the costs for the German war effort of allowing Belgium or France go the same way would be much higher.

—Mark Mazower, Hitler’s Empire: How the Nazis Ruled Europe (New York: Penguin Books, 2009), 272-273.

A Major Element of Exploiting Occupied Countries Is the Manipulation and Devaluation of the Official Exchange Rates

From the very beginning, a major element in Germany’s successful exploitation of occupied countries was the manipulation of official exchange rates. In France, German occupiers lowered the exchange rate for 100 francs from 6.6 to 5 reichsmarks—a devaluation of just under 25 percent. This automatically raised soldiers’ salaries, which were paid in francs but calculated in reichsmarks. (The franc would, of course, have inevitably become softer under German occupation, but even in late 1942 the exchange rate in Zurich was 16 percent higher than the one set by German occupiers.) Similar action was taken with the establishment of the Protectorate of Bohemia and Moravia. The Czech crown remained the official currency but was devalued by a third. In 1939 the Reich also intervened in Poland and in 1943 in Nazi-occupied northern Italy, where the exchange rate between the lira and the mark was lowered from 100 to 13.1 to 100 to 10. But even that is dwarfed by the 470 percent devaluation of the Russian ruble in 1941. Those responsible for the new exchange rates knew exactly what they were doing. Privately, they acknowledged that the reichsmark was “greatly overvalued in comparison with [other] European currencies.”

—Götz Aly, Hitler’s Beneficiaries: Plunder, Racial War, and the Nazi Welfare State, trans. Jefferson Chase (New York: Metropolitan Books, 2006), 81.

To Ensure “Economically Just Prices,” The Reich’s Commissar for Price Formation Suspended the Operations of the Price Mechanism

In 1933 the government issued the “Law on Compulsory Cartels,” by virtue of which it assumed the right to consolidate enterprises as a means of regulating the market for their products and reducing competition. In time, Berlin forged hundreds of such compulsory cartels, which determined, under state guidance, what their member firms could produce and what prices they could charge: the normal practice until the end of 1941 was for enterprises to operate on a cost-plus basis, presenting government agencies with evidence of costs and then being allowed to add 3-6 percent profit. In 1936, the office of the Reich’s Commissar for Price Formation was created to ensure “economically just prices.” The operations of the price mechanism of the open market were thus suspended. The cartel law made new investment conditional on state approval. State authorities also regulated dividend payments: a law issued in 1934 decreed that the profits to be distributed to stockholders were not to exceed 6 percent of the paid-in capital; another law of that year provided that any excess was to be invested in state bonds for future distribution. Holders of municipal and other bonds were compelled to convert them into new issues carrying lower interest rates. Private enterprise was constantly whipped into shape by complaints of “economic egoism” and tireless reminders that the interests of the community took precedence over those of the individual.

—Richard Pipes, Property and Freedom (New York: Alfred A. Knopf, 1999), Vintage e-book.

Brüning's “Rolling Deflation” Is Used to Argue in Favor of an International Lender of Last Resort and World Currency

It is understandable that economic and political elites fear deflation, but it is not so clear why almost all economists have developed a deflation phobia. It was this fear of deflation that has ensured that we are still stuck in the monetary system which was about to melt down in 2008. Unfortunately, at the time In Defense of Deflation was not out there to help combat the myths about price deflation.

There are all kinds of myths about price deflation that inhibit the surge of free market institutions, because these myths are used to justify interventions. The fear of a deflationary spiral is only one, albeit probably the most important of them. An almost equally harmful myth is that the rate of the growth of the money supply must be at least as high as the rate of economic growth, because otherwise there would be a harmful price deflation. This is an argument that even well-trained economists bring forward against the introduction of a gold standard or against the chances of bitcoins to become money.

Another myth that has become very relevant recently is that policies aiming at lowering costs, especially wages, and reducing public budget deficits would drive an economy into recession. Indeed, in the European sovereign debt crisis, austerity is branded as a harmful deflationary policy. Commentators recall the supposedly fateful deflationary policies of German Chancellor Heinrich Brüning in the early 1930s as a deterrent example of austerity. Moreover, the “rolling deflation” of 1931 is even used to argue in favor of an international lender of last resort, a step close to the introduction of a world currency. In this book all these myths are rebutted. There is even an historical analysis of Brüning’s policies, showing that they helped to speed up recovery.

—Philipp Bagus, preface to In Defense of Deflation, Financial and Monetary Policy Studies 41 (Cham, CH: Springer International Publishing, 2015), viii.

