Four Theories about the Great Depression

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More than most people, libertarians have beliefs about the Great Depression. Having spent several years studying the matter, I have some conclusions about four such beliefs: first, that what caused the depression was the Federal Reserve allowing a drop in the money supply; second, that what made it terrible was the passage of the Smoot-Hawley Tariff, which collapsed America’s foreign trade; third, that the New Deal really began under Herbert Hoover; and fourth, that what lengthened the Depression was fear of what the New Deal government would do.

In addressing these questions, I am relying heavily on my hometown newspapers — the Seattle Times, Seattle Post-Intelligencer and Seattle Star — because newspapers are “the raw material of history.” They are not the only sources available, and they have their mistakes, omissions, and biases. But they are broader than politicians’ collected personal papers and broader, in a different sense, than the economists’ statistical tables. As sources for general research about a period, I like newspapers best. I know newspapers. I spent 37 years working for newspapers and magazines, about half that time on the business and financial pages.

The first of the four beliefs, associated with Milton Friedman and the Chicago School, is that the Federal Reserve was responsible for turning a recession into a depression — the deepest and longest in American history — by shrinking the money supply. It’s true that there was less money in people’s pockets, and that was a bad effect. But when economists talk about the Fed shrinking the money supply, they mean shrinking the money available to the banks — and during most of the Depression banks were loaded to the gunwales with money. With few willing and qualified borrowers, they simply parked depositors’ money in US Treasury bonds and local bonds and warrants (thereby helping to finance their local governments and the New Deal). Bankers talked about this on the business pages, and showed it in the year-end bank balance sheets presented in newspaper display ads. For those reasons I find it difficult to indict the Fed for starving the banking system of money.

Newspapers have their mistakes, omissions, and biases. But they are broader than politicians’ collected personal papers and broader, in a different sense, than the economists’ statistical tables.

A variant of this argument is that the Fed mistakenly turned a recession into a depression by raising interest rates.

Overall the Fed lowered interest rates in the depression. In the two years following the Crash of 1929, the Fed cut its rate on short-term loans to banks, going down from 6% to 1.5%. But to stop the outflow of the Treasury’s gold during the currency crisis of September 1931, the Fed temporarily raised the rate to 3.5%. This 2% bump is the “mistake” that the economists holler about. At the time the Fed did this, critics said it would retard recovery, and when recovery didn’t come, the critics pronounced themselves right. But at the time, the financial editor of the Seattle Times noted that the Fed’s supposedly stimulative 1.5% interest rate hadn’t done anything to stimulate recovery. (The Keynesians would later say the Fed was “pushing on a string.”) Investors weren’t holding back because of two percentage points. They were holding back because they were afraid to borrow at all.

I’m not a historian of the Fed, and am not claiming the Fed made no mistakes. But pinning the depression on the stinginess of the Fed to the banks doesn’t seem right. If it were true, the interest rates would have been higher. Also, there would have been furious complaints in the newspapers, even in Seattle. And I didn’t see it.

During most of the Depression banks were loaded to the gunwales with cash. With few willing and qualified borrowers, they simply parked depositors’ money.

The second belief is that the Smoot-Hawley Tariff caused the Depression by posting the highest taxes on imports in the 20th century. The figure usually cited is that the average tariff rate under Smoot-Hawley was 59% — a horrible rate. This, however, was the rate on dutiable goods, and excludes the many goods on the free list. The average rate on all goods was 19.8% — still bad, but something less than torture.

Free traders always reach for the Smoot-Hawley argument. I have heard it not only from libertarians but from supporters of the WTO, TPP, NAFTA, and the promoters of trade in my hometown. And politically, I am on free traders’ side. I agree that the Smoot-Hawley Tariff, signed in June 1930 by Herbert Hoover, was bad medicine. And in this case, there was protest in the newspapers, with voices saying it was a terrible, self-defeating law, and predicting that other countries would retaliate. The newspapers ran stories when the other countries did retaliate.

Smoot-Hawley was also a contributing cause of the collapse in the international bond market in 1931, because it made it more difficult for America’s debtors — Britain, France, Germany, Brazil, Bolivia, Peru, and others — to earn the dollars to repay their debts. But this one bad law cannot bear all the blame for the subsequent implosion of America’s imports and exports.

I can think of four reasons why. First, the Depression was already on, so that by June 1930 imports and exports were already headed downward. Second, if you want to blame tariffs, put two-thirds of the blame on the tariffs in place before Smoot-Hawley was signed, which were an average of 13.5% on all goods. Third, in 1930 exports made up only about 5% of US output (versus 12.5% today), so that the shrinkage in trade, though dramatic in itself, was only two or three percentage points of the overall economy.

This one bad law cannot bear all the blame for the subsequent implosion of America’s imports and exports.

Finally, in September 1931, the British Commonwealth went off the gold standard. The British, Australian, and Canadian currencies were immediately devalued by 15 to 20%. Austria, Germany, Japan, and Sweden also went off gold, effectively devaluing their own currencies. The products of these fiat-money countries immediately dropped in price relative to the products of the United States. One example: Swedish wood pulp pushed US pulp out of world markets, so that almost all the pulp mills in Washington state shut down.

When Franklin Roosevelt came into office in March 1933, he ended the convertibility of the dollar into gold at the old rate of $20.67 an ounce. The reason for doing this was not a shortage of gold; the Treasury had stacks of it. The reason was to match the foreign devaluations and make American goods competitive again. And it did. Trade, the stock market, and the real economy jumped immediately when the dollar went off gold. From April to July 1933 there was a kind of boom, even though Smoot-Hawley was still in effect. (The boom ended because of the National Recovery Act and some other things, but that is another story.)

If you focus on principles, which libertarians like to do, you can lose sight of magnitudes and proportions that matter more.

The third belief, that Herbert Hoover was an interventionist and implemented a kind of proto-New Deal, is a thesis of Murray Rothbard in America’s Great Depression. Rothbard recounts that after the Crash of 1929, Hoover called leaders of industry to the White House and made them promise not to cut wages. The theory at the time was that this would maintain “purchasing power” and thereby prevent a depression. That was a precedent for the New Deal. It was noted at the time by business columnist Merryle Rukeyser (father of Louis Rukeyser, host of PBS-TV’s “Wall Street Week” from 1970 to 2002). Merryle Rukeyser wrote in December 1929 of the Hoover meetings, “The old-fashioned idea of leaving such matters to the individualism of business leaders — known as the doctrine of laissez faire among economists — has been formally laid to rest and buried.”

So Rothbard had a point: in principle, Hoover was an interventionist. But if you focus on principles, which libertarians like to do, you can lose sight of magnitudes and proportions that matter more. The larger fact is that the Hoover and Roosevelt regimes were hugely different in what the federal government undertook to do, what constitutional precedents they set, how many people they employed, how much money they spent, and how much they affected the world we still live in.

The fourth belief, that the New Deal prolonged the depression by frightening investors, is the thesis of libertarian historian Robert Higgs in his essay, “Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed After the War.” (Reprinted in Depression, War and Cold War, Independent Institute, 2006.) Higgs argues that the Depression lasted for more than ten years because of “a pervasive uncertainty among investors about the security of their property rights in their capital and its prospective returns” during the later New Deal of 1935–1940.

I can’t comment on much past the beginning of 1935, because that’s where I am in my reading. But I can verify that “regime uncertainty” was real, and that I saw evidence of it beginning in mid-1933, when the initial Roosevelt boom faltered.

At first Forbes advised his business readers to swallow it and said he was loyally swallowing it himself.

In the newspapers I read, the best barometer of this is B.C. Forbes’ business-page column. Forbes — the founder of the eponymous magazine — was very much a pro-capitalist guy. (The magazine calls itself a “capitalist tool.”) Forbes once wrote that his job as a newspaper columnist was to explain the economy to ordinary readers by interviewing industrialists and bankers. Much of the time Forbes was a transmission belt of their doings, thoughts, and feelings along with his own.

It was predictable that Forbes would not like the New Deal. At first he advised his business readers to swallow it and said he was loyally swallowing it himself. But he quickly began choking on the two principal “recovery” programs, the Agricultural Adjustment Act (AAA) and the National Recovery Administration (NRA). The NRA’s boss, Gen. Hugh Johnson, was a loud, imperious man who had been President Wilson’s boss of military conscription during World War I. During the early New Deal, Johnson helped to popularize two expressions: to chisel, meaning to lower one’s price below the government minimum, and to crack down, meaning to punish. In July 1933, Johnson went right to work, cracking down on the chiselers in American industry.

General Johnson was the closest that peacetime American business ever had to a military dictator. In August 1933, Forbes called him “a Vesuvius, in epochal, thundering eruption . . . Not even Teddy Roosevelt in his most explosive days matched General Johnson’s Titanic energy and action — or his wielding of the big stick.”

And: “Mussolini has nothing on him in readiness to undertake multitudinous tasks and to swing the Big Stick.” (This was when Italy’s dictator, Benito Mussolini, was popular with many Americans.)

General Johnson was the closest that peacetime American business ever had to a military dictator.

In the fall of 1934, when Gen. Johnson was replaced by labor attorney Donald Richberg, Forbes wrote: “Reason is expected to replace ranting swashbucklerism.” Forbes loved to publicize good omens, but during these years he was repeatedly disappointed.

In March 1934, Forbes quoted an anonymous industrialist (probably Charles Schwab of Bethlehem Steel, whom he named elsewhere in the column): “No, don’t quote me as saying anything that would sound like criticism of the administration or any branch of it. It’s too dangerous. I don’t want to be cracked down on at this time when Washington has unlimited power to do what it likes.”

Later in the same month Forbes wrote, “The fear today is not of the law but of bureaucrats. Few employers regard themselves as in a position to stand up against dictation as Henry Ford has done.” (Ford had refused to accept the NRA’s “voluntary” price and production controls, and was not allowed to display the Blue Eagle and its motto “We Do Our Part.”)

One of Forbes’ October 1934 columns was an open letter to Franklin Roosevelt, titled in the Seattle Post-Intelligencer “Mr. President, All Employers Aren’t Crooks.”

Forbes loved to publicize good omens, but during these years he was repeatedly disappointed.

Forbes is not the only wellspring of business angst. Here is Merryle Rukeyser, a man more sympathetic to the New Deal than Forbes, in September 1934: “Business men are in a timid mood because of lack of assurance as to their tax liability and as to the attitude of the powers that be toward business profits.”

