Ron Paul On The Fed

Quote - Xu Kuangdi

Xu Kuangdi,the former mayor of Shanghai (1995-2001), was interviewed by the Saudi Gazette (read here) recently and when asked about China adopting a western-style democracy, this was his reply:

Recently I was speaking to a top US leader who also asked this question. I asked him: “What is democracy?” He said, “One man, one vote.” But, where does one man, one vote lead in a society where the middle class is still relatively small compared to so many poor people? In Venezuela, it produced Chavez.
China already experimented with mass democracy during the Cultural Revolution, and it was a catastrophe. Do we want some young Red Guard standing on the table today, harassing entrepreneurs and trying to turn back the market economy?

From my very limited knowledge about China's government, I'm not a big supporter. What caught me about this answer was his public expression of respect for the entrepreneur and the market economy. The founders of the United States shared similar fears of a democracy, which is why they were founded as a Republic. It was refreshing to read this answer considering the market economy and the entrepreneur are two entities that are being relentlessly attacked here in the west.

His perspective on where the US failed:

The real problem for the American economy, in my view, resulted from (former Federal Reserve Chairman) Alan Greenspan reducing the interest rate too much back in 2002. When money is too easy, it is too easy for people to be irresponsible: They get in trouble by borrowing more than they can afford. As China tries to stimulate its own economy, making money too cheap would be a mistake there as well.

On losing trade with the US:

Despite what many think, less than 3 percent of China’s annual GDP growth comes from the trade surplus with the US. The rest comes from investment and domestic consumption. So, even if China loses 2 percent of its GDP growth from exports falling to the US, we are still in decent shape.

Quote - Abraham Lincoln

I see in the near future a crisis approaching that unnerves me and causes me to tremble for the safety of my country. Corporations have been enthroned and an era of corruption in high places will follow, and the money power of the country will endeavor to prolong its reign by working upon the prejudices of the people until all wealth is aggregated in a few hands and the Republic is destroyed. - Abraham Lincoln

Working Together

The AP is reporting on staff at Mr. B's Pancake House who have donated to their owner some free time to help keep the restaurant open. You can read it here.

17 employees got together and decided to work only for tips for 1 day shift in an effort to help the restaurant out during these stressful economic times. Customers who found out tipped more generously and each employee managed to earn $51 that day.

Most workers and employers understand that they depend on each other mutually in order to be successful. Fortunately, for the employees, they didn't have a union boss preventing them from providing this act of generosity.

You can check out Mr. B's Pancake House here.

Dan Mitchell On Obama's Stimulus

Stephen Halbrook on the 2nd Amendment

Ron Paul on Morning Joe

Congressman Ron Paul explains why the US is in its mess, and what they need to do (and not do) to get out of it:

Canadian Revenue Agency Propaganda

Yes folks, let us remember: You are owned by the government and therefore you must report all that you earn. You are BAD if you don't and you hurt little kids.

Thank you CRA, I almost thought I was an individual for a moment.

And Thank you LewRockwell.com for bringing this piece of propaganda crap to my attention. Please notice how the comments section of the video on YouTube has been turned off. I wonder why?

Truth to Power

Former BBC producer Tony Benn went on BBC to appeal to their audience to donate money for citizens on Palestine. He went further and bashed the BBC for their negligence for not promoting the appeal themselves and buckling to Israeli pressure.

Credit Given Where Credit Due

The NDP, a political party in Canada I have no use for, is doing something right in Ontario.

Teaching assistants and contract faculty at York University have been on strike for 12-weeks looking for more job security. The Liberal government in Ontario has tried to force through legislation ordering staff back to work as soon as today, however the NDP has blocked the legislation. The Globe and Mail is reporting on it here.

The union and the university need to work this out. Many contract workers are forced to reapply for their position every year irregardless of how long they have been in their position. If they are able to push the universities hand on this, they should be allowed to and the government should butt-out. It could easily be said that the university has simply been sitting tight waiting for the government to intervene, and this does a serious injustice to the rights of the workers.

Many people will ask, what about the students? The students are looking into the possibility of a class-action law-suit against the university, although they are weighing the pros and cons of taking such action. Their action is for them to decide. I would simply recommend to look elsewhere for your education next year.

The government has no place picking a side in this disagreement.

Will You Still Be Pro-Obama in 4 years?

Most people who voted for Obama during the past election hold the same perspective as those who support liberty on a few issues: the economy, war, and civil liberties. We all hope Obama will perform better than Bush on these three issues. If we are ever to get real change on these issues, we need to be honest with ourselves over the next four years when evaluating Obama's performace. In 2012, we need to ask, has the substance Obama brought to government really provided change for the better?

