We are currently marking the hundredth anniversary of the fighting of the First World War. For four years between the summer of 1914 and November 11, 1918, the major world powers were in mortal combat with each other. The conflict radically changed the world. It overthrew the pre-1914 era of relatively limited government and free market economics, and ushered in a new epoch of big government, planned economies, and massive inflations, the full effects from which the world has still not recovered.
All the leading countries of Europe were drawn into the war. It began when the archduke of Austria- Hungary, Franz Ferdinand, and his wife, Sophia, were assassinated in Bosnia in June 1914. The Austro-Hungarian government claimed that the Bosnian-Serb assassin had the clandestine support of the Serbian government, which the government in Belgrade denied.
How a Terrible War Began and Played Out
Ultimatums and counter-ultimatums soon set in motion a series of European military alliances among the Great Powers. In late July and early August, the now-warring parties issued formal declarations of war. Imperial Germany, the Turkish Empire, and Bulgaria supported Austria-Hungary. Imperial Russia supported Serbia, which soon brought in France and Great Britain because these countries were aligned with the czarist government in St. Petersburg. Italy entered the war in 1915 on the side of the British and the French.
The United States joined the conflict in April 1917, a month after the abdication of the Russian czar and the establishment of a democratic government in Russia. But this first attempt at Russian democracy was overthrown in November 1917, when Vladimir Lenin led a communist coup d’état; Lenin’s revolutionary government then signed a separate peace with Imperial Germany and Austria-Hungary in March 1918, taking Russia out of the war.
The arrival of large numbers of American soldiers in France in the summer of 1918, however, turned the balance of forces against Germany on the Western Front. After having been driven out of the French territory they had occupied since the first year of the war, the Germans agreed to the armistice on November 11, 1918 that ended what was already called the Great War – the “War to End All Wars” as it was falsely believed.
The Human and Material Costs of War
The human and material cost of the First World War was immense. During the conflict more than 60 million men were called up to fight. At least 20 million soldiers and civilians lost their lives, with an equal number wounded.
The participating governments combined spent more than $145.9 billion in fighting each other. In 2015 dollars, this represents a monetary expenditure of more than $3.8 trillion. (As a point of comparison, what the belligerent powers spent, in total, fighting each other in the four years of World War I, the U.S government almost spent, alone, in fiscal year 2015 – $3.6 trillion!)
These numbers, of course, do not capture the human suffering from the four years of war. On the Western Front, which ran through northern France from the English Channel to the Swiss border, millions of soldiers lived endless months – years – in frontline trench warfare. They fought in the heat of the summer and the cold of winter, often with the decomposing bodies of their fallen comrades next to them for days on end.
They fought in battles such as the one for the French town of Verdun in which hundreds of thousands of men were killed during human wave attacks in attempts to capture enemy positions. Soldiers were mowed down by machine guns or crushed under the treads of that new machine of war, the tank.
The airplane entered modern warfare for the first time, raining down bombs on both military and civilian targets. And both sides introduced the use of poison mustard gas that blinded the eyes, blistered the lungs, and brought agonizing death.
War and the End of Limited Government Liberalism
The First World War also brought about the end of the (classical) liberal epoch in modern Western civilization. For most of the 100 years before 1914, the Western world had moved in the direction of greater individual freedom and wider economic liberty.
All-powerful kings were replaced with representative democratic government or constitutionally limited monarchy. Expanding civil liberty brought about a more impartial equality before the law and the end of human slavery.
The older eighteenth century mercantilist system of economic planning and control by government was ended. In its place, arose domestic free enterprise and widening global freedom of trade. The standard of living of tens of millions in the West began to dramatically rise above subsistence and starvation for the first time in human history, while at the same time population sizes grew exponentially.
War may not have been abolished in the nineteenth century, but new international “rules of war” meant that they were less frequent, of shorter duration, and when among the Great Powers, at least, often involved fewer deaths and greater respect for civilian life and property.
(The American Civil War in the 1860s was the one major exception with more than 650,000 deaths and massive destruction in the Southern states.)
Wars and armament races, many argued at the time, had become too costly and destructive among “civilized” nations. A universal epoch of international peace was hoped for when the new century dawned in 1900.
But in 1914, the First World War shattered the long liberal peace that had more or less prevailed in Europe since the last world war that ended with the defeat of Napoleon’s France in 1815. But even before 1914, there were emerging anti-liberal forces that were moving the world toward greater government control and a renewal of international conflict. (See my article, “Before Modern Collectivism: The Rise and Fall of Classical Liberalism.”)
The Rise of Nationalism and Socialism
Early in the nineteenth century, the ideology of nationalism became a new rallying cry for peoples throughout Europe and increasingly around the world. If liberalism had espoused peaceful market exchange and the freedom of individuals under the rule of law, nationalism called for the forced unification under one government of all peoples speaking the same language or sharing the same culture or ethnicity. National collectivism was considered a higher ideal than respect for the liberty of the individuals comprising communities and nations.
In the middle of the nineteeth century, another form of collectivism started to gain popularity and support: socialism. Karl Marx and other socialists argued that capitalism was the root of all social evil, causing poverty and resulting in exploitation of the masses for the benefit of those who privately owned the means of production. Socialists called for the nationalization of the means of production, central planning of all economic activity, and the curtailing of individual freedom for the sake of the collective good.
