Inflation; W. Hillendahl

They have pervaded the formal institutions of the church, govern ment, commerce, finance, agricul ture, education a.s well as culture and the arts. In the present age the struggle centers on the law, the rules by which contemporary civilizations are ordered and un der which individuals conduct Mr. Hillendahl is Vice President of the Bank of Hawaii. This article is reprinted by per mission from his paper at a March 1974 semi nar sponsored by The Committee for Mone tary Research and Education. By-Productof Ideologiesin Collision WESLEY H. HILLENDAHL their daily affairs with each other. Whether man will be free to pursue his life and God-given des tiny in an orderly environment in which government plays the do mestic role of impartial umpire, or whether his life will be con trolled in every detail by the dic tums of an omnipotent materialis tic bureaucracy is the central theme of today's conflict. Indeed, this is the essence of the catas trophic collision of economic thought of the 19th and 20th cen turies. Upon the outcome of this collision will depend man's way of life for generations to come. In simple economic terms, will the market place exist to serve the in dividual a.ccording to his choice, or will the market and the individ ual be under the control of the state?

413 414 THE FREEMAN July Ideological Roots of the Free Market Economy It is doubtful that a totally free market economy ever existed -·one that is completely free of state in tervention of one sort or another. And only in a few brief periods of recorded history has man been suf ficiently motivated· to assert him self to the degree required to grasp control of the market place from the ha.nds of the rulers. 1 Such an event occurred in 1776 in America, but it was far from spontaneous. The spirit of '76 had been brewing for centuries in Europe. Its unique significance may be brought into focus by a brief review of several historical events. In this review, the essential distinction between the legal framework and the eco nomic system must be kept in mind. It is all too easy to confuse the economic activities of a people with the legal framework under which they live, particularly today as government becomes increas ingly involved in the economic af fairs of its citizens.

The first of these historical in cidents occurred on June 15, 1215 A.D. One recalls that King John of England was an oppressive tyrant. English noblemen and freemen be came so incensed at the king's dis regard for their rights that they pursued him to Runnymede where he was "convinced" to sign a docu ment called the Magna Carta. This summit meeting produced a docu ment which provided the concept of trial by jury, no taxation without representation, and the Writ of Habeas Corpus. It provided the fundamental restraint on govern ment in the form of written law known throughout much of the world today.2 By 1628, the British King's dis regard of individual rights won 400 years earlier became so insuf ferable that Parliament refused to vote any money to run the king dom, a.nd King Char les I was forced to sign the Petition of Right. This document provided the essential ingredients of per sonal security by restricting con ditions relating to the levy of taxes, boarding of troops, declara tion of martial law, trial by jury, and arbitrary imprisonment; with out these rights, an individual can not enj oy personal security.

In 1689, Parliament rebelled against King James Irs tyran nical belief in absolute monarchy. Out of this action came the Brit ish Bill of Rights. Political liberty had triumphed in England, and with it a degree of economic free dom unknown before. The profound significance to Americans of these early limita tions on government is easily re cognized, for in the first eight amendments to the Constitution of the United States, we find the in1974 INFLATION: BY-PRODUCT OF IDEOLOGIES IN COLLISION 415 fluence of the Magna Carta, Peti tion of Right and· the English Bill of· Rights. It was George Mason, the Vir ginian, 3 more than any other in dividual who forged the basic structure of limited and divided powers of government found in the United States Constitution and Bill of Rights. These are re strictive documents in the sense that they place more constraints on government than had ever pre vailed in the past. The intent was to fragment political power, and to provide major obstacles to the reassembly of that power. In the wake of the centuries of tyranny, and the sacrifices of untold thou sands of individuals in their strug gle for freedom in England and Europe, the founders of the Repub lic were hardly likely to construct a government which could be cen tralized easily at the expense of in dividual liberty. The principle of separation or subdivision of pow ers, as championed by men such as Mason, is still history's most ef fective stumbling block for ty rants. However, the Constitution was not perfect, and it was George Mason who foresaw the fatal flaws introduced by compromise that ul timately became' the avenues by which much of it has been struck down.

