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- A Weekly Dose of Hazlitt: Time-Deposit Inflation
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Business Tides: The Newsweek Era of Henry Hazlitt - Henry Hazlitt
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From Prog Archives:
‘Sinto is a versatile hybrid kraut jazzy project in the typical vein of bands coming from 70’s German underground (Morpheus, Out of Focus, Kraan, Ibliss…) They punctuate their soulful jazzy rock improvs with funky-catchy grooves and tones. The band features members of Embryo and Between. Their debut and unique album called Right on Brother (1972) is considered as a long time lost classic.‘
“Time-Deposit Inflation” is the title of Henry Hazlitt’s Newsweek column from August 11, 1958. Here Hazlitt makes a point that only the Austrian school makes, inflation is the increase in money proper and fiduciary media in an economy, while the manifestation of inflation is a rise in prices, consumer, real estate, asset. He notes that the confusion of the latter with the former masked the substantial inflation at the time of this column as well as during the 1920s. We have seen the same scenario over the past few years as central banks around the world have been working overtime pumping money into their economies.
‘The recent dramatic rise in the stock market has been
hailed by many as a sign that the recession is over. But
the rise has been quite disproportionate to the recovery
in business. The Dow-Jones industrial average rose
from 420 on Oct. 22 last year, and from 437 on Feb.
25 this year, to 505 on Aug. I, an overall increase of 20
The Federal Reserve index of industrial production,
on the other hand, which stood at 142 last October, was
only 130 in June of this year, a decline of about 8 percent.
Unemployment was estimated at 2.5 million last
October and is now estimated at about 5 million.
Well, it may be said, the stock market isn’t supposed
to reflect actual conditions at the moment, but
anticipated conditions; it is forecasting further recovery.
But perhaps what the stock market really is reflecting
is current credit inflation and the belief in a further
shrinkage in the dollar.
The continued existence of inflation is plain enough
not only from the rise in the stock market while unemployment
is substantial and the level of output is down,
but from the rise of both wholesale and retail prices
in the face of this lower activity. The dollar has lost
about 3 cents in purchasing power in the last twelve
months. And it has done this because government (and
Federal Reserve) policy has been increasing the number
Swollen Money Supply
There are many economists and statisticians who contend
that this has not occurred. The money supply, they
argue, consists of demand bank deposits and currency
outside of banks. The total of demand deposits, they
point out, was $104.8 billion at the end of May 1957
and only $105.8 billion at the end of May this year.
For the same period, currency outside of banks was
$27.9 billion in 1957 and $27.8 billion in 1958. So for
the twelve months the total money supply was almost
This picture alters, however, as soon as we take
account of time deposits. Between the end of May 1957
and the end of May this year, these increased by nearly
Here is where the expansion of bank credit—the
inflation—has taken place. Since the end of 1951,
demand deposits have increased only 8 percent and currency
outside of banks only 5 percent, but time deposits
have increased from $61.5 billion to $94.6 billion,
or 54 percent. It is common to think of time deposits
as “savings.” That is why their growth has been rather
complacently regarded. But another interpretation may
now be called for.
1958 and 1928
There is a striking parallel between the present situation
and that exactly 30 years ago. In June of 1928 Benjamin
M. Anderson analyzed the situation in two bulletins
for the Chase National Bank. “Since July of 1927,” he
wrote, “there has been an immense expansion of bank
credit flowing into the securities market. . . . The most
conspicuous effect of cheap money and bank expansion
has been in the speculative rise in the prices of securities
and real estate, but this rise has in itself had a very
marked effect upon the volume of consumer demand.”
He went on to show how the Federal Reserve authorities,
by lowering the rediscount rate and by other means,
had brought about an expansion of bank credit which
had taken the form primarily of increased time deposits.
In the seven years ending in April 1928, whereas the net
demand deposits of the reporting banks of the Federal
Reserve System had increased 34 percent, their time
deposits had increased 135 percent.
“The fact,” he continued, “that an immense expansion
of bank credit has taken place, unneeded by commerce
and industry, has made it inevitable that a high
percentage of this increase would take the form of time
deposits rather than demand deposits. . . . The greater
part of time deposits in great cities” are not true savings
deposits but “represent the temporarily idle funds
of business corporations. . . . Most of the growth of the
time deposits . . . is a product of bank expansion rather
than of savings.”
All this applies to the present situation. Bank credit
has expanded. Out-of-line wage rates have not been
adjusted. So we have a booming market with continued
‘Stephen Walt has an excellent albeit incomplete piece in Foreign Policy magazine that raises an important question: What accounts for the lack of anti-interventionist voices in the “mainstream” media?
Walt uses the term “realist” as a synonym for anti-interventionist, in part because Foreign Policy is a quasi-academic journal, and in part because Walt is one of the leading advocates of the realist school, i.e. the school that sees foreign policy as a function of states vying for power in a world where good intentions don’t account for much. “Realism,” of course, is a very broad label, one that includes figures as disparate as Henry Kissinger, one the one hand, and, Andrew Bacevich on the other. In short, it is not so much a stance as a methodology – a way of looking at the world from which one can derive a variety of different policy conclusions. Given this caveat, however, one can say that the realist school is inherently more cautious than its rivals – liberal internationalism and neoconservatism – when it comes intervening in foreign conflicts.