War and the Planned Society
Imperialist designs by the Great Powers in conjunction with the new ideological forces of rising nationalism and socialism all came together in the caldron of conflict that enveloped so much of the world after 1914.
Immediately with the outbreak of hostilities, the liberal system of individual liberty, private property, free enterprise, free trade, limited government, low taxes, and sound money was thrown to the wind.
The epoch of political and economic collectivism had begun. Civil liberties were rapidly curtailed in all the belligerent nations, with laws restricting freedom of speech and the press. Opponents of war were silenced with long prison sentences for “anti-patriotic” behavior. Industry and agriculture were soon placed under increasingly strict price and wage controls.
Governments imposed wartime planning boards that directed the economic activities of all. They raised taxes to heights never experienced even under the most plundering hands of absolute monarchs of the past. Governments also ended international free trade, and introduced rigid regulations over all imports and exports.
The nineteenth century freedom of movement under which people in the West could travel from one nation to another without passport or visa was abolished; a new era of immigration and emigration barriers began. The individual was now completely under the control and command of the state.
With this came a new governmental responsibility: direct caring for the economic welfare of the citizenry. German free-market economist Gustav Stolper explained:
“Just as the [First World] War for the first time in history established the principle of universal military service, so for the first time in history it brought economic national life in all its branches and activities to the support and service of state politics – made it effectively subordinate to the state. . . . Not supply and demand, but the dictatorial fiat of the state determined economic relationships – production, consumption, wages, and cost of living . . .
“At the same time, and for the first time, the state made itself responsible for the physical welfare of its citizens; it guaranteed food and clothing, not only to the army in the field but to the civilian population as well . . .
“Here is a fact pregnant with meaning: the state became for a time the absolute ruler of our economic life, and while subordinating the entire economic organization to its military purposes, also made itself responsible for the welfare of the humblest of its citizens, guaranteeing him a minimum of food, clothing, heating, and housing.”
Gold as Money in the Prewar Liberal World
Along with these losses of personal civil and economic freedom came yet another abridgement of the liberal system of government: the abolition of the gold standard. During the 25 years of war between France and Great Britain following the French Revolution of 1789, both governments had resorted to the money printing press to finance their war expenditures. As a result, inflation had eaten away at the wealth and security of the British and French citizenry.
When those wars ended in 1815, the lesson learned was that governments could not be trusted with direct control over the creation of money. The liberal monetary goal was the reestablishment of the gold standard, so the amount of money in society was independent of political manipulation.
Better to rely upon the market forces of supply and demand and the profitability of gold mining, the classical liberals argued, than the caprice of politicians and special interest groups desiring to print the paper money they wanted to use to plunder the peaceful production of the mass of humanity.
Through the decades of the nineteenth century, first Great Britain and then the rest of the Western nations legally established the gold standard as the basis of their monetary systems. The gold standard was mostly managed by national central banks, and thus not truly free market monetary systems.
But central banks were expected to, and for the most part did, abide by the monetary “rules of the game” of limiting increases (or decreases) in the domestic currency to additions to (or reductions in) the nation’s supply of gold. Sound money for the nineteenth century liberals was gold money.
Paper Money and Inflation Finances the War
But with the firing of the first shots in the summer of 1914, the belligerent governments all ended legal redemption of their currencies for fixed amounts of gold. The citizens in these warring counties were pressured or compelled to hand over to their respective governments the gold in their private hands, in exchange for paper money.
Almost immediately, the monetary printing presses were set to work creating the vast financial means needed to fight an increasingly expensive war.
In 1913, the British money supply amounted to 28.7 billion pounds sterling. But soon, as British economist, Edwin Cannan, expressed it, the country was suffering from a “diarrhea of pounds.” When the war ended in 1918, Great Britain’s money supply had almost doubled to 54.8 billion pounds, and continued to increase for three more years of peacetime until it reached 127.3 billion pounds in 1921, a fivefold increase from its level eight years earlier.
The French money supply had been 5.7 billion francs in 1913. By war’s end in 1918, it had increased to 27.5 billion francs. In this case, a fivefold increase in a mere five years. By 1920, the French money supply stood at 38.2 billion francs. The Italian money supply had been 1.6 billion lire in 1913 and increased to 7.7 billion lire, for a more than fourfold increase, and stood at 14.2 billion lire in 1921.
In addition, these countries took on huge amounts of debt to finance their war efforts. Great Britain had a national debt of 717 million pounds in 1913. At the end of the war that debt had increased to 5.9 billion pounds, and rose to 7.8 billion pounds by 1920.
French national debt increased from 32.9 billion francs before the war to 124 billion francs in 1918 and 240 billion francs in 1920. Italy was no better, with a national debt of 15.1 billion lire in 1913 that rose to 60.2 billion lire in 1918 and climbed to 92.8 billion in 1921.
Though the United States had only participated in the last year and a half of the war, it too created a large increase in its money supply to fund government expenditures that rose from $1.3 billion in 1916 to $15.6 billion in 1918. The U.S. money supply grew 70 percent during this period from $20.7 billion in 1916 to 35.1 billion in 1918.