In 1850, a French statesman, economist and author, Frederic Bastiat, espoused the theme of lim ited government at a time when France was turning to Socialism or total bureaucracy, following the French Revolution in 1848 which had coincided with the release of Marx's Manifesto. Bastiat empha sized the essential spiritual ante cedents in the framework of eco nomic freedom. He commenced his book, The Law, with the following: "We hold from God the· gift which includes all others. This gift is life - physical, intellectual, and moral life. . .. Life, liberty, and prop erty do not exist because men have made laws. On the contrary, it was the fact that life, liberty, and property existed beforehand that caused men to make laws in the first place."4 It is all but forgotten by many today that the State is not the source of liberty and property; these are inalienable rights that come from God.

Bastiat expressed the issue clearly: "What, then, is law? It is the collective organization of the individual right to lawful defense. Each of us has a natural right from God - to defend his person, his liberty, and his property; and by extension it follows that a group of men have the right to or ganize and support a common force to protect these rights con stantly." He concluded, ". . . since an in416 THE FREEMAN July dividual cannot lawfully use force against the person, liberty or property of another individual, then the common force - for the same reason - cannot lawfully be used to destroy the person, liberty, or property of individuals or 'groups." In Bastiat's eyes, any form of state intervention in the affairs of the individual is not only illegal, it is immoral and con trary to God's law. Thus did Bastiat so eloquently summarize what had evolved over hundreds of years - the legal framework of the constraints on government that make it possible for ea.ch of us to order his own life, and to offer his service in the man ner called "free enterprise."

Here then are the moral and spiritual antecedents of the Ameri can system as codified in the law forming the framework of the free market economy. Being all but for gotten today under the pressure of the conflict, these principles are restated here because they consti tute the raison d' etre for any meaningful monetary and econom ic reform. Accomplishments of the Free Market Having established a Republic under the legal framework of lim ited government, what could man accomplish in the free market? In the beginning the focus was mainly on the family, the commu...; nity, and the job of survivaL By 1840, 70. per cent of the people in the United States still lived on farms, while more than 90 per cent grew their own food. Not satisfied with devoting most of his energies to the drudgery of surviv al, the free individual American possessed of a drive to better him self undertook an unprecedented change in his wa.y of life.

The age-old concept that man's material wealth is limited, which had arisen out of the fact that hu man energy had never been effec tively augmented, gave way to the principle that material wealth could be expanded to an almost un limited extent by multiplying lim ited natural resources and limited human energy by tools using non human energy.5 During the 1800's, a massive re construction of the application of labor was brought about through the invention of a host of machines which permitted the augmenta tion of human effort by non-hu man energy. Initially, wood and, whale oil were the principal sources of energy. These gave way in time to petroleum products, the use of which doubled decade a.fter decade until early in the 20th cen tury. In agriculture, the first signif icant invention, the steel-bladed plow, occurred in 1841. In rapid succession came the power reaper, 1974 INFLATION: BY-PRODUCT OF IDEOLOGIES IN COLLISION 417 the steam thrasher, and the hay ing machine. Then in 1884, the first combine and the first tractor appeared. All of the things which we take for granted today were marvelous inventions in those days.

Can you visualize yourself pitch ing hay or performing some other type of hand labor on a farm be fore being rescued by these mar velous machines? After the turn of the century, a whole succession of specialized tools and machines were developed which bring food all the way from the farm to the home refrigerator. As a consequence of these labor saving inventions, the 70 per cent of people on farms in 1840 had been reduced by one-half by the turn of the century. Continuing advancement to World War II brought the proportion of people on farms to 18 per cent. Today, only about 5 per cent of the population live on farms, and farm labor ac counts for only 4 per cent of the nation's labor force. At no time in history nor in any other country has there been such extensive productive application of man's in ventive genius; and the process .seems endless. Economic freedom has, by sim i! ar processes, provided an enor mous expansion of physical and mental productivity, and offered the incentive to develop the vast array of items that have become the underpinning of our standard of Iiving. We've had the incen tive to solve disease and sanitation problems, provide housing for the entire population, develop great centers for preserving and trans mitting our accumulated learning, and transfer goods via a vast pro duction, distribution and market ing mechanism unknown in his tory.

