On the Road to Ruin

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When would a wise Jew have begun making plans to leave Germany? 1933? 1934? 1938? 1939?

In retrospect, most people would say 1933, the year Hitler was appointed (not elected) Chancellor by President von Hindenburg. On 30 January, Hitler became Chancellor. He asked Hindenburg to dissolve the government and schedule new elections for March 5, which Hindenburg did.

Should a Jew have begun packing his bags? Maybe not. Maybe after the next election, the Nazis would have been defeated.

On 27 February, the Reichstag building burned down. One man did it, who admitted he had done it. Hitler immediately identified him as a Communist, although even today, it is not clear that he did anything but act alone.

Hitler used this as a propaganda tool. On March 5, the Nazis got 44% of the popular vote, up from 33%. With an allied party, they had 52% of the vote in the Reichstag.

Was it time to pack the bags? Maybe not. The Nazis did not have a majority. They had only a coalition majority.

On March 23, the government passed the Enabling Act. It took a two-thirds vote to do this. Hitler now possessed dictatorial powers. He had attained these by means of support by rival political parties.

Was it time to pack the bags? Maybe not. Those powers might not be used.

On April 1, a one-day boycott of Jewish businesses was staged by the S.A., which were technically private storm troops. Was it time to pack those bags. Maybe not. This was not government-directed. It was only symbolic.

What about 1935’s Nuremberg Laws on Citizenship and Race? They made it illegal for Jews to be citizens. But that was only politics. How many votes did Jews have, anyway? They were only 1% to 2% of the population. Politics isn’t everything.

And so on, right down to Crystal Night in November 1938, when rioters broke the plate glass windows of 7,500 Jewish-owned businesses and burned or damaged 200 synagogues, meaning most synagogues in Germany.

After that, over 100,000 Jews packed their bags and departed. Between 1933 and 1939, about half the Jews in Germany emigrated: 250,000. But half did not.

There were a series of trigger points, 1933 to 1939. Most Jews sat tight until very late.

Yet in Austria, Ludwig von Mises saw the handwriting on the wall in 1934. He looked at the map. He concluded that the Nazis would wind up running Austria. Hitler was an Austrian, and he would want to control Austria. He packed his bags and took his first salaried teaching position, a job in Geneva, Switzerland. He warned Jewish friends to get out. Economist Gottfried Haberler did, in 1936. Economist Fritz Machlup already had. He fled in 1933. Well, not quite. He was in the United States in 1933, and he decided not to return to Austria. Both men found safe havens in the United States. So did Mises in 1940, when he left Switzerland, barely escaping German troops in France as he and his wife rode a bus toward Spain, and from there to Portugal and the United States.

One might have thought that a careful reading of Mein Kampf (1926) would have been a sufficient trigger point in the Summer of 1933. The gun was loaded. Then the hammer was cocked in March: the Enabling Act.

Laws enacted by the Reich government shall be issued by the Chancellor and announced in the Reich Gazette. They shall take effect on the day following the announcement, unless they prescribe a different date. Articles 68 to 77 of the Constitution do not apply to laws enacted by the Reich government.

Articles 68 to 77 stipulated the procedures for enacting legislation in the Reichstag. “So what?” This seems to have been a mere technicality. The language was so procedural. But there was substance to it. As we read on Wiki, “The Enabling Act allowed the cabinet to enact legislation, including laws deviating from or altering the constitution, without the consent of the Reichstag.”

It was time to move out and move on . . . and not just if you were Jewish.

Some people see the signs. Others do not. Some decide to get out while the getting is good. Others do not.

Incident by incident, trigger point by trigger point, people see signs. Most people ignore them. “It can’t happen here.” Most times it doesn’t. Sometimes it does.

TRIGGERS AND SAFETIES

On April 5, 1933, President Franklin Roosevelt, in office for one month, signed Executive Order 6102.

Executive Order 6102 required U.S. citizens to deliver on or before May 1, 1933, all but a small amount of gold coin, gold bullion, and gold certificates owned by them to the Federal Reserve, in exchange for $20.67 per troy ounce. Under the Trading With the Enemy Act of October 6, 1917, as amended on March 9, 1933, violation of the order was punishable by fine up to $10,000 ($167,700 if adjusted for inflation as of 2010) or up to ten years in prison, or both.