As Europe “Reinterpreted” the Maastricht Treaty to Avoid Catastrophe, Ben Bernanke Launched His “QE-Infinity” Policy

Towards avoiding the feared 2nd Lehman crisis, which incidentally would sink the re-election prospects of their commander-in-chief, President Obama, Treasury Secretary Geithner and Federal Reserve Chair Bernanke were prepared to put US taxpayer funds on the line by way of swaps with the ECB even though under some scenarios the ECB might itself become insolvent. As part of the deal Chancellor Merkel was persuaded to put at stake a much larger amount of German taxpayer funds, either directly via the new EU bail-out entities, the European Stability Mechanism (ESM) or European Financial Stability Facility (EFSF), or indirectly by standing (albeit to an unknown extent) behind the ECB’s vast loan programs. The LTROs [Long-Term Refinancing Operations] were highly dubious in terms of constitutionality — with critics arguing that the Maastricht Treaty specifically banned such bail-out operations. What followed was even more dubious, and to such a degree that we describe it here as a coup against the monetary constitution in the Treaty.

This coup played itself out in Summer and Autumn 2012 as the Spanish government debt market plunged and another crisis of survival erupted in EMU, this time with the centre of the storm in Spanish banking collapse. ECB Chief Mario Draghi, buttressed by the US Treasury Secretary, persuaded German Chancellor Merkel that the only way to avoid ‘catastrophe’ in Europe would be to ‘re-interpret’ the Maastricht Treaty so as to allow direct monetary financing of weak sovereigns, albeit subject to certain conditions. Simultaneously Chairman Bernanke launched his QE-infinity policy setting no time or quantity limit to massive monetary base expansion.

—Brendan Brown, Euro Crash: How Asset Price Inflation Destroys the Wealth of Nations, 3rd ed. (Houndmills, UK: Palgrave Macmillan, 2014), 217-218.

How the TARGET2 Balances of the European Central Bank Worked BEFORE the European Financial and Debt Crisis

With the national central banks being part of the Eurosystem, the intra-euro area rescue measures became reflected in the TARGET2 balances of the European Central Bank. TARGET2 (Trans-European Automated Real-time Gross Settlement Express Transfer System) is a real-time gross settlement system for payments within the euro zone, which is used to clear cross-border transfers in the euro area. Before the European financial and debt crisis, the national central banks’ positions in the TARGET2 system were widely balanced, because private capital flows were matched by respective payment flows resulting from goods markets transactions. For instance, German (Greek) capital exports (capital imports) corresponded to payments receipts (payments) for German goods sales (Greek goods purchases).

—Gunther Schnabl, “The Failure of ECB Monetary Policy from a Mises-Hayek Perspective,” in Banking and Monetary Policy from the Perspective of Austrian Economics, ed. Annette Godart-van der Kroon and Patrik Vonlanthen (Cham, CH: Springer International Publishing, 2018), 140.

On the Two Major Risks with the Euro: Sovereign Default and Redenomination or Intra-Euro Currency Risk

Currently there remains a strong strand of belief (particularly in euro zone countries) that exit is impossible. As we have already seen in 2010–12, markets are constantly probing and re-evaluating the probabilities and scale of alternative outcomes, and managing their investment and derivative positions accordingly. To date, most of the market pricing of euro stress has been concentrated in the sovereign debt markets. But this represents just one of two risks within the euro — the risk of sovereign default. The other risk — the risk of redenomination (or ‘intra-euro currency risk’) — has so far found little direct expression in the markets.

With a euro exit, this belief would be shattered and, once that happened, almost all of the advantages that a single currency had over an exchange rate mechanism would evaporate. It is likely, if there are any exits from the euro zone, that markets will begin to discriminate in favour of ‘strong’ (predominantly northern) debtors and against weak (predominantly southern) debtors on the basis of perceived exit risk. This could lead to a rapid emasculation of southern countries’ banking systems as southern depositors moved their deposits north for little or no cost or loss of interest.

—Neil Record, “Managing the Transition: A Practical Exit Strategy,” in The Euro: The Beginning, the Middle . . . and the End? ed. Philip Booth (London: Institute of Economic Affairs, 2013), 148-149.

Germany Broke Free from the Worldwide Dollar Standard (Bretton Woods System) By Floating the Deutsche Mark in May 1971

US monetary chaos has been both a hugely creative and a destructive force in the history of EMU [European Monetary Union].

If monetary stability had reigned throughout in the US there would have been no impetus to monetary union in Europe at least in its modern gargantuan form. Each country there might well have adhered individually to an international US dollar standard. . . . 

Instead the inflationary path taken by the Martin and Burns Federal Reserves fanned direct US monetary conflict with Germany where monetarist titans had assumed power in the Deutsche Bundesbank. Eventually Germany ‘broke free’ from the deeply flawed worldwide dollar standard often described as ‘the Bretton Woods system’, floating the Deutsche mark in May 1971. The calculation in Frankfurt and Bonn was that that the gains for the German economy from domestic monetary stability now possible would more than match the losses from exchange rate instability. Even so there was considerable concern about those possible losses.

—Brendan Brown, Euro Crash: How Asset Price Inflation Destroys the Wealth of Nations, 3rd ed. (Houndmills, UK: Palgrave Macmillan, 2014), 210.