A doubter might argue that a handful of newspaper columns aren’t enough to prove Higgs’ thesis. I suppose so; but how would you prove it? It is about a state of mind — “confidence” — and how do you demonstrate that except by considering what people say and do? In fact, investors talked and acted as if they lacked confidence; statistics show a shortage of long-term investment. And in fact, there were statements by Roosevelt and by Hugh Johnson, Harold Ickes, Henry Wallace, Rexford Tugwell, and other New Dealers that might very well cause investors to lack confidence. And it was not only the New Dealers, but also their opponents on the left: Dr. Francis Townsend, who wanted every American over 60 to have $200 a month of government money (about $3000 in today’s terms); Upton Sinclair, the Democratic nominee for governor who wanted to set up a socialist economy in California; Father Coughlin, a radio priest who ranted against the rich; and Sen. Huey Long, the “Kingfish” of Louisiana who called his program “Share the Wealth,” and who was stopped only by an assassin’s bullet. This was a different time — and newspapers give you a flavor of it.

Of the four beliefs about the Depression I mentioned at the beginning, I think Robert Higgs’ “regime uncertainty” is most clearly verified. (Read his essay!) The crucial fact about the Depression of the 1930s is not that America got out of it; it always gets out. It’s that the getting out took more than ten years, which was longer any other depression in US history, and that Canada, Britain, Germany, and most other countries got out sooner, and that it took a worldwide war and the eclipse of the New Dealers for America to get all the way out.

Investors talked and acted as if they lacked confidence; statistics show a shortage of long-term investment.

But I don’t think the depression of the 1930s — the onset of it, the depth of it, the duration of it — was caused by any single thing. The commercial world is more complicated than that. I think the Austrian theory of overinvestment, or “mal-investment,” explains much of the setup of the crash, because in the late 1920s and into 1930 there were a lot of bad investments in real estate, commercial buildings, holding companies, and junky stocks. The Crash in 1929 shrank people’s assets and, more important, their confidence — for years. The Dow Jones Industrials went down almost 90%. The reparations owed by Germany to Britain and France, the sovereign debts owed to the United States by Germany, Britain, and France, as well as to Brazil and other South American republics, all had something to do with it, because in 1931 this grand edifice of debt went down in a heap. The bond market was so thoroughly wrecked that counties, cities, school districts, and corporations were locked out of long-term borrowing for several years. Smoot-Hawley and the whole movement toward economic nationalism had a bad effect. The gold standard deepened the Depression because it imposed a discipline on government finances — heavy spending cuts — at a time when they were painful, and when some countries freed themselves of that discipline it shifted the pain to the other ones. Finally, the anti-capitalist political currents and the ad hoc, experimental, extralegal character of the New Deal frightened investors, whose long-term commitments were needed for economic recovery.

That’s the best I can do. I’m still reading old newspapers.




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More Trumpeterian Trade Follies

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President Trump is nothing if not consistent on the matter of international trade. The Boss has had few fixed positions over the years. He’s been a Democrat — and a generous financial party donor, even giving money to Crooked Hillary — then a Republican when it suited him; pro-abortion then anti-abortion; pro-immigrant before becoming the king of nativism; religiously indifferent before his newfound flourishing of faith; and so on. But his opposition to global trade has never wavered.

When pressed, of course, he will feign support for free trade if it’s “fair” — “fair” being what philosophers call a “weasel-word.” It allows the speaker to shift meanings to suit the context. If we are talking about China, Trump says its trade is unfair because it steals intellectual property and forces our companies to share technology with Chinese companies — both practices that, all economists agree, violate the World Trade Organization rules — and because it has a large balance of trade surplus with the US — something that most economists view as usually not a problem, because any trade surplus is invariably balanced by an investment deficit.

Trump has had few fixed positions over the years. But his opposition to global trade has never wavered.

But Trump’s virulent attack upon NAFTA was merely based on the fact that Mexico posted a modest balance of payments deficit with us and Canada an even smaller one. Neither country, please note, has routinely (or even occasionally that I have heard reported) stolen our technology or forced transfers of it as the price of doing business in its markets. El Jefe, who apparently cannot grasp the concept of comparative advantage, has never understood that in any free trade deal with Mexico, a fair amount of low-level manufacturing would shift there, but a fair amount of agricultural production would move from there to the US. Both things happened, but most American critics of NAFTA never noticed the shift of agriculture to the US, just as Mexican critics of NAFTA never noticed the shift of manufacturing to their country.

I recall a business ethics class in which one of my students — a gabacho like me — waxed emotional about “Mexicans stealing our jobs”, while another student — una Mexicana — waxed equally emotional about how gringo farmers were stealing the jobs of campesinos. I suggested that this is what the law of comparative advantage would predict: in the case of a country blessed with a grotesque amount of deeply fecund land trading freely with a country blessed with a grotesque number of deeply hard-working but low-skilled laborers (and less fertile land), low-level manufacturing moves to the labor-heavy country, while agricultural production moves to the fertile-land-heavy country — to the obvious general benefit of both sides. At this, the clearly puzzled students fell silent.

Several recent stories bring to light the economic consequences of Trump’s economic incomprehension. The first is about the debate over the USMCA — the new agreement between the US, Mexico, and Canada that is intended to replace NAFTA. Our own International Trade Commission, a bipartisan body that is tasked with evaluating trade deals for Congress, has said that the effects of the new trade agreement would be limited, eventually raising the GDP of America by only 0.35%, while adding maybe 176,000 jobs. These are meager results compared to the benefits that the existing NAFTA has delivered. And the ITC found that (if the new agreement is ratified) the cost will be a considerable rise in prices for American-made cars — in great part because it requires Mexican companies to raise wages artificially to bring them closer to American unionized auto wages. Specifically, the agreement says that 75% of a car’s value must come from North America, 45% of the car must be made by workers earning $16 per hour or more, and more local aluminum and steel must be used.

He has never understood that in any free trade deal with Mexico, a fair amount of low-level manufacturing would shift there, but a fair amount of agricultural production would move from there to the US.

This is a great deal for Trump’s rentseeking union supporters, but a screw job for the American consumer. The ITC estimated that small American cars will rise 1.6% in price, leading to a 2.35% drop in sales — sales that are already shaky.

Worse yet, some economists predict that many auto industry companies will simply pay the tariffs rather than agree to the outrageous rules and regulations imposed by the unions’ catspaw Trump — ironically, a man who brags about eliminating regulations! This will again directly raise prices to consumers.

Another article reports on the aftermath of Trump’s reckless and thoughtless decision to pull out of the Trans-Pacific Partnership (TPP). He figured that he killed the agreement when he announced that the US would drop out of the deal (negotiated under the Obama administration); however, the remaining 11 countries went ahead, renamed it the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), and ratified it in 2018. In its first year, it is already producing great results for the countries in it, though not of course for us.

For instance, the General Department of Vietnam Customs has reported that Vietnam’s exports to Japan are up by 11.2%, and those to Canada are up by 36.7%, in the first two months of this year compared with last year. Japan reported that last year its beef imports rose 25% from the same period. New Zealand has seen a rise of 133% in beef exports to Japan, and Canada a rise of 345% this year over last.

In its first year, the renamed Trans-Pacific Partnership is already producing great results for the countries in it, though not of course for us.

The rise in beef imports threatens to trigger a Japanese protection mechanism that will jack up tariffs on beef imports from an insane 38.5% to a truly absurd 50%. This will not affect CPTPP ranchers, but it will non-CPTPP ones. More generally, as the Asian region continues its rapid economic growth, the US will be at a distinct disadvantage in exports to the region, compared with the CPTPP ones.

As another article notes, Japan is willing to deal. It has indicated that to avoid tariffs on its cars, it will open up its agricultural market. If Trump simply can’t stomach joining the CPTTP, he can still do a bilateral deal. We can only hope that he does. And Our Oyabun seems to think that he can get better deals if they are bilateral rather than multilateral, apparently under the schoolyard-bully theory that he can use his personal power to force concessions out of the other side.

That’s the theory. So far it hasn’t worked out.

Two other articles point out the idiocy of Trump’s trade policy. The first reports the results of the steep tariff on imported washing machines he ordered a year ago. Faced with stiff competition from evil Asian competitors — you know, horrible people who work harder, for less money, and produce a superior product! — especially the companies LG and Samsung, domestic company Whirlpool got the president to impose a whopping 50% tariff on all imported washing machines. That was a year ago. A new research report written by economists at the Federal Reserve and the University of Chicago gives the results. Profits at Whirlpool have risen a stunning fourfold, to $471 million; but only a measly 1,800 jobs are owing to this high tariff. Samsung plans to open a plant here employing 1,000 people, LG one employing 600, and Whirlpool — the crony capitalist villain of this story — will add a risible 200 jobs.

American consumers were ripped off to the tune of $1.5 billion. That works out to $800,000 for each of the 1,800 jobs!

What is the cost of this “fair-trade” charade? Prices on imported washing machines went up $86 on average (that is, about 12%). Of course, Whirlpool did not keep its own prices low — it jacked them up 13% to 17%! Hence Whirlpool’s whopping half-billion-buck profit. The report estimates that American consumers were ripped off to the tune of $1.5 billion. That works out to $800,000 for each of the 1,800 jobs! That was your tax dollars at work.

Another article reminds us that while China’s trade with us has been flawed by its often dishonest trade practices, we ourselves don’t exactly have clean hands. Consider “anti-dumping duties.” In America, as in most other countries, domestic companies that can’t compete with foreign ones routinely claim that the foreigners are “dumping.” Dumping is the (alleged) practice of selling what is traded in the foreign market for less than what is charged to home customers, or below the cost of production. Most economists doubt that this routinely occurs — it would cost a company a lot of capital to sell below market in another country to get a monopoly, especially when you realize that such a monopoly would be impossible to sustain. When the “dumper” raised prices back up, domestic firms would just start making the product again.

Trump has systematically used dumping charges to protect chosen industries here. China has been the target of 40% of American dumping investigations, and the US imposes the heaviest duties on Chinese companies — duties that have been rising recently. These charges are often dubious. The US protects its own industries, often by comparing a foreign company’s prices here only with full prices in that company’s home market, disregarding discounted prices it charges at home. Moreover, price deductions for such things as overhead and salespersons’ salaries are capped for sales at home but not here. In other cases, where the home market prices are lower, our trade officials simply ignore them.