The Roots of the Control/eel Economy At the heart of the notion that the economy must be controlled by the government are several well re cognized themes: (1) the concept that society is made up of two classes, the oppressed and the op pressors, the "class struggle", (2) the concept of "exploitation" of man by man, and (3) the concept that the controlled order is inevit able as the consequence of the in exorable increase in impoverish ment caused by the development of capitalism. Hence, by revolution as advocat ed by some, such as the secret League of Just Men who had com missioned Marx to write their Manifesto, or by evolution as ad vocated by the British Fabian Society or the ADA, "... It is nec essary to emancipate society at large from exploitation, oppres sion, class distinctions, and class struggles." The economic and political meas418 THE FREEMAN July ures by which collectivists intend to convert society .generally in clude :6 1. Abolition of private property and the rental thereof to individuals by the state.

2. A heavily progressive income tax. 3. Abolition of all right of inheritance. 4. Government control of credit by means of a monopolistic central bank. 5. Government control of communi cations, transportation, and means of production. 6. Abolition of distinctions between urban and rural areas by redistri bution of population. 7. Free government schooling. These features of the welfare state, Socialism, the planned econ omy - call it what you will-are recited, not as we recited the roots of the free market which are all but forgotten, but because they are so conspicuous in today's econ omy that we are inclined to over look what they really are - the legal framework for the very an tithesis of the free market which this country's founding fathers envisioned. Ideologies in Collis;on Both Marx and Bastiat express ed concern for the common man under the tyranny which had pre vailed for centuries in Europe and England. But Marx advocated as a substitute for the monarchy a new form of tyranny - a. bureauc racy supported by a synthetic ma jority rule; whereas Bastiat and his English counterparts correctly envisioned that only by placing all forms of tyranny in the chains of restrictive law could man arise out of repression.

Hence, the industrial revolution in America, operating under the aegis of a Constitutional Repub lic providing maximum freedom for the individual and a minimum of exploitation, bore fruit as no where else in the world. Instead of the exploitation and oppression, anticipated by Marx, has come the emancipation of the masses seen in the visions of the founding fathers. However, while vast economic changes were occurring through out the western world and in America in particular over the last century, government was also un dergoing a transformation of ma jor proportions. From an incon sequential power over economic af fairs during the 19th century, the Federal Government today has be come the most powerful bureauc racy on earth, and has regressed into a massive engine for control and redistribution of people and wealth, largely as Marx and his colleagues had advocated. Much of what government has undertaken domestically falls with1974 INFLATION: BY-PRODUCT OF IDEOLOGIES IN COLLISION 419 in the prescribed limits of the role of referee. However, the main thrust of government activity in recent years has gone far beyond the prescribed limits. F. A. Hayek, in The Constitution of Liberty,7 foretold the consequences of prac tices which have developed under persistent pressure to do away with those limitations on govern ment which were erected for the protection of individual liberty.

"This conflict between the ideal of freedom and the desire to 'cor rect' the distribution of incomes so as to make it more 'just' is usually not clearly recognized .... But the ultimate result . . . will necessarily be, not a modification of the existing order, but its com plete abandonment and its replace ment by an altogether different system - the command economy." Hayek is one of the few writers who correctly recognized the mixed economy for what it is - an unstable transitional condition be tween the free market economy and the bureaucratically controlled society. Inflation in the Transitional Period While those who champion the sanctity of individual liberty and the ideal of the free market de plore the transition, socialist schola,rs are' inclined to want to get on with the work of erecting the bureaucra.cy and eradicating all vestiges of their bogy man, "laissez faire" enterprise. Be that as it may, it is the contemporary status of this transition that in vites our closer examination. Spe cifically, our concern is the phe nomenon of inflation in the mixed economy as a manifestation of the transition.

Because many qualified econo mists have demonstrated the es sential monetary nature of infla tion, we need not restate here the distinction between money and credit expansion and the resultant rise in wages and prices, nor go into the fine points of monetizing debt. There is a prevailing notion that in the transition period dur ing which functions performed by the private sector of the economy are transferred to government, in flation will persist as long as the still strong private sector and the growing public sector fight for the limited amount of capital. However, many economists seem only recently to be grasping the fact that as the transition pro gresses, so must monetary infla tion proceed at an accelerated rate. The long-standing argument that the manner in which government debt is funded is a determining f actor in inflation, seems inade quate to explain the evident fact that inflation is accelerating.