The Axis Joining the Berlin Chancellery to the ECB Would No Longer Be Able to Support German Export Companies with a Cheap Euro

Hence the big German export companies would face a Day of Reckoning. The axis which joins the Berlin Chancellery to the ECB [European Central Bank] (at present the Merkel-Draghi axis) would no longer be able to support them (via a cheap euro). Under these changed circumstances, the euro falling apart may be their most promising road to future success. Yes, a re-incarnated DM [Deutsche Mark] would press down on export profit margins; but the menace of US-German or US-EU trade war would recede.

The CDU [Christian Democrat Union] could have new scope to move towards the right and away from the prevailing euro-centrism of the Merkel era, so winning back voters from the parties on the far right while also gaining some middle-class support from savers long disgruntled with the soft euro and negative interest rate euro. The feared descent of Germany into Weimar-style political chaos as could occur if the CDU remains frozen in euro-centrism (eventually joining up with the Greens in coalition and thereby fanning support for the extreme parties) could be aborted.

Yes, Italy would fall out of the euro-zone. The potential for sound money renaissance in Europe, possibly with France, Holland and Germany getting together in a new monetary union, would be real. Europe’s monetary future would no longer hang on a US thread. This possible window of opportunity might be short, given the potential danger of a US inflation storm further ahead as stemming from devastatingly weak public finances.

—Brendan Brown, “How a Fragile Euro May Not Survive the Next Crisis,” in Anatomy of the Crash: The Financial Crisis of 2020, ed. Tho Bishop (Auburn, AL: Mises Institute, 2020), 84-85.

The Death of the Euro Will Occur in Response to the Sudden Emergence of a “Deflationary Interlude”

A big US monetary inflation bang brought the euro into existence. Here’s a prediction: Its death will occur in response to a different type of US monetary bang—the sudden emergence of a “deflationary interlude.” And this could come sooner than many expect. . . . 

We find the existential vulnerability of the euro and the next US monetary shock will present the severest test yet. The shock is most likely to take the form of a sudden arrival of a “deflationary interlude” in a long and likely intensifying monetary inflation over the long-run beyond.

Specifically, as the virulent asset inflation stoked up in the present global monetary cycle (as always led by the Federal Reserve) proceeds into the final stage of unwind (asset deflation) and recession, there will be a period of overall credit contraction. This will be reflected most likely in the broad money aggregates. Prices and wages could come under some downward pressure, though this is not in itself evidence of monetary deflation.

In this asset deflation phase, accompanied by global slowdown or recession, Europe would be in a particularly dangerous situation. The vastly over-extended export sectors of Northern Europe are vulnerable, not least to the emerging market credit bubble turning to bust. Weak banks and sovereigns across Europe would descend into an insolvency zone. The weak euro and market share boosting measures of the big northern European exporters are likely to attract Trumpian ire.

There would be zero tolerance in Washington for continued or new-style monetary radicalism in Europe. If this is what holding the euro together requires, meaning that currency’s perpetual weakness, then it should not be held together.

—Brendan Brown, “How a Fragile Euro May Not Survive the Next Crisis,” in Anatomy of the Crash: The Financial Crisis of 2020, ed. Tho Bishop (Auburn, AL: Mises Institute, 2020), 81, 83-84.

Conditions Today Were Last Seen in 1929 When Smoot-Hawley Tariffs Coincided with the End of a Long Phase of Credit Expansion

Germany, whose fastest growing market was China, has been driven into recession, with last Monday’s purchasing managers’ index headlined as “simply awful”. With Germany being the locomotive pulling along all the other Eurozone members, this is already leading to deepening concerns for the Eurozone’s outlook and a resumption of asset purchases by the ECB (quantitative easing) is now due in November. It is also very bad news for Germany’s hard-pressed banking community, represented in New York by Deutsche Bank. . . . 

Clearly, the conflict between America and China has escalated well beyond just tariffs, making it difficult to visualize how the damage to global trade can be corrected. The economic outlook is therefore set to deteriorate further, with no end to it in sight. From a banker’s viewpoint, a global recession is the greatest threat to his business as a financial intermediary between failing borrowers and nervous depositors. He can only survive by taking anticipatory action to avoid potential losses.

Some bankers will have been clinging to the hope that the Fed, by reducing interest rates and if necessary, reintroducing quantitative easing, will rescue the US economy from outright recession and that economic growth will resume. Without doubt, this is the advice being given to management by in-house economists, unfamiliar with today’s destructive dynamics of tariffs combining with a failing late-stage credit cycle. These conditions were last seen in 1929, when Smoot-Hawley tariffs coincided with the end of a long phase of credit expansion. However, there is little statistical evidence so far that the US economy faces anything more than a pause in economic growth, which is why stock prices and other collateralized assets have held their values.

The reality is that a credit crisis cannot be avoided, only deferred. It is also hard to see how zero interest rates reduced from current levels can be enough to rescue markets that, on the evidence from the repo market, are beginning to price growing counterparty risk into interbank loans. Recent experience and central banking models suggest that dollar interest rates should be reduced by at least four or five per cent to stabilize the situation, putting them deep into negative territory. And as for negative rates, there is no development more likely to drive depositors into gold, silver and other media to escape from the taxation of negative rates on deposits.

