These are two must read books recently available from the scholars at the Mises Institute.
Thomas DiLorenzo explodes the myth of Hamilton and presents him for what he truly was: a man opposed to the ideas of liberty and freedom. He served as Washington’s aide during the Revolutionary war and later was one of the three authors of the Federalist papers. Sadly, the former did nothing to quell his lust of monarchies and the latter were a collection of bald faced lies. Had he written what he truly felt, then it is perhaps inconceivable that the Constitution would have passed.
Alexander Hamilton wrote in Federalist #83:
Having now seen that the maxims relied upon will not bear the use made of them, let us endeavor to ascertain their proper use and true meaning. This will be best done by examples. The plan of the convention declares that the power of Congress, or, in other words, of the NATIONAL LEGISLATURE, shall extend to certain enumerated cases. This specification of particulars evidently excludes all pretension to a general legislative authority, because an affirmative grant of special powers would be absurd, as well as useless, if a general authority was intended.
That should make it quite clear that the power of the national legislature (i.e. Congress) shall extend ONLY to the enumerated cases (Article I, Section 8 ) and that there is no general, or unlimited, grant of powers.
However, nothing that he might have said precluded him from pursuing his goal of a powerful central government with the states as vassals. Neither did it prevent him from using that same government to extract taxes and levies of all sorts, nor did his time alongside Washington dissuade him from leading an army to collect taxes from Pennsylvania farmers.
Hamilton thought of Aaron Burr as the Cataline of America, a man [as quoted by Ron Chernow] “sanguine enough to hope everything, daring enough to attempt everything, wicked enough to scruple nothing”. Apparently he learned best from those he most despised.
Hamilton’s influence can be seen most vividly in one of his admirers, John Marshall. Nowhere in the constitution are the courts empowered to review legislation, yet this mythical role, one which every school age child learns, was created whole cloth by Hamilton’s acolyte. That so much power could rest in so few hands is not only tyrrany, but Hamilton’s dream.
Baron de Montequieu was perhaps the most important influence on the Constitution. He wrote in the Spirit of the Laws, Book 11, that:
Again, there is no liberty, if the judiciary power be not separated from the legislative and executive. Were it joined with the legislative, the life and liberty of the subject would be exposed to arbitrary control; for the judge would be then the legislator. Were it joined to the executive power, the judge might behave with violence and oppression.
The judiciary power ought not to be given to a standing senate; it should be exercised by persons taken from the body of the people at certain times of the year, and consistently with a form and manner prescribed by law, in order to erect a tribunal that should last only so long as necessity requires.
By this method the judicial power, so terrible to mankind, not being annexed to any particular state or profession, becomes, as it were, invisible. People have not then the judges continually present to their view; they fear the office, but not the magistrate
And today? Is there any area of society that does not feel, or fear, the power of judiciary. Worse still, are there not groups whose sole purpose is to use the courts to exact their political agenda, contrary to public will and or welfare?
Just imagine, an invisible judiciary…
Consistent with Austrian economic theory, the greatest act of malfeasance Hamilton foisted upon the public is the national bank. Manipulating currency is the most dangerous and deceitful act any government can do. It is the central bank that has given us the boom and bust cycles and the inflation that is robbing us of our wealth and prosperity.
Professor DiLorenzo presents an excellent analysis of the legacy of Hamilton. Our country was forged with the words of Jefferson, but the Republic usurped with the ideas of Hamilton. Where Jefferson was a believer in free trade, capitalism, and sound money, Hamilton was a mercantilist, favoring tariffs, regulations, and debt. Where Jefferson saw the government as being one of few, limited, powers, Hamilton saw one where if not prohibited, then powers exist.
Nowhere is the difference of views more evident than our current federal budgets. Congress engages in a multitude of unconstitutional acts, from allotting money for everything from farm subsidies and education, to taking billions from the states and dispensing it only upon oaths of fealty.
The end of the book offers hope, but one has to wonder what chances there are. Currently the numbers of tax recipients (i.e. those that receive monies from taxation) is close to the number of tax contributors. And, if the Obama administration succeeds with its current schemes, then surely the latter will far outnumber the former. Thus, “change” would be “hope”less.