There was no public outcry. There was no sense of loss. Violation of gold contracts, which had been legal ever since 1879, had taken place, but few people cared.

That was a trigger point. There were many others. The journalist Garet Garrett wrote of the New Deal in 1938, “the revolution was.” It continued. It was, in his words, a revolution within the form.

There are those who still think they are holding the pass against a revolution that may be coming up the road. But they are gazing in the wrong direction. The revolution is behind them. It went by in the Night of Depression, singing songs to freedom.

There are those who have never ceased to say very earnestly, “Something is going to happen to the American form of government if we don’t watch out.” These were the innocent disarmers. Their trust was in words. They had forgotten their Aristotle. More than 2,000 years ago he wrote of what can happen within the form, when “one thing takes the place of another, so that the ancient laws will remain, while the power will be in the hands of those who have brought about revolution in the state.”

Another monetary trigger point was Nixon’s unilateral decision on August 15, 1971, to cancel all gold contracts with foreign central banks to pay an ounce of gold for $35. Again, there was no sense of outrage.

Along with that declaration, he froze wages and prices. There was widespread cheering in the business elite. That was a popular decision. The resulting shortages, losses due to bottlenecks, and lines in front of gasoline stations were not blamed on the controls, at least not by the average voter.

Over the next decade, the United States suffered the worst price inflation in its peacetime history. Gold went from $35 an ounce to over $800 an ounce in January 1980, falling only because Paul Volcker’s Federal Reserve policy of tighter money (1979-82) reversed the inflationary panic.

Nixon’s decision was a pair of trigger points, both having to do with the violation of contracts.

There were counter-indications: safeties, to stick with the analogy of triggers. The main ones were the reduction in top marginal income tax brackets, first by Kennedy and then by Reagan. Under Carter, price floors imposed by Federal regulatory agencies were reduced or eliminated. In transportation these changes produced rapid economic growth and innovation, along with price cutting. A decade earlier, the Federal Communications Commission’s Carterfone decision began to break the back of AT&T’s monopoly, which led to enormous innovation in telecommunications.

The passage of the Patriot Act of 2001 was a blow to liberty. The development of the Internet since 1995 has been a much greater advancement of liberty.

To shift the analogy, we are now in a “two steps forward, one step back” scenario. I think we have been since the end of the Vietnam War. The defeat of the United States was visible. The government has sought to reclaim the old trust, but it has failed to do so. The public accepts inconclusive, drawn-out wars in the Middle East only because it has no commitment to victory. Voters assume that there will be no victory. That is not the basis of strong political commitment. That is not the basis of that crucial form of political capital: legitimacy.

The public’s support of the Federal government has been reduced to the Valley Girl’s shrug: “Whatever.” As long as the public gets access to its entertainment and does not suffer immediate pain, it ignores the Federal government. Bureaucrats prosper, but the tax resistance is forever. The Federal government has been unable to collect taxes in excess of 20% of GDP since 1946, and it has never collected more than 23%. The pubic loves increased spending, but only if it is borrowed.

So, money is borrowed. That borrowing is now facing resistance. The Federal Reserve is creating money to buy the deficit. China isn’t. Japan isn’t. PIMCO isn’t. Interest rates are low because only the Federal government is borrowing heavily.

The Federal debt climbs relentlessly. The public does not care enough to accept cuts in spending, but it will not tolerate tax increases. The debate over the deficit is gridlocked. That means more debt. It also means default. Today’s “no pain, big deficit” will become “big pain, big default.” The only question is this: By what arrangement? Hyperinflation? Outright default? Piecemeal default?

BROKEN WINDOWS, BROKEN BUDGET

In Frederic Bastiat’s story of the broken window, the public sees spending as a way to get the economy going. The broken window produces economic growth. The story points to the truth: it takes resources to repair windows. That is the thing not seen. The lesson: look for the thing not seen.