Twenty-two percent of America’s war costs were covered by taxation, about 25 percent from printing money, and the remainder of 53 percent by borrowing.
The German Ideology of Power for War
The most severe inflations during World War I occurred in Central and Eastern Europe. Among the worst of these were the one in Germany during and then after the war, with the near total collapse of the German currency in 1922 and 1923.
For decades before the start of the war, German nationalist and imperialist ambitions were directed to military and territorial expansion. A large number of German social scientists known as members of the Historical School had been preaching the heroism of war and the superiority of the German people who deserved to rule over other nationalities in Europe.
Hans Kohn, one of the twentieth century’s leading scholars on the history and meaning of nationalism, explained the thinking of leading figures of the Historical School, who were also known as “the socialists of the chair” in reference to their prominent positions at leading German universities. He wrote:
“The ‘socialists of the chair’ desired a benevolent paternal socialism to strengthen Germany’s national unity. Their leaders, Adolf Wagner and Gustav von Schmoller, [who were Heinrich von] Treitschke’s colleagues at the University of Berlin and equally influential in molding public opinion, shared Treitschke’s faith in the German power state and its foundations. They regarded the struggle against English and French political and economic liberalism as the German mission, and wished to substitute the superior and more ethical German way for the individualistic economics of the West . . . In view of the apparent decay of the Western world through liberalism and individualism, only the German mind with its deeper insight and its higher morality could regenerate the world.”
These German advocates of war and conquest also believed that Germany’s monetary system had to be subservient to the wider national interests of the state and its imperial ambitions. Austrian economist Ludwig von Mises met frequently with members of the Historical School at German academic gatherings in the years before World War I. He recalled:
“The monetary system, they said, is not an end in itself. Its purpose is to serve the state and the people. Financial preparations for war must continue to be the ultimate and highest goal of monetary policy, as of all policy. How could the state conduct war, after all, if every self- interested citizen retained the right to demand redemption of banknotes in gold? It would be blindness not to recognize that only full preparedness for war [could further the higher ends of the state].”
Germany’s Great Inflation began with the government’s turning to the printing press to finance its war expenditures. Almost immediately after the start of World War I, on July 29, 1914, the German government suspended all gold redemption for the mark. Less than a week later, on August 4, the German Parliament passed a series of laws establishing the government’s ability to issue a variety of war bonds that the Reichsbank – the German central bank – would be obliged to finance by printing new money.
The government created a new set of Loan Banks to fund private sector borrowing, as well as state and municipal government borrowing, with the money for the loans simply being created by the Reichsbank.
During the four years of war, from 1914 to 1918, the total quantity of paper money created for government and private spending went from 2.37 billion to 33.11 billion marks. By an index of wholesale prices (with 1913 equal to 100), prices had increased more than 245 percent (prices failed to increase far more because of wartime price and wage controls). In 1914, 4.21 marks traded for $1 on the foreign exchange market. By the end of 1918, the mark had fallen to 8.28 to the dollar.
Germany’s Hyperinflation and the Destruction of the Mark
But the worst was to come in the five years following the end of the war. Between 1919 and the end of 1922, the supply of paper money in Germany increased from 50.15 billion to 1,310.69 billion marks. Then in 1923 alone, the money supply increased to a total of 518,538,326,350 billion marks.
By the end of 1922, the wholesale price index had increased to 10,100 (still using 1913 as a base of 100). When the inflation ended in November 1923, this index had increased to 750,000,000,000,000. The foreign exchange rate of the mark decreased to 191.93 to the dollar at the end of 1919, to 7,589.27 to the dollar in 1922, and then finally on November 15, 1923, to 4,200,000,000,000 marks for the dollar.
During the last months of the Great Inflation, according to Gustav Stolper, “more than 30 paper mills worked at top speed and capacity to deliver notepaper to the Reichsbank, and 150 printing firms had 2,000 presses running day and night to print the Reichsbank notes.” In the last year of the hyperinflation, the government was printing money so fast and in such frequently larger and larger denominations that to save time, money, and ink, the bank notes were being produced with printing on only one side.
Finally, facing a total economic collapse and mounting social disorder, the German government in Berlin appointed the prominent German banker, Halmar Schacht, as head of the Reichsbank. He publicly declared in November 1923 that the inflation would be brought to an end and a new non-inflationary currency backed by gold would be issued. The printing presses were brought to a halt, and the hyperinflation was stopped just as the country stood at the monetary and social precipice of total disaster.
The Legacies of Tyranny, Paternalism and Lost Freedom
But the deaths, destruction, and disruptions of the First World War and its immediate aftermath were never fully recovered from. In 1922, Mussolini and his Fascist Party came to power in Italy. In 1933, Hitler’s Nazi movement took power in Germany in the midst of the Great Depression.
In the United States, also in 1933, Franklin D. Roosevelt’s New Deal ushered in the arrival of America’s version, at first, of a fascist-type planned economy, with a growing concentration of political control and economic paternalism in the form of the modern interventionist-welfare state in the postwar period that followed a worse and far more destructive and mass murdering Second World War. (See my article, “When the Supreme Court Stopped Economic Fascism in America.”)
Out of this second “war to end all wars,” came America’s role as global policeman and international social engineer during the Cold War with the Soviet Union. But even the post-Cold War era after the end of the Soviet Union in 1991 has seen part of the legacy of World War I in international affairs.