Only two points that I feel Professor DiLorenzo missed. One, the most egregious of Hamiltonian/Mashallian-style edicts from the court was the 1942 Wickard v. Filburn decision, that has done enormous harm to liberty, which is also to say nothing has done more to empower the state. Under the guise of the commerce clause, everything from minimum wage laws, environmental protection regulations (and if one doubts this, as of the time of writing this, Obama is considering making California’s highest in the nation fuel efficiency standard, the national standard) and even gun control laws have all been “justified”. Of course, any mention of the commerce clause abuses would be incomplete without the war on drugs. That this particularly pernicious decision was left out I would argue is a significant omission.
The other omission, which again falls under judicial tyrrany, was the Kelo decision. Under this, states may now confiscate private property and turn it over to private developers. All this is of course to be done under guise of the public good, which takes us back to the beginning of the book and the assessment of Hamilton as the Rousseau of the Right. The “public” or “general” interest was a common Hamiltonian theme, one that has been used with egregious effect by dictators right and left alike.
Thomas Woods Meltdown begins with an analysis of the housing crisis. Unlike any other commentator/analyst (save other Austrian economists) he nails the problem perfectly. His list of culprits all lead back to the same source: the federal government. The list reads like one of those “don’t try this at home” warnings one sees before some television show. Freddie and Fannie, CRA, tax policies, the Federal Reserve, and political interference all contributed to an unmitigated disaster.
Many people seem to believe that libertarians, and conservatives (whatever that moniker applies to nowadays, I’ve no idea) are all in love with big business, corporations, and favoritism for them at the expense of “the little guy”. Nothing could be further from the truth, at least about libertarians.
The myth that somehow government policy that favors one group, even if it is business, is somehow “free market capitalism” is ludicrous. In fact, the truth is that it is anything BUT capitalism. Woods destroys this myth, and many others, in his description of the bailouts now being undertaken. (One must wonder what the outrage would be if the Bush administration were doing all of this.) No business, absolutely none, is “too big to fail”. Quite the opposite is actually true. Firms that can no longer efficiently utilize resources must be allowed to fail. In fact, they are only in that predicament in the first place by government intrusion into the marketplace.
No greater service could ever be done for the nation, and the future of liberty and prosperity in general, than that of exposing the truth about the depression and FDR. Here Mr. Woods does yeoman’s work. The depression was not the failure of capitalism but a sad example of fed credit expansion and the terrible effects it has. Hoover was not a laissez faire president, but a Keyensian well before that awful treatise was published. He raised taxes, increased spending, ran huge deficits (which oddly enough FDR campaigned against), passed wage and price controls (keeping them artificially high in the insane belief that high wages and prices were necessary), not to mention signed the tariff bill basically shut off trade. All of this combined to prevent the economy from recovering. And FDR only furthered the problem, making it far worse.
In addition, it was not World War 2 that got the US out of the depression. In fact, massive spending cuts followed the war, and the predicted depression never materialized. If nothing else, the book exposes the lies and for that, we should all be grateful.
Few, even those who should know, are aware of the deep recession of 1920-21. And because of this, none are aware that the Harding administration’s response, cutting spending, and the Fed’s, raising interest rates, were the exact right policy. And, because of such, the recession, though deep, was brief and once the malinvestment cleared, paved the way for a long period of growth and prosperity. Thus, doing absolutely nothing (other than less) to interfere with the economy adjusting is, was, and will always be the correct approach.
Mr. Woods reserves special treatment for the federal reserve, especially the leadership of Alan Greenspan and Ben Bernanke. The artificial creation of trillions of dollars in money and credit along with the “Greenspan put” created market distortions and lowered the moral hazard allowing the massive bubble to form.
Had there been none of the Keynesian style interference, mercantilist policies, nor monetary distortions, than all that came to pass would have been avoided long before. Banks and other lending institutions all the way down to consumers were duped into believing that such simple things like scarcity no longer existed. Worse, they were tricked into believing that worthless pieces of paper (be they stocks or bills with dead presidents) constitute real wealth.
Woods attacks and destroys the notion that deregulation was the problem. Volumes upon volumes of federal code and tax law exist specifically regulating the industries that are now coming hat in hand to the government. Yet, a few changes at the margin and we’re supposed to buy the lie that those changes alone were the cause. And now we’re supposed to buy the even bigger lie that more regulation will solve our problems.