Bretigne Shaffer, from The Campaign For Liberty, has written an open letter to her pro-Obama friends asking them to reconsider their traditional perspective on American politics in 4 years if Obama proves to do no better on the economy, war, and civil liberties than did Bush. Below are parts of her letter:

On war:

Obama was not an anti-war candidate, and he is not an anti-war president. His opposition to the US occupation of Iraq was based not on a principled stance against pre-emptive invasion and occupation of a foreign country, but on his view that it had damaged the US's credibility and therefore its ability to engage in military interventions in the future. Senator Obama voted to continue funding the Iraq war and voted against a 2007 pullout in June of 2006. He does not plan to bring troops home from Iraq, but to redeploy them in Afghanistan, and he "support[s] plans to increase the size of the Army by 65,000 soldiers and the Marine Corps by 27,000 Marines." (from Obama's website, change.gov)

In an article for Foreign Affairs last year, Obama said "I will not hesitate to use force, unilaterally if necessary, to protect the American people or our vital interests whenever we are attacked or imminently threatened." (Emphasis mine.) He has promised AIPAC (the American Israel Public Affairs Committee) that he will "...do everything in my power to prevent Iran from obtaining a nuclear weapon. Everything." Coming from the future leader of one of the most heavily nuclear-armed nations in the world, these are chilling words. Prior to his election, Obama also spoke of expanding the war on terror to Pakistan (indeed, by the end of his first week in office, he had already ordered air strikes on villages in Pakistan, killing at least 17 people including three children), and prior to his inauguration he remained silent as the Israeli government killed hundreds of civilians in Gaza with weapons provided by the US government.

And the predictions:

1. The US will still have an active military presence in Iraq.
2. The US will have attacked at least one more country that poses no direct threat to us. (I'm not even going to count his early air strikes on Pakistan.)
3. Military spending will have increased.
4. US citizens will be no safer from terrorist attacks. I say this because I believe the (sadly all-too-accurate) perception of the US as an imperialist warmongering nation will persist. I realize this one is open to interpretation. I would just ask you to honestly ask yourselves at the end of these four years whether this is the case.

My one caveat to this section is this: If the US government becomes financially unable to maintain its empire abroad, then Obama's military aspirations may be hampered by budget constraints. However I maintain (and Obama's own words support me here) that this will not be because of any lack of will on his part.

On civil liberties:

In his first few days in office, President Obama signed executive orders to 1) close Guantanamo within a year; 2) officially ban the use of torture in the military; 3) close the CIA-run secret prisons around the world; and 4) review detention policies and procedures and review individual detention cases. He has also suspended the military trials at Guantanamo for 120 days, and has acted to combat government secrecy. These are all good things and Obama is receiving well-deserved praise for them.

More important though, the fundamental problems facing civil liberties and human rights in this country do not stem from the operation of some detention centers. The damage inflicted has its roots in such things as the USA PATRIOT ACT (which Obama voted to re-authorize), drug law enforcement, and the repudiation of the very foundation of due process of law, habeas corpus. The big questions then, are: 1) whether Obama's administration will actually follow through on his executive orders and close Guantanamo, close the CIA prisons and truly end torture (there is also of course the question of what will then happen to the detainees); and 2) whether Obama will be able to tackle the more fundamental problems such as restoring habeas corpus and due process.

And there are some fundamental issues that Obama has not even taken on. While he is aware of the fact that more than one percent of American adults, and one out of every nine black men, are in prison, he does not tackle this issue head on. Nor does he really address the war on drugs in its entirety, nor the increasingly dangerous police state it has helped to spawn. To his credit, he has promised to end the illegal federal raids on medical marijuana clinics, and to eliminate the inherently racist sentencing disparities between crack and powder cocaine. However these measures don't even come close to addressing the fundamental problem that is the drug war itself. And some of his moves so far do not inspire hope: His appointment of Eric Holder, formerly a big proponent of mandatory minimum sentencing is worrisome. Even more disturbing, Obama has pledged to strengthen two federal programs ("Community Oriented Policing Services" (COPS) and the Byrne grant program) that have actually contributed to increased militarization of local police forces.