The wars and “ethnic cleansings” experienced in the former Yugoslavia in the 1990s, and at least part of the causes behind the current conflicts in the Middle East are outgrowths of the post-World War I peace settlements imposed by the victorious Allied powers.
But most importantly, I would suggest, is the lasting legacy out of the First World War that has been the rationales and implementations of paternalist Big Government in the Western world, with its diminished recognition and respect for individual liberty, free association, freedom of competitive trade and exchange, reduced civil liberties and weakened impartial rule of law.
From this has followed the regulating and redistributing State, which includes political control and manipulation of the monetary and banking systems to serve those in governmental power and others who feed at the trough of governmental largess.
It is a legacy that will likely take another century to completely overcome and reverse, if we are able to devise a strategy for restoring the idea and ideal of a society of liberty.
Valery Giscard D’Estaing pronunció el 28 de mayo de 1979 un emotivo discurso en Atenas, en el que daba la bienvenida a Grecia a las Comunidades Europeas. El político francés presidía el Consejo Europeo, había apadrinado esta adhesión y no dudó en utilizar su buen griego clásico para cantar las alabanzas de la civilización nacida hace más de 2500 años. El hecho de que no muchos asistentes entendiesen sus loas no le impidió extenderse en ellas. Se trataba de la segunda vez que el club europeo abría sus puertas a un nuevo miembro. A diferencia de la ampliación de 1973, las Comunidades habían tenido muy en cuenta un imperativo político: la necesidad de anclar en las instituciones de Bruselas a la recién recuperada democracia griega.
Giscard apoyaba a fondo al primer ministro Konstantinos Karamanlis, quien había regresado del exilio para ganar las elecciones, aprobar la constitución de 1975 y formular la petición de adhesión a las Comunidades Europeas, invocando el acuerdo de asociación de 1961 que abrió a Grecia las puertas del Mercado Común.
La petición de ingreso fue acogida con reservas debido a los problemas sociales y políticos que arrastraba el país, la debilidad de su sistema financiero, una alta inflación y una agricultura poco modernizada. Pero el tándem franco-alemán impuso su visión geopolítica e invocó la pertenencia de Grecia a la OTAN desde 1953. Grecia ingresó en 1980 con un trato favorable para su agricultura y unos períodos transitorios generosos que permitieron ensayar su adaptación en otros sectores. La Comisión por primera vez estableció la siguiente condición: para convertirse en Estado miembro el candidato debía garantizar la democracia y el imperio de la ley.
Los socialistas y comunistas griegos votaron en contra de la ratificación del tratado de adhesión. A diferencia de España, no hubo un gran consenso pro-europeo detrás de esta decisión de tanto calado constitucional. Cuando Andreas Papandreou, líder del PASOK, ganó las elecciones en 1981 anunció que renegociaría los términos de la adhesión e incluso convocaría un referéndum para decidir sobre la permanencia en las Comunidades, una consulta que nunca llegó a realizar. El socialista consiguió a cambio un incremento de los fondos europeos. En Bruselas, los sucesivos gobiernos helenos se granjearon enseguida fama de hiper-nacionalistas por su tendencia a vetar cualquier aproximación a Turquía por parte de las Comunidades.
El peso político y económico de España, que empezaba a negociar en 1977 su ingreso, alertó a los negociadores comunitarios de que nuestro país podía ser una “gran Grecia” si, una vez dentro de Europa, imitaba el comportamiento de Atenas. El presidente Giscard no tuvo reparos en vetar varias veces estas negociaciones, que se alargaron ocho años años y acabaron con condiciones mucho más exigentes que las de la adhesión griega.
Por su parte, el país heleno no desarrolló, como otros recién llegados al proyecto de integración, un europeísmo que le llevase a un proceso de modernización de la economía y la sociedad. Nunca consiguió organizar un sistema eficaz para cobrar impuestos y desarrollar una cultura cívica para entender por qué pagarlos. Aunque parte de sus elites sí hicieron suyo el sueño europeo, la mayoría de los ciudadanos se conformó con entenderlo como un apoyo financiero continuado.
Una vez cayó el muro de Berlín, Grecia centró sus esfuerzos políticos en conseguir que Chipre ingresara en la Unión Europea junto con los países del Este. En 2002 consiguió unirse al euro ya en marcha sin hacer mucho ruido, presentando unas estadísticas oficiales sorprendentes en las que como por ensalmo había desaparecido la inflación y el déficit público quedaba en un 1,5%. En 2004 el nuevo gobierno conservador anunció que el verdadero déficit era del 8,3%. Pero la celebración de los Juegos Olímpicos ese año en Atenas llevó a aumentar la deuda sin reducir el gasto público, aprovechando que se podía financiar en las mismas condiciones que Alemania. Los acreedores no valoraron el riesgo de seguir financiando alegremente a un país que se endeudaba a toda velocidad. Justo en ese año, Francia y Alemania, en vez de aceptar sanciones por incumplir los límites de gasto público señalados en el Pacto de Estabilidad y Crecimiento, lo reformaron para hacerlo más flexible, una señal nefasta hacia países como Grecia.
