TÁQUEOPARIU!!! SÉRIO ISSO????

É sobre a Independência Americana ~MAS~ algumas partes lembram a Brasília do Congresso, do Planalto, da Esplanada et caterva. [3ª parte do 4º Volume]

Getting Aid from France

To open the ports of America to trade for munitions and with the West Indies the Americans were required to take a step toward independence almost as momentous as throwing open the ports in defiance of the navigation acts: they had to negotiate as a separate country with the European countries supplying the munitions, especially with the major supplier, France.

As early as July 1775 the Continental Congress began its first diplomatic efforts by sidestepping the British government and speaking directly to their fellow subjects. An address stating its wish for equal liberty was sent to the City of London. Appeals to the people of Canada and Jamaica to join in the colonial cause, and a particularly noteworthy address sent to the people of Ireland, were the first attempts to export the revolution overseas. Congress noted the grievances of the Irish under British rule, and suggested that both peoples should engage in a common struggle for liberty, albeit within the framework of the British Empire. The subservient Irish Parliament, however, merely moved to endorse the British war of suppression against the colonies.

At the same time Congress was moving toward liberty and independence, however, it was taking some steps at home toward oligarchic rule Of necessity, it had already begun to function through various standing committees to discharge its vital responsibilities for the war effort. Generally these functioned under the strict control of Congress itself and were always open to its guidance and supervision. But in late 1775 Congress created two "secret committees," and as their name implies, they acted in secret and on their own initiative, without checking with Congress. Instead, Congress only had the power (largely unexercised) to ask for their records at its discretion. A great deal of working power was thereby put into the hands of a few men who dealt, furthermore, in the particularly sensitive area of foreign affairs. On September 18 Congress created the nine-man Secret Committee to handle the deals with foreign countries for munitions; on November 29 it created the five- (later six-) man Committee of Secret Correspondence, to correspond "with our friends" abroad. An omen for the future was the highly conservative complexion of the Committee of Secret Correspondence, consisting of John Jay, John Dickinson, Benjamin Harrison, and Thomas Johnson, who were archconservatives, and Benjamin Franklin, a thoroughgoing opportunist with highly conservative instincts. The establishment of this committee came as a response to the prodding by John Adams, Patrick Henry, and Samuel Chase of Maryland to open full diplomatic relations with France.

Soon the two secret committees were able to work very closely and cozily together. This close working relationship was embodied in the person of the young Philadelphia merchant Robert Morris, destined to become the great Mephistophelean figure of the revolutionary era. At the turn of the year, he became a member of both committees; he virtually ran the Committee of Secret Correspondence himself throughout 1776 and quickly became the leading figure in the Secret Committee. He was, in fact, to serve as the second chairman of the latter committee, succeeding his friend and partner, Thomas Willing of the firm of Willing and Morris. Thus catapulted to the very seat of power in the American colonies, the highly conservative Morris was able to make himself the center of a veritable plunderbund, which unabashedly and systematically looted the public purse for their private profit.

One of the first deeds of the Secret Committee was to substitute for regular market purchases a system of contracting—the ancestor of modern "cost-plus" government contracts. Under this system some favored firms were selected by the government to purchase (or to produce) certain goods, which the government pledges to buy at a rate that will give the merchants a guaranteed margin of profit, a lucrative special privilege eagerly fought for by business then and since. The Secret Committee established a handsome rate of profit on such mercantile purchases and often advanced the merchants the initial capital to buy the supplies. Moreover, Congress had thoughtfully allowed only merchants specifically to purchase supplies abroad, and as we have seen, this condition obtained until April 1776. This authorization came from the Secret Committee, and it was soon clear enough that control of this committee was the open sesame to special privilege and high guaranteed fortunes to be made out of the revolutionary effort.

Control of the committee Morris and Willing had, and they lost no time in exploiting their position. One of the first acts of the committee was to grant heavy contracts to the firm of Willing and Morris. These commission contracts were not the only form of subsidy the company enjoyed. The committee now quickly granted it a startling contract for supplying gunpowder, guaranteeing a high flat price of fourteen dollars a barrel, whether or not the powder reached American stores safely! This assured Willing and Morris a clear profit of $60,000 without even a fleeting risk of loss. Other members of the Secret Committee also came in for their share of the loot. John Langdon of New Hampshire provided contracts to his own firm; Philip J. Livingston routed contracts to Livingston and Turnbull of New York; Silas Deane of Connecticut furnished commissions to his brother Barnabas. But heading the associates in plunder were Willing and Morris. All in all, the Secret Committee paid out over $2 million in war contracts from 1775 to 1777, and of these nearly $500,000, or one-fourth of all disbursements, went directly to the firm of Willing and Morris. Morris also directly shared with fellow members of the committee the largesse of nearly $300,000 in other contracts. Morris and Willing soon established a far-flung network of agents and followers, including leading merchants Benjamin Harrison (a member of the Committee of Secret Correspondence) and Carter Braxton, both of whom consequently received handsome contracts from the Secret Committee. Two particularly important committee agents were soon to double as congressional envoys to the French, William Bingham of Philadelphia, and Silas Deane of Westfield, Connecticut.