And the predictions:

1. More than 1% of US adults will still be in prison. This number will very likely be even higher than it is today, and the black and Hispanic portion of that population will not have decreased by any significant amount.
2. We will still suffer from the kind of police abuse that is becoming more and more common: military-style raids on unarmed civilians in their homes; the shooting and tasering of unarmed citizens; and police and judicial corruption leading to the jailing of many more innocent people than can be acceptable under any system. The militarization and aggressive behavior of police forces will probably become worse before they get any better. This is another one that is somewhat open to interpretation. I would ask you to rely on your own honest judgement regarding whether you believe things have really changed in this area.
3. "No-Fly" lists will still be in place, and there may even be more restrictions on travel.
4. There will be more restrictions on gun ownership and the right to self-defense.
5. The police tactics and suppression of dissent at the 2012 RNC and DNC conventions will be just as brutal as they were in 2008.
6. Government surveillance of US citizens will continue (remember that bill Obama voted for that gave immunity to the telecoms companies that assisted with this in the past?),

On the economy:

It is true that President Obama has inherited a tremendous problem from the previous administration. Any president would be hard-pressed to come out of the next four years claiming victory in this area. In fact, the best that anyone could do would be to not make things any worse by allowing markets to function, overvalued assets to depreciate and poorly run companies to fail. Barack Obama is not going to do that.

With his support for the massive financial-industry bailouts, and his plans for stimulus packages to get the economy on track again, President Obama is doing all the wrong things. What got us into this mess was too much borrowing and spending, too much government involvement in markets, and now he wants to implement more of the same as the solution. I'm not even going to ask you all to agree with my assessment. Just watch what happens.

And the predictions:

1. The US will have massive inflation. The dollar will lose at least 50% of its value against most goods and services, and certainly against the goods and services most people use every day. This is a very conservative estimate. It will probably be much worse.
2. Unemployment in the US will be worse than it is now. It will be at least in the double digits.

A Day On The Ice

Sunday was my one day off this week. Saturday was supposed to be a day off as well, although, as normal, I was working. So, because I worked on Saturday, Sarah and I had a day planned of chores on Sunday. We needed to get groceries, to do laundry, there was school work, she wanted to clean the bathroom, we had a bit shopping to do, etc. A bunch of stuff to keep us busy for the day, but nothing that was overly enjoyable.

Fortunately, Saturday night, a friend of mine, Mike, gave us a call and invited us out to his girlfriend's lake to go skating. It has been too long since I've had the opportunity to skate on an open lake. I convinced Sarah we'd be able to do this and still get our chores done. I figured this would be a 1 hour thing; we go to the lake, skate around for awhile, get some much needed exercise, and then get on with the day.

Well, the chores didn't get done, which is okay, they weren't important. The entire day was spent skating on the lake. Once we got there, we met up with our friends and discovered the intention was to skate across the lake to Amanda's (the girlfriend) camp. It wasn't too far and it made for a great day. The ice had some rough patches, but it was smooth enough to make for some pleasant skating. The first strides on skates always feel the greatest, however the stamina I once had as a chubby 14 year old on skates is no longer with this chubby 25 year old.

Once we got to the other side we built a fire on the edge of the lake, warmed up a little bit and cooked some hot dogs. Amanda had a propane stove in the camp so we were even able to boil some water and enjoy some hot chocolate. Amanda's sister even brought some Bud Light out; not my favourite but it does the trick in a pinch. I turned an empty beer can into a hockey puck; it worked alright for a while, but the wind plays some mean defense.



It was a much needed simple day. We got a lot of exercise, took a lot of pictures, visited with some friends and enjoyed the outside. It was just what I needed and I couldn't have spent the day in a better way. I consider it my celebration for my recent promotion.

Anyway, this a slide show of some of the better photos I managed to take; still learning how to use the new camera.

So Right.

Ron Paul and Peter Schiff speaking truth to power:



Peter Schiff is going to be making a keynote speech to the New Brunswick Securities Commission in Fredericton in early May. I hope to find some way in to hear it.

More Change

So Obama has taken his right of passage as POTUS and committed his very first murder. He must be so proud of murdering those 15 Pakistani's. It's good to know another president is in power that likes to wipe his ass with the constitution. It's also heart warming to see peace being brought forth in such a graceful and respectable manner. Thank you for change, Obama, because if this was Bush, he just would've destroyed the entire country.

In further news, MORE CHANGE! When Obama's press secretary Robert Gibbs was asked about the incident, in the name of the transparency Obama pledged to bring to the White House, Gibbs said,"i'm not going to get into these matters".

Please watch:



This reminds me nothing of the many times Scott McClellan, Tony Snow, or Dana Perino refused to answer many, many important questions and shrugged them off an insignificant.