En otoño de 2009, en plena crisis financiera y repitiendo la “confesión” de 2008, el gobierno recién elegido del PASOK hizo de nuevo las cuentas y comunicó a Bruselas un déficit del 14%, en lugar del 2,7%. Los líderes europeos con la ayuda del FMI tuvieron que improvisar en mayo de 2010 un primer programa de rescate, al que siguió un segundo programa y un verdadero rediseño de la moneda común para evitar que una pequeña parte de la economía de la zona euro pudiese amenazar la viabilidad del proyecto entero. Desde entonces, la financiación a Grecia por 240.000 millones de euros no ha impedido que crezca el desempleo, se hunda la economía y aumente la deuda hasta casi el 180% del PIB. Solo el gobierno de Antonis Samaras consiguió enderezar el rumbo por unos meses.
La victoria en enero de la coalición de extrema izquierda de Syriza puso fin a ese momento de esperanza. El comportamiento radical e incompetente del gobierno de Alexis Tsipras en Bruselas ha destruido la confianza de sus socios europeos. El primer ministro ha alimentado la frustración de sus conciudadanos agitando enemigos externos como la “troika”, Alemania, los bancos o una UE insolidaria. Ese peligroso juego ha culminado con el referéndum-chantaje del pasado domingo, el cierre de los bancos y la negociación al borde de la salida del euro para iniciar un tercer rescate, como era de esperar, con condiciones más exigentes que nunca. A nadie le sorprenderá que hace unos días el ex presidente Giscard haya propuesto una “salida amigable” de Grecia de la eurozona, para que “pueda ocuparse de sus problemas financieros, crecer fuera de una moneda fuerte y generar inflación”. De este modo, explica el político francés, “Grecia se prepararía para volver a ingresar en el futuro en el euro”. Para que se le entienda mejor, esta vez no lo ha dicho en griego clásico.
Most modern socialists are in favor of inflation, because it is supposed, in Keynes’s words, to “euthanize the rentiers.” It doesn’t mean however, that the “founding fathers” of socialism were in favor of inflation. In fact, the opposite is true. Karl Marx had a wide knowledge of the economic literature and even though he’s usually wrong, he was correct in his preference for a gold standard.
As for Lenin, he was in his writings opposed to inflation and saw paper money as a means used by the bourgeois capitalists to enrich themselves. Even though Marx and Lenin were not supporters of inflation, they supported sound money for the wrong reasons. But, at least, we can say that concerning money they did not succumb to naïve inflationist views.
Karl Marx, Inflation, and the Gold Standard
Marx applied the labor value theory to money. According to Marx, the use of a particular commodity like gold or silver for money rests on the fact that — like all other commodities — there is an amount of “socially necessary labor” required to produce it. If, for example, one ounce of gold requires ten hours’ labor, its value is equal to another product requiring ten hours’ labor. Marx’s labor theory led him to say that “Although gold and silver are not by nature money, money is by nature gold and silver …”
What Marx put forward was that the total value of needed currency represented a total amount of labor value, and therefore a total weight of gold. According to Marx, if the total of gold is replaced by inconvertible paper money and the paper money is then issued in excess, prices will go up:
If the paper money is in excess, if there is more of it than represents the amount of gold coins of like denomination which could actually be current, it will (apart from the danger of falling into general disrepute) represent only that quantity of gold, which, in accordance with the laws of circulation of commodities, is really required and is alone capable of being represented by paper. If the quantity of paper money issued is, for instance, double what it ought to be, then in actual fact one pound has become the money name of about one-eighth of an ounce of gold instead of about one-quarter of an ounce. The effect is the same as if an alteration had taken place in the function of gold as a standard of prices. The values previously expressed by the price £1 will now be expressed by the price £2.
Therefore, Marx opposed the use of inflation as a means for increasing production. However, Marx’s monetary theory is very confusing. Concerning money, Karl Marx owes nothing to Ricardo. He was influenced by Tooke and the Banking school while he was very critical of the Currency school. Furthermore, Marx was fiercely opposed to Peel’s Act of 1844 which forbade notes unbacked by metallic money. Oddly enough however, Marx was criticizing fiduciary credit as being “fictitious capital” which seems to be in contradiction with his opposition to Peel’s Act.
We must keep in mind, however, that the main difference between Marx and other economists is that Marx was simply trying to describe how capitalism operates, with or without inflation. He was not saying that inflation will improve or destroy capitalism. In Marx’s view, capitalism is inevitably unstable and doomed. For him, workers must abolish capitalism and replace it with socialism, in which there are no problems of prices, inflation, crises, and unemployment.
Lenin, the Bolsheviks, and Inflation
The following quote is often attributed to Lenin: “The best way to destroy the Capitalist System is to debauch the currency.” This supposed statement has circulated widely among economists and the public. Hellwig remarked that: “It is almost a ritual, on the occasion of the required tributes to a stable monetary standard, to quote Lenin as a bogeyman.” The problem is that this quote has never been found in Lenin’s works. The first attribution of this statement was made by J.M. Keynes in his book The Economic Consequences of the Peace (1919). No one at the time challenged what Keynes was attributing to Lenin, and even today, this quote is still used by some sound-money advocates. However, Lenin’s few remarks on monetary matters give the opposite impression from the remark attributed to him by Keynes. In September 1917, before the Bolsheviks overthrew the government in power, Lenin wrote an article on “The Threatening Catastrophe” where he speaks about money and banking. Of inflation he said:
Everybody recognizes that the issue of paper money is the worst kind of a compulsory loan, that it worsens the conditions principally of the workers, of the poorest section of the population, that it is the chief evil in the financial confusion. … The unlimited issue of paper money encourages speculation, allows the capitalists to make millions, and places tremendous obstacles in the path of the much-needed expansion of production; for the dearth of materials, machines, etc., grows and progresses by leaps and bounds. How can matters be improved when the riches acquired by the rich are being concealed?
