Inflation and Empire
by Daniel M. Ryan Present-day American mercantilists do rate a certain cold esteem. They’ve come up with a perfect means to fool old-style mercantilists, who seize upon a trade surplus as if it was the perfect indicator of national competitiveness. Those who think that the U.S. is the "accommodating loser" in the international trade game, simply on account of what seems to be the U.S.’s permanent trade deficit, are the real saps of the game. Modern mercantilists do not use the government treasury to measure national competitiveness; they use the rate of change of measured national wealth, or economic growth. Using this perspective, and remembering that the United States government is not obligated to send a single gram of gold to any other government in the world, the modern mercantilist can easily conclude that a supposed trade deficit is a real advantage for the United States, because it is made up of fiat money. In fact, "losing" fiat dollars to "foreigners" makes for a good excuse to create more of them. Provided that the national worthies, and members of the public, are not riled by the sight of "foreigners" buying up "our assets," a continual trade deficit position looks like a rather sweet deal for a fiat-currency economy. It’s made even sweeter by foreigners investing in U.S. government obligations, which is where the bulk of the capital inflows go. How can a nation foreclose on the government with the most powerful military in the world, one with the power (also) to cut off the world’s most reliable consumers from a "rogue trading partner?" If a nation seems to be in the position of the sucker, but in fact is cleaning up, then it is clearly a hegemonic power. A state of hegemony exists when the hegemon "wins by losing" versus its competitors. Clearly, the position of winning through incurring a trade deficit is, by old-fashioned mercantilist standards, "winning by losing." The cause of this enviable position is inflation. Some may be surprised at my conclusion that the United States is becoming an imperial power. To be charitable to the uppermost officials of the U.S. government, the United States government does confine its international aggression to the squelching of perceived direct threats, as well as to largely retaliatory measures. The characterization of the United States as "an aggressive imperial power" is not quite applicable to the United States government, as of now. The definition of an imperial power, though, is a sovereign nation that takes away the sovereignty of other sovereign nations. The United States government is doing that now, although (as of now) the use of this power is confined to squelching the sovereignty of governments that are openly and actively hostile to the United States. The U.S. government isn’t at the point of full imperialist aggression, as yet. But it’s clearly going that way. If the United States government is turning into Caesar, then the role of Caesar’s wife is being taken up by the United Nations. In order to thrive, an empire has to have the might to take away the sovereignty of one or more sovereign nations. It also must bring some sort of benefit to those nations in order to quell unrest and incipient rebellion among the de-sovereignized. In the case of Rome, it was the benefit of Roman law and access to Roman civilization, as well as the regularization of exacted tribute. In the case of the United States, it’s democracy and access to U.S. aid and markets, as well as a guaranteed criterion for non-invasion of countries that are not active enemies of the American State. That criterion is a democratic State, now ratcheted up to one that holds "free and fair" elections. Except for market access, these benefits to being a good hegemonee are bickered over and hashed out, for the most part, in the confines of the U.N. building, in downtown New York, New York. It’s obvious that, since the U.N. has no ability to tax and can only maintain a military that makes Canada’s look like a Great Power’s, it has next to no clout in the international arena. But, despite the occasional scandal, the U.N. is still good at the duty of being above reproach. The United States is definitely becoming an empire of democracy; its analog to the Roman fasces is the ballot box. The self-sacrificial nature of the Wilsonian base is resulting in compensatory advantages being squeezed out of the "deals." One of them, a political squeeze, is currently hobbling the still-U.S.