—Alasdair Macleod, “The Ghosts of Failed Banks Have Returned,” in Anatomy of the Crash: The Financial Crisis of 2020, ed. Tho Bishop (Auburn, AL: Mises Institute, 2020), 63-65.

A More Worrying Comparison between Deutsche Bank and Northern Rock Is with the Credit-Anstalt Crisis of May 1931

Returning to the subject of bank relationships, a more worrying comparison between Deutsche Bank and the Northern Rock episode could be with the Credit-Anstalt crisis of May 1931. It was the largest bank in Austria, just as Deutsche is the largest in Germany, a far larger country with a more important economy. Then in Austria and today in Germany, European economies were tipping into recession, forcing large losses onto their banks. Following the 1931 crisis, within months not only Austria but other European countries endured financial distress, the gold exchange standard began to disintegrate, and the international flow of goods was disrupted by growing protectionism as governments tried to batten down the hatches.

The flight of foreign creditors triggered by these events rapidly turned a major crisis in a minor country into a major crisis for all Europe and beyond. Today, if the same fate were to happen to Deutsche Bank, not only would it be on a far larger scale, but there is the additional question of the gross notional value of its derivatives book of nearly $50 trillion and the future of the euro itself. Is it any wonder, if Deutsche is indeed at the centre of last week’s repo crisis, that other major banks,  have decided to step back and refused to accept its collateral in a repo?

—Alasdair Macleod, “The Ghosts of Failed Banks Have Returned,” in Anatomy of the Crash: The Financial Crisis of 2020, ed. Tho Bishop (Auburn, AL: Mises Institute, 2020), 58-59.

We Are Seeing (October 2019) the Ghosts of Past Bank Failures, Most Recently in the UK (2007) with Northern Rock

I have a strong suspicion we are seeing the ghosts of past bank failures, most recently in the UK, the sorry tale of Northern Rock which I closely observed. For non-British readers, a short reminder: as a licensed bank, Northern Rock was a mortgage lender which got into difficulties in September 2007, before being nationalized the following February. An old-fashioned run with customers queuing outside its branches seeking to withdraw their deposits had alerted the general public to Northern Rock’s problems. It was unable to tap wholesale money markets, because other banks were unwilling to lend to it on an uncollateralized basis.

The establishment missed the point. As Gillian Tett wrote in the Financial Times at the time, there were increasing concerns over how Libor [London Interbank Offered Rate] was operating. There was a growing divergence in the rates that different banks were quoting in the various currencies priced in Libor, discriminating against the smaller borrowers (actually, an indication of growing counterparty risk, not a supposed failure of Libor). Furthermore, larger banks were reducing their exposure to Libor by sourcing funds from the treasury operations of large companies and using the developing repo market (which is collateralized, unlike Libor — a further indication of increasing systemic concerns) to maintain their overnight balances instead.

—Alasdair Macleod, “The Ghosts of Failed Banks Have Returned,” in Anatomy of the Crash: The Financial Crisis of 2020, ed. Tho Bishop (Auburn, AL: Mises Institute, 2020), 55.

On a Key Difference between How the ECB and the BoJ Plus the SNB Have Administered Negative Interest Rate Policy

The subject: a key difference between how the ECB on the one hand and the Bank of Japan (BoJ) plus the Swiss National Bank (SNB) on the other have been administering negative interest rate policy in this cycle.

The powerful bank lobby in Germany has been asking why the ECB does not copy the SNB and BoJ in only charging banks negative rates on a marginal slice of their deposits with the central bank rather than the entirety.

Chief Draghi has not provided a direct or frank answer but admits that the issue is “under review.” His reticence hints at some of the disturbing motives behind negative rate policies.

In puzzling out why the ECB is administering negative rate policy in harsh fashion as regards the banks which are plush with reserves let’s start by identifying what common purpose it could achieve with the BoJ and SNB by keeping to a lighter touch (imposing negative rates on only a small marginal slice of deposits placed with the central bank by its member banks).

This common aim is currency manipulation.

The national money (or union money in the case of the euro) depreciates as a flight of capital occurs out of negative rate assets. All are not equal in this flight. Banks seek to shelter their regular domestic clients from negative rates. They pass on the cost of the negative rate fee on their reserves only to wholesale and foreign depositors, also taking account of the squeezed rates of return obtainable on their other assets including loans and short-maturity government bonds.

In effect the negative rate regime operates partly like a system of exchange restrictions which imposes penalties on foreign inflows into the domestic money market.

German banks are more stressed in sheltering their depositors from negative rates than their Swiss and Japanese counterparts given the harsh treatment of the ECB. In consequence the shelter they offer is less broad and deep and bank shareholders have to pay more heavily for its provision via diminished profits.

