14: Monetary Policy of Statism
(EN: The original text used the term "etatism," which I suppose was the term in favor at the time. Currently, "Statism" is preferred, and the two notions are considered synonymous - and I expect this is so, though I feel the need to drop this note on the chance that there is some subtle difference between "etatism" and "statism" than I have failed to recognize.)
Statism is a doctrine which prescribes the application of authoritative command and prohibition with the aim of controlling the behavior of citizens in all manner of affairs, even those that are mundane and have no appreciable impact to society. Socialism is its economic corollary.
It's noted that this does not entail the formal transfer of property to the state - individuals are still nominally the "owners" of property, but have no authority of its use or disposal except in obedience to the state.
In mixed economies, it's generally the case that large enterprises, such as factories, farms, and mines, are controlled by the state while individuals may remain their nominal "owners." People may retain ownership, with all rights and privileges, to the goods and factors of production that are not in the interest or capability of state to control - essentially, their personal effects.
Socialism is underpinned by the belief that government can act as a disinterested third party, that is capable of objectively assessing the needs of all people and directing the resources necessary to fulfill those needs in a fair and objective manner, itself being disinterested in the accumulation of wealth.
It's noted that proponents of statism often refrain from an explicit and literal statement of its objectives: to focus on social order as an end, and to downplay the means by which that end is accomplished (the seizure and control of all factors of production, including people as a labor input, by forceful means).
It's also noted that statism is often the de facto form of economics practiced, even by governments that otherwise allow people to interact freely, in times of crisis such as war. In wartime, the needs of the state take precedent over the needs of the people, and those items that remain in private hands that are requisite to serving the interests of state are controlled, if not seized outright, under that same premise.
Von Mises success statism is "valueless," but given the time in which he lived, it seemed the ruling doctrine in all of Europe, and he states that "it will not do for us nowadays to ignore it."
National Prestige and the Rate of Exchange
The author goes off on a seeming tangent about the effect of war on money - specifically, that when two countries are in conflict, the currency of the winning side becomes stronger and that of the losing side becomes weaker. And in instances where one nation annexes another (such as the American Civil War), the victorious side's money overtakes the losing side's, which becomes worthless.
Nations see themselves as being in competition even in times where there is no open military conflict between them. And in these instances, "money" becomes a method of measuring which side is winning. It is assumed that a weaker currency is inferior, and evidence of an inferior state - and based on this assumption, a nation will seek to gain prestige by maintaining the value of its money.
However, the value of a country's currency has no bearing whatsoever on the actual wealth of a nation: the benefits its citizens enjoy by the virtue of a plentitude of material goods to serve their needs. And as the majority of money is backed by fiat or credit, it is not to be equated with a share of ownership. "The richest country may have a bad currency and the poorest country a good one."
Currency speculators have made costly mistakes when guided by the assumption that they could purchase the currency of and under-developed nation and that it would have a higher exchange value when the welfare of the nation improved. Such speculation fails to consider the flexibility of the money supply: should the real wealth of a nation (the volume of consumer goods) increase, the government of that nation will furnish more money to facilitate increased market exchange.
Regulation of Prices by Authoritative Decree
Von Mises suggests that price controls, particularly using state authority to fix maximum prices for goods, is among the oldest and most popular economic intrusions of the state. By such measures, states seek to gain the approval of buyers at the expense of sellers, who are reasoned to be fewer in number.
Historically, the effect of such law is less availability of goods rather than more, as producers seek to move their goods to more profitable markets or to shift their production to more profitable goods. In effect, if a portion of the profits are seized, even to the point where the good must be furnished to the market at a loss, it is no longer feasible to provide that good to the market.
Even in the short term, a mandated increase in price results in higher quantity of demand, and buyer opportunism: those who would normally purchase the good at its normal price are now willing to purchase it, depleting the good from the market for those whose need of the good is greater (as evidenced by their willingness to pay a higher price).