This paragraph could have been written by an Austrian economist, and it is known that the Marxist tradition is sometimes close to the Austrian analysis concerning business cycles (see Huerta de Soto’s Money, Bank Credit and Economic Cycles). Like Lenin, we believe that inflation can foster income inequality, hamper economic growth, impoverish the poor, and cause asset inflation.
However, once they were in power, the Bolsheviks were responsible for hyperinflation. In Socialism, Ludwig von Mises wrote:
The Bolshevists, with their inimitable gift for rationalizing their resentments and interpreting defeats as victories, have represented their financial policy as an effort to abolish Capitalism by destroying the institution of money.
Mises is right, but he forgot to say that political opportunism and not ideology was the reason why communists used inflation. Basically, for the communists, inflation is wrong when communists are not running things, but it is all right when they are in control. Professor E.H. Carr wrote:
None of the Bolsheviks wanted, or planned, inflation. But, when that happened (since the printing press was their main source of revenue) they rationalized it ex post facto by describing it as (a) death to the capitalists and (b) a foretaste of the moneyless Communist Society. Talk of this kind was widely current in Moscow in 1919 and 1920. … Keynes in 1919 had no special knowledge of Lenin; everything that came out of Moscow was automatically attributed to Lenin or Trotsky, or both.
Hayek wrote once that as long as it remains theoretical, socialism is internationalist, but when it is put into practice, it becomes violently nationalist. We should also say: as long as it remains theoretical, Marxism is anti-inflationist, but when it is put into practice, it becomes violently inflationist.
A booming financial sector means economic growth. Or does it? This column presents new evidence showing that when the financial sector grows more quickly, productivity tends to grow disproportionately slower in industries with either lower asset tangibility or in industries with higher research and development intensity. It turns out that financial booms are not, in general, growth-enhancing.
Finance and growth are intimately connected. For at least two decades, we have known that for economies to thrive, they need deep and broad financial systems (Levine 1997). But what is true for emerging market economies may not be true in the advanced world. That is, finance could very well be a two-edged sword. When credit is relatively low, or the financial sector’s share of employment modest, higher levels of debt add to growth. But there is a threshold beyond which it becomes a drag. There is now considerable evidence that productivity grows more slowly when a country’s government, corporate or household debt exceed 100% of GDP (see Reinhart and Rogoff 2010, Cecchetti et al. 2011, and Cecchetti and Kharroubi 2012).
The link between financial growth and real growth
In a recent paper (Cecchetti and Kharroubi 2015) we broaden the focus to the study of the relationship between financial growth and real growth. Or, more specifically, the effect of changes in the size of the financial system on total factor productivity growth. And, unlike the level relationship – where finance is good for a while – in this case the result is unambiguous. The faster the financial sector grows, the worse it is for total factor productivity growth. Using panel 20 countries over 30 years, we establish that there is a robust, economically meaningful, negative correlation between productivity and financial sector growth. We also find that causality likely runs from financial sector growth to real economic growth.
Graph 1 plots growth in real GDP per person employed on the vertical axis against two measures of financial sector growth on the horizontal: growth in private credit to GDP (left-hand panel) and growth in the share of total employment that is in financial intermediation (right-hand). We use data on 20 advanced economies from 1980 to 2010. In every case, data are averaged over five year periods and measured as deviations from the country mean. The figure shows a clear negative relationship between financial sector growth and productivity growth. The line running through the scatter plot has a negative slope with a coefficient that is significantly less than zero at the 1% level in both cases.
To ensure that the impression from the graph is in fact an accurate reflection of the relationship in the data, we estimate a simple growth regression that both examines a variety of measures for financial sector growth and controls for things like initial conditions, inflation, the size of government, trade openness, population growth, investment to GDP and the occurrence of financial crises. Our conclusion is quite robust – there is a clear negative relationship between financial sector growth and real growth.
Graph 1. Financial sector growth and productivity growth
We can get a sense of the size of the effect by looking at some specific examples. Consider the cases of Ireland and Spain. Starting with Ireland, from 2005 to 2010 the ratio of Irish private credit to GDP more than doubled, growing 16.9% per year. By contrast, over the five years from 1995 to 2000, it grew at a more modest average annual rate of 7.7%. Our estimates (not reported here) imply that this 9.2 percentage point difference has resulted in a productivity slow-down over 2005-2010 of 0.8 percentage points per year compared to the period 1995-2000. This accounts for around 30% of the 2.9 percentage point drop in productivity growth (from 3.3% a.r. to 0.4% a.r.) that occurred over this period.