Why doesn’t Chief Draghi relent? Because that would mean less subsidy to Italian banks, stupid! The ECB takes advantage of the negative rate fee it charges on deposits (and German banks are the main net creditor of the euro-system reflecting the huge German savings surplus) to make subsidized loans most of all to Italian banks.

If ECB Chief Draghi were just pursuing currency manipulation, yes, he could please the German bank lobby (and the Bundesbank which pleads on their behalf). But he has this second purpose in mind. Hence the prevarication.

Ultimately these transfer consequences of negative rates within Europe (mainly from Germany to Italy) are not a matter for anyone else, including the Trump Administration. German voters should have their say. The aspect of concern for the US is currency manipulation.

—Brendan Brown, “The Menace of Sub-Zero Interest-Rate Policy,” in Anatomy of the Crash: The Financial Crisis of 2020, ed. Tho Bishop (Auburn, AL: Mises Institute, 2020), 41-42.

Money Has NO Market of Its Own Setting the Research Agenda for Monetary Disequilibrium Theory

Figure 3.7 looks dramatically different, to say the least, from the diagrammatics of conventional macroeconomics. The specific relationship between capital-based macroeconomics and, say, ISLM analysis or Aggregate-Supply/Aggregate-Demand analysis is not readily apparent. To compare and contrast Austrian macroeconomics with its Anglo-American counterpart in any comprehensive way would take our discussion too far afield. A few particular points of contrast, however, will help to put the differences into perspective.

First, unlike ISLM analysis, the graphics in Figure 3.7 do not include a market for money. Neither the money supply nor money demand are explicitly represented. Both in reality and in our analysis of it, money has no market of its own. Understanding the broadest implications of this truth sets the research agenda for monetary disequilibrium theory, which we take up in Chapter 11. Austrians, too, recognize the uniqueness of money in this respect. With trivial exceptions, money appears on one side of every exchange. Money, by definition, is the medium of exchange. But neither the transactions demand for money, as embedded in the classical equation of exchange, nor the speculative demand for money, as conceived by Keynes, make a direct appearance in the Austrian-oriented construction. Consistent with Hayek’s understanding, capital-based macroeconomics treats money as a “loose joint” in the economic system. As Hayek ([1935] 1967: 127) indicated early on, “the task of monetary theory [is] nothing less than to cover a second time the whole field which is treated by pure theory under the assumption of barter.” The three-quadrant construction in Figure 3.7 can be taken to depict, if not actually a barter system, a tight-jointed system. That is, money is assumed to allow market participants to avoid the inefficiencies of barter – without introducing any inefficiencies of its own. So interpreted, the interrelationships shown in Figure 3.7 belong to the realm of pure theory.

—Roger W. Garrison, Time and Money: The Macroeconomics of Capital Structure, Foundations of the Market Economy (London: Routledge, 2002), 51-52.

Theft by Devaluation Is the Technocratic Equivalent of Theft by Looting and War that Europeans Set out to Eradicate

At present, Europe’s most tangible and visible symbol is the euro. It is literally held, exchanged, earned, or saved by hundreds of millions of Europeans daily, and it is the basis for trillions of euros in transactions conducted by many millions more around the world. In late 2014 the ECB will occupy its new headquarters building, almost six hundred feet high, located in a landscaped enclave in eastern Frankfurt. The building is a monument to the permanence and prominence of the ECB and the euro.

Many market analysts, Americans in particular, approach Europe and the euro through the lens of efficient-markets theory and standard financial models—but with a grossly deficient sense of history. The structural problems in Europe are real enough, and analysts are right to point them out. Glib solutions from the likes of Nobelists Paul Krugman and Joseph Stiglitz—that nations like Spain and Greece should exit the Eurozone, revert to their former local currencies, and devalue to improve export competitiveness—ignore how these nations got to the euro in the first place. Italians and Greeks know all too well that the continual local currency devaluations they had suffered in the past were a form of state-sanctioned theft from savers and small businesses for the benefit of banks and informed elites. Theft by devaluation is the technocratic equivalent of theft by looting and war that Europeans set out to eradicate with the entire European project. Europeans see that there are far better options to achieve competitiveness than devaluation. The strength of this vision is confirmed by the fact that pro-euro forces have ultimately prevailed in every democratic election or referendum, and pro-euro opinion dominates poll and survey results.

—James Rickards, The Death of Money: The Coming Collapse of the International Monetary System (New York: Portfolio / Penguin, 2014), e-book.