We keep pulling these stunts, even though the WTO has shot many of them down. Funny, President Trump never mentions how we stick it to other countries. No, he has demagogically persuaded a large part of the American public that we are pure victims in these trade games.

Trump’s tariffs will cost the average American family over $800 per year. The amount will rise dramatically if he applies those tariffs to all Chinese imports.

Two other articles put a nice cap on this discussion. No doubt to Trump’s amazement, the Chinese are playing hardball. Their tariffs on our agricultural goods have devastated many of our farmers. Brazil — which long ago negotiated a free trade agreement with China — has now replaced us as China’s major supplier of soy beans and other crops. In fact, Brazil is opening more of its lands to cultivation, in order to increase exports. In soybean production, US exports to China fell from $12.3 billion in 2017 to a pathetic $3.2 billion last year.

To counter the decision by the Chinese to buy more from Brazil, and to keep the support of farmers here, Our Great Protector just announced that he will give another $16 billion in aid to farmers (in addition to the $11 billion he gave them last year). This is the president at work: using billions of our tax dollars to keep the farm states on his side. It’s a great illustration of public choice theory, or venality in office.

While Trump makes the claim that the subsidies for farmers are coming from the tariffs the Chinese are paying, that claim is ludicrous on its face. Tariffs are taxes imposed on foreign goods — but paid by the American consumer. As noted by US News, Trump’s tariffs will cost the average American family over $800 per year. The amount will rise dramatically if he applies those tariffs to all Chinese imports, as he has threatened to do.

Yet another article informs us about another unseen group of Trump’s economic victims, namely, American farm equipment manufacturers. As the piece reports, companies that make combines, tractors, and other farm machinery are looking at a double-Trump-whammy.

Trump’s high tariffs for the steel and other metals that farm equipment manufacturers use will further hurt them.

First, they face a loss in demand as farmers under pressure from low prices for crops choose to defer buying new equipment. US agricultural exports to China in the first few months of this year are down 40% from the same period last year. And in 2018 we shipped to China less than half of what we shipped in 2017. So Deere will cut production 20% in the second half of its fiscal year. Lindsay Corp said its profits will drop by 31%, because sales have declined 16% in the last three months through February. CNH and AGCO also reported lower sales of their machinery in the first quarter of this year, compared to last year. Titan has reported a 35% drop in first-quarter profit in farm machinery sales.

Second, Trump’s high tariffs for the steel and other metals that farm equipment manufacturers use will further hurt the manufacturers. For example, Vermeer Corp., manufacturer of hay balers, said that it will lose $4 million in direct tariff costs in 2019. CNH expects tariffs to drive up its costs by $50 to $100 million, and Deere estimates the tariffs will cost it $75 million. Moreover, both Vermeer Corp. and Lindsay Corp. report paying more for costs because of the tariffs.

Especially worrisome for the American agricultural industry is this question: once China and all the other countries we have hammered get robust supply chains set up with Argentina, Brazil, Canada, New Zealand, and elsewhere, will they resume buying from us when we cease our tariff wars?

There’s no reason to think that Trump is open to a cessation of tariffs, which he seems to love, as an exercise in power.

Now, to this last point, one might cleverly respond that if a cessation of dumping would cause a quick resumption of competition, why wouldn’t a cessation of tariffs cause a quick resumption of competition?

Of course, there’s no reason to think that Trump is open to a cessation of tariffs, which he seems to love, as an exercise in power. But speaking to the general principle: if a country were truly to start dumping with an eye to putting its competition out of business, it would lose massive amounts of profit until it succeeded. Upon cessation of this dumping, the prior competition could just quickly reopen its factories. But when you tariff your own goods, your domestic producers lose market share as other countries create or expand facilities to meet the demand of satisfying your prior customers. But if you stop your tariffs, those other countries would still have their newly created or expanded production lines still in place.

In other words, this feeble reply is a false analogy. Dumping — a phenomenon most economists doubt really exists — would only temporarily shut down some of the pre-existing competitors’ facilities. But tariffs lead to the permanent creation of new facilities of competitors.

Even after any imagined cessation of tariffs, there will be an irreversible loss of trust.

Does anyone really think that after tariffs disappear — if they disappear — that the newly developed farmland in Brazil will just be converted back into rainforest? If you believe that, I have a high-rise Trollop Tower in Manhattan to sell you.

Finally, even after any imagined cessation of tariffs, there will be an irreversible loss of trust. If America, a loud exponent of free markets, private property, and free trade, from the end of WWII until recently, is now willing to wage tariff war for the most trivial of reasons, who will trust such a Republic of Lies?

The even more worrisome question raised above is this: will the tariff war end at all? Perhaps the Chinese have taken the measure of Trump and have concluded that he is a flawed and doomed president, and that they can just outlast him. Moreover, he has just announced that he will reattack — Mexico! His loopy proposal is aimed at getting Mexico to seal its borders, so Central Americans won’t keep coming here. He will start the tariff at 5% on all of Mexico’s exports immediately, and raise it 5% per month until it hits 25%. What a massive misuse of the tariff powers of the president! Trump seems to now view tariffs to be the ultimate skeleton key to open the door for any policy he wishes to achieve.

America will be increasingly consigned to third-rate status in world trade and influence.

Oh, and this just in: Trump has informed Prime Minister Modi (a man he professes to admire) that India — whose alliance we may need to counter a rising China — will shortly lose its designation as a beneficiary developing country. It will be removed from the Generalized System of Preferences, aimed at helping developing countries. We will now start jacking up taxes on Indian trade — starting with washing machines! To this, India has promised jacking up tariffs on American goods. In fine, a new front on the widening trades war.

This all raises the question of whether our standing in the world will recover any time soon. Color me skeptical. Trump’s widespread and indiscriminate use of tariffs, his refusal to join TPP, his upending of NAFTA, his failure to produce any new free trade agreements, his other bullying trade tactics — indeed, his whole crony capitalist betrayal of free market economics — mean that America will be increasingly consigned to third-rate status in world trade and influence.

Trump has made America small again. Quick — somebody order a bunch of “MASA” caps!




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Will the LP Be Destroyed by Victories?

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The thesis of this reflection is simple: if the Republicans move to the right on economic issues, trying to attract fiscal-Right voters, and stay with the Right on guns, while the Democrats move to their social left by supporting legalization of recreational cannabis, sex workers, and gambling, then every Libertarian Party issue will be championed by either Democrats or Republicans who will have a better chance of winning elections. At that point, the LP will have no reason to exist.

The GOP recently passed tax cuts, and the current White House is aggressively deregulating. The LP can do little that the GOP is not already doing. The GOP is also extremely strong on gun rights and opposition to gun control, and, like the Democrats’, its foreign policy is veering toward military disengagement abroad.

The LP has won by forcing the two major parties to embrace libertarian issues in a way that would have been untenable and even unthinkable in previous generations.

Meanwhile, state and local Democratic parties are increasingly willing to reform criminal laws to legalize recreational cannabis. Right now it is also a vanguard or vogue position among far-left Democrats to support legalizing prostitution (a position that has long been championed by gay rights groups on the far left). There are whispers in New York that the Democrats in the state legislature intend to legalize both recreational cannabis and sex workers, a path that other state Democratic Parties are also treading.

The LP has won by forcing the two major parties to embrace libertarian issues in a way that would have been untenable and even unthinkable in previous generations. But take away weed, whores, guns, and tax cuts, and what is left for the LP to talk about? Nothing. There may be nothing more for the LP to do. But do not worry. I have a solution to this problem.

The one thing liberal Democrats and conservative Republicans cannot do is create a social space uniquely for libertarians. The Libertarian Party should essentially reimagine itself as a social club for liberty where running candidates is a hobby but the real purpose is building a community. The LP can organize meetings, sponsor online events, build forums for communication, assist the authorship and distribution of ideological content, and fund academic scholarships. The LP will probably never win elections even if it tries, so it has nothing to lose by moving in this direction.

But take away weed, whores, guns, and tax cuts, and what is left for the LP to talk about?

An organized movement built from LP grassroots community activism could then trickle down into the mass of mainstream voters, keeping the GOP on the far Right and forcing Democrats to defend the social Left. Other than providing services uniquely to libertarians, there may be nothing the LP can do that Republicans or Democrats could not do better in today's political climate.




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The Great Panic

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I have long been a fan of the Panic of 1893, which is the usual name for the great depression of the 1890s. When I say “great” I mean it is comparable by all available measures (business losses, unemployment, political turmoil) to the Great Depression of the 1930s — with two exceptions. First, the depression of the 1930s lasted for more than ten years, ending only with the start of the Second World War in Europe; the depression of the 1890s lasted less than half as long. Second, in the 1930s the federal government intervened massively to try to end the depression, whereas the government of the 1890s did as little as it could.

These two exceptions are closely related. In 1893 and after, President Grover Cleveland had the political and above all the intellectual courage to allow prices to sink until recovery could begin. He devoted his best efforts to stabilizing the dollar, so that sound money and real prices could beget confidence, and confidence could beget reinvestment. This happened. But in 1929 and after, Presidents Herbert Hoover and Franklin Roosevelt were guided by the economic ignorance and sheer quackery of their times (and ours); they intervened to keep prices up and bail out bad investments — using money, of course, extorted from the people who had made good investments. Roosevelt’s subsidies extended to the destructive political ideas of his time; he encouraged political action to fulfill the borderline-crazy terms of his first inaugural address, in which he announced:

The money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths. The measure of the restoration lies in the extent to which we apply social values more noble than mere monetary profit.

The result was not only chronic political turmoil but a failure of reinvestment caused by a chronic absence of confidence in the nation’s economic and political prospects. Money, as R.W. Bradford used to say, wants to be invested, but it didn’t during the 1930s, when for a series of years there was actually “negative investment” in the economy.

In 1929 and after, Presidents Herbert Hoover and Franklin Roosevelt were guided by the economic ignorance and sheer quackery of their times (and ours).