Turning to Spain, from 1990 to 1995, credit to GDP was almost constant (-0.22% per year) while Spanish productivity was growing 1.7% per year. Fifteen years later, from 2005 to 2010, credit to GDP grew 8.1% a year but productivity grew only 1% a year. Our estimates suggest that, if credit to GDP had been constant instead of rising by 8.1 percentage points, then productivity growth in Spain over 2005-2010 would have the same as it was in 1990-1995 (1.7% per year).
Why finance is doing harm
What is behind this empirical regularity? What is the mechanism by which finance, something we know to be fundamental to the operation of the economy, is doing harm? Our hypothesis is that it arises because finance tends to favour relatively low productivity industries as such industries usually own assets that are relatively easy to pledge as collateral. So as finance grows, the sectoral composition of the economy changes in a way that drives aggregate total factor productivity down. The intuition for this comes from the observation that it is easier to obtain external finance for projects that are based either use tangible capital in their production or produce more tangible outputs. The more tangible a firm’s assets or output, the easier it is to pledge them as collateral for a loan.
We take this prediction to the data and study 33 manufacturing industries in 15 advanced economies. The key to figuring out which sectors are most likely to be damaged from financial sector growth requires that we look for the sectors where pledging of either assets or output is difficult. On the asset side, we can measure this directly from information on asset tangibility. For output, we use research and development intensity as a proxy.
Our results are unambiguous. When the financial sector grows more quickly, productivity tends to grow disproportionately slower in industries with lower asset tangibility, or in industries with higher research and development intensity.
As for the quantitative implications of these estimates, we find that productivity of an industry with high asset tangibility located in a country experiencing a financial boom tends to grow 2.5-3% a year more quickly than an industry with low asset tangibility located in a country not experiencing such a boom. This is quite a large effect, especially when compared with the unconditional sample mean and volatility of labour productivity growth of 2.1% and 4.3%, respectively.
Financial booms are not, in general, growth-enhancing. And, the distributional nature of the impact is disturbing, as credit booms harm what we normally think of as the engines for growth – those industries that have either lower asset tangibility or high research and development intensity. This evidence, together with recent experience during the financial crisis, leads us to conclude that there is a pressing need to reassess the relationship of finance and real growth in modern economic systems.
Disclaimer: Views expressed are those of the author and not necessarily those of the BIS.
La noticia económica de la semana pasada fue el anuncio por parte de Gowex de que había falseado sus cuentas. Al margen de los vericuetos técnicos de la estafa en cuestión, subyace la gran cuestión de por qué ha pasado y qué hacer para que no vuelva a pasar. Ante esta cuestión, prácticamente la mayoría de la opinión pública y publicada se inclina por señalar la falta de controles como principal causa del fraude y derivado de lo anterior, lógicamente, para que no vuelva a repetirse la fechoría, se llama a los poderes públicos ha endurecer e intensificar los controles.
Sin embargo, en opinión de este analista, puede que la respuesta no sea tan sencilla. Toda regulación añade un coste –muchas veces muy importante, algunas veces incluso insalvable – a la actividad económica. Las nuevas regulaciones incrementan los costes de transacción y requieren de más recursos del Estado destinados hacer cumplir, vigilar y juzgar los comportamientos que no se ajustan a la nueva normativa. Además, la complicación paulatina del marco normativo añade una barrera de entrada “intelectual” por la cual únicamente los más capaces se atreven a batallar contra los laberintos legislativos en los que hemos ido convirtiendo cada uno de los sectores. La consecuencia última de todo lo anterior es pérdida de crecimiento potencial y paro estructural crónico.
Con todo, mi argumento principal en contra de nuevos y más refinados controles no es “economicista”. La consecuencia más perniciosa de regular con normas específicas (positivismo normativo) con el objetivo último de modificar la conducta de los agentes económicos limitando su libertad de acción y no por leyes generales de protección y garantía de derechos, es la consolidación de un sistema económico en donde inversores y acreedores no son seres responsables, capaces de tomar sus propias decisiones y asumir las consecuencias de las mismas, sino que se les considera seres inválidos que necesitan de una tutela permanente para realizar sus negocios o quehaceres diarios. Este hecho se convierte en la profecía que se auto-cumple: si tratamos, por ejemplo, a los inversores en bolsa como seres inválidos e irresponsables lo trágico de la situación es que si en un inicio no lo eran lo acabarán siendo.
Idealmente, un marco normativo tiene que ser comprensible, poco costoso, de aplicación universal y predecible en su sentido más práctico. En suma, las leyes tienen que proteger la propiedad y dotar a los contratos de seguridad jurídica para, precisamente, rebajar los costes de transacción y servir de sólido soporte a la edificación de una economía prospera y sostenible. Lo contrario significa sembrar la semilla para la generación de sociedades subvencionadas y frágiles.
El problema que subyace al caso de Gowex, al margen de los vericuetos del caso específico, ha sido la profusa intervención que caracteriza todos nuestros mercados y, muy especialmente, el mercado financiero. En un entorno en donde todo se realiza bajo mandato – de forma coordinada por un ente omnisciente que todo lo sabe y todo lo controla, esto es el Estado – se paraliza el funcionamiento dinámico del mercado y se esteriliza la tensión que caracteriza el impulso dinámico e innovador necesario para que los mercados sean eficientemente dinámicos. Y subrayo tres veces la palabra dinámico. Por el contrario, como decíamos, el estatismo conduce a la parálisis y a la falsa pretensión de que el Gobierno puede tomar de forma centralizada decisiones más juiciosas que cada uno de los agentes individuales por su propia cuenta y riesgo cosa que empíricamente los trabajos de Mises y Hayek demostraron ya en su día ser una idea tremendamente falsa.