The thing not seen today is the cost of communication. Digits keep getting cheaper. Ideas spread far faster. Networks are created by the millions. And the government is in control of none of this.

The more oranges in the air, the harder the juggler’s routine. This is the dilemma of every government on earth. The real economy is growing because of cost-cutting and innovation. The government wants to control this process, but it can’t.

On all sides, the politicians are besieged. They cannot balance the budget. They have no intention of doing so. Yet their failure places them on the dole. Ben Bernanke is like some modern day J. P. Morgan, providing money in a crisis, the way Morgan did (briefly) in 1907. But what will happen when QE2 ceases? If the private sector wants to fund the Federal government, capital will shift to Washington, where it will be consumed.

The Federal government still parades as the ultimate source of bailouts, the safety net of the nation. But with whose money? Not the taxpayers’ money. They won’t pay. They have kept Federal revenues below 20% of GDP for two generations.

The Navy sends its dozen carriers to sweep the oceans, but it can’t catch land-based guerillas. Without boots on the ground, there is no way for the military to impose its will. The fiscal bloodletting required to fund the deployed troops is huge. The Taliban is not losing. Iran is not losing. It is not clear that Qadaffi is losing. Where are we winning? “Wherever,” says the Valley Girl.

The budget is the visible symbol of political futility. There is no resolution. The Democrats’ version of the irresistible force is Medicare. The Republicans’ version of the immovable object is tax resistance. The solution, so far, has been QE2. But it is scheduled to end on June 30.

Stalemate internationally is defeat. We will run out of money and patience. Stalemate domestically is defeat. We will run out of money and patience.

The government is fixing windows. Every time one gets fixed, two more get broken. Think of North Africa. Think of Pakistan and Afghanistan. Think of the deficit. Think of unemployment.

Crystal Night was deliberate. It was not metaphorical. But it was surely symbolic. We are watching the economic equivalent of crystal night. The windows keep breaking. The policies of fixing the broken glass seem to lead to more broken glass. The new windows must be paid for. By whom? For how long? At what rate of interest?

“WE TOLD YOU SO”

At some point, there will be too much broken glass for the government to conduct business as usual. Interest rates will rise. Prices will rise. Output will slow. Unemployment will rise.

When politics shifts to establishing blame for visible failures, the licensed airwaves and shrinking print media will be filled with versions of “We told you so.” The Establishment will have its explanation, which will be Paul Krugman’s “the Federal government should have spent more.” On that defense, the Keynesian Establishment will bet the farm.

In contrast will be the Internet, which will be multiple networks of blame-shifting. But there will be a common theme: “Tax somebody else.” Blame will be handed out to many deserving candidates, but the common theme will be this: “They bailed out their cronies.”

The future of American politics will be settled by the winning faction in the blame-shifting enterprise. But the winners will have to be able to back it up with this: “We told you so.”

The economic gurus of the future will have to do the same.

So will the hedge funds and portfolio managers.

To survive the coming fiscal cataclysm, one must be vocal now. One must also put his money where his mouth is. And he had better keep more of his money than the competition.

CONCLUSION

Modern men know little history. Few people today know the central issue of World War II. The World War I settlement allowed Germany access to the free city of Danzig, a port city. Beck, the Polish Foreign Minister, refused to grant this access in 1939. Germany invaded Poland. So did the Soviet Union three weeks later. Jews caught in the west got trapped by the German Army. Those in the east were trapped by the Soviet Army. Germany’s invasion of the USSR in June 1941 sealed the fate of Jews in Poland.

Poles paid little attention to German politics in the 1930s. Jews in Poland were not concerned with these details until 1939. By then it was too late. They were victims who had no warning.

This is always the fate of those caught in a crossfire.

The average citizen has no real understanding of the underlying causes of booms and busts. He trusts the government. He thinks that those in charge know what they are doing. Yet the evidence indicates otherwise.

There will be victims. The Great Default will affect millions of people who do not understand that they are at risk or why.

I suggest that you mentally identify some trigger points as indicators. When they are set off, one by one, increase your commitment to finding and funding a port in the coming storm.

Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

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