Deane was a prototype of the young lawyer with a keen eye to the main ;hance. He had launched his career by marrying the widow of a wealthy merchant, then capped that by divorcing her and marrying a member of the powerful Saltonstall family, thus getting himself profitably launched in Connecticut politics. Hardly had he latched onto a good thing in the operations of the Secret Committee, however, when the ungrateful voters of Connecticut unceremoniously turned him out of Congress in the elections of October 1775.

Estaleiro em Alagoas

http://www.16tonelada.blogspot.com.br/#!http://16tonelada.blogspot.com/2011/01/feliz-2011-pra-voces-tambem.html

MOLINARI!!!!!! [The society of tomorrow]

Preface: THE LAWS OF NATURE

"If," wrote Condorcet, "there is a science which forecasts, guides, and promotes the advance of the human race, it must be based on the records of past progress. "But we must go back still further. We must return to the first causes of that progress which the human race has realised since its appearance upon earth, and of the progress that it is still destined to realise. We must have an understanding of man, the laws which determine and govern his activities, the nature and circumstances of the environment in which he has been placed for the fulfilment of a purpose still hidden from his eyes.

I. The Motive Of Human Activity.

Man is an organism composed of vital, physical, intellectual, and moral forces. This matter and these forces, which form the individual and the species, can only be preserved and developed by the assimilation, or, to use the economic term, the consumption of materials and forces of like nature. Failing this consumption, their vitality wastes and is finally extinguished. But waste and extinction of vitality cause pain and suffering, and it is the stimulus of pain and suffering which impels man to acquire the materials necessary for the development and preservation of his life. All these materials are present in his environment, air, &c.; and nature gives him a small number free of cost. But with the exception of this minority they must be discovered, acquired, and adapted to the purposes of consumption. Man must be a producer.

Man is also subject to a further necessity, one which is again  inherent in his environment. He must defend both life and the means of its support from the attacks of numerous spoilers and agents of destruction. The risks to which he is exposed under this head entail more pain and more endurance.

It is to meet this twofold need—sustenance and self-defence—that man labours, labours to produce the necessaries of consumption and to destroy the agents or elements that menace his security. Labour therefore implies waste of vital force, and this more endurance and more pain. Humanity is, however, compensated by the pleasure and enjoyment which it derives from consuming the materials that support life, and from providing the services that safeguard it. But always, whether there be question of nourishment or self-defence, the pleasure of these actions is bought with a pain. It is an exchange, and, like every other exchange, it may result in a profit or loss. It is profitable when the sum of vitality, acquired or preserved, exceeds the amount of vital force expended in the task. The product may be concrete or one of service, but it is always subject to the costs of production which are inseparable from every expenditure of force.

Excess of expenditure over receipts means, on the other hand, loss, so that man is only stimulated to work when he expects that his receipts will exceed his expenses, that the pleasure will outweigh the pain. The degree of the stimulus naturally varies with the sums involved and the rate of expected profit; the prime motive of human activity, no less than that of all other creatures, is, therefore, the hope of profit. This motive, or motor-power, has been called interest.

II. The Natural Law Of The Economy Of Power, Or The Law Of Least Expenditure.

From the motive of which we have spoken, the roots of which lie deep in human nature and the conditions of human existence, we derive a first natural law, the Law of Economy in Production, or the Law of Least Expenditure. Under the spur of interest, man first satisfies his most pressing needs, those that appeal with the greatest urgency, or penalise deficient supply with the greatest amount of suffering. It is only after this that he endeavours to decrease expenditure by selecting the more remunerative spheres of activity, and by setting himself to perfect processes, or invent tools, which enable him to enhance the profits of production. By increasing the margin of gain, enlarging the excess Of material acquired or saved over the outlay of vital force, he also insures the preponderance of compensatory pleasure over the discomfort, which is inseparable from effort.