Charlemagne Engaged in an Early Form of Quantitative Easing by Switching to a Silver Standard, and He Created a Single Currency

Charlemagne’s monetary reforms should seem quite familiar to the European Central Bank. The European monetary standard prior to Charlemagne was a gold sou, derived from solidus, a Byzantine Roman coin introduced by Emperor Constantine I in A.D. 312. Gold had been supplied to the Roman Empire since ancient times from sources near the Upper Nile and Anatolia. However, Islam’s rise in the seventh century, and losses in Italy to the Byzantine Empire, cut off trade routes between East and West. This resulted in a gold shortage and tight monetary conditions in Charlemagne’s western empire. He engaged in an early form of quantitative easing by switching to a silver standard, since silver was far more plentiful than gold in the West. He also created a single currency, the livre carolinienne, equal to a pound of silver, as a measure of weight and money, and the coin of the realm was the denire, equal to one-twentieth of a sou. With the increased money supply and standardized coinage, along with other reforms, trade and commerce thrived in the Frankish Empire.

Charlemagne’s empire lasted only seventy-four years beyond his death in A.D. 814. The empire was initially divided into three parts, each granted to one of Charlemagne’s sons, but a combination of early deaths, illegitimate heirs, fraternal wars, and failed diplomacy led to the empire’s long decline and final dissolution in 887. Still, the political foundations for modern France and Germany had been laid. The Frankenreich’s legacy lived on until it took a new form with the creation of the Holy Roman Empire and the coronation of Otto I as emperor in 962. That empire, the First Reich, lasted over eight centuries, until it was dissolved by Napoleon in 1806. By reviving Roman political unity and advancing arts and sciences, Charlemagne and his realm were the most important bridge between ancient Rome and modern Europe.

Notwithstanding the institutions of the Holy Roman Empire, the millennium after Charlemagne can be seen largely as a chronicle of looting, war, and conquest set against a background of intermittent ethnic and religious slaughter. The centuries from 900 to 1100 were punctuated by raids and invasions led by Vikings and their Norman descendants. The period 1100 to 1300 was dominated by the Crusades abroad and knightly combat at home. The fourteenth century saw the Black Death, which killed from one-third to one-half the population of Europe. The epoch starting with the Counter-Reformation in 1545 was especially bloody. Doctrinal conflicts between Protestants and Catholics turned violent in the French Wars of Religion from 1562 to 1598, then culminated in the Thirty Years’ War from 1618 to 1648, a Europe-wide, early modern example of total war, in which civilian populations and nonmilitary targets were destroyed along with armies.

—James Rickards, The Death of Money: The Coming Collapse of the International Monetary System (New York: Portfolio / Penguin, 2014), e-book.

Economic Performance in the US and the UK Was Superior under the Gold Standard to that of Managed Fiduciary Money

Economists are nearly unanimous in pointing out the beneficial economic results of this period. Giulio M. Gallarotti, the leading theorist and economic historian of the classical gold standard period, summarizes this neatly in The Anatomy of an International Monetary Regime:

Among that group of nations that eventually gravitated to gold standards in the latter third of the 19th century (i.e., the gold club), abnormal capital movements (i.e., hot money flows) were uncommon, competitive manipulation of exchange rates was rare, international trade showed record growth rates, balance-of-payments problems were few, capital mobility was high (as was mobility of factors and people), few nations that ever adopted gold standards ever suspended convertibility (and of those that did, the most important returned), exchange rates stayed within their respective gold points (i.e., were extremely stable), there were few policy conflicts among nations, speculation was stabilizing (i.e., investment behavior tended to bring currencies back to equilibrium after being displaced), adjustment was quick, liquidity was abundant, public and private confidence in the international monetary system remained high, nations experienced long-term price stability (predictability) at low levels of inflation, long-term trends in industrial production and income growth were favorable and unemployment remained fairly low.

This highly positive assessment by Gallarotti is echoed by a study published by the Federal Reserve Bank of St. Louis, which concludes, “Economic performance in the United States and the United Kingdom was superior under the classical gold standard to that of the subsequent period of managed fiduciary money.” The period from 1870 to 1914 was a golden age in terms of noninflationary growth coupled with increasing wealth and productivity in the industrialized and commodity-producing world.

—James Rickards, Currency Wars: The Making of the Next Global Crisis (New York: Portfolio / Penguin, 2011), e-book.

A Currency War Is Fought By One Country through Competitive Devaluations of Its Currency Against Others

A currency war, fought by one country through competitive devaluations of its currency against others, is one of the most destructive and feared outcomes in international economics. It revives ghosts of the Great Depression, when nations engaged in beggar-thy-neighbor devaluations and imposed tariffs that collapsed world trade. It recalls the 1970s, when the dollar price of oil quadrupled because of U.S. efforts to weaken the dollar by breaking its link to gold. Finally, it reminds one of crises in UK pounds sterling in 1992, Mexican pesos in 1994 and the Russian ruble in 1998, among other disruptions. Whether prolonged or acute, these and other currency crises are associated with stagnation, inflation, austerity, financial panic and other painful economic outcomes. Nothing positive ever comes from a currency war.