In effect, would-be purchasers have less chance of obtaining the goods they require before they are snapped up by opportunistic bargain-shoppers whose need is less, but sufficient to obtain the item at an unusually low price. And as such, the market ceases to function as a means of mitigating scarcity of goods.
The author presents rather a slippery-slope argument, suggesting that fixing prices leads to state socialism. (EN: This is not necessarily true, but it entirely plausible that, in order to ensure a certain level of supply at a fixed price, the same government must seek to seize control the factors of production to force manufacture. And as labor is a factor of production, it may find the need to freeze wages and prevent people from leaving their jobs for more profitable work.)
The Balance-of-Payments Theory
In terms of international commerce, another concern of government is balance of payments, which maintains that a currency can only be kept stable if the amount of money going out of a country to import goods is balanced by an equal amount of money from foreign nations for the export of domestic goods.
This was certainly true in terms of metallic currency, in which the gold and silver coin of domestic currency was traded abroad for any goods that entered the country and, over time, the domestic stock of metal would be entirely depleted. In effect, the ultimate result is an economy in which there is "no money" because it has all been exported.
Historically, it is noted that in any instances in which a given market exported a significant amount of its money resulted only from government intervention. In effect, the demand for precious metal as a commodity in any given market ensures that it will be valued within that market, and that it is no more likely to be exported in significant quantity than any other consumer good.
In a country where credit or fiat money has been substituted for metallic money, it is likewise asserted that the balance-of-payments affects the rate of exchange. But this is also an "inadequate explanation" because the rate of exchange is determined by the purchasing power of a unit of money. Hence the scarcity of money causes it to increase in value, and the market will achieve a balance when the demand for money in that market makes it more valuable in the domestic market (at which time, it will cease to flow to other markets).
In effect, whether the currency is backed by commodity, fiat, or credit, the supply of money in a given market will gravitate toward a point of equilibrium, where its value in domestic markets exceeds its value to foreign markets. So long as government refrains from attempting to control the value of money, it will eventually achieve this balance by virtue of supply and demand.
One major foible of the balance-of-payments theory is that it overlooks the interaction of supply and demand in setting prices: neither import nor export is profitable unless there are differences in the availability of goods in two distinct markets - specifically, scarcity in the importing market that makes customers willing to pay a higher price for a good, and abundance in the exporting market that makes it more profitable to export the good (and undertake the additional expense of transportation) rather than selling it in the domestic market.
It also fails to take into account that, with each transaction, the goods brought to a foreign market shift the supply. Over time, the import of goods reduces scarcity, which reduces price, to a point of equilibrium in terms of quantity demanded at a price level that is profitable to supply. Likewise, the export of goods from a market increases their scarcity, and their domestic price, making the domestic market more profitable, as a result of motion toward the same state of equilibrium.
A separate take on balance-of-payments excludes from consideration any luxury good and focuses solely upon necessities, articles that cannot be dispensed with. It is suggested that a necessity will be purchased at whatever price it is offered because the buyer has no choice but to purchase it, or suffer from the neglect of his basic needs. Aside of the specious nature of necessity (is there any specific good that is truly necessary, and for which there is no substitute), this forgets that the intensity of need for a good is reflected in the buyers' willingness to pay a given price for it.
It also overlooks the notion of production and trade: in order to have something, it must be produced or gained in trade; and in order to gain it in trade, you must produce something to trade for it in return. The desire in a market to have goods to consume, without the necessity of producing them (or producing goods of equal value to trade for them) is a fond notion, but cannot be circumvented by legislative sleight-of-hand.
It therefore follows that the various tactics used to hinder the free exchange of goods among markets are ultimately useless. They are either unnecessary or harmful to the markets, to domestic production, and ultimately to the ability of the people to obtain the goods they desire at a price they are willing and capable to pay to obtain them.
Ultimately, imports are exchanged for exports, albeit indirectly, and unless production in the domestic market ceases, the export of goods does not create a scarcity in the domestic market.