The individual whose income exceeds expenditure, who possesses a profit, may sink it in the purchase of immediate enjoyment, or collect it as capital to be employed in a further increase of his productive capacity. He may, also, simply hoard it against future need. It, then, serves the purpose of a twofold reserve, drafts upon which may obviate privations, or furnish the means of repelling such chances as may, hereafter, menace vitality. When individuals of the same, or of alien races, join issue as to who shall obtain the materials of subsistence, the victor is he who has devoted most profits to remunerative ends, to measures best fitted to conserve, or augment, his vital force.

ROTHBARD, no 23º Capítulo de Economic Controversies

Do Not Crack Down on Black Markets

One route toward freedom that former President Gorbachev had adopted was to crack down on the villains of the black market. We might conclude that the mindset of the Eastern bloc has a long way to go in understanding freedom, except that there are precious few Westerners who understand this problem either. For the black marketeers are not villains; if they sometimes look and act like villains, it is only because their entrepreneurial activities have been made illegal. The “black market” is simply the market, the market which Soviets claim to be searching for, but which has turned “black” precisely because it has been declared illegal. It is the market crippled and distorted, but it is there, in this despised “black” area, that the Soviets will find the market most readily. Instead of cracking down, then, the governments should, immediately, set the black market free. 

Do Not Confiscate the People’s Money 

The Soviet Union suffers from the problem of “ruble* overhang,” that is too many rubles chasing too few goods. It is generally admitted that the “overhang” is the result of comprehensive price fixing, by which the government has set prices far below market-clearing levels. Over the years, the Soviet government has been rapidly printing new money to finance its expenditures, and this increased money supply, coupled with ever-dwindling supply of goods resulting from the breakdown of socialist planning, has created aggravated shortages and an excess supply of money over goods available. 

It is commonly acknowledged that the shortages will be relieved and the overhang abolished, if prices were set free to move. But the government fears the wrath of unhappy consumers. Perhaps, but it is scarcely a solution to do what Gorbachev did, that is, follow the uninspired path of the Brazilian “free market” President Collor de Mello[grifo com gostinho de nosso], who in the spring of 1990, in an attempt to reverse hyperinflation, arbitrarily froze 80 percent of all bank accounts. Gorbachev did one better by suddenly making useless all large-ruble bills, allowing only a small number to be exchanged for smaller dominations. This is no way to eliminate an overhang; at best, the cure is much worse than the disease. In the first place, in this supposed strike at black marketers, it has been rather the savings of the average Soviet that has been destroyed, since the black marketeers were shrewd enough to have moved already into precious metals and foreign currency. But even more important: By this action, the government delivers the second body blow of a one-two punch at the average citizen, and at the economy. The first punch was for the government to inflate the money supply so as to engage in its usual, wasteful expenditures. Then, after the money has been spent, and prices driven up—in either open or repressed fashion—then the government, in its wisdom, begins to exclaim at the horrors of inflation, blames black marketeers, greedy consumers, the rich, or whatever, and proceeds to the second monstrous punch of confiscating the money long after it has come into private ownership. Whether or not one calls this process “free market,” it remains confiscatory, unjust, statist, and a double set of implicit taxes and burdens upon the economy.

Do Not Increase Taxes 

Unfortunately, one of the “lessons” that many East Europeans have absorbed from Western economists is the alleged necessity of sharply raising taxes and making them progressive. Taxes are parasitic and statist; they cripple energies, savings, and production. Taxes invade and aggress against the rights of private property. The higher the taxes, the more the economy becomes socialistic; the lower they are, the closer the economy approaches true freedom and genuine privatization, which means a system of complete rights of private property. The Mazowiecki attempt to achieve privatization and free markets in Poland was greatly hampered by the imposition of far higher and progressive taxes.

As part of the shift toward freedom and desocialization, then, taxes should be drastically lowered, not raised.

Government Firms Owning Each Other is Not Privatization

I owe to Dr. Yuri Maltsev the information that the much-vaunted Shatalin plan for the Soviet Union, which was supposed to bring about privatization and free markets in 500 days, was really not privatization at all. Apparently, existing government firms in each industry, instead of being actually privatized—that is, owned by private individuals—would have been owned (or 80 percent owned) by other firms in the same industry. This would mean that giant state monopoly firms would continue to be state monopoly firms, and be self-perpetuating oligarchies rather than truly privately owned. Privatization must mean private property.**

* Ruble = Rublo, moeda russa

** Semelhança com as "privatizações" Tupinambás? Ou seriam - a despeito do termo ter sido cunhado por PTRALHAS, é sensacional - PRIVATARIAS?