In any case, Walt’s piece details the realist record when it comes to the issues of the past decade or so and draws the inevitable conclusion: they’ve been right about practically everything. Realists warned us [.pdf] against the folly of invading Iraq. They predicted [.pdf] that nation-building in Afghanistan would come to naught. George Kennan, perhaps the quintessential realist, inveighed against the post-cold war push to expand NATO, accurately predicting that it would lead to unnecessary conflict with Russia and the renewed threat of World War III. Critics of the Clinton era policy of “dual containment” in the Middle East – which sought to take on both Iran and Iraq simultaneously – were right that it would result in failure: one has only to look at the turmoil in the region today to see how people like Brent Scowcroft should have been heeded. The realists were correct once again when they said the Libyan “humanitarian intervention” was a) doomed to fail and b) completely phony because there never was a viable threat of “genocide” – it was all war propaganda from start to finish.
So, realists have a great record when it comes to predicting what would happen if we followed the advice of the Usual Suspects, and why it would happen. Yet they are nowhere visible in the Major Media, which employs platoons of neocon laptop bombardiers and cruise-missile liberals without a single regular spokesperson representing the realist view – the view, by the way, most favored by the American people.
Indeed, the War Party dominates the three major media outlets in the English-speaking print world, and on television as well. As far as the former is concerned, the War Street Journal is dominated by the neocons. At the New York Times, liberal internationalists – Thomas Friedman, Nicholas Kristof, and Roger Cohen – reign unchallenged. The Washington Post is the worst: there the editorial director, Fred Hiatt, is an unabashed warmonger, with the rest of the crew – Charles Krauthammer, Robert Kagan, Jackson Diehl, Marc Thiessen, Michael Gerson, Jennifer Rubin – dyed-in-the-wool neocons.‘
‘I’ve written about how statist policies help the rich and hurt the poor.
Now let’s mix those two issues (though I hasten to add that this isn’t like math…two negatives don’t make a positive.
Here’s an infographic from the American Enterprise Institute showing how farm programs are a (yet another) perverse example of poor-to-rich redistribution.
‘You may have heard about the Swiss referendum to end fractional reserve lending by Swiss commercial banks. It’s a fascinating development, and another example of how average Swiss people can use the federal referendum process to force both the central legislature and the 26 cantons to consider citizen proposals– merely by gathering 100,000 signatures within 18 months.
We asked Claudio Grass, a good friend of the Mises Institute and a principal with the Swiss company Global Gold, to give us his perspective on the initiative as our Mises Weekends guest—you can listen here.
But first a bit of background is in order. The referendum, known as the Vollgeld initiative, would require banks to hold 100% reserves against their deposits. In effect, commercial banks would become money warehouses– albeit holding both physical and electronic currency–something many libertarians and Austrians have long favored.
But while the initiative sounds like a positive step toward ending the expansionary pressures of a now almost entirely fiat Swiss franc– and a happy development for libertarians who consider fractional reserve banks fraudulent–the reality in Switzerland is more complicated.
Austro-libertarians like Rothbard argue that we should end central banking altogether: let the marketplace decide what form money takes, how much of it is available, and what interest rates for borrowing it should be. Money is a both a medium of exchange and a commodity that is best supplied by the market.
By contrast, the Vollgeld initiative calls for giving the Swiss Central Bank absolute control over money creation. Money is too important to be left in the hands of even nominally private, profit-seeking commercial banks.
This is the philosophy of the Swiss Sovereign Money movement that’s behind Vollgeld, a loose coalition of anti-capitalist and anti-banking groups that certainly don’t want money to operate as a market commodity. Money, they argue, is so important that it must be issued and run only by the “sovereign”– a curious term in a country that has fully rejected monarchs and centralized power at least since its federal constitution was approved in 1848. It evidences, perhaps, the same kind of loyalist fervor for centralized state control that European subjects once showed for their Kings and Queens.
In this sense the Swiss sovereign money movement has an American cousin in modern-day Greenbackers. Greenbackers in the US also want monopolized control over money, but through Congress directly rather than a central bank. In fact, they got their start by having the Union government pay for its Civil War military buildup by issuing unbacked currency.
Today’s Greenbackers include former congressman Dennis Kucinich, and presidential hopeful Bernie Sanders is a fellow-traveler of sorts who favors favors Modern Monetary Theory. Greenbackers are populist, anti-capitalist, and at least nominally anti-Fed, who correctly see the confluence between central banks and commercial banks as an unjust enrichment scheme for Wall Street.
But enriching DC instead, by handing control over monetary policy from guileful central bankers to dimwitted members of Congress, is not the answer.‘
“… we may put forth our labour in such a way that it at once completes the circle of conditions necessary for the emergence of the desired good, and thus the existence of the good immediately follows the expenditure of the labour; or we may associate our labour first with the more remote causes of the good, with the object of obtaining, not the desired good itself, but a proximate cause of the good; which cause, again, must be associated with other suitable materials and powers, till, finally,—perhaps through a considerable number of intermediate members,—the finished good, the instrument of human satisfaction, is obtained.” – Eugen von Böhm-Bawerk, The Positive Theory of Capital.
‘It’s become fashionable in libertarian circles to ridicule the nonaggression principle. Stephan Kinsella and I speak in its defense. This one is long overdue.‘
Additional information can be found at the show notes page.