The problem is that too much 420 THE FREEMAN July attention has been devoted to na tional income analysis while ignor ing the nation's balance sheet. An examination of practically all meas ures of balance sheet liquidity or cash reserves reveals that the pri vate sector of the economy is being progressively starved of funds by rising taxes and increasing costs of nonproductive overhead caused by governmental interventions. Expanding Government Empirically, the record in the United States shows that so long as all governments combined took in direct and indirect taxes less than 25 per cent of personal income, some discretion existed as to what rate of monetary inflation could be undertaken at any given time. However, once government ex panded beyond the range, as it did years ago, the economy embarked on a one-way street; and as gov ernment grows progressively larg er at the expense of the private sector, so must inflation proceed apace to accommodate the credit re quirements of the economy.8 Government spending having ex panded to more than 43 per cent of personal income, this progres.. sive expansion of credit is neces sary to avoid collapse as the level of borrowing must also accele·rate in lieu of diminishing residual pro fits and retained earnings.

Ultimately, as government proceeds progressively to confiscate all earnings, one might expect monetary inflation to reach pro portions experienced in France in the 1790's, Germany in the 1920's, Russia immediately after the so called revolution, and Hungary in 1946. However, before hyperinflation of such proportions would be gen erated, it is more likely that an at tempt toward the conversion to a totally controlled economy will be undertaken under the guise of some combination of "emergen cies." Many of the mechanisms to achieve such a conversion have been on the books for many years. 9 A.nd Congress delegates additional "emergency powers" to the bu reaucracy as each new ucrisis" is engineered. Meanwhile, unforeseen develop ments such as the projection of the Middle East conflict into the otherwise inevitable domestic oil shortage may produce profound and undefinable effects on the fu ture timing and nature of the con version, not only in the United States, but worldwide. It is clear that the Arab nations have admin istered the coup de grace to the faltering International Monetary Fund, and that the role of gold is about to achieve a significance in world monetary affairs virtually inconceivable in the United States only a few years ago.

1974 INFLATION: BY-PRODUCT OF IDEOLOGIES IN COLLISION 421 Inflation in the Controlled Economy It is not our purpose here to en ter into a theoretical discussion of inflation under Socialism, but rather to suggest two thoughts. First, utopian goals of inflation free prosperity for all, as envision ed by the planners of the multi national political economy, may be quite unrealistic. The end product of the transi tion from the free market to So cialism even in America may well produce vastly different results than .expected. Simply stated, a bureaucratically controlled econo my is incapable of maintaing a lev el of production adequate to sustain itself. In the absence of the profit motive, people will not produce at their capacity, and in the absence of a mechanism to retain and uti lize savings, the machinery of pro duction will either run down or wear out. Even more significant is the underlying moral issue. Let us heed Garet Garrett's words :10 When in the conquest of power and for political ends a government delib erately engineers inflation ... the people will lose control of [govern ment] ... and finally, the revelry of public money, which for a while seems to cost nobody anything, brings to pass a state of moral obliquity throughout society. The monetary de bacle is relatively unimportant. The moral debacle is cancerous and pos sibly incurable.

Who, then, under the controlled economy will have the incentive to continue to produce the economic abundance from which has been drawn the hundreds of billions of dollars of foreign aid designed to prop up untold socialist experi ments in a hundred or more coun tries, the numerous unsupportable and uneconomic public infrastruc tures,* the vast nonproductive, self-defeating bureaucracies set up in many so-called developing na tions to divide the free loot? Can Russia Survive? But of even greater significance, what will be the fate of the USSR, the greatest socialist experiment of all time? This question may sound strange in the context that the USSR is presented to us as an economy based on such a highly advanced technology that it poses a vast military threat to which we must respond by spending over $80 billion annually on armaments. Under the Czar, Russia was well advanced into the industrial rev olution, and at the turn of the century, was the world's leading * All too frequently American taxpay ers' dollars have been used to provide in frastructures which to date have done little to improve the status of the average citizen of developing nations; instead, the benefits have accrued largely to the prof its of multinational corporations which have located plants in these low-cost la bor markets.