Modelo Ricardiano (Livre comércio)

Mito: o controle de armas reduz a criminalidade

Você duas vacas (Só pra descontrair)

Você tem duas vacas...
No Socialismo: Você tem duas vacas. O governo pega uma e dá a outra ao seu vizinho.
No Comunismo: Você tem duas vacas. Você dá as duas para o governo, e o governo dá de volta a você um pouco de leite.
No Facismo: Você tem duas vacas. Você dá elas para o governo, e o governo vende pra você um pouco de leite.
No Capitalismo: Você tem duas vacas. Você vende uma e compra um boi.
No Nazismo: Você tem duas vacas. O governo atira em você e pega as vacas.
No New Dealalismo (http://pt.wikipedia.org/wiki/New_Deal e http://www.mises.org.br/Article.aspx?id=97): Você tem duas vacas. O governo pega as duas, atira em uma, compra leite da outra vaca, e em seguida o derrama no chão.

de Soto, Capítulo 5, Seção 2 de Money, Bank Credit, and Economic Cycles

THE RICARDO EFFECT

All increases in voluntary saving exert a particularly important, immediate effect on the level of real wages. Chart V-2 shows how the monetary demand for consumer goods falls by one-fourth (from 100 m.u. to 75 m.u.), due to the rise in saving. Hence it is easy to understand why increases in saving are generally followed by decreases in the prices of final consumer goods.* If, as generally occurs, the wages or rents of the original factor labor are initially held constant in nominal terms, a decline in the prices of final consumer goods will be followed by a rise in the real wages of workers employed in all stages of the productive structure. With the same money income in nominal terms, workers will be able to acquire a greater quantity and quality of final consumer goods and services at consumer goods’ new, more reduced prices.

This increase in real wages, which arises from the growth in voluntary saving, means that, relatively speaking, it is in the interest of entrepreneurs of all stages in the production process to replace labor with capital goods. To put it another way, via an increase in real wages, the rise in voluntary saving sets a trend throughout the economic system toward longer and more capital-intensive productive stages. In other words, entrepreneurs now find it more attractive to use, relatively speaking, more capital goods than labor. This constitutes a third powerful, additional effect tending toward the lengthening of the stages in the productive structure. It adds to and overlaps the other two effects mentioned previously. 

The first to explicitly refer to this third effect was David Ricardo. He did so in his book, On the Principles of Political Economy and Taxation, the first edition of which was published in 1817. Here Ricardo concludes that 

[e]very rise of wages, therefore, or, which is the same thing, every fall of profits, would lower the relative value of those commodities which were produced with a capital of a durable nature, and would proportionally elevate those which were produced with capital more perishable. A fall of wages would have precisely the contrary effect.**

In the well-known appendix “On Machinery,” which was added in the third edition, published in 1821, Ricardo concludes that “[m]achinery and labour are in constant competition, and the former can frequently not be employed until labour rises.”*** 

The same idea was later recovered by F.A. Hayek, who, beginning in 1939, applied it extensively in his writings on business cycles. Here we will for the first time use it, integrated with the prior two effects, to explain the consequences an upsurge in voluntary saving has on the productive structure and to detract from theories on the so-called “paradox of thrift” and the supposedly negative influence of saving on effective demand. Hayek offers a very concise explanation of the “Ricardo Effect” when he states that 

[w]ith high real wages and a low rate of profit investment will take highly capitalistic forms: entrepreneurs will try to meet the high costs of labour by introducing very labour-saving machinery—the kind of machinery which it will be profitable to use only at a very low rate of profit and interest.****

Hence the “Ricardo Effect” is a third microeconomic explanation for the behavior of entrepreneurs, who react to an upsurge in voluntary saving by boosting their demand for capital goods and by investing in new stages further from final consumption. 

It is important to remember that all increases in voluntary saving and investment initially bring about a decline in the production of new consumer goods and services with respect to the short-term maximum which could be achieved if inputs were not diverted from the stages closest to final consumption. This decline performs the function of freeing productive factors necessary to lengthen the stages of capital goods furthest from consumption.*****Furthermore the consumer goods and services left unsold as a result of the rise in voluntary saving play a role remarkably similar to that of the accumulated berries in

our Robinson Crusoe example. The berries permitted Crusoe to sustain himself for the number of days required to produce his capital equipment (the wooden stick); during this time period he was not able to devote himself to picking berries “by hand.” In a modern economy, consumer goods and services which remain unsold when saving increases fulfill the important function of making it possible for the different economic agents (workers, owners of natural resources and capitalists) to sustain themselves during the time periods that follow. During these periods the recently-initiated lengthening of the productive structure causes an inevitable slowdown in the arrival of new consumer goods and services to the market. This “slowdown” lasts until the completion of all of the new, more capital-intensive processes that have been started. If it were not for the consumer goods and services that remain unsold due to saving, the temporary drop in the supply of new consumer goods would trigger a substantial rise in the relative price of these goods and considerable difficulties in the provision of them.******