-led war effort in Afghanistan. Economic squeezes tend to add to the "national wealth" of the United States, through corporations that are still called "free enterprisers" by the yearners for yesterdays in the Left. Not since World War 2, luv; not since then. And what makes this hegemonic state possible? Inflation – currency expansion. As the old book Business And The Banking Cycle relates, on pp. 14–15, World War 1 was 75% financed by borrowing and currency expansion. Only 25% of the financing for it was done through taxes. Since the Federal Reserve System inflates through the credit market, and was already up and active as of 1917, there is no way to precisely gauge the amount of war financing done by inflation. The active support of the Fed in dishing out reserves to aid banks in financing loans for War Bond purchases, though, implies that the bulk of the borrowing was disguised currency expansion. As the authors relate throughout the rest of the book, this inflating bent the United States economy way out of shape, in a way that was completely unknown to every school of economics at that time except for the Austrian one. Even the laissez-faireists of the time (except for that perceptive few) seriously underestimated the extent of the prior damage, which explains why it was so easy for New Dealers to label "liquidationist" arguments as fatuities, as of 1932–3. Given what is now known about the Great Depression, though, the old laissez-faireists now seem plaintive, not risible. The inflationists were definitely the victors, though. Even since the 1930s victory of inflationism over laissez-faire, inflation and war have always gone hand-in-hand in the G-8, with Keynesian neomercantilism issuing apologias for it all the way. Is it possible to stop it? Unfortunately, it’s hard to be optimistic about that kind of "Rosy Scenario." The accumulated malinvestments in the present-day American economy are far more extensive now than in 1929. Thus, it’s reasonable to conclude that the liquidation option would be both longer and harder now than it was in the 1930s. In addition, the citizens of every "advanced" nation are used to an economy permeated by credit inflation. The living tradition of life with a gold standard, which would ease the behavioral transition to a 100% reserve gold-backed currency, has almost faded away. As producers and consumers, we’re flying astigmatic. Hence, there is little surprise in the unpopularity of gold as an alternate currency as of now; the less you can see, the more habit-bound you are. It is true that the destiny of fiat currency is eventual worthlessness, but it is plausible that such a process could take a very long time. The reason why can be seen through drawing two parallels. The first one is succinct: quick hyperinflations tend to accompany defeat in war. The chance of that happening to the United States is remote. Hyperinflations in strong and pre-imperial, or imperial, States tend to be drawn out over generations. (Rome’s was.) The second parallel is more subtle, and easier to misunderstand. The economy of the United States has been getting along fine enough, for decades, without gold money. The Bourbon monarchial State, though, got along fine enough without its traditional legislature for more than 150 years. (The last twenty-five-or-so years did see things getting rough.) I have little doubt that the pragmatic Louis XIII – not to mention Marie de Medici – saw the Estates-General as an unnecessary impediment to the progress of the French kingdom, as did Louis XIV, XV and XVI. I also have little doubt that, as France grew in power, glory and even pelf as the seventeenth century proceeded, the decision to live without the Estates-General was considered both wise and sagacious by the mainstream of France’s then-living intellectuals. It should be remembered that Louis XIII was generally known as "The Just," and his successor, Louis XIV, was loved. Both of them governed without the Estates-General, which didn’t hobble their popularity by any significant bit. Of course, America is profoundly different in political character from Bourbon France. The "progressive principle" in modern America is not enlightened monarchy, but democracy, a completely different political system. And, of course, it may seem a real stretch to draw a parallel between gold money and a legislature. The only similarity is the brushing away of a tradition which secured a measure of independence from the dictates of the State, on the grounds that that tradition was merely obstructionary and therefore obsolete. This similarity seems only of interest to a political "process analyst," or political operator. There is another parallel of interest, though. Getting rid of that tradition was not only politically successful at the time of retirement, but the popularity also endured for generations. If America’s 1933 is the same as France’s 1615, then the America of today is roughly at France’s 1689. Inflationary America is still on the high side of the ride, as was the State of late seventeenth-century France. Both the domestic and foreign parallels drawn above indicate that America can keep going down the inflationary-Empire path for quite some time. Thankfully, this conclusion implies that we have a very long time to prepare for the eventual downfall. We may very well need it.
January 24, 2007 Daniel M. Ryan [send him mail] is a Canadian whose reach has long exceeded his grasp. He's currently wearing out his thumb with pen and paper. Copyright © 2007 LewRockwell.com |