So you see one reason why I am a fan of the depression of the 1890s — it provides clear and persuasive economic, political, and, if you will, spiritual lessons. But another reason is that the economic and political controversies of the 1890s are a lot of fun. Communism is dull stuff, no matter where it appears, and in the 1930s it manifested itself in remarkably dull, stupid, pompous, and oppressive forms. Compared with that, the nostrums of the 1890s are bright, delusive rays of sunshine. You just have to smile at Jacob Coxey’s plan to save the country by a complicated scheme for the federal government to print tons of paper money and use it to give free loans to local governments so they could create jobs in public building programs — a plan he implemented in the first of the great marches on Washington, the march of Coxey’s Army. The march culminated in Coxey’s arrest at the Capitol, for walking on the grass.

And who wouldn’t have fun trying to follow the logical permutations of the Free Silver idea, the notion that the American economy would be perfected if the federal government would simply produce unlimited quantities of silver dollars (and paper instruments representing them), priced at 16 silver dollars for one gold dollar, when the market price of a gold dollar was much higher than 16 silver dollars? This was a recipe for outrageous inflation, yet in 1896 it captured the Democratic Party and could have led to the election of the Democratic candidate, William Jennings Bryan, he of the stirring Cross of Gold speech:

You shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.

It’s a good speech, and some of the books and pamphlets written in favor of Free Silver are immensely clever complications of an argument that is clearly wrong but has a way of starting to look right if you don’t take a step backward and remind yourself of what it’s really about.

Compared with the remarkably dull, stupid, pompous, and oppressive forms of communism that manifested in the 1930s, the nostrums of the 1890s are bright, delusive rays of sunshine.

Now comes Bruce Ramsey, author of the book I am reviewing and — all cards on the table — senior editor of Liberty and a good friend of mine. Bruce is a tireless researcher of the events, theories, and movements of the 1890s. He knows their importance. He knows they reveal important truths about the ways in which economies function, and in which people function within them. And he knows they’re fun. The only problem is that the vast majority of Americans have simply forgotten about the depression of the 1890s. They forgot about it almost as soon as it was over. (I have an essay about this in Edward Younkins’ Capitalism and Commerce in Imaginative Literature [Lexington Books, 2015].) In the popular imagination, the decade of desperation was soon transformed into the Gay Nineties.

There aren’t a lot of good treatments of national politics and economics in the 1890s. Allan Nevins’ biography of Cleveland (1932) remains the best. And there are few decent treatments of the effects of the depression on individual men and women, in their local communities. That’s the vital part of the story that practically nobody knows. And that’s what Ramsey gives us in his brilliant new book about the state of Washington during the Panic.

In writing such a book, Ramsey faced one of the hardest challenges a writer of history can encounter. A straight-line narrative of national political and economic events would capture only part of the picture. So would an exclusive concern with one particular locality, such as Bruce’s home state, Washington. So would concentration on certain personalities, as in the cheap, tangential approach to history that one sees in the Ken Burns films. What Bruce needed to present was the full tapestry of local people and local events, rippling in the strong winds of national affairs; he needed to capture not only the big patterns but the individual figures in the tapestry, and he needed to show those ripples of history too. But he was equal to the challenge.

The vast majority of Americans have simply forgotten about the depression of the 1890s. They forgot about it almost as soon as it was over.

Bruce Ramsey is a quick but colorful narrator. He provides the pungent detail and the suggestive episode and then moves briskly onward to the next significant picture, whether it’s the portrait of an interesting man or woman, an array of statistics, a sketch of political developments nationwide, or a tale of something that’s too ridiculous to be true, but is. Did you know that in 1893 the Populist governor of Kansas tried to use the state militia to oust the Republicans (who happened to be in a majority) from the House of Representatives in Topeka? (If Dorothy wanted adventure, she could have stayed right in Kansas.) This absurd drama — one of many in Ramsey’s book — offers some perspective on the absurd politics of the present era. To say that Ramsey’s political narrative is entertaining is itself absurd; it’s an absurd understatement.

Here are thousands of stories, small in the number of words that Ramsey, a thrifty narrator, allots to each, but large in drama and implication. We see people who are found talking gibberish in darkened hotel rooms because their bank deposits of $256 had been lost to the panic. We see government officials who steal money, and lose it, and then escape to Argentina, or to a place off the coast of Washington called Tatoosh Island, thence to change identities and be discovered working as mowers in Idaho. We learn of a government official who is acquitted by a jury that doesn’t believe that bribery is against the law. We listen to a contractor for the Northern Pacific railway who says he “had put white men at work at $2 and gradually raised their wages to $2.50, although there was no time when [he] could not have employed Chinamen at 80 cents” (p. 51). We meet mayors who work in shingle mills because their cities can’t pay them a salary, and unionists who resort to riot and terror to keep their salaries from being cut.

The sheer number of stories that Ramsey tells is remarkable; still more remarkable is his unfailing ability to integrate them into larger contexts of meaning. Here’s one of the general patterns he sees. Businesses and banks that made it through this great depression often did so because they backed each other up. Seattle, where the spirit of cooperation was strong, suffered many fewer losses than such competing communities as Tacoma and Spokane. Seattle’s bankers went so far as to refuse deposits from people who had withdrawn them in panic from other banks. This was individual action, but it was mutually supportive. It was a kind of spontaneous order, and it often saved the day.

We see people who are found talking gibberish in darkened hotel rooms because their bank deposits of $256 had been lost to the panic.

Here’s another pattern. Led by President Cleveland, the federal government disclaimed responsibility for helping individuals — whether bankers or street sweepers — get out of their financial jam. Most public opinion seems to have backed him up. Newspapers in the Pacific Northwest counseled their readers to take responsibility for themselves — and above all not to hurt business by fleeing to some place with a marginally better economy. Their message was “stay here and keep pitching.” A Baptist potentate cautioned against giving money to the poor indiscriminately; this was “a selfish act, done to make the giver feel good” (83). Some local governments acted in what they regarded as the spirit of community and provided employment on public works projects, and some of them went broke doing it. But charity ordinarily began at home. As Ramsey observes, very perceptively, “In a world with little free public food, people tend to be generous with their private food” (93).

A darker side of community spirit was the almost universal feeling that if anyone was going to be without a job, it shouldn’t be someone white. Everywhere Asians were fired from jobs or prevented from getting any, and mobs formed to destroy Chinatowns throughout the region. It was only a temporary rescue when the wife of a local missionary faced down a mob that came for the Chinese people of La Grande, Oregon: “She appeared with a Winchester and announced that the first man to enter the house would be shot” (79). Most of the Chinese left town anyway; and although 14 rioters were arrested, none was convicted. Oregon’s Progressive governor haughtily rejected President Cleveland’s request that he protect the rights of the Chinese.

A darker side of community spirit was the almost universal feeling that if anyone was going to be without a job, it shouldn’t be someone white.

Much of Ramsey’s book is devoted to racism and progressivism during the depression. It’s quite a story, and again, it’s a gift of perspective: then as now, the predominant individualism of America was too much of a burden for many Americans to bear.

Obviously, the implications of Ramsey’s stories go far beyond the Pacific Northwest. The stories of that region cannot be explained without reference to the bigger stories of the nation’s money policy, its “reform” and “progressive” movements, and its national elections. Ramsey devotes lively chapters to all these things. If you don’t know the 1890s, this is the book for you, wherever you live. If you do know the 1890s, you know a lot about America, and this book will help you learn even more.

The Panic of 1893 is beautifully illustrated, with fine contemporary pictures, and backed by years of patient research. It is a distinguished and compelling book.


Editor's Note: Review of "The Panic of 1893: The Untold Story of Washington State’s First Depression," by Bruce Ramsey. Caxton, 2018, 324 pages.



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A FreedomFest Report

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FreedomFest, LasVegas, July 2018: Fewer breakout sessions. Shorter hours. Only one special-event luncheon. What’s going on at FreedomFest? Are we losing it?

Actually, it’s quite the opposite. Too much choice can be daunting. As first timer Walter Block of the Mises Institute and Loyola University told us, “I attended FreedomFest for the first time in 2018. It was a magnificent experience. Rarely have so many lovers of liberty gathered under one roof. The only ‘problem’ I had with the event was the concurrent sessions. I wanted to attend ALL of them!”

We wanted this year’s event to involve our attendees more directly — not just sitting in chairs listening to speakers, but participating actively in the discussion.

History professor Barry Strauss of Cornell University concurred, saying, “FreedomFest was one of the few conferences that I’ve attended in my professional career of which I could say, ‘I only wish that I could have attended more sessions.’ From start to finish, it was an inspiration.”Imagine the frustration of previous years, when we offered 30% more sessions from which to choose!

Sometimes “less” really is “more.” When presentations are tightened, only the best remain. That’s what we decided to do at FreedomFest this year, reducing the number of concurrent breakout session from 13 to ten and ending each day at 6:30 instead of 8.

We wanted this year’s event to involve our attendees more directly — not just sitting in chairs listening to speakers, but participating actively in the discussion. So we lengthened our Q&A times, reduced the number of breakout sessions, created a scavenger hunt that brought attendees more actively into the exhibit hall, and added “conversation circles” in the evenings where attendees and speakers could discuss thematic topics. We expanded our “FreedomFest after Dark” activities with Karaoke led by “Lady of Liberty” Avens O’Brien and clubbing at a local night spot. The result was a more vibrant, engaged experience for everyone.

The Mock Trial was back too, this year charging the Public School System with fraud. We even had a hint of scandal in the jury box.

Of course, not everything was brand new. Perennial favorite Judge Napolitano was back, reporting on the Constitution and the significance of President Trump’s choice of Brett Kavanaugh to replace retiring Supreme Court Justice Anthony Kennedy. And we followed his speech with a special-event luncheon moderated by Steve Forbes. But most attendees enjoyed the break time by visiting the exhibit hall, viewing one of our lunchtime movies, or buying a sandwich and visiting with other attendees in our lounge areas.

The Mock Trial was back too, this year charging the Public School System with fraud. We even had a hint of scandal in the jury box, when the foreman announced a tie of 6–6, even though the collected ballots were clearly marked 7 to convict, 4 to acquit, and one with both options marked. Was this an example of the New Math? Or the “everybody wins a trophy” mindset? We promise Price Waterhouse wasn’t tabulating the results!