*As Hayek indicates, these reductions in prices may take some time, depending upon the rigidity of each market, and at any rate, they will be less than proportional to the fall in demand that accompanies saving. If this were not the case, saving would not entail any actual sacrifice and the stock of consumer goods necessary to sustain economic agents while more capital-intensive processes are completed would not be left unsold. See F.A. Hayek, “Reflections on the Pure Theory of Money of Mr. J.M. Keynes (continued),” Economica 12, no. 35 (February 1932): 22–44, republished in The Collected Works of F.A. Hayek, vol. 9: Contra Keynes and Cambridge: Essays, Correspondence, Bruce Caldwell, ed. (London: Routledge, 1995), pp. 179–80.

**See David Ricardo, The Works and Correspondence of David Ricardo, vol. 1: On the Principles of Political Economy and Taxation, Piero Sraffa and M.H. Dobb, eds. (Cambridge: Cambridge University Press, 1982), pp. 39–40.

***Ibid., p. 395. 

****See Hayek, “Profits, Interest and Investment” and Other Essays on the Theory of Industrial Fluctuations, p. 39. Shortly afterward, in 1941, F.A. Hayek briefly touched on this effect in relation to the impact an increase in voluntary saving exerts on the productive structure, though he did not expressly quote Ricardo. This is the only instance we know of in which the “Ricardo Effect” is directly applied to an analysis of the consequences of a rise in voluntary saving, and not to the role the effect plays in the different phases of the business cycle, theorists’ predominant concern up until now. The excerpt in question is found on p. 293 of The Pure Theory of Capital (London: Macmillan, 1941), and successively reprinted thereafter (we quote from the 1976 Routledge reprint). It reads as follows: “The fall in the rate of interest may . . . drive up the price of labour to such an extent as to enforce an extensive substitution of machinery for labour.” Hayek later returned to the topic in his article, “The Ricardo Effect,” published in Economica 34, no. 9 (May 1942): 127–52, and republished as chapter 11 of Individualism and Economic Order (Chicago: University of Chicago Press, 1948), pp. 220–54. Thirty years later he dealt with it again in his article, “Three Elucidations of the Ricardo Effect,” published in the Journal of Political Economy 77, no. 2 (1979), and reprinted as chapter 11 of the book New Studies in Philosophy, Politics, Economics and the History of Ideas (London: Routledge and Kegan Paul, 1978), pp. 165–78. Mark Blaug recently admitted that his criticism of the “Ricardo Effect” in his book, Economic Theory in Retrospect (Cambridge: Cambridge University Press, 1978), pp. 571–77, was based on an error in interpretation regarding the supposedly static nature of Hayek’s analysis. See Mark Blaug’s article entitled “Hayek Revisited,” published in Critical Review 7, no. 1 (Winter, 1993): 51–60, and esp. note 5 on pp. 59–60. Blaug acknowledges that he discovered his error thanks to an article by Laurence S. Moss and Karen I. Vaughn, “Hayek’s Ricardo Effect: A Second Look,” History of Political Economy 18, no. 4 (Winter, 1986): 545–65. For his part, Mises (Human Action, pp. 773–77) has criticized the emphasis placed on the Ricardo Effect in order to justify a forced increase in wages through union or government channels with the purpose of raising investment in capital goods. He concludes that such a policy only gives rise to unemployment and a poor allocation of resources in the productive structure, since the policy does not stem from an increase in society’s voluntary saving, but rather from the simple coercive imposition of artificially high wages. Rothbard expresses a similar view in Man, Economy, and State (pp. 631–32). Hayek does so as well in The Pure Theory of Capital (p. 347), where he concludes that dictatorially- imposed growth in wages produces not only a rise in unemployment and a fall in saving, but also generalized consumption of capital combined with an artificial lengthening and narrowing of the stages in the productive structure.