Who exactly is going to regulate? Is it going to be the wise men and women in Congress, who themselves were recipients of millions of dollars in campaign contributions then fought to keep the regulators at bay? Or will it be our wise leaders picked by the chosen one, whose cabinet is filled with tax cheats?
The second half of the book is a very concise yet clear and thorough explanation of the Austrian business cycle theory. Personally, I have only in the last few years come to the Austrian school and not because of any particular persuasion from the professional economic community. I have come to the school for the simplest reason of all: they alone were completely accurate.
Mr. Woods explains in terms that anyone can easily understand how federal reserve monetary distortions skew the economy. The money supply, with a commodity based currency such as gold, regulates cash holdings and investment via the mechanism of the interest rate. This is perhaps the most essential and vital component for people to understand.
The interest rate is the price of money, and in the field of economics, referred to as the opportunity cost of money. In other words, to hold cash one forgoes the interest. So, to save more, the interest rate must increase. This of course increases the pool of funds available to invest. As this pool increases, the price (interest rate) will lower. Likewise, the rate of return on investment must be greater than the prevailing interest rate. As the interest rate decreases, the cost of investment decreases. It is in this manner that the interest rate has affects investment, being the mechanism which regulates and brings into balance the amount of funds demanded and supplied.
However, when the fed artificially pushes interest below what would otherwise be the prevailing market rate, it distorts investment. This is particularly true in time sensitive investment, i.e. long term investments, in things such as housing.
The current schools of economic thought (primarily Keynesian, however Keynesian thought has invaded and corrupted most schools, cf. Milton Friedman’s “we’re all Keynesians now”) see savings as a negative [“it is not a substitution of future consumption-demand for present consumption-but a net diminution of such demand”], a drain on economic growth. This sort of thinking is at the heart of our current, both short and long term, problems.
Savings is future spending, and savings are what funds investment. The more savings, the more the desire to consume in the future and thus, a lower interest rate. (The lower interest rate comes about as there is more money in bank reserves.) This is the signal to businesses to invest in longer term projects, as the lower price makes the more delayed return possible. In this manner, future production attempts to time up with future expenditures. However, fed injections of credit and artificially low interest rates distort this delicate balance. More longer term, future oriented projects are undertaken to sync with future spending, yet the future spending will be lower.
Businesses mistake this increase in funds as an increase in real savings. When the investment reaches completion there needs to be savings necessary to convert into cash holdings to purchase. Those savings are not present, the consumer demand is absent, and those investments fail. The low interest rates mask the current consumption and confuse the investment plans. This is the classic Austrian boom/bust cycle. It is only much later when the investments which were perceived as worthwhile at the time are realized as being poor.
This over investment and expansion is the boom, where things are (appear to be) going very well. Everyone is happy, the future looks bright. But two sinister things are happening which will not only make this view wrong, but the future very painful. One, resources are finite, and greater future oriented investment puts upward pressure on resource prices, which makes those investments more expensive. And two, those investments, which were perceived as worthwhile, actually take away from true worthwhile investment. This is called malinvestment. And when the interest rates begin to get pushed upwards, as indeed was (and will be) the case, the distortions become painfully, extremely one might add, clear.
Thus, the bust comes as those malinvestments are recognized and now need to clear, at much reduced prices. However, it also requires a readjustment of resources. Both of these will take time and much discomfort. Nothing the government attempts to alleviate the pain will work, instead it will only exacerbate and extend the problem. The current administration’s takeovers of the financial sector, the auto industry, and whatever else they can get their hands on (heaven help the sick if they ever get control of health care) will only lead us to a prolonged recession and diminished wealth.
Like Professor DiLorenzo, Mr. Woods ends with a prescription for the future. However, in today’s current environment, limiting the size and scope of the government, returning to a gold standard, and relying on the power of the free market and not the modern equivalent of Plato’s guardians, might be just too much to hope for.
In today’s climate of complexity, where everything requires thousands of analysts and myriads of experts, where the problems are “too big” or “too important”, something as simple as doing nothing at all, just leaving the market alone, will never be the option.
One can always remain hopeful though. Perhaps these two books might be lights along the long and difficult path towards recovery, wealth, prosperity, and ultimately, to liberty.