Of course, FreedomFest is never without controversy. Our panel on “The Rise and Triumph of the Angry Voter” led to some testy anger among the panelists, and the debate between Newsmax contributor Wayne Allyn Root and New York Times columnist Ross Douthat over whether Trump is more like Reagan or Mussolini became predictably (for Root) loud. The debate between Douthat and Hugh Hefner biographer Steve Watts on whether FreedomFest should dedicate a room to the late Hugh Hefner was controversial as well — was Hefner a hero who liberated women from Victorian sexual mores, or a lecher who objectified women by turning them into sexual playthings? Interestingly, the debate on “Faith and Reason” between Dan Peterson and Michael Shermer was more popular than the Playboy debate, with standing room only.

Eli Whitney, John Deere, Alexander Graham Bell, and even Ray Kroc drastically changed the face and future of America, “and it did not begin at the ballot box."

First-timer George Will was another keynote speaker, delivering an inspiring speech about the power of entrepreneurship and innovation. Referencing Ted Kennedy’s declaration that “change begins at the ballot box,“ Will offered several examples refuting the claim; he reminded the audience that Eli Whitney, John Deere, Alexander Graham Bell, and even Ray Kroc drastically changed the face and future of America, “and it did not begin at the ballot box. It began with the spark of entrepreneurial genius. . . . It began in individualism, which is important to everyone in this audience.”

Financial speakers have always been part of our faculty, and this year attendees enjoyed the new “Fast Money Summit” sponsored by Eagle Publishing, with its shortened 25-minute breakout sessions featuring top financial experts such as Steve Forbes, Mark Skousen, Doug Casey, Jim Rogers, Gena Lofton, Alex Green, Peter Schiff, Keith Fitz-Gerald, Marin Katusa, Jim Woods, and many more. At FreedomFest we believe that financial freedom is just as important as political freedom; money makes it possible to support causes and live a fuller personal life. “One good tip is worth the price of your admission,” was Eagle’s promise.

Others found their way to the Anthem Libertarian Film Festival — and some never left. “I can buy the recordings of the speeches,” one woman told me. “Where else can I watch these great films and meet the directors afterward?” In all modesty, as the director of the world’s only fully juried libertarian film festival — I couldn’t agree more. We had the best films and the best attendance in our eight-year history, with four world premiere films, five SRO screenings, 11 hard-hitting panels, and films that inspired us even as they told stories that outraged us. Libertarian films can be depressing when they’re set in dystopian futures or focus entirely on the hopelessness of big government; what I loved about this year’s lineup is that they offered hope for a brighter future through greater freedom, greater courage, greater understanding, and greater technology. And the production values of our films this year were top notch.

Storytelling can be more powerful than a lecture because of the emotional connection it creates with the audience.

Our films focused on themes such as immigration, escape from communism, criminal justice reform, and technology. Their messages were often indirect and compelling. One of my favorites was the Best Comedy winner The Inconsiderate Houseguest (Rob and Letitia Capili), which offers a subtle (Rob claims “unintended”) and unexpected theme about immigration beneath its quirky story about an uptight, rule-oriented roommate. “Subtle” is the key here; messages don’t need to shout if they are presented well. Storytelling can be more powerful than a lecture because of the emotional connection it creates with the audience. In fact, at our Thursday night Master Class for filmmakers, one of the panelists credited the television show Modern Family with changing public opinion, and thus public law, regarding gay marriage because of its likeable gay couple and its reluctantly tolerant and loving family patriarch. “Everyone knows the message of a Michael Moore movie, but almost no one watches his documentaries. They just hear about it on the news,” another panelist observed. Engaging stories with nuanced messages have the power to move hearts and change minds. That’s the main reason we started the Anthem Libertarian Film Festival.

The $2,500 Anthem Grand Prize went to Skid Row Marathon (Mark Hayes, director), an inspiring documentary about L.A. Judge Craig Mitchell who, troubled by the outrageous mandatory sentencing he was forced to impose, started a running club to help former felons regain their self-confidence and restart their lives. Mitchell has taken the club to marathon competitions throughout the world. The club is financed through private donations and teaches the principles of choice and accountability. Club member Rafael Cabrera was on hand for the Q&A following the screening. The film also won the $500 AnthemVault Prize for Best Original Score, featuring music composed by club member Ben Shirley. I defy you to watch this film with a dry eye.

Saber Rock (Matt and Thomas Locastro, directors), about a young Afghan interpreter for the American military who was targeted for assassination by the Taliban when he began teaching children about the principles of freedom, won the Anthem award for Best Short Documentary. The real Saber Rock attended the festival and gave an impassioned opening night speech to the FreedomFest crowd. Rock was a festival favorite, taking selfies with numerous fans throughout the week. He was awarded Anthem’s Special Jury Prize for heroism and received a standing ovation from the audience.

The room was so packed that we had to bring in 50 more chairs, while many leaned against the walls or sat on the floor and at least 20 more brought chairs to sit five-deep in the doorway.

Festival judge Gary Alexander argued at the judges’ meeting that America Under Siege: Antifa was one of the most important films at the festival because it reveals the truth behind the rising violence against free speech. Meanwhile, the gentle tone of Off the Grid with Thomas Massie won the hearts of festival attendees, who awarded it the Audience Choice trophy. Director Matt Battaglia follows the brilliant MIT graduate and inventor around the Kentucky farm that he built and maintains with his own hands as he talks about the priorities in his life and why he went to Congress. In one memorable segment he describes his congressional lapel pin, which garners him deferential treatment wherever he goes in Washington, as “Precious” and describes how difficult it can be to keep “Precious” from corrupting one’s focus and integrity.

A second Audience Choice trophy was awarded to Jimmy Morrison for his film The Housing Bubble, which features interviews with FreedomFest regulars Doug Casey, Peter Schiff, Jim Rogers, Gene Epstein, Tom Palmer, and others. It offers a cogent history of money, interest rates, inflation, and how they affect each one of us. The room was so packed that we had to bring in 50 more chairs, while many leaned against the walls or sat on the floor and at least 20 more brought chairs to sit five-deep in the doorway. The post-screening panel included all of the speakers who were featured in the film. Said director Morrison of the experience, “After all the delays with my movie, I really needed to make a statement with my premiere. I can't thank you enough for all that you did to make last week so successful!” That’s why we do what we do. These libertarian films need a venue. We provide it.

The Anthem Libertarian Film Festival is one of the fastest-growing features of FreedomFest, and also the best kept secret. Film aficionados can purchase a FilmLovers Pass for all four days for just $149, less than a third of the FreedomFest retail price. It includes all the films, plus film panels featuring top FreedomFest speakers and entrance to the exhibit hall. You can’t attend the FreedomFest general sessions or breakout sessions with it, but come on — with films and panels like these, who needs FreedomFest?

Members of the Reason crew presented the libertarian position on drug policy, gun control, biotechnology, pensions, prison reform, Bitcoin, transportation, and more. It was a libertarian feast.

My husband, Mark Skousen, who produces FreedomFest, completely disagrees with me on this, of course! “Why would anyone go to a movie when they can hear these great speakers in person?” he often asks me. And he has a point. With nearly 250 speakers and over 200 sessions, it’s hard to choose. A good point, but only one point.

This year, in honor of the 50th anniversary of Reason magazine, FreedomFest hosted six Reason Day breakout sessions, plus the Reason Media Awards at our Saturday night banquet. Reason notables Katherine Mangu-Ward, Nick Gillespie, Matt Welch, Bob Poole, Ronald Bailey, Jacob Sullum, Lisa Snell and others presented the libertarian position on drug policy, gun control, biotechnology, pensions, prison reform, Bitcoin, transportation, and more. It was a libertarian feast, culminating in presenting the Friedlander Prize to Steve Forbes at the Saturday night banquet.

But don’t just take me word for the success of FreedomFest 2018; here’s what Marc Beauchamp, former west coast bureau chief for Forbes Magazine, foreign correspondent in Tokyo, and trade association executive director in Washington DC, said about FreedomFest this year:

“For me . . . FreedomFest is where you hear things you don’t hear anywhere else.

“Like the foreign policy panel where it was pointed out that Russia’s economy is smaller than that of Italy or South Korea and Doug Casey said, ‘Russia is a gas station in a wheat field attached to a gun store.’

“You can get pretty glum watching talking heads on cable TV. The antidote is David Boaz’s optimism — that there’s never been a better time to be alive in the United States, and in almost any other country on the planet.

FreedomFest is an individualist’s dream (though admittedly, for those who arrange it, it can have its nightmare moments).

“FreedomFest is a movable feast. You never know what’s on the menu. I enjoyed Skeptic magazine’s Michael Shermer’s breakout session on the scientific search for evidence of an afterlife, and his conclusion that we should focus on living a full meaningful life rather than worrying about what might or might not happen in the afterlife.”

In sum, FreedomFest is an individualist’s dream (though admittedly, for those who arrange it, it can have its nightmare moments). As in those old “Choose Your Own Adventure” novels of the ’70s and ’80s, you can create your own conference as you circle your favorite sessions and decide what you’re going to hear and do.

We can’t wait to see all of our friends at FreedomFest 2019 where our theme is “The Wild West.” Escape the Deep State to Live Free! Come choose your own adventure in Las Vegas July 17–20. Hats and boots optional. Leave your horse at home.




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When Nobody Knew What a Dollar Would Be

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The Caxton Press has just published my book, The Panic of 1893, and I can now write for Liberty about it. Its topic is the final economic downturn of the 19th century. For more than three years, my head was in the 1890s — in books, articles, personal and official papers, lawsuits, and, especially, old newspapers, chiefly from my home state. The book’s subtitle is, The Untold Story of Washington State’s First Depression.

It is a popular history, not a libertarian book as such. But I have a few thoughts for a libertarian audience.

Many libertarians espouse the Austrian theory of the trade cycle, in which the central bank sets interest rates lower than the market rate, leading to a speculative boom, bad investments, and a collapse. In the 1890s the United States had no central bank. Interest rates before the Panic of 1893 were not low, at least not in Washington. The common rate on a business loan was 10%, in gold, during a period in which the general price level had been gently falling. Washington was a frontier state then, and it needed to pay high interest rates to attract capital from the East and from Europe. Credit standards, however, were low, sometimes appallingly low. Many of Washington’s banks had been founded by pioneers — optimistic patriarchs who lent freely to their neighbors, associates, relatives, and themselves. By a different road from the Austrians’ theory, the economy was led to the place it describes: a Hallowe’en house of bad investments.

