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Opinion column by Aubrey Herbert (pseudonym for Murray Rothbard), published in Faith and Freedom, Volume VII, Number 6, February 1956, pp. 22-23
Along Pennsylvania Avenue - Aubrey Herbert

Depressions are a thing of the past ... the old boom-and-bust cycle is as dead as the dodo ... the future faces us chock-full of permanent prosperity. That's what everyone is saying today.

The bitter blight of depression disappears from the horizon? What is changed? From Left to Right, the chorus answers: "nowadays things work differently." Economists have developed the "tools" to tame the business cycle.

The "tools"—a homely metaphor of workshop and factory, that's a favorite with the economists. President of the Council of Economic Advisers, Dr. Arthur F. Burns, fondly compares economy with carpentry. And few realize that Dr. Burns' lumber is the American people, and his "tools" just a policeman's club and handcuffs, when stripped of their fancy packaging.

Depression cures don't come easily; the economy must be planned carefully. The economic planner must be always on the alert, ready to turn on a little steam here, to apply the brakes there.

But the life of the planner is busy and rewarding, too. In the lower ranks, armies of statisticians gather the data and route it to Washington. On the upper levels, Dr. Burns and Dr. Hauge, top economic solons, confer with the President first thing on Monday morning, and plot the nation's course.

Just what kind of magical weapons do these economists forge? They doctor interest rates, expand public works (roads, schools, etc.), widen unemployment insurance, encourage unions to demand wage increases, continue high taxes, and offer new creations such as Dr. Burns' "domestic Point 4 program" for depressed areas. Both Left and Right Wing sing hosannas for this last program—from Miss Sylvia Porter (financial writer for the left-wing New York Post), to Murray Shields (corporation economist and director of Burns' National Bureau of Economic Research), to the conservative U.S. News and World Report.

Libertarians, like most people, are often unfamiliar with economics, and helpless in the face of this barrage. They may protest that all these economic tools set government dictation over the individual. But they fail to convince the host of citizens, who prefer a so-called "sound" economy to the blessings of liberty.

But the libertarian should rest easy. The great portion of the "economics" served up today is not scientific economics at all—only apologetics for statism, all dressed up in gobbledegook. Look closely at the "anti-depression remedies" offered. All add up to fancy schemes for government spending via inflation of the currency.

Inflation means an economic jag when we all delude ourselves that we are getting prosperous. The analogy—a system where one group may counterfeit to their heart's content.

Naturally, the "counterfeiters" spend the new money, and if the injections are large enough, the new money circulates throughout the economy; it raises prices and incomes. Everyone feels prosperous then. But the only ones who really benefit are the "counterfeiters" and the early receivers of the counterfeit money. They benefit at the expense of the late receivers—the "fixed income" groups: teachers, ministers and pensioners.

Thus inflation is simply legalized counterfeiting, performed by the government and its virtually nationalized banking system. Inflation takes income from the unorganized and gives it to the favored.

Inflation has another fatal result: when pumped into new business loans, it causes a later depression. How? It affects the rate of interest—that vital area of the free market understood by few, and manipulated by government. In a free economy, the rate of interest reflects the proportion people want to spend on consumption now, compared to how much they want to invest in producing goods for consumption later. As people's "time preference" for the present over the future lowers, the more they save and invest in plant and equipment, and the less they consume at present. Finally the rate of interest drops, because the interest rate expresses the people's time preference.

The interest rate, therefore, serves as a signal to businessmen; it tells them how much savings is available for investment in plant and machinery.

No Brake! Look Out

Inflation tampers with the signal, and tragedy results. Inflation lowers the interest rate below the free-market level; it makes businessmen think that more savings are available than are. Then, when the counterfeit money leaves the arena of business credit and spreads through the economy, the old consumption-investment proportion re-appears.

Businessmen are lured by the flood of cheap credit. They invest in countless projects that are really unprofitable and unjustified. When the credit inflation stops, depression occurs. Then business and the people wake up. They find that their investments were wrong, that they had best liquidate the unsound projects and salvage what they can. The depression is actually this painful, but necessary adjustment period that follows the inflationary credit boom. Finally, unemployment results when unions prevent wages from adjusting to the new conditions.

Thus we see that depressions are the consequence of credit inflation. Inflation, in turn, is generated by the government. If the government tries to bolster shaky firms or step up consumer spending in a depression, it only prolongs the distress—as in the 1929-39 period. The distress requires unhampered adjustment and increased savings for relief.

So depressions begin when the credit inflation ends. And the bigger the inflation, the longer the depression. The new "tools" simply try to stave off depression by prolonging inflation indefinitely. Hardly new, modern, or magical! All this was known for years. But when we were on the gold standard, we had a brake on governmental inflation, which had to stop when gold reserves were low.

Now the brake is off, and the sky's the limit. Are the economists right? Are depressions avoidable? For a time, sure, but only at the terrible price of something much worse—runaway inflation. Runaway inflation takes place when the people finally realize that the government means to inflate permanently. Thus begins the "flight from the dollar"—into stocks, real estate, gold, anything! In the final stages, people stop working and spend their time in a frenzy to get rid of their money as fast as possible.

Runaway inflation not only brings unemployment, it also wipes out the middle classes, washes away savings, kills the currency. Runaway inflation paved the way for Hitler in the 1920's, and did more to ruin Chiang-Kai-shek's regime than all the Red agitators.

Our planners know this; they only inflate a "little bit" each year, just a few billion dollars. This only postpones the day of the runaway.

Of course, the planners are always warning us about inflation, too. They don't criticize the government increase of money supply. Not a word about that. But they do attack the public for spending the new counterfeit dollars the government pumped in. So more "tools" of government spending and dictation are forged. The planners impose high taxes to "sop up excess purchasing power," put restrictions on real estate credit, installment purchases, the stock exchange—anything and anyone except the government itself.

"It's a Hold-Up"

Picture what your reaction would be if a group of counterfeiters printed new money, spent it, and then denounced the general public for causing inflation by spending too much! Picture your reaction if the gang used this as a reason for confiscating more of the public's money, and forced the people at gunpoint to spend their money in the ways the counterfeiters think best. But let's strip the present situation of the legalisms and the glitter, and ask ourselves: What's the difference?

The answer is plain: one is authorized by law. But that's the only difference; the results are the same.‡‡