422 THE FREEMAN July oil exporter. But such prerevolu tionary developments are por trayed as insignificant in terms of the Soviet's achievements of the past 50 years. However, the record shows that present day Soviet technology is synthetic - it has all been im ported. Based on ten years of re search into official documents, Antony C. Sutton, research fellow at the Hoover Institution on War, Revolution and Peace, developed grounds for his widely quoted tes timony before the Republican Party National Convention in 1972. In Sutton's words: "There is no such thing as Soviet technol ogy. Almost all-perhaps 90-95 per cent - came directly or indi rectly from the United States and its allies.' In effect, the United States and the NATO countries have built the Soviet Union. Its industrial and its military capabil ities. This massive construction job has taken 50 years, since the revolution in 1917. It has been carried out through trade and the sale of plants, equipment and tech nical assistance."ll Sutton also quoted Ambassador Harriman: "Stalin paid tribute to the assistance rendered by the United States to Soviet industry before and during the War. Stalin said that about two-thirds of all large industrial enterprises in the Soviet Union has been built with the United States' help or tech nical assistance."

The West Helps Russia In his three volume work, W est ern Technology and Soviet Eco nomic Development 12 covering 1917 to 1965, Sutton demonstrates on an industry-by-industry basis that the West has contributed under contract essentially all the plants and technology which comprise the Soviet military-industrial com lex today. Of great significance is his statement that it has been shown Russia has never suffered from a dearth of competent technical and scientific personnel, rather the bureaucracy is incapable of trans lating the endeavors of individuals into productive. results. The power of his statement is that it is not theoretical, but is based on the observed record. Its significance lies in the application of Garrett's observation regarding the cancerous moral debacle which occurs under bureaucratic control. In basic English: People cannot be forced to produce, effectively without personal incentives to do so. And Socialism demonstrably fails to provide these essential incentives.

In my opinion, the death of the free market in the United States would come not as a sudden de1974 INFLATION: BY-PRODUCT OF IDEOLOGIES IN COLLISION 423 pression, but rather a, gradual sinking into stagnation in activity characteristic of controlled econ omies. The drying up of that enormous production by which much of the so-called free world is subsi.dized would also cause the sta.gnation to extend abroad. Fi nally, the stream of technology upon which the Iron Curtain coun tries have relied for 50 years would dry up, and the Soviets, for the first time in their existence, would be cast free to sink or swim on their own. Socialism Precludes Inflation? The second thought I wish to examine more carefully is the notion that inflation is a product of sound monetary practices, ir respective of the type of economy or political framework. Let us not forget that one of Napoleon's first acts was to restore the gold stand ard in France.

As to the alleged freedom from inflation in a, world under Social ism, we may turn to economist Benj amin Anderson: 13 By 1921, Lenin had reached the conclusion that pure communism would not work, and the New Eco nomic Policy announced by Lenin in 1921, frankly acknowledged a partial return to capitalism. The reestablish ment of capitalism in Russia involved the redevelopment of a money held as closely as possible at a parity with gold. In the years that followed, Rus sia had repeated slumps in the value of its currency, but always resisted them, and finally turned decisively toward heavy gold production, recog nizing the need of gold both for inter national use and as an elelnent of strength in the do'mestic currency situation .... Russia could never make its paper money a "thing in itself" created by the state and held fixed by the state's fiat. Currently, the Soviet Union holds gold in such high esteem that the first of four nuclear pow er plants was recently activated to power gold dredges and other mining machinery at the Soviets' principal gold mining center of Bilibino in Siberia.

Hence, it would appear that in the totally socialized world, civ ilization would descend into stag nation for an untold period of time. If such economy as remains in the world is to be free of infla tion, it could be accomplished only by recourse to that perennial bar barian, gold. The Solution - A Moral Issue Although we are far down the road, this dismal outcome of the ideological collision need not occur - indeed, we must not permit it to occur. However, mere monetary constraint will no longer provide an effective, answer because of the balance sheet liquidity p.rob424 THE FREEMAN July lem. Restoration of a sound gold convertible currency is a move in the right direction; but if Ander son's observations regarding the Soviet Union are valid, such a move will not, in itself, eradicate the bureaucracy. Only by attack ing the ideological roots of Social ism can the tide be turned in practice. This means checking the growth of government and the spawn of monopoly industries which through the centuries have always fed on centralized power.