So it was shocking and disturbing to global financial elites to hear the Brazilian finance minister, Guido Mantega, flatly declare in late September 2010 that a new currency war had begun. Of course, the events and pressures that gave rise to Mantega’s declaration were not new or unknown to these elites. International tension on exchange rate policy and, by extension, interest rates and fiscal policy had been building even before the depression that began in late 2007. China had been repeatedly accused by its major trading partners of manipulating its currency, the yuan, to an artificially low level and of accumulating excess reserves of U.S. Treasury debt in the process. The Panic of 2008, however, cast the exchange rate disputes in a new light. Suddenly, instead of expanding, the economic pie began to shrink and countries formerly content with their share of a growing pie began to fight over the crumbs.

Despite the obvious global financial pressures that had built up by 2010, it was still considered taboo in elite circles to mention currency wars. Instead international monetary experts used phrases like “rebalancing” and “adjustment” to describe their efforts to realign exchange rates to achieve what were thought by some to be desired goals. Employing euphemisms did not abate the tension in the system.

—James Rickards, Currency Wars: The Making of the Next Global Crisis (New York: Portfolio / Penguin, 2011), e-book. 

In Zimbabwe, Hyperinflation Made Everyone a Criminal Because You Had to Break the Law to Survive

Zimbabwean society was a paradox. There was tremendous violence and thievery perpetrated in the name of political power, and yet there was respect and relative peace between individuals and communities of different cultures.

The government, in an attempt to maintain control, stirred violence in the rural areas and townships. Opposition party members were brutally oppressed, while those supporting the ruling party were given special favour. There was violent land occupation in the name of land reform and access to food became a political tool. Increased government surveillance and control resulted in great acts of terror.

Yet, in stark contrast, people felt safe to walk home at night without fear of assault.

Instead of the government fostering order through justice, it used the justice system as a tool to oppress and restrict. Ordinary citizens became accustomed to breaking the myriad of new laws that were issued in an attempt to control the population. Slowly, the formal justice system broke down. Respect for authority deteriorated, and the values held dear within the culture slowly began to erode.

Despite the peaceful culture, hyperinflation wore away at people’s ethical resolve over time. As millions were impoverished and government control increased, the only way to survive was through bribery, corruption and illegal activities. To continue about their everyday, peaceful lives, Zimbabweans had to break these laws. The paying and taking of bribes became an accepted norm.

Instead of obedience to the law, people had to use their own personal values and sensibilities in relationships as a guideline for what was wrong or right. Paying someone in US dollars, for example, wasn’t considered wrong by most people even though it was illegal, while stealing bread was considered wrong.

Yet, slowly values deteriorated with the heightening levels of desperation, and petty theft became frequent. Whatever could be stolen in public spaces disappeared. Anything that was made of wood was used for fire. Any movable metal was taken and sold as scrap. At one stage, all the road signs disappeared, many to be used as rudimentary funnels as barter in fuel increased.

Petty theft grew to be a big problem. There are stories of entire automatic gates being stolen (but very rarely would the thieves then go on to break into the house). Businesses struggled with inventory theft because staff just didn’t earn enough money to make ends meet. Truck drivers would siphon off fuel from truck tanks. Farmers’ crops and livestock were often stolen — particularly the livestock, which would typically disappear during the night.

In summary, theft revolved around stock shrinkage and theft of public property. Violent and aggressive disrespect for private property, muggings and house break-ins only started becoming a problem once hyperinflation had completely destroyed the economy and social values had deteriorated considerably.

—Philip Haslam and Russell Lamberti, When Money Destroys Nations: How Hyperinflation Ruined Zimbabwe, How Ordinary People Survived, and Warnings for Nations that Print Money (Johannesburg: Penguin Books, 2014), e-book.

With a 900 Per Cent Interest Rate in September 1923 the Reichsbank Was Practically Giving Money Away!!!

In these circumstances it is easy to understand that the German books dealing with the history of the Inflation Period are for the greater part of little value. They are so full of prejudices, and are often so entirely lacking in the theoretical insight which must necessarily precede all historical description that they cannot even give an adequate picture of the great historical event. For this reason this work by a learned American is all the more welcome. In his Exchange, Prices and Production in Hyper-Inflation: Germany, 1920-1923, Professor F. D. Graham of Princetown University has taken great pains to provide a reliable narrative. . . .

In reading Professor Graham’s historical survey even those who were witnesses of the Inflation must again and again be amazed at the incredible incapacity evinced in regard to the monetary problem by all sections of the German nation. For the economist the most astonishing fact is the inadequacy of the Reichsbank’s discount policy. This is Professor Graham’s verdict: “From the early days of the war till the end of June 1922 the Reichsbank rate remained unchanged at 5 per cent; it was raised to 6 per cent in July, to 7 per cent in August, 8 per cent in September and 10 per cent in November 1922, to 12 per cent in January 1923, 18 per cent in April, 30 per cent in August and 90 per cent in September. But these increases were as nothing when measured alongside the progressive lightening in the burden of a loan during the time for which it ran. Though, after September 1923, a bank or private individual had to pay at the rate of 900 per cent per annum for a loan from the Reichsbank, this was no deterrent to borrowing. It would have been profitable to pay a so-called interest, in reality an insurance, charge, of thousands or even millions of per cents per annum, since the money in which the loan would be repaid was depreciating at a speed which would have left even rates like these far in the rear. With a 900 per cent interest rate in September 1923 the Reichsbank was practically giving money away and the same is true of the lower rates in the preceding months when the course of depreciation was not quite so headlong.