The Sherman Silver Purchase Act was a sop to the inflationists, who wanted an increase in the money supply, and to the silver mining interests, who wanted the government to continue buying their silver.

The dollar was backed by gold, with the US Treasury intending to keep at least $100 million of gold on hand. But in 1890, at the peak of the boom period, Congress passed the Sherman Silver Purchase Act, obligating the Treasury to buy up the nation’s silver output with newly printed paper money. It was a sop to the inflationists, who wanted an increase in the money supply, and to the silver mining interests, who wanted the government to continue buying their silver, which it had been doing to create silver dollars. Politically the Sherman Silver Purchase Act was also part of a deal to pass the McKinley Tariff, which raised America’s already high tariff rates even higher.

The problem with the Sherman Silver Purchase Act was that the new paper money being paid to the silver miners could be redeemed in gold. The prospect of an increase every year in paper claims against the Treasury’s gold alarmed foreign investors, and they began to pull gold out. Two crises abroad also shifted the psychology of lenders and borrowers worldwide: Argentina defaulted on a gold loan from the Baring Brothers in 1890 and a real estate boom in Australia collapsed in 1893. These crises shifted the thoughts of financial men from putting money out to getting it back, from a preference for holding promises to a preference for cash.

By the time Grover Cleveland took office in March 1893, the Treasury’s gold cover had shrunk to $101 million. A run began on the Treasury’s gold — and that triggered the Panic of 1893.

In the Pacific Northwest, the four-year-old state of Washington (pop. 350,000 then) had 80 bank failures in the following four years.

Two crises abroad also shifted the psychology of lenders and borrowers worldwide: Argentina defaulted on a gold loan from the Baring Brothers in 1890 and a real estate boom in Australia collapsed in 1893.

Economists have listed the ensuing depression as the second-deepest in U.S. history. (One estimate: 18% unemployment.) But they don’t know. The government didn’t measure unemployment in the 1890s. And the rate of unemployment may not be the best comparison. America was less wealthy in the 1890s than in the 1930s, and living conditions were harsher. In absolute terms, the bottom of the depression of the 1890s was clearly lower than that of the 1930s.

The Left of the 1890s, the Populists and silverites, wanted cheap money. They blamed the depression on the gold standard. And gold is not an easy taskmaster; libertarians have to admit that.

The silverites wanted a silver standard. Most of them were “bimetallists,” claiming to favor a gold standard and a silver standard at the same time, with 16 ounces of silver equal to one ounce of gold. Their idea was that by using gold and silver the people would have more money to spend.

Free silver was a policy well beyond the Sherman Silver Purchase Act, which compelled the Treasury to buy silver at the market price. In the mid-1890s, silver fell as low as 68 cents an ounce. At that price, a silver dollar had 53 cents’ worth of silver in it and the silver-gold ratio was 30-to-1.

In absolute terms, the bottom of the depression of the 1890s was clearly lower than that of the 1930s.

The bimetallists wanted 16-to-1. That was the ratio for U.S. currency set in the late 1700s when the market was at 16-to-1. Later the market shifted and Congress changed the ratio to 15 1/2-to-1. Then came the Civil War, and the U.S. government suspended the gold standard, and printed up its first “greenbacks,” the United States Notes.

The United States Notes were effectively a new currency, and traded at a discount from metallic dollars. In September 1896, the Seattle Post-Intelligencer reminded readers of those times:

There never was a time from the beginning of the first issue of greenbacks down to the resumption of specie payments when the greenback dollar was ever accepted on the Pacific Coast for anything more than its market price in terms of gold.

The greenback was discounted, sometimes by 50 to 60%.

In 1873, Congress decided to define the dollar as a certain weight of gold, but not silver. The silver people in the 1890s called this “The Crime of ’73.”

Redemption of paper money under the gold standard began in 1879. To placate the silver interests, Congress had passed a law requiring the government to buy silver at the market price and coin it into dollars — the Morgan dollars prized by collectors today. At the beginning, the silver in a Morgan dollar was worth about a dollar, but by the 1890s, the value of silver had fallen.

In 1890, the silver-dollar law was replaced by the Sherman Silver Purchase Act, which created paper money. The government still coined silver dollars, and by 1896 had more than 400 million of them in circulation.

To placate the silver interests, Congress had passed a law requiring the government to buy silver at the market price and coin it into dollars.

The law did not require the Treasury to pay out gold for silver dollars, and it hadn’t. But the law declared all the different kinds of dollars (and there were five different kinds of paper money, at that point) to be equally good for everyday use except for taxes on imports. At the amounts an individual was ever likely to have, a silver dollar was as good as a gold dollar.

If you ask why a sane person would have designed a monetary system with gold dollars, silver dollars, Gold Certificates, Silver Certificates, National Currency, Treasury Notes, and United States Notes — Congress had designed it, one variety at a time.

Under the proposal for “free silver,” gold would be kept at the official price of $20.67 and silver set at one-sixteenth that price, or $1.29. Just as the world was free to bring an ounce of gold to the Treasury and take away $20.67 — “free gold” — the world would be free to bring an ounce of silver to the Treasury and take away $1.29. Free silver! The advocates called this the “unlimited coinage” of silver, but the aim was to create dollars, not coins. Most of the silver could pile up in the Treasury and be represented by crisp new pieces of paper.

The gold people argued that for the United States to set up a 16-to-1 currency standard in a 30-to-1 world was nuts. Essentially, the Treasury would be offering to pay out one ounce of gold for 16 ounces of silver. It would be a grand blowout sale on gold, and the world would come and get it until the gold was gone. The Treasury would be left with a Fort Knox full of silver, and the U.S. dollar would become a silver currency like the Mexican peso.

Surely the gold people were right about that. (And today’s ratio is 78 to 1.)

Milton Friedman argues in his book Money Mischief that two standards, with the cheapest metal defining the dollar in current use, would have worked all right. If the cheap metal got too expensive, the system would flip and the dollar would be defined by the other metal. In theory it makes sense, and apparently before the Civil War it had worked that way. But the financial people didn’t want a system like that.

The Treasury would be left with a Fort Knox full of silver, and the U.S. dollar would become a silver currency like the Mexican peso.

In 1896, America had a watershed election, with the silver people for Bryan, the Democrat, and the gold people for McKinley, the Republican. A third party, the People’s Party, endorsed Bryan. Its followers, the Populists, didn’t want a silver standard. They were fiat-money people. But Bryan was against the gold standard, and that was enough.

In that contest, the silver people were derided as inflationists. They were, to a point. They wanted to inflate the dollar until the value of the silver in dollars, halves, quarters, and dimes covered the full value of the coin. The silver people were not for fiat money.

Here is the Spokane Spokesman-Review of October 1, 1894, distinguishing its silver-Republicanism from Populism:

Fiat money is the cornerstone of the Populist faith . . . Silver money is hard money, and the fiatist is essentially opposed to hard money . . . He wants irredeemable paper money, and his heart goes out to the printing press rather than the mint.

The Populists and silverites argued in 1896 that the gold standard had caused the depression, and that as long as gold ruled, the nation would never recover. History proved them wrong. They lost, and the nation recovered. It began a recovery after the election settled the monetary question. Investors and lenders knew what kind of money they’d be paid with.

Milton Friedman makes a monetarist point in Money Mischief that starting in about 1890, gold miners had begun to use the cyanide process, which allowed gold to be profitably extracted from lower-grade ore. The result was an increase in gold production all through the decade. I came across a different story in my research. The increase in the supply of gold (about which Friedman was correct) was outstripped by the increase in the demand for gold. Prices in gold dollars declined sharply during the depression of the 1890s, including the prices of labor and materials used in gold mining. It became more profitable to dig for gold. Deflation helped spur a gold-mining boom — in the Yukon, famously, but also in British Columbia, in Colorado, and in South Africa.

The US began a recovery after the election settled the monetary question. Investors and lenders knew what kind of money they’d be paid with.

Under a gold standard, a deflation sets in motion the forces that can reverse it. This is a useful feature, but it can take a long time.

The recovery from the depression of the 1890s began not with a burst of new money but with a quickening of the existing money. What changed after the election was the psychology of the people. They knew what sort of money they held and could expect. The important point wasn’t that it was gold, but that it was certain. If Bryan had been elected and the dollar became a silver currency, people would have adjusted. With gold, they didn’t have to adjust, because it was what they already had.

The writers of the 1890s had a less mechanistic view of the economy than people have today. People then didn’t even use the term, “the economy.” They might say “business” or even “times,” as if they were talking of weather conditions. They talked less of mechanisms (except the silver thing) and more of the thoughts and feelings of the people. People today are cynical about politicians who try to manipulate their thoughts and feelings, and think that it’s the mechanisms that matter. And sometimes mechanisms matter, but the thoughts and feelings always matter.

Prices in gold dollars declined sharply during the depression of the 1890s, including the prices of labor and materials used in gold mining. It became more profitable to dig for gold.

Now some observations about the ideas of the 1890s.

The Populists, called by the conservative papers “Pops,” were much like the Occupy Wall Street rabblerousers of a decade ago: anti-corporate, anti-banker, anti-bondholder, anti-Wall Street, and anti-bourgeois, but more in a peasant, almost medieval way than a New Left, university student way. Many of the Pops were farmers, with full beards at a time when urban men were shaving theirs off or sporting a mustache only. More than anti-Wall Street, the Pops were anti-debt, always looking for reasons for borrowers not to pay what they owed. On Wikipedia, Populism is labeled left-wing, which it was mainly. It was also rural, Southern, Western, anti-immigrant, and often racist. In Washington state it was anti-Chinese.

In the 1890s traditional American libertarianism was in the mainstream. In the newspapers this is very striking, with the Republican papers championing self-reliance and the Democratic papers championing limited government. Democrats, for example, argued against the McKinley Tariff — which imposed an average rate of more than 50% — as an impingement on individual freedom. Here is Seattle’s gold-Democrat daily, the Telegraph, of September 10, 1893:

If it be abstractly right that the government shall say that a man shall buy his shoes in the United States, why is it not equally right for it to say that he shall buy them in Seattle? . . . Where shall we draw the line when we start out from the position that it is the legitimate and natural function of government to regulate the affairs of individuals . . .

Our idea is that the least government we can get along with and yet enjoy the advantages of organized society, the better.