*****See Hayek, The Pure Theory of Capital, p. 256.

******In the words of Hayek himself: All that happens is that at the earlier date the savers consume less than they obtain from current production, and at the later date (when current production of consumers’ goods has decreased and additional capital goods are turned out . . .) they are able to consume more consumers’ goods than they get from current production. (Hayek, The Pure Theory of Capital, p. 275.

de Soto, Capítulo 6, Seção 12 de Money, Bank Credit, and Economic Cycles

THE NECESSARY TIGHTENING OF CREDIT IN

THE RECESSION STAGE: CRITICISM OF THE

THEORY OF “SECONDARY DEPRESSION”

We will now consider three different types of deflation, defined as any decrease in the quantity of money “in circulation.” Deflation consists of a drop in the money supply or a rise in the demand for money, and other things being equal, it tends to cause an increase in the purchasing power of the monetary unit (i.e., a decline in the “general price level”). Nevertheless it is important to avoid confusing deflation with its most typical, pronounced effect (the fall in the general price level), given that in certain cases the prices of goods and services decrease in the absence of deflation. As we have seen, this is part of the healthy growth process of an economy whose productivity is improving due to the incorporation of new technologies and to capital accumulation which arises from the entrepreneurial spirit and from the natural increase in the voluntary saving of its agents. We studied this process in previous sections, and without any decrease in the quantity of money in circulation, it gives rise to a widespread increase in the production of consumer goods and services, which can only be sold at lower prices. Thus the process results in a real rise in wages and in the income of the other original means of production, because although the income of workers and of the other owners of original factors may remain fairly constant in nominal terms, the prices of the consumer goods and services workers acquire drop considerably. In this case the decline in the general price level is not monetary in origin, but real, and it derives from the generalized increase in the productivity of the economy. Hence this phenomenon is completely unrelated to deflation as we have defined it, and is simply a sign of the healthiest and most natural process of economic development. 


Nonetheless we will now examine three distinct types of deflation (strictly defined as any decline in the supply of or increase in the demand for money) which have radically different causes and consequences. Let us analyze these types of deflation in detail:


(a) The first type consists of policies adopted by public authorities to deliberately reduce the quantity of money in circulation. Such policies have been implemented on various historical occasions and trigger aprocess by which the purchasing power of the monetary unit tends to increase. Moreover this forced decrease in the quantity of money in circulation distorts the structure of society’s productive stages. Indeed the reduction in the quantity of money initially brings about a decline in loan concession and an artificial increase in the market interest rate, which in turn leads to a flattening of the productive structure, a modification forced by strictly monetary factors (and not by the true desires of consumers). Consequently many profitable capital goods stages in the productive structure erroneously appear unprofitable (especially those furthest from consumption and most capital-intensive). As a result the most specialized companies in capital-intensive sectors sustain widespread accounting losses. Furthermore in all sectors the reduced monetary demand is unaccompanied by a parallel, equally-rapid decline in costs, and thus accounting losses arise and pessimism becomes generalized. In addition the increase in the purchasing power of the monetary unit and the decrease in the products’ selling price cause a substantial rise in the real income of the owners of the original means of production, who, to the extent their prices are rigid and do not fall at the same rate as those of consumer goods, will tend to become unemployed. Therefore a prolonged, painful adjustment period begins and lasts until the entire productive structure and all original factors have adjusted to the new monetary conditions. This whole process of deliberate deflation contributes nothing and merely subjects the economic system to unnecessary pressure. Regrettably, politicians’ lack of theoretical knowledge has led them on various historical occasions to deliberately initiate such a process.


(b) The second type of deflation, which should be clearly distinguished from the first, occurs when economic agents decide to save; that is, to refrain from consuming a significant portion of their income and to devote all or part of the monetary total saved to increasing their cash balances (i.e., to hoarding)*. In this case, the rise in the demand for money tends to push up the purchasing power of the monetary unit (in other words, it tends to push down the “general price level”). However this type of deflation differs radically from the former in the sense that it does make a contribution, since it originates from an increase in the saving of economic agents, who thus free resources in the form of unsold consumer goods and services. [...] [T]he “Ricardo Effect” appears, due to the drop in the relative prices of consumer goods, which in turn leads to an increase, other things being equal, in the real wages of workers and in the income of the other original means of production. Hence the processes which trigger a lengthening of the productive structure are set in motion. The productive structure becomes more capital-intensive, due to the new investment projects undertaken, projects entrepreneurs will be able to complete because productive resources have been freed in the stages closest to consumption. The only difference between this situation and that of an increase in voluntary saving which is immediately and directly invested in the productive structure or capital markets is as follows: when saving manifests itself as a rise in cash balances, there is a necessary decline in the price of consumer goods and services and in the price of products from the intermediate stages, as well as an inevitable reduction in the nominal income of the original means of production and in wages, all of which adapt to the increased purchasing power of the monetary unit. Nevertheless unlike the first type of deflation mentioned, this type does not entail a painful process which contributes nothing. Instead here it is based on effective saving which causes a rise in society’s productivity. The lengthening of the productive structure and the reallocation of the factors of production occur to the extent there is a change in the relative prices of the products from the intermediate stages and from the final stage, consumption. Such a change is independent of whether, in absolute, nominal terms, all prices must drop (to a varying extent) as a consequence of the increased purchasing power of the monetary unit.**  