Ron Paul On The House Floor, Again

Quote

I'm currently reading an article title On "Private Tyrannies". The author referenced an Ayn Rand quote I thought was rather interesting:

A disastrous intellectual package-deal, put over on us by the theoreticians of statism, is the equation of economic power with political power. You have heard it in such bromides as: "A hungry man is not free," or "It makes no difference to a worker whether he takes orders from a businessman or a bureaucrat." Most people accept these equivocations — and yet they know that the poorest laborer in America is freer and more secure than the richest commissar in Soviet Russia. What is the basic, the essential, the crucial principle that differentiates freedom from slavery? It is the principle of voluntary action versus physical coercion or compulsion. The difference between political power and any other kind of social "power," between a government and any private organization, is the fact that a government holds a legal monopoly on the use of physical force.

Ron Paul On The House Floor

Audio of "Economic Depressions - The Cause and The Cure"

You can listen to Murray Rothbard's essay posted below here just in case your eyes are tired.

The Irrational Religious Fanatic: No matter which religion, they're all full of hate, and they all love to terrorize.

My brother posted this on his blog:

"Economic Depressions: Their Cause and Cure"

In 1969, Murray Rothbard wrote an essay describing the business cycle, why Keynes is wrong, why Mises is right, and why this was important at that time. The essay was titled Economic Depressions: Their Cause and Cure and while reading it, you might think it was written in reference to the economic issues we are suffering from today.

I would suggest anyone who finds economics even relatively interesting to take 20 minutes and read the entire essay. I've provided a lot of quotes from it below; I probably should have just posted the entire thing.

On government intervention in the economy:

The idea that increased government spending or easy money is "good for business" and that budget cuts or harder money is "bad" permeates even the most conservative newspapers and magazines. These journals will also take for granted that it is the sacred task of the federal government to steer the economic system on the narrow road between the abysses of depression on the one hand and inflation on the other, for the free-market economy is supposed to be ever liable to succumb to one of these evils.

All current schools of economists have the same attitude. Note, for example, the viewpoint of Dr. Paul W. McCracken, the incoming chairman of President Nixon's Council of Economic Advisers. In an interview with the New York Times shortly after taking office [January 24, 1969], Dr. McCracken asserted that one of the major economic problems facing the new Administration is "how you cool down this inflationary economy without at the same time tripping off unacceptably high levels of unemployment. In other words, if the only thing we want to do is cool off the inflation, it could be done. But our social tolerances on unemployment are narrow." And again: "I think we have to feel our way along here. We don't really have much experience in trying to cool an economy in orderly fashion. We slammed on the brakes in 1957, but, of course, we got substantial slack in the economy."

Note the fundamental attitude of Dr. McCracken toward the economy – remarkable only in that it is shared by almost all economists of the present day. The economy is treated as a potentially workable, but always troublesome and recalcitrant patient, with a continual tendency to hive off into greater inflation or unemployment. The function of the government is to be the wise old manager and physician, ever watchful, ever tinkering to keep the economic patient in good working order. In any case, here the economic patient is clearly supposed to be the subject, and the government as "physician" the master.

It was not so long ago that this kind of attitude and policy was called "socialism"; but we live in a world of euphemism, and now we call it by far less harsh labels, such as "moderation" or "enlightened free enterprise." We live and learn.

On Marx and the Business Cycle:

The currently fashionable attitude toward the business cycle stems, actually, from Karl Marx. Marx saw that, before the Industrial Revolution in approximately the late eighteenth century, there were no regularly recurring booms and depressions. There would be a sudden economic crisis whenever some king made war or confiscated the property of his subject; but there was no sign of the peculiarly modern phenomena of general and fairly regular swings in business fortunes, of expansions and contractions. Since these cycles also appeared on the scene at about the same time as modern industry, Marx concluded that business cycles were an inherent feature of the capitalist market economy. All the various current schools of economic thought, regardless of their other differences and the different causes that they attribute to the cycle, agree on this vital point: That these business cycles originate somewhere deep within the free-market economy. The market economy is to blame. Karl Marx believed that the periodic depressions would get worse and worse, until the masses would be moved to revolt and destroy the system, while the modern economists believe that the government can successfully stabilize depressions and the cycle. But all parties agree that the fault lies deep within the market economy and that if anything can save the day, it must be some form of massive government intervention.