(EN: My sense is that much can be done to delay the inevitable. Should a government seek to "protect" domestic producers from price-competition from abroad, tariffs and subsidies can be used to prop up price controls in the market. Citizens will pay the fair exchange price of goods, as a whole, as the price in the market plus whatever amount they pay in taxes to maintain that price. In all, the more sensible approach is to allow citizens to obtain for their needs at the best price the market can provide, even if this means that it is supplied from abroad, unless and until domestic producers can discover a way to be competitive.)
(EN; Von Mises doesn't mention this explicitly, but an attempt to manage import/export is often an attempt to protect suppliers, though sometimes indirectly motivated by a desire to protect the jobs of those who work for suppliers in a domestic industry. Previous sections were clear on the intent to protect consumers to the detriment of producers, so it seems worthwhile to highlight that government also intervenes to protect producers to the detriment of consumers.)
Suppressing Speculation
Few economists have put much credence in the notion that the value of money is harmed by speculation. The practice of doing so, both in its basis as well as intent, is "the resource of governments in search of a scapegoat."
Speculation does not determine prices, but is merely an attempt to profit from the natural fluctuation in prices by acting in advance of an adjustment in supply or demand. Should the adjustment fail to occur, speculators will fail to profit and will often suffer losses as a result of their activity - and government raises no objection to such failure.
It is reasonable to suggest that speculation mitigates the fluctuation of prices, rather than exacerbating it, by causing prices to rise at a more gradual pace, in anticipation of a sharp increase. Speculation, itself, is the process of gradual recognition - a few speculators predict a fluctuation, then a few more, then a few more. The prices rise gradually as increasing numbers of traders consider the future value in determining the price they are willing to pay in the present. It does not occur in large numbers, all at once, until such time as the fluctuation is obvious even to the dullest and least observant forecasters.
(EN: I think the author overlooks the situation where one party gains a reputation for accuracy and others, rather than performing their own predictions, merely attempt to ride his coat-tails. This can cause a dramatic shift in a short amount of time - but it would be more appropriate to attribute such behavior to mindless panic or mindless greed of those who react to the actions of others that they do not fully understand. The act of speculation is one of independent rational judgment, and should not bear the blame for the consequences of a panicked herd.)
Speculation is also mitigated by the interaction of speculators, Under normal condition, there are bulls and bears, whose predictions counterbalance one another. This, itself, has a counterbalancing effect as bears sell and bulls buy at a wide range of prices, and equilibrium is achieved, just as it is in on-the-spot trading.
There are situations in which it is conceivable for a speculator to attempt to influence a market, but it's noted that these are situations in which the goal is something other than making a profit. Specifically, the "enemies" of a nation can seek to damage its currency, as a means of damaging its prestige in international markets. But again, since profit isn't a motive, this is not an act of speculation, as the initiator often suffers great losses for the sake of achieving an ulterior motive.
But Von Mises argues that such notions "belong to the real of fairy tales," and are more attributable to paranoia than to actual behavior, and again is a scapegoat tactic on the part of a government that has debased its own currency and seeks to place the blame elsewhere. Historically, the cause and effect can be observed in this order: a currency becomes weak, and those who hold it seek to be rid of it before it falls further. This activity accelerates the fall in value, but is not its root cause. Moreover, it is generally the result of large numbers of individuals disposing of currency in smaller quantities rather than the actions of a few individuals moving large masses of currency.
The author catalogs some of the actions taken by governments, allegedly in reaction to speculation, but whose relevance to speculation is entirely missing: banning the import of foreign currency, requiring domestic trade to be conducted in domestic currency, forbidding the publication of exchange rates, and so on. None of these measures have prevented the debasement of a domestic currency.
It seems to be a common theme of statism that the possession of any foreign currency is to be regarded as detrimental to the nation - and that it is a failure of patriotism for citizens to seek to avoid the damage done to their own welfare when the state debases its official currency. This notion is all too clear to the author, given the time the book was written, in which German citizens placed a false sense of patriotism in continuing to support the national currency, even as it plummeted in value, and the reward for their patriotism was financial ruin.