This means returning. government to its constitutionally authorized role and restoring true competi tion to the market place. In the final analysis, the issue is a moral one: Are enough people willing to exercise sufficient indi vidual initiative, responsibility and integrity to do the job? In the abstract, this seems to be a reasonable challenge. But in practice, how many businessmen who espouse free enterprise for their own businesses will give up the practice of using their influ ence with their legislators to limit competition or otherwise gain eco nomic advantage through the leg islative process? How many businessmen will sacrifice profits in a genuine com passion for their fellow man by giving up their lucrative business with the bureaucrats of countries who have sent millions of their citizens to their death in slave labor camps? How many businessmen will vol untarily undertake the necessary expenditures to control their fac tory effluents in the interest of cleaning up genuine environ mental health hazards, or will do the same for their employees by minimizing work hazards?

How many labor union leaders will acknowledge tha t they can obtain more jobs and better work ing conditions for the rank and file union members by allowing companies to make higher profits for capital formation rather than by extracting maximum wage and fringe benefits at the bargaining table? How many able-bodied people who are racketeering on welfare will voluntarily go back to work? How many legislators will stand in the face of the pressures of those bent on selfish gains and stop the legal plunder? And of equal importance, how many leg islators will stand for election on constitutional principles instead of offering even more legal plunder? How many government bureau crats will voluntarily husband public funds, trim dead wood from their departments, and phase out unnecessary operations? These are examples of individ ual human actions. Ludwig von 1974 INFLATION: BY-PRODUCT' OF IDEOLOGIES IN COLLISION 425 Mises, who was acknowledged to be the greatest contemporary champion of the free market, has shown that economics is the ag gregate of individual human ac tion. Whether a society is basically moral or immoral in total depends on the degree of morality of the actions of each individual in it.

Inflation is the aggregate, result of legal plunder - as such, it rep resents the epitome of immorality. In a totalitarian society, the problem of inflation, like any oth er, can be controlled at any time by government decree, but only at an unmeasurable cost in loss of personal liberty. In a free society, control over inflation can be ac complished only when its underly ing causes are held in check by the predominance of individuals motivated by moral principles and acting with economic responsi bility. Only when sufficient people rec ognize the moral nature of the problem and are willing to act accordingly will the surge toward the command economy be reversed. I - Footnotes1 Weaver, HEmry Grady, The Main spring of Human Progress, The Founda tion for Economic Education, Irvington on-Hudson, New York. 2 Mussatti, James, The Constitution of the United States, D. Van Nostrand Com pany, Inc., Princeton, New Jersey, 1960.

3 Mason, George, Architect of Consti tutional Liberty, Education Information, Inc., P. O. Box 2037, Fullerton, California. 4 Bastiat, Frederic, The Law, The Foundation for Economic Education, Irvington-on-Hudson, New York. 5 Hackett, Warren T., How We Pros per Under Freedom, Citizens Evaluation Institute, Washington, D. C. 6 Marx, Karl, Communist Manifesto, Henry Regnery Company, Chicago, Illi nois, 1965. 7 Hayek, F. A., The Constitution of Liberty, University of Chicago Press, Chicago, Illinois, 1960. 8 Hillendahl, Wesley H., Big Government's Destruction of the American Econ omy, Bank of Hawaii, Honolulu, Hawaii, April, 1973. 9 Executive Order 11490, Assigning Preparedness Functions to Federal De partments and Agencies, Federal Regis ter, Volume 34, No. 209, Part II, October 30, 1969. 10 Garrett, Garet, The People's Pot tage, The Caxton Printers, Inc., Caldwell, Idaho, 1965. 11 Sutton, Antony C., National Suicide, Military Aid to the Soviet Union, Arling ton House, New Rochelle, New York, 1973.

12 Sutton, Antony C., Western Tech nology and Soviet Economic Develop ment, 1917 ... 1965, Hoover Institution of War, Revolution and Peace, Stanford University, Stanford, California, 1968. 13 Anderson, Benjamin M., Economics and the Public Welfare, D. Van Nostrand Company, Inc., Princeton, New Jersey, 1949.