On the entrepreneurs role in the economy:

In the market economy, one of the most vital functions of the businessman is to be an "entrepreneur," a man who invests in productive methods, who buys equipment and hires labor to produce something which he is not sure will reap him any return. In short, the entrepreneurial function is the function of forecasting the uncertain future. Before embarking on any investment or line of production, the entrepreneur, or "enterpriser," must estimate present and future costs and future revenues and therefore estimate whether and how much profits he will earn from the investment. If he forecasts well and significantly better than his business competitors, he will reap profits from his investment. The better his forecasting, the higher the profits he will earn. If, on the other hand, he is a poor forecaster and overestimates the demand for his product, he will suffer losses and pretty soon be forced out of the business.

The market economy, then, is a profit-and-loss economy, in which the acumen and ability of business entrepreneurs is gauged by the profits and losses they reap. The market economy, moreover, contains a built-in mechanism, a kind of natural selection, that ensures the survival and the flourishing of the superior forecaster and the weeding-out of the inferior ones. For the more profits reaped by the better forecasters, the greater become their business responsibilities, and the more they will have available to invest in the productive system. On the other hand, a few years of making losses will drive the poorer forecasters and entrepreneurs out of business altogether and push them into the ranks of salaried employees.

If, then, the market economy has a built-in natural selection mechanism for good entrepreneurs, this means that, generally, we would expect not many business firms to be making losses. And, in fact, if we look around at the economy on an average day or year, we will find that losses are not very widespread.

On the Ricardian Theory of the business cycle:

The Ricardian analysis of the business cycle went something as follows: The natural moneys emerging as such on the world free market are useful commodities, generally gold and silver. If money were confined simply to these commodities, then the economy would work in the aggregate as it does in particular markets: A smooth adjustment of supply and demand, and therefore no cycles of boom and bust. But the injection of bank credit adds another crucial and disruptive element. For the banks expand credit and therefore bank money in the form of notes or deposits which are theoretically redeemable on demand in gold, but in practice clearly are not. For example, if a bank has 1000 ounces of gold in its vaults, and it issues instantly redeemable warehouse receipts for 2500 ounces of gold, then it clearly has issued 1500 ounces more than it can possibly redeem. But so long as there is no concerted "run" on the bank to cash in these receipts, its warehouse-receipts function on the market as equivalent to gold, and therefore the bank has been able to expand the money supply of the country by 1500 gold ounces.

The banks, then, happily begin to expand credit, for the more they expand credit the greater will be their profits. This results in the expansion of the money supply within a country, say England. As the supply of paper and bank money in England increases, the money incomes and expenditures of Englishmen rise, and the increased money bids up prices of English goods. The result is inflation and a boom within the country. But this inflationary boom, while it proceeds on its merry way, sows the seeds of its own demise. For as English money supply and incomes increase, Englishmen proceed to purchase more goods from abroad. Furthermore, as English prices go up, English goods begin to lose their competitiveness with the products of other countries which have not inflated, or have been inflating to a lesser degree. Englishmen begin to buy less at home and more abroad, while foreigners buy less in England and more at home; the result is a deficit in the English balance of payments, with English exports falling sharply behind imports. But if imports exceed exports, this means that money must flow out of England to foreign countries. And what money will this be? Surely not English bank notes or deposits, for Frenchmen or Germans or Italians have little or no interest in keeping their funds locked up in English banks. These foreigners will therefore take their bank notes and deposits and present them to the English banks for redemption in gold – and gold will be the type of money that will tend to flow persistently out of the country as the English inflation proceeds on its way. But this means that English bank credit money will be, more and more, pyramiding on top of a dwindling gold base in the English bank vaults. As the boom proceeds, our hypothetical bank will expand its warehouse receipts issued from, say 2500 ounces to 4000 ounces, while its gold base dwindles to, say, 800. As this process intensifies, the banks will eventually become frightened. For the banks, after all, are obligated to redeem their liabilities in cash, and their cash is flowing out rapidly as their liabilities pile up. Hence, the banks will eventually lose their nerve, stop their credit expansion, and in order to save themselves, contract their bank loans outstanding. Often, this retreat is precipitated by bankrupting runs on the banks touched off by the public, who had also been getting increasingly nervous about the ever more shaky condition of the nation's banks.

The bank contraction reverses the economic picture; contraction and bust follow boom. The banks pull in their horns, and businesses suffer as the pressure mounts for debt repayment and contraction. The fall in the supply of bank money, in turn, leads to a general fall in English prices. As money supply and incomes fall, and English prices collapse, English goods become relatively more attractive in terms of foreign products, and the balance of payments reverses itself, with exports exceeding imports. As gold flows into the country, and as bank money contracts on top of an expanding gold base, the condition of the banks becomes much sounder.