Here is the silver-Republican Tacoma Ledger of Dec. 3, 1895:

Thoughtful men must perceive that our whole system of civilization is undergoing a revolution in its ideas; and we are in danger of gradually supplanting the old, distinctive idea of the Anglo-Saxon civilization — the ideas of the individualism of the man, his house as his castle, and the family as his little state, which he represents in the confederation of families in the state — by the Jacobinical ideas of . . . continental republicanism . . . The continental republican theory contemplates the individual man as an atom of the great machine called the nation. The Anglo-Saxon considers every man a complete machine, with a young steam engine inside to run it. The continental republican must have a government that will find him work and give him bread. The Anglo-Saxon wants a government only to keep loafers off while every man finds his own work and earns his own bread.

Contrast that with today’s editorial pages.

The Populists were anti-debt, always looking for reasons for borrowers not to pay what they owed.

Here’s a final one I particularly liked. Archduke Franz Ferdinand of Austria-Hungary — the same gent whose assassination 21 years later would touch off World War I — came through Spokane on the train in 1893. Americans, fascinated with him just as they would be a century later with Princess Diana, stood in the rain for hours to get a glimpse of the famous archduke — and they were sore because he never showed himself. On October 9, 1893, here is what the Seattle Telegraph had to say about that:

Why in the name of common sense should the people of this country go out of their way to honor a man simply because he happens to be in the line of succession to a throne . . . The correct thing is to let their highnesses and their lordships and all the rest of them come and go like other people. To the titled aristocracy of Europe there is no social distinction in America.

The America of the 1890s had some unlovely aspects. But in my view, the Telegraph’s attitude toward princes is exactly right. I recalled the Telegraph’s patriotic comment during all the blather over the wedding of Princess Diana’s son.

The 1890s had its blather, but after 125 years, sorting out facts from nonsense is easier. Silly statements, especially wrong predictions, don’t weather well. It makes me wonder what of today’s rhetoric will seem utterly preposterous in the 2100s.




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Is the Libertarian Movement Moving Anymore?

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It’s been a long time since there was a new libertarian book I wanted to read. Or a libertarian argument I itched to join.

Libertarian thought isn’t what it used to be. Nor libertarian influence. I think it peaked in the ’90s.

Think back on that time. In 1994 the Republicans rallied against Hillary Clinton’s health insurance plan and took back the House of Representatives for the first time in 40 years, and with a staying power they hadn’t had in 70 years. Bill Clinton tacked to the right, famously saying in 1995, “The era of big government is over.” Whether or not Bill meant it, it meant something that he said it.

Politicians get their proposals from ideas current at the time. If the New Deal was socialistic, it was because in the first half of the last century, socialism was in the air. Similarly, Bill Clinton did some pro-market things in the ’90s that Democrats wouldn’t have done 70 years before.

Libertarian thought isn’t what it used to be. Nor libertarian influence.

The reigning ideas had changed. When Richard Nixon got rid of the draft, the idea came from the free-market economists, principally Martin Anderson and Milton Friedman. Starting under Jimmy Carter and continuing under Ronald Reagan, the federal government followed the advice of the economists and ripped away price and entry controls over airlines, trucking, and natural gas. It opened up the telephone industry to competition and removed interest-rate controls on banks. The New York Stock Exchange freed itself of controls on commissions. The Supreme Court freed professionals of controls on advertising. When unions failed to seed themselves in the new tech industries, they lost their grip on most of the private economy.

Under Clinton, the government supported the extension of private property into the radio spectrum and into the North Pacific fisheries for halibut and black cod. Clinton signed the Republicans’ North American Free Trade Agreement and the Republicans’ welfare reform.

In the last half of the ’90s came the dotcom boom. Bill Gates, Steve Jobs, Jeff Bezos and others became cultural figures in a way businessmen hadn’t since the 1920s. The Democrats were happy with the dotcom boom. Al Gore even claimed parenthood of the Internet.

When Richard Nixon got rid of the draft, the idea came from free-market economists.

All this was totally unlike the reigning Democratic thought of the 1930s, 1940s, 1950s, or 1960s.

And in the ’90s there came peace. For the first time since Adolf Hitler, America had no enemy. That was a new thing, and a wonderful thing.

None of this is hardcore libertarianism, but think of what libertarianism really is. The essence of it is that your life belongs to you, not the community. We celebrate the private life. Well, the biggest threat to private life is war. From 1940 through 1973, the military could pluck a young man out of private life against his will, put a gun in his hands and make him bellow, “Yes, Sir!” But even with the draft gone, war still skews thought and feeling. It limits what a society can afford, what it can allow, or even what it can discuss. Remember the time after Sept. 11, 2001.

Libertarians like to say their philosophy is about freedom, but it is a particular brand of freedom. The Left offers a brand of freedom: “Just let us control your work and property, and you can be free of worry about food, shelter, schooling, public transit, sickness, and old age.” The Left dismisses the libertarian’s freedom as “the freedom to starve” — which, among other things, it is. The freedom to venture out includes the freedom to fall on your face. And if enough individuals crash and burn, people may decide the system that allows it is not worth it. The libertarian’s freedom requires a large dose of self-reliance — and in the ’90s, self-reliance was pushing forward with welfare reform and the most entrepreneurial economy since the 1920s.

The essence of libertarianism is that your life belongs to you, not the community. We celebrate the private life.

Regarding self-reliance, the frontier political struggle was for private accounts within Social Security. Here was a proposal to phase down payments out of a common pot under government control and phase in individual accounts under private control. Libertarian purists were prissy about it, because the individual’s control was going to be limited and the contributions would still be compulsory, but these are not realistic people, and nothing was ever going to satisfy them. The limited Social Security “privatization” would have been a big change, a culture-shifting change. The Left sensed how big it was, and denounced it in an emotional fury as a Wall Street plot to make financiers rich. And it wasn’t. I knew who the proponents were. I had interviewed some of them and written about them. I had read their books. They weren’t trying to make money; they were trying to make the world better. The most credible ones, the ones from the commercial world, made an economic case that had to do with individual wealth, not Wall Street’s profits. (For example, see The Real Deal: The History and Future of Social Security, bySylvester Schieber and John Shoven, published by Yale University Press in 1999.)

We forget that in the private sector, individual accounts did push aside “common-pot” pension plans. They’re called 401(k) plans. They increase the individual’s chance to gain and also his risk of loss — a net gain for self-reliance. They were put in by employers, not by employees. But with Social Security, the Democrats appealed to employees’ fear of loss, and the “privatizers” were defeated — decisively. Given a choice, Americans stuck with the system designed in the 1930s. And those who keep predicting that Social Security will fail are wrong. It won’t. Congress will fix it by raising taxes, probably by eliminating the cap on taxable income. If they have to, they’ll cut benefits in some gentle and technocratic way.

The freedom to venture out includes the freedom to fall on your face.

It has been years since Republicans talked about private accounts in Social Security. It’s a dead body they don’t want to be reminded of. Donald Trump vowed never to go near it, and he won’t.

The ’90s were the time of greatest libertarian momentum. By my reckoning, they ended with several events.

The first event was the protest against the World Trade Organization in my hometown, Seattle, on November 30, 1999. The Left came out — tens of thousands of them — against trade. I had imagined that the Left had withered away like the Marxian state, but I was wrong. They were here. They would come again in the Occupy Wall Street demos, and in the Bernie Sanders campaign, loud and obnoxious.

The second event was the end of the dotcom boom in early 2000. You can extend the rules of capitalism when there is a surplus of happiness. Not otherwise.

Given a choice, Americans stuck with the system designed in the 1930s.

The third event was the attacks of September 11, 2001. George W. Bush wasn’t going to be a free-market president. He was going to be a war president, if he had to start one himself.

After the war came another recession, worse than the one before it. Bankers and capitalists were seen to be bad, and Alan Greenspan was ejected from the people’s hall of heroes.

And then came Barack Obama, and now Donald Trump.

Can anyone argue that we’re progressing?

Has there been a libertarian moment to compare with the ’90s? There were the campaigns of Ron Paul — which amounted to what? What did they achieve? Paul has not changed his party, as Barry Goldwater famously did. Donald Trump has changed the Republican Party, and into an anti-immigrant, anti-trade, resentful mess. Ron Paul’s son is still in the Senate, but one man does not a movement make. Note the exit of Sen. Jeff Flake, Republican of Arizona — not a good omen.

George W. Bush wasn’t going to be a free-market president. He was going to be a war president, if he had to start one himself.

So where are we, now? Here in Seattle, with my city council putting a (since-retracted) head tax on Amazon in order to succor the squatters on public land — and passing out tax-funded vouchers to donate to dingbat political candidates — it feels like a socialist moment. I also read in the press that Democrats across the country have turned left, and are toying with such Bernie-style ideas as free college for everyone, Medicare for everyone, and a guaranteed job for everyone. There is even babbling out there for UBI — universal basic income.

For everyone.

Those are all hobgoblin ideas until you think of the typical American Democratic politician we all know trying to define them, sell them, and get the average American to love them and pay for them. I imagine that, and I feel better. I think the socialists are selling something Americans won’t want to buy.

Anyway, I hope so.




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Leland Yeager, R.I.P.

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Leland B. Yeager, a distinguished economist and proponent of liberty, died on April 23, in Auburn, Alabama. He was 93 years old.

In public accounts of his life you will see it noted that he was Professor Emeritus at Auburn University and the University of Virginia and that he was a monetarist economist who believed that government should keep its hands off the money supply, except by defining a “unit of account.” He was the author of many books, including International Monetary Relations: Theory, History and Policy (1976), Experiences with Stopping Inflation (1981), The Fluttering Veil: Essays on Monetary Disequilibrium (1997), and Ethics As Social Science: The Moral Philosophy of Social Cooperation (2001).

When you read his work, you will find that his interests were as wide as the world.

Many of Leland Yeager’s shorter publications, as well as his fascinating collection of essays, Is the Market a Test of Truth and Beauty? (2011), can be found on the website of the Ludwig von Mises Institute. When you read his work, you will find that his interests were as wide as the world. Unlike other polymaths and original thinkers, however, he was always careful to stipulate where his own knowledge stopped. He believed in limited government; he believed also in responsible self-limitation. As a result, he was never a pedant, and he was never a bore.