(c) The third type of deflation we will consider results from the tightening of credit which normally occurs in the crisis and recession stage that follows all credit expansion[...]: just as credit expansion increases the quantity of money in circulation, the massive repayment of loans and the loss of value on the assets side of banks’ balance sheets, both caused by the crisis, trigger an inevitable, cumulative process of credit tightening which reduces the quantity of money in circulation and thus generates deflation. This third type of deflation arises when, as the crisis is emerging, not only does credit expansion stop increasing, but there is actually a credit squeeze and thus, deflation, or a drop in the money supply, or quantity of money in circulation. Nevertheless this sort of deflation differs from that analyzed in (a) above and produces various positive effects which merit our attention. First, deflation caused by the tightening of credit does not give rise to the unnecessary maladjustments referred to in section (a); instead it facilitates and accelerates the liquidation of the investment projects launched in error during the expansionary phase. Therefore it is the natural market reaction necessary for a rapid liquidation of the investment projects undertaken in error during the expansionary stage. A second positive effect of credit deflation is that it in a sense reverses the redistribution of income which took place in the expansionary stage of the inflationary boom. In fact inflationary expansion tended to bring about a decrease in the purchasing power of money, which in turn reduced the real income of everyone on a fixed income (savers, widows, orphans, pensioners) in favor of those who first received the loans of the banking system and first experienced an increase in monetary income. Now, in the stage of credit tightening, this forced redistribution of income reverses in favor of those who in the expansionary stage were the first harmed, and thus people on a fixed income (widows, orphans, and pensioners) will gain an advantage over those who most exploited the situation in the earlier stage. Third, credit deflation generally makes business ventures appear less profitable, since historical costs are recorded in monetary units with less purchasing power, and later, accounting income is recorded in monetary units with more purchasing power. As a result entrepreneurial profits are artificially diminished in account books, prompting entrepreneurs to save more and distribute less in the form of dividends (exactly the opposite of what they did in the expansionary phase). This tendency to save is highly favorable to the commencement of economic recovery***. The decline, provoked by the tightening of credit, in the quantity of money in circulation undoubtedly tends to drive up the purchasing power of the monetary unit. An inevitable drop in the wages and income of the original means of production follows, though at first this decrease will be more rapid than the reduction in the price of consumer goods and services, if such a reduction takes place. Consequently, in relative terms, the wages and income of the original means of production will decline, leading to an increased hiring of workers over machines and a massive transfer of workers toward the stages closest to consumption. In other words the credit squeeze reinforces and accelerates the necessary “flattening” of the productive structure, a process which accompanies thebrecession. It is essential that labor markets be flexible in every aspect, in order to facilitate the massive transfers of productive resources and labor. The sooner the readjustment is completed and the effect of loans granted for erroneous investment projects is eliminated, the sooner the foundations of the subsequent recovery will be laid. The recovery will be characterized by a restoration of the relative price of the original means of production, i.e., by a decrease in the price of consumer goods and services. This reduction in the price of consumer goods and services will be greater, in relative terms, than the drop in wages, due to an increase in society’s general saving, which will again stimulate growth in the capital goods stages. This growth will be achievable, given that it will originate from a rise in voluntary saving. As Wilhelm Röpke reasonably concludes, this third type of deflation (the result of the credit squeeze that follows the crisis) 

is the unavoidable reaction to the inflation of the boom and must not be counteracted, otherwise a prolongation and aggravation of the crisis will ensue, as the experiences in the United States in 1930 have shown.

Under certain conditions, government and union intervention, along with the institutional rigidity of the markets, may prevent the necessary readjustments which precede any recovery of economic activity. If wages are inflexible, hiring conditions very rigid, union power great and governments succumb to the temptation of protectionism, then extremely high unemployment can actually be maintained indefinitely, without any adjustment to new economic conditions on the part of the original means of production. Under these circumstances a cumulative process of contraction may also be triggered. By such a process the massive growth of unemployment would give rise to a widespread decrease in demand, which in turn would provoke new doses of unemployment, etc. Some theorists have used the term secondary depression to refer to this process, which does not arise from spontaneous market forces, but from coercive government intervention in labor markets, products, and international trade. In some instances, “secondary depression” theorists have considered the mere possibility of such a situation a prima facie argument to justify government intervention, encouraging new credit expansion and public spending. However the only effective policy for avoiding a “secondary depression,” or for preventing the severity of one, is to broadly liberalize markets and resist the temptation of credit expansion policies. Any policy which tends to keep wages high and make markets rigid should be abandoned. These policies would only make the readjustment process longer and more painful, even to the point of making it politically unbearable. 