This, then, is the meaning of the depression phase of the business cycle. Note that it is a phase that comes out of, and inevitably comes out of, the preceding expansionary boom. It is the preceding inflation that makes the depression phase necessary. We can see, for example, that the depression is the process by which the market economy adjusts, throws off the excesses and distortions of the previous inflationary boom, and reestablishes a sound economic condition. The depression is the unpleasant but necessary reaction to the distortions and excesses of the previous boom.

Why, then, does the next cycle begin? Why do business cycles tend to be recurrent and continuous? Because when the banks have pretty well recovered, and are in a sounder condition, they are then in a confident position to proceed to their natural path of bank credit expansion, and the next boom proceeds on its way, sowing the seeds for the next inevitable bust.

On the role of a central bank:

But if banking is the cause of the business cycle, aren't the banks also a part of the private market economy, and can't we therefore say that the free market is still the culprit, if only in the banking segment of that free market? The answer is No, for the banks, for one thing, would never be able to expand credit in concert were it not for the intervention and encouragement of government. For if banks were truly competitive, any expansion of credit by one bank would quickly pile up the debts of that bank in its competitors, and its competitors would quickly call upon the expanding bank for redemption in cash. In short, a bank's rivals will call upon it for redemption in gold or cash in the same way as do foreigners, except that the process is much faster and would nip any incipient inflation in the bud before it got started. Banks can only expand comfortably in unison when a Central Bank exists, essentially a governmental bank, enjoying a monopoly of government business, and a privileged position imposed by government over the entire banking system. It is only when central banking got established that the banks were able to expand for any length of time and the familiar business cycle got underway in the modern world.

The central bank acquires its control over the banking system by such governmental measures as: Making its own liabilities legal tender for all debts and receivable in taxes; granting the central bank monopoly of the issue of bank notes, as contrasted to deposits (in England the Bank of England, the governmentally established central bank, had a legal monopoly of bank notes in the London area); or through the outright forcing of banks to use the central bank as their client for keeping their reserves of cash (as in the United States and its Federal Reserve System). Not that the banks complain about this intervention; for it is the establishment of central banking that makes long-term bank credit expansion possible, since the expansion of Central Bank notes provides added cash reserves for the entire banking system and permits all the commercial banks to expand their credit together. Central banking works like a cozy compulsory bank cartel to expand the banks' liabilities; and the banks are now able to expand on a larger base of cash in the form of central bank notes as well as gold.

So now we see, at last, that the business cycle is brought about, not by any mysterious failings of the free market economy, but quite the opposite: By systematic intervention by government in the market process. Government intervention brings about bank expansion and inflation, and, when the inflation comes to an end, the subsequent depression-adjustment comes into play.

Mises theory of the business cycle:

Without bank credit expansion, supply and demand tend to be equilibrated through the free price system, and no cumulative booms or busts can then develop. But then government through its central bank stimulates bank credit expansion by expanding central bank liabilities and therefore the cash reserves of all the nation's commercial banks. The banks then proceed to expand credit and hence the nation's money supply in the form of check deposits. As the Ricardians saw, this expansion of bank money drives up the prices of goods and hence causes inflation. But, Mises showed, it does something else, and something even more sinister. Bank credit expansion, by pouring new loan funds into the business world, artificially lowers the rate of interest in the economy below its free market level.

On the free and unhampered market, the interest rate is determined purely by the "time-preferences" of all the individuals that make up the market economy. For the essence of a loan is that a "present good" (money which can be used at present) is being exchanged for a "future good" (an IOU which can only be used at some point in the future). Since people always prefer money right now to the present prospect of getting the same amount of money some time in the future, the present good always commands a premium in the market over the future. This premium is the interest rate, and its height will vary according to the degree to which people prefer the present to the future, i.e., the degree of their time-preferences.

People's time-preferences also determine the extent to which people will save and invest, as compared to how much they will consume. If people's time-preferences should fall, i.e., if their degree of preference for present over future falls, then people will tend to consume less now and save and invest more; at the same time, and for the same reason, the rate of interest, the rate of time-discount, will also fall. Economic growth comes about largely as the result of falling rates of time-preference, which lead to an increase in the proportion of saving and investment to consumption, and also to a falling rate of interest.