But now I’ve started to talk about Leland Yeager the person, and as I do, I feel a sense of overwhelming loss. For three decades, Leland honored Liberty with his contributions, and I had the privilege of working with him as editor on most of them. He was a fine writer and a gracious fellow citizen of the republic of letters. His friendship inspired me. He cannot be replaced in my esteem.

Leland had many intellectual involvements, and in his last years his health was failing, so I knew I was doubly fortunate to maintain a literary relationship with him. Not that he ever indicated, as academics are wont to do, that he was tired of all the demands on his time. Oh no. There was no falsity about Leland Yeager. He did what he could, and he was interested in doing what he could.

He was a fine writer and a gracious fellow citizen of the republic of letters. His friendship inspired me. He cannot be replaced in my esteem.

If I could have published his essays, reviews, and comments every month, or every week, I would have. But I tried to be respectful of his time. Every few months I asked him whether he might be thinking about something that would be good for Liberty. Usually he’d mention some interests; I’d say that I shared them, and I was sure our readers would also; and soon his crisp, clear copy would appear in my inbox. I’d make a few editorial suggestions, of which he accepted maybe half; but whether he did or he didn’t, he would discuss the logic behind his final choice of words or syntax. I always looked forward to that.

Many authors aren’t interested in discussing words. They’re more interested in what they have to say than in how they actually say it. But Leland was in love with the way language works and with the reasoning behind our syntax, diction, and even punctuation. To an editor, he was the ideal author, a person with whom one could freely discuss the craft of writing and editing, a person from whom one could learn, even when one disagreed with him.

Leland sometimes joshed me about my “flattering” him into writing his next article for Liberty, but there was no flattery involved. I told him exactly how good he was. I looked forward to discovering what his next subject would be. Economics? Government? History? Words themselves? Leland was better at explaining economics than anyone else I ever encountered, with the possible exception of Murray Rothbard (and that’s saying something); but the same enthusiasm and authorial integrity he showed in discussing economics appeared in his treatment of ethics, linguistics, history, and every other subject. A careless word, a willful exaggeration, an improbable “fact,” a cheap piece of abuse — those were things he would never permit himself. Leland never thought that good intentions could excuse bad writing.

Leland was in love with the way language works and with the reasoning behind our syntax, diction, and even punctuation. To an editor, he was the ideal author.

Rereading Leland’s works for Liberty, I found everything as fresh as the day he wrote it — and how much journal writing can you say that about? I’ll mention a few examples:

  • Leland’s essay on alternative histories, the histories of things that never happened (Liberty, September 2009);
  • his essay on free will and determinism (February 2017);
  • his introduction to the “auxiliary language” Interlingua (February 2008);
  • his essay on national and occupational cultures (April 2011);
  • his review of “Reaganomics,” with an exposition of the reasons for separating economy and state (January 1989); and
  • his magisterial consideration of government debt (December 2000).

In 2007 I persuaded him to debate the existence of God with me. He took the unbeliever’s side, but his essay remains a favorite of mine: “Is There a God? And Does It Matter?” (October 2007).

Leland’s last contribution to Liberty was an incisive analysis of Bitcoin. The essay, which I assume to be the final publication in a long career of authorship, appeared on April 4 of this year.

But I mean the final publication during his life. Last November 20, Leland wrote me a message in his characteristic manner. He noted that he was “93 and in poor health.” “Still,” he said, “I can’t and don’t complain.” Then he filled me in on his current literary project:

For years I have been working on a book on capital and interest. It is substantially complete, although still in rough form. Now, I think, I have a coauthor, an eminent economist, who will finish the book after my death and try to get it published.

I am looking for news on this project, and as I get it, I will report it here. Meanwhile, his published work remains — large and rich and thoughtful, and ready at all times to encourage people who delight in true works of the mind.




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Bitcoin Blues

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Enthusiasts expect bitcoin to become a new privatized money, perhaps even replacing government money. The system will keep track of cash balances and transactions in such a way as to prevent fraudulent double-spending of the same units. Operating without any centralized recordkeeping (as by a bank or government), it will enhance financial privacy. It will employ an advanced technology called blockchain. As the Federal Reserve Bank of St. Louis Review (first quarter 2018) said, to really understand bitcoin and its many imitators requires combined knowledge of cryptography, computer science, and economics.

I lack this knowledge. Some points, though, are clear enough. A workable monetary system requires a unit of account and a medium of exchange. Prices, values, debts, claims, and cash balances are expressed, and accounting is conducted in the unit. The medium is something routinely used for receiving and making payments; in the United States it is currency and bank accounts denominated in dollars. Each transactor needs to hold some of the medium of exchange because receipts and expenditures are uncertain in exact timing and amount and are not closely synchronized.

The bitcoin unit goes undefined by anything and lacks redeemablity.

A suitable unit of account has an at least roughly stable value, which may be achieved in either of two ways. First, the unit may be defined by a quantity of some good or basket of goods, with the definition kept operational by two-way convertibility between money and the defining good or basket. Under the gold standard the US dollar was defined as the value of 1.5046 grams of pure gold. Under such a system the money supply adjusts almost automatically to the defined value. Alternatively, the value of the unit may be managed by central control of the money supply. The price level then adjusts to rough proportionality with the money supply, as explained by the quantity theory of money.

The bitcoin unit goes undefined by anything and lacks redeemablity. Its quantity grows in a strange way called “mining.” As a reward for taking part in the system’s decentralized record-keeping and especially for solving increasingly difficult mathematical problems, miners obtain new bitcoins. Their final amount is limited to 21 million. Who knows what happens then? Meanwhile, bitcoin-mining destroys real wealth by consuming vast amounts of electricity to operate huge computers.

Wild fluctuations in bitcoin’s undefined value rule out its use as unit of account and so, almost completely, as medium of exchange. Who wants to hold amounts of such an unstable asset for receiving and making payments? The occasional business firm “accepting” bitcoin promptly sells it for standard money rather than adding it to its transactions cash balance. A video by a Wall Street Journal reporter shows the great effort and extra costs of buying a pizza with bitcoin in New York City.

The final amount of bitcoins is limited to 21 million. Who knows what happens then?

Why, then, does anyone hold bitcoin? Some libertarians hold it to express disgust with government money and a hope for some kind of private and privacy-preserving alternative. (But other and academically respectable proposals for privatized money are available.) Some enthusiasts buy it as an investment or speculation. (Saying so in no way denies that speculation generally serves sound economic functions and that the distinction between it and investment is fuzzy.)

Prudence recommends that anyone considering an investment should ask how the desired gain might come as a share of real wealth — desired goods and services — created by his own and others’ investment. Even a gambling casino creates wealth in the perhaps questionable form of hopes, excitement, and entertainment. Gain on an investment or speculation with no prospect of creating wealth must come as a transfer from losers.

Meanwhile, bitcoin-mining destroys real wealth by consuming vast amounts of electricity to operate huge computers.

How, then, might promoting bitcoin create wealth? The advantages of a sound nongovernmental monetary system could count as wealth, but as a “public good” in the technical sense of something whose benefits cannot be withheld from people not paying for it — such as national defense or policing. Furthermore, competition from bitcoin’s surviving imitators would dilute any profits. More optimistically, experience with bitcoin might spur profitable improvements in its blockchain technology, which is already being extended beyond monetary uses.

Bitcoin might even evolve, after all, into a workable privatized money, quite in contrast with our current system. But how? Ayn Rand would dismissively reply: “Somehow.”

A final comment may be unfair, but I cannot resist making it. Excitement over bitcoin reminds me of the dotcom boom of the 1990s and even more so of the British South Seas bubble of 1720. For little more reason than that stocks kept going up, speculators drove prices still higher — until the crash came. Meanwhile, stock in dubious new enterprises sold readily. Charles Mackay (Extraordinary Popular Delusions and the Madness of Crowds, 1848) writes of one promoter who disappeared with the proceeds of successfully issuing stock in something described as “A company for carrying on an undertaking of great advantage, but nobody to know what it is.”




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Profound and Destructive

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President Trump’s destructiveness requires few words here. Consider how world stock and currency markets have been shaken by the resignation on March 6 of Gary Cohn, regarded until then as Trump’s chief economic adviser. Although not a trained economist, Cohn apparently had some sound instincts derived from years of financial experience. His departure apparently and ominously leaves more influence, or echo, to Peter Navarro — look him up with Google.

This latest example of destructiveness follows the one touched off by Trump’s March 2 tweet bewailing America’s loss of “many billions of dollars on trade with virtually every country it does business with” and heralding trade wars as “good, and easy to win.”

Trump views international trade as a game, a zero-sum game in which one player’s gain is another’s loss.

I’ll spend more words on how profound Trump’s ignorance is. He considers a country’s excess of imports over exports a measure of loss. This measure applies even to trade with each foreign country separately. He counts China and Mexico among the worst offenders, deserving punishment. He does not understand the multilateral aspect of beneficial trade.

Nor does he understand how we gain in buying goods cheap from abroad. What difference does it make if steel and aluminum are cheap because of low foreign prices or because they grow cheaply on bushes at home? Money cost is a measure of opportunity cost, which means the loss of other goods when resources go instead to make the particular good in question. Opportunity cost reflects scarcity. Scarcity applies even to prosperous America, where we could enjoy still higher standards of living if food, clothing, shelter, entertainment, and other goods and services came costlessly and miraculously from heaven. Scarcity and how gains from domestic and foreign trade alleviate it are fundamentals of economics. The principle of comparative advantage goes far in explaining how.

The profundity of Trump’s ignorance goes beyond economics, extending even to the behavior of a decent human being.

Without understanding the academic presentation of the “absorption approach to the balance of payments,” everyone should be able to grasp its central idea, which is sheer arithmetic. If we as a country use more output for consumption and real investment than we produce, then the difference must come from somewhere — from abroad in the form of more imports than exports. A big item in this excess absorption, alias national undersaving, is government deficits. Yet Trump and Congress are complacent about increasing the deficit and debt by taxing less and spending more.

All too many politicians say that they are in favor of free trade if it is “fair trade” played on a “level playing field.” These slogans express Trump’s view of international trade as a game, a zero-sum game in which one player’s gain is another’s loss.

Trump does not understand how the price system coordinates economic activity, making most government planning about jobs and industries unnecessary and harmful.

The profundity of Trump’s ignorance goes beyond economics. It extends to diplomacy in domestic and foreign relations and even to the behavior of a decent human being. Yet his destructive economic ignorance remains prominent.




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