What should be done if, under certain circumstances, it appears politically “impossible” to take the measures necessary to make labor markets flexible, abandon protectionism and promote the readjustment which is the prerequisite of any recovery? This is an extremely intriguing question of economic policy, and its answer must depend on a correct evaluation of the severity of each particular set of circumstances. Although theory suggests that any policy which consists of an artificial increase in consumption, in public spending and in credit expansion is counterproductive, no one denies that, in the short run, it is possible to absorb any volume of unemployment by simply raising public spending or credit expansion, albeit at the cost of interrupting the readjustment process and aggravating the eventual recession. Nonetheless Hayek himself admitted that, under certain circumstances, a situation might become so desperate that politically the only remaining option would be to intervene again, which is like giving a drink to a man with a hangover. In 1939 Hayek made the following related comments: 

it has, of course, never been denied that employment can be rapidly increased, and a position of “full employment” achieved in the shortest possible time by means of monetary expansion. . . . All that has been contended is that the kind of full employment which can be created in this way is inherently unstable, and that to create employment by these means is to perpetuate fluctuations. There may be desperatevsituations in which it may indeed be necessary to increase employment at all costs, even if it be only for a short period—perhaps the situation in which Dr. Brüning found himself in Germany in 1932 was such a situation in which desperate means would have been justified. But the economist should not conceal the fact that to aim at the maximum of employment which can be achieved in the short run by means of monetary policy is essentially the policy of the desperado who has nothing to lose and everything to gain from a short breathing space. [Hayek, Profits, Interest and Investment, footnote 1 on pp. 63–64]

Now let us suppose politicians ignore the economist’s recommendations and circumstances do not permit the liberalization of the economy, and therefore unemployment becomes widespread, the readjustment is never completed and the economy enters a phase of cumulative contraction. Furthermore let us suppose it is politically impossible to take any appropriate measure and the situation even threatens to end in a revolution. What type of monetary expansion would be the least disturbing from an economic standpoint? In this case the policy with the least damaging effects, though it would still exert some very harmful ones on the economic system, would be the adoption of a program of public works which would give work to the unemployed at relatively reducedwages, so workers could later move on quickly to other more profitable and comfortable activities once circumstances improved. At any rate it would be important to refrain from the direct granting of loans to companies from the productive stages furthest from consumption. Thus a policy of government aid to the unemployed, in exchange for the actual completion of works of social value at low pay (in order to avoid providing an incentive for workers to remain chronically unemployed) would be the least debilitating under the extreme conditions described above unemployed) would be the least debilitating under the extreme conditions described above

* It is also possible, in theory and in practice, for economic agents to raise their cash balances (demand for money) without at all modifying their volume of monetary consumption. They can do this by disinvesting in productive resources and selling capital goods. This leads to a flattening of the productive structure and brings about the widespread impoverishment of society through a process which is the exact opposite of the one we analyzed with respect to a lengthening (financed by growth in voluntary saving) of the productive structure. resources have been freed in the stages closest to consumption.

**48 Whenever an individual devotes a sum of money to saving instead of spending it for consumption, the process of saving agrees perfectly with the process of capital accumulation and investment. It does not matter whether the individual saver does or does not increase his cash holding. The act of saving always has its counterpart in a supply of goods produced and not consumed, of goods available for further production activities. A man’s savings are always embodied in concrete capital goods. . . . The effect of our saver’s saving, i.e., the surplus of goods produced over goods consumed, does not disappear on account of his hoarding. The prices of capital goods do not rise to the height they would have attained in the absence of such hoarding. But the fact that more capital goods are available is not affected by the striving of a number of people to increase their cash holdings. . . . The two processes—increased cash holding of some people and increased capital accumulation—take place side by side. (Mises, Human Action, pp. 521–22)

***An analysis of the positive effects of this third type of deflation (caused by the tightening of credit in the recession stage of the cycle) can be found in Rothbard, Man, Economy, and State, pp. 863–71. See also Mises, Human Action, pp. 566–70. Furthermore Mises indicates that despite its negative effects, the deflationary squeeze is never as damaging as credit expansion, because contraction produces neither malinvestment nor overconsumption. The temporary restriction in business activities that it engenders may by and large be offset by the drop in consumption on the part of the discharged wage earners and the owners of the material factors of production the sales of which drop. No protracted scars are left. When the contraction comes to an end, the process of readjustment does not need to make good for losses caused by capital consumption. (Mises, Human Action, p. 567)