But what happens when the rate of interest falls, not because of lower time-preferences and higher savings, but from government interference that promotes the expansion of bank credit? In other words, if the rate of interest falls artificially, due to intervention, rather than naturally, as a result of changes in the valuations and preferences of the consuming public?

What happens is trouble. For businessmen, seeing the rate of interest fall, react as they always would and must to such a change of market signals: They invest more in capital and producers' goods. Investments, particularly in lengthy and time-consuming projects, which previously looked unprofitable now seem profitable, because of the fall of the interest charge. In short, businessmen react as they would react if savings had genuinely increased: They expand their investment in durable equipment, in capital goods, in industrial raw material, in construction as compared to their direct production of consumer goods.

Businesses, in short, happily borrow the newly expanded bank money that is coming to them at cheaper rates; they use the money to invest in capital goods, and eventually this money gets paid out in higher rents to land, and higher wages to workers in the capital goods industries. The increased business demand bids up labor costs, but businesses think they can pay these higher costs because they have been fooled by the government-and-bank intervention in the loan market and its decisively important tampering with the interest-rate signal of the marketplace.

The problem comes as soon as the workers and landlords – largely the former, since most gross business income is paid out in wages – begin to spend the new bank money that they have received in the form of higher wages. For the time-preferences of the public have not really gotten lower; the public doesn't want to save more than it has. So the workers set about to consume most of their new income, in short to reestablish the old consumer/saving proportions. This means that they redirect the spending back to the consumer goods industries, and they don't save and invest enough to buy the newly-produced machines, capital equipment, industrial raw materials, etc. This all reveals itself as a sudden sharp and continuing depression in the producers' goods industries. Once the consumers reestablished their desired consumption/investment proportions, it is thus revealed that business had invested too much in capital goods and had underinvested in consumer goods. Business had been seduced by the governmental tampering and artificial lowering of the rate of interest, and acted as if more savings were available to invest than were really there. As soon as the new bank money filtered through the system and the consumers reestablished their old proportions, it became clear that there were not enough savings to buy all the producers' goods, and that business had misinvested the limited savings available. Business had overinvested in capital goods and underinvested in consumer products.

The inflationary boom thus leads to distortions of the pricing and production system. Prices of labor and raw materials in the capital goods industries had been bid up during the boom too high to be profitable once the consumers reassert their old consumption/investment preferences. The "depression" is then seen as the necessary and healthy phase by which the market economy sloughs off and liquidates the unsound, uneconomic investments of the boom, and reestablishes those proportions between consumption and investment that are truly desired by the consumers. The depression is the painful but necessary process by which the free market sloughs off the excesses and errors of the boom and reestablishes the market economy in its function of efficient service to the mass of consumers. Since prices of factors of production have been bid too high in the boom, this means that prices of labor and goods in these capital goods industries must be allowed to fall until proper market relations are resumed.

Since the workers receive the increased money in the form of higher wages fairly rapidly, how is it that booms can go on for years without having their unsound investments revealed, their errors due to tampering with market signals become evident, and the depression-adjustment process begins its work? The answer is that booms would be very short lived if the bank credit expansion and subsequent pushing of the rate of interest below the free market level were a one-shot affair. But the point is that the credit expansion is not one-shot; it proceeds on and on, never giving consumers the chance to reestablish their preferred proportions of consumption and saving, never allowing the rise in costs in the capital goods industries to catch up to the inflationary rise in prices. Like the repeated doping of a horse, the boom is kept on its way and ahead of its inevitable comeuppance, by repeated doses of the stimulant of bank credit. It is only when bank credit expansion must finally stop, either because the banks are getting into a shaky condition or because the public begins to balk at the continuing inflation, that retribution finally catches up with the boom. As soon as credit expansion stops, then the piper must be paid, and the inevitable readjustments liquidate the unsound over-investments of the boom, with the reassertion of a greater proportionate emphasis on consumers' goods production.

Thus, the Misesian theory of the business cycle accounts for all of our puzzles: The repeated and recurrent nature of the cycle, the massive cluster of entrepreneurial error, the far greater intensity of the boom and bust in the producers' goods industries.