—Ludwig von Mises, “The Great German Inflation,” Economica, no. 36 (May 1932): 230-231.

Ludwig von Mises Criticized Herr Havenstein, the Governor of the Reichsbank During the Hyperinflation of 1921-1923

In passing under review the German monetary and banking policy from the outbreak of the war to the catastrophe of 1923, the most startling thing is the absolute ignorance even of the most elementary principles of monetary science on the part of literally all German statesmen, politicians, bankers, journalists and would-be economists. It is impossible for any foreigner even to realise how boundless this ignorance was. For this reason, in the last three years of the German inflation, some foreigners came to believe that the Germans ruined their own currency of set purpose in order to involve other countries in their own ruin, and to evade the payment of reparations. Such imputation of secret satanism to German policy does it wrong. The only secret of German policy was Germany's total lack of any acquaintance with economic theory.

Thus Herr Havenstein, the governor of the Reichsbank, honestly believed that the continuous issue of new notes had nothing to do with the rise of commodity prices, wages, and foreign exchanges. This rise he attributed to the machinations of speculators and profiteers and to intrigues on the part of external and internal foes. Such indeed was the general belief. Nobody durst venture to oppose it without incurring the risk of being denounced both as a traitor to his country and as an abettor of profiteering. In the eyes both of the public and of the rulers the only reason why monetary conditions were not healthy was the lamentable indulgence of the Government in regard to profiteering. For the restoration of sound currency nothing else seemed to be necessary than a powerful suppression of the egotistic aims of unpatriotic people.

—Ludwig von Mises, “The Great German Inflation,” Economica, no. 36 (May 1932): 228-229.

Socialists Soon Recognized that a Result of Punitive Measures Against the Black Market Was an Increase in the Profits from It

Our politicians, blinded by their Étatist illusions, believe that the urban population is entirely dependent upon whatever is supplied to them by the state sector. That may be true for public employees without a second income and for many pensioners, to the extent that they are not supported by food supplements provided by relatives in the countryside. It is completely erroneous as far as the majority of the population is concerned. Rationed food items do not supply enough nutrition to sustain bodily functions in an adult at rest. Anyone who must restrict himself to what the government provides and what is offered in public food kitchens is doomed to a slow death from starvation. Expenses for rationed food items and prepared meals in war kitchens do not at this point use up the entire income of the workers. Any money left over finds its way into the black market. The masses live on what their black market purchases provide, and as soon as they can no longer obtain food supplies from the black market with crowns, they will be faced with a very difficult situation.¹¹

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¹¹ Following the collapse of the Austro-Hungarian Empire and the declaration of German-Austria as an independent republic in November 1918, the provincial authorities took increasing power over political and economic affairs in their jurisdictions, including restrictions on the sale and shipment of food supplies out of their areas to Vienna, leading to near-starvation conditions in the capital city through all of 1919 and into 1920. See Chapter 9, “Vienna’s Political Relationship with the Provinces in Light of Economics.” The black market became the only avenue for many in Vienna to acquire many of the essential items of life; see Charles A. Gulick, Austria: From Habsburg to Hitler, Vol. I (Berkeley: University of California Press, 1948), pp. 90–92:

Closely connected with the problem of state particularism [provincial political and economic nationalism] were the important Schleichhandel or black market difficulties; indeed, the restrictive policies of the [provinces] rendered that trade possible. And because of the desperate food shortage it became the most thriving “business enterprise” of Austria. The number of persons engaged in it, in defiance of law and decrees both of central and [provincial] governments, was naturally never statistically ascertained, but must have amounted to many thousands. . . . Despite their support for laws and ordinances on the matter, the Socialists soon recognized that a major result of punitive measures against the black market was an increase in the profits from it. The consumer needed commodities so badly that he had to buy them at almost any price; consequently, he was generally prepared to pay for the greater risks of the profiteer and his higher costs, that is, bribes, entailed by the prohibitive measures. . . . Specifically, the black market became a source of income for many official circles in the [provinces], for the bribes willingly paid by the profiteer were a welcomed addition to the lean wages of the civil servants. Thus the state bureaucracy had a special reason for supporting the system of trade restrictions which, as already noted, rendered the illicit trade possible.

—Ludwig von Mises, “On the Actions to Be Taken in the Face of Progressive Currency Depreciation,” in Between the Two World Wars: Monetary Disorder, Interventionism, Socialism, and the Great Depression, ed. Richard M. Ebeling, vol. 2 of Selected Writings of Ludwig von Mises (Indianapolis: Liberty Fund, 2002), 51, 51-52n11.