¿Por qué la auditoría tiene que ser obligatoria? ¿Por qué el Estado tiene que ser quién certifique quién puede ser censor de cuentas?
En un sistema en donde la auditoría es obligatoria y en donde los criterios contables están sujetos al criterio del Estado y estos dejan de evolucionar en función de los intereses y preocupaciones de inversores y acreedores en cada momento, a quiénes el proceso de auditoría debiera proteger, sino que queda sujeta a la voluntad de los intereses políticos de turno. Además, estos principios son mutables con el tiempo (y es bueno que así sea porque dinámico es también el entorno), aunque la evidencia empírica demuestra que los principios contables apenas habían cambiado desde los primeros comerciantes europeos al final de la edad media.
En este escenario – que es en el que se enmarca el fraude de Gowex –, el inversor no se preocupa de la calidad del auditor al tiempo que el mercado difícilmente permite la existencia de auditores excelentes (ya que al estar todo regulado no hay incentivos a la innovación) ni tampoco puede depurar la existencia de malos criterios contables porque el proceso de mercado por el cual se lleva a cabo esta criba – y que es el resultado de la interacción libre y voluntaria de millones de agentes económicos – queda paralizado por la normativa estatal.
Imaginemos por un momento que auditarse no fuese obligatorio, que las auditoras no estuviesen reguladas por un censo oficial, y que las diferentes plazas en las que se compran y venden acciones (mercados organizados) tampoco estuviesen sometidas al arbitrio de la normativa estatal. De entrada, si una compañía no quiere auditarse mala señal que la entiende hasta mi abuela (con todo el cariño para mi abuela que como dice ella es de letras). Por otro lado, el mercado de la auditoria ya no sería percibido como unacommodity sino que habrían auditoras muy severas, a las que tan solo unas pocas compañías pasarían su escrutinio (compañías que serían percibidas como muy solventes por el mercado), y otras no tan estrictas (compañías que serían percibidas con algo más de riesgo por parte de los inversores). Las dinámicas libres de mercado, en este caso la libre interacción entre inversores, acreedores y órganos de gobierno de las compañías decidirían, en cada caso particular, cual es la mejor manera de auditarse y con quién.
Por ejemplo, en el supuesto de que un emprendedor decidiera impulsar un proyecto empresarial y necesitará fondos, tendrá incentivos para auditarse por aquellas auditoras que generen más confianza entre los futuros inversores, es decir que –su track record auditando– ha probado ser solvente en el pasado y gustoso pagará sus fees (comisiones) para someterse libremente al proceso de auditoría y generar la confianza necesaria entre los futuros socios. Esta misma argumentación podría aplicar perfectamente a las plazas de negociación de valores (MAB y similares) o las famosas agencias de calificación: los procesos de mercado libre y un marco regulatorio claro y estable son los mejores ingredientes para que los mercados financieros sean eficientes y funcionen normalmente.
Con este esquema, además, conseguiríamos que el verdadero cliente de la auditora fuese, de nuevo, la propiedad (accionistas y acreedores) y no el equipo gestor de la compañía como sucede ahora. ¿Quién sino Jenaro García era el principal beneficiado del esquema actual en donde el proceso de auditoría está absolutamente reglado y las auditoras no tienen los incentivos para ir más allá del horizonte que les marca la ley? En un entorno de mercado libre, los auditores de una firma tendrían los incentivos para escudriñar de manera continua a las compañías y su equipo gestor, innovando, para proteger los intereses del verdadero cliente – la propiedad – ya que si, a la postre, se descubriese alguna irregularidad esa auditora perdería reputación en el mercado y no volvería a ser contratada.
La conclusión ha de ser clara: cuando la regulación y esquema normativo de los estados limita la capacidad de decisión de los agentes económicos y les impone normas de conducta específica es inevitable tender hacia sistemas más complejos y frágiles en donde siempre surgen efectos no previstos por dichas regulaciones. En efecto, cuando los procesos de mercado – que son el instrumento más eficaz para el avance de las economías – se ven entorpecidos estamos favoreciendo una sociedad cada vez menos responsables y cada día más dependiente de nuevas normas con el grave menoscabo para la libertad de empresa que eso conlleva y el enorme coste fiscal y regulatorio al que esta espiral normativa nos conduce. Se trata por lo tanto de regular menos y mejor, y de establecer un marco institucional en el que, en la medida de lo posible, los agentes económicos sean responsables de sus propios actos.
Publicado en Oro y Finanzas. Gowex: ¿Qué podemos aprender de este caso?
La actual crisis (Gran Crisis Financiera) es, ante todo, una crisis moral y de ideas. Han fallado las políticas pero estas han fallado por qué se han apoyado en una visión de la economía muy limitada y equivocada de como funcionan los mercados y la economía en general. Adjunto pequeña reflexión “moral” de la crisis. Borrador.