On the role of government during a depression:

In the first place, government must cease inflating as soon as possible. It is true that this will, inevitably, bring the inflationary boom abruptly to an end, and commence the inevitable recession or depression. But the longer the government waits for this, the worse the necessary readjustments will have to be. The sooner the depression-readjustment is gotten over with, the better. This means, also, that the government must never try to prop up unsound business situations; it must never bail out or lend money to business firms in trouble. Doing this will simply prolong the agony and convert a sharp and quick depression phase into a lingering and chronic disease. The government must never try to prop up wage rates or prices of producers' goods; doing so will prolong and delay indefinitely the completion of the depression-adjustment process; it will cause indefinite and prolonged depression and mass unemployment in the vital capital goods industries. The government must not try to inflate again, in order to get out of the depression. For even if this reinflation succeeds, it will only sow greater trouble later on. The government must do nothing to encourage consumption, and it must not increase its own expenditures, for this will further increase the social consumption/investment ratio. In fact, cutting the government budget will improve the ratio. What the economy needs is not more consumption spending but more saving, in order to validate some of the excessive investments of the boom.

Thus, what the government should do, according to the Misesian analysis of the depression, is absolutely nothing. It should, from the point of view of economic health and ending the depression as quickly as possible, maintain a strict hands off, "laissez-faire" policy. Anything it does will delay and obstruct the adjustment process of the market; the less it does, the more rapidly will the market adjustment process do its work, and sound economic recovery ensue.

The Misesian prescription is thus the exact opposite of the Keynesian: It is for the government to keep absolute hands off the economy and to confine itself to stopping its own inflation and to cutting its own budget.

On the great depression and the Keynesian revolution:

It has today been completely forgotten, even among economists, that the Misesian explanation and analysis of the depression gained great headway precisely during the Great Depression of the 1930s – the very depression that is always held up to advocates of the free market economy as the greatest single and catastrophic failure of laissez-faire capitalism. It was no such thing. 1929 was made inevitable by the vast bank credit expansion throughout the Western world during the 1920s: A policy deliberately adopted by the Western governments, and most importantly by the Federal Reserve System in the United States. It was made possible by the failure of the Western world to return to a genuine gold standard after World War I, and thus allowing more room for inflationary policies by government. Everyone now thinks of President Coolidge as a believer in laissez-faire and an unhampered market economy; he was not, and tragically, nowhere less so than in the field of money and credit. Unfortunately, the sins and errors of the Coolidge intervention were laid to the door of a non-existent free market economy.

If Coolidge made 1929 inevitable, it was President Hoover who prolonged and deepened the depression, transforming it from a typically sharp but swiftly-disappearing depression into a lingering and near-fatal malady, a malady "cured" only by the holocaust of World War II. Hoover, not Franklin Roosevelt, was the founder of the policy of the "New Deal": essentially the massive use of the State to do exactly what Misesian theory would most warn against – to prop up wage rates above their free-market levels, prop up prices, inflate credit, and lend money to shaky business positions. Roosevelt only advanced, to a greater degree, what Hoover had pioneered. The result for the first time in American history, was a nearly perpetual depression and nearly permanent mass unemployment. The Coolidge crisis had become the unprecedentedly prolonged Hoover-Roosevelt depression.

Ludwig von Mises had predicted the depression during the heyday of the great boom of the 1920s – a time, just like today, when economists and politicians, armed with a "new economics" of perpetual inflation, and with new "tools" provided by the Federal Reserve System, proclaimed a perpetual "New Era" of permanent prosperity guaranteed by our wise economic doctors in Washington. Ludwig von Mises, alone armed with a correct theory of the business cycle, was one of the very few economists to predict the Great Depression, and hence the economic world was forced to listen to him with respect. F. A. Hayek spread the word in England, and the younger English economists were all, in the early 1930s, beginning to adopt the Misesian cycle theory for their analysis of the depression – and also to adopt, of course, the strictly free-market policy prescription that flowed with this theory. Unfortunately, economists have now adopted the historical notion of Lord Keynes: That no "classical economists" had a theory of the business cycle until Keynes came along in 1936. There was a theory of the depression; it was the classical economic tradition; its prescription was strict hard money and laissez-faire; and it was rapidly being adopted, in England and even in the United States, as the accepted theory of the business cycle. (A particular irony is that the major "Austrian" proponent in the United States in the early and mid-1930s was none other than Professor Alvin Hansen, very soon to make his mark as the outstanding Keynesian disciple in this country.)

What swamped the growing acceptance of Misesian cycle theory was simply the "Keynesian Revolution" – the amazing sweep that Keynesian theory made of the economic world shortly after the publication of the General Theory in 1936. It is not that Misesian theory was refuted successfully; it was just forgotten in the rush to climb on the suddenly fashionable Keynesian bandwagon. Some of the leading adherents of the Mises theory – who clearly knew better – succumbed to the newly established winds of doctrine, and won leading American university posts as a consequence.