In 1930 F.A. Hayek sent an article to his friend, Professor Wilhelm Röpke, criticizing a German scheme to attain full employment through credit expansion. Röpke was then a member of a political commission that advocated credit expansion for the German economy. Hayek's article included a cover letter. "I feel you ought not ... to start expanding credit," Hayek explained. "But if the political situation is so serious that continuing unemployment would lead to a political revolution, please do not publish my article."
Hayek acknowledged that political exigencies might take precedence over economic principles. As it happened, Röpke did not publish Hayek's article. According to Hayek, "the political danger of increasing unemployment was so great that [Röpke] would risk the danger of causing further [economic] misdirections by more inflation in the hope of postponing the crisis." Within three years of Hayek's note to Röpke, Germany's troubles led to the appointment of Hitler as Chancellor of Germany.
The question may be asked: Why were two economists of the Austrian School - Hayek and Röpke - willing to stifle their criticism of credit expansion in the face of political revolution? As it happens, political wisdom is not the same as economic wisdom. In politics the correct solution to a problem may not be acceptable to the voters. After all, the public does not understand economic principles. They do not recognize that pain is necessary to market correction and a healthy economy. Instead, they are frequently ready to reject good economic policy in favor of anti-market demagogues (like Hitler). From the point of view of practical politics, therefore, it is better to adopt bad economic policies and steal the demagogue's thunder than allow a totalitarian party to win popular approval and destroy the republic.
It is still remarkable, however, that Hayek and Röpke were willing to accept the necessity of credit expansion in the case of Weimar Germany. Their colleague, Ludwig von Mises, warned against credit expansion in the text of Human Action: "A lowering of the gross market rate of interest as brought about by credit expansion always has the effect of making some projects appear profitable which did not appear so before." In other words, credit expansion leads to bad investments and an inevitable market debacle. "If the credit expansion is not stopped in time," Mises explained, "the boom turns into [a] crack-up boom; the flight into real values begins, [and] the whole monetary system founders." Mises also stated: "The final outcome of the credit expansion is general impoverishment."
Sadly, the voters in Germany during the 1930s and the voters in America today do not understand the harmfulness of credit expansion. Worse yet, the Federal Reserve does not fully appreciate - or does not admit - that America must pass through a period of economic pain in order to regain its economic health. If the Federal Reserve cannot speak frankly, or act correctly in this regard, what can we expect from leading politicians? The party most associated with the free market - the Republican Party - will doubtless take the blame for future economic consequences. Logically, the political left - now in firm control of the Democratic Party - will make significant gains.
In a book titled Omnipotent Government, written during World War II, Ludwig von Mises noted that the Nazis initially triumphed because the "fundamental tenets of the Nazi ideology do not differ from the generally accepted social and economic ideologies." According to Mises, these "generally accepted" ideologies embrace the following six points: "(1) Capitalism is an unfair system of exploitation. It injures the immense majority for the benefit of a small minority.... (2) It is therefore the foremost duty of popular government to substitute government control of business for the management of capitalists and entrepreneurs. (3) Price ceilings and minimum wage rates ... are an adequate means for improving the lot of the consumers and permanently raising the standard of living.... (4) Easy money policy, i.e., credit expansion, is a useful method of lightening the burdens imposed by capital upon the masses and making a country more prosperous. It has nothing to do with the periodical recurrence of economic depression. Economic crises are an evil inherent in unhampered capitalism. (5) All those who ... assert that capitalism best serves the masses ... are ill-intentioned and narrow-minded apologists of the selfish class interests of the exploiters.... (6) The advantage derived from foreign trade lies exclusively in exporting. Imports are bad and should be prevented as much as possible." (See pp. 222-223.)
At a time of economic crisis, the appeal of Nazi economic ideas must prove irresistible. It stands to reason, therefore, that a future financial crash will benefit political extremists whose ideas coincide with those listed above. Please note: there is no appreciable difference between the six dogmas listed above and the rhetoric of the Democrats in Congress.
Should the United States experience a severe economic contraction during the second term of President Bush, the American people will likely support politicians who advocate further restrictions and controls on our market economy - guaranteeing its strangulation and the steady pauperization of the country. In Congress today, Sen. Edward Kennedy supports nearly all the economic dogmas listed above. It is easy to see, therefore, that the coming economic contraction, due in part to a policy of massive credit expansion, will have serious political consequences for the Republican Party (to the benefit of the Democrats). Furthermore, an economic contraction will encourage the formation of anti-capitalist majorities and a turning away from the free market system.
The danger here is not merely economic. The political left openly favors the collapse of America's strategic position abroad. The withdrawal of the United States from the Middle East, the Far East and Europe would catastrophically impact an international system that presently allows 6 billion people to live on the earth's surface in relative peace. Should anti-capitalist dogmas overwhelm the global market and trading system that evolved under American leadership, the planet's economy would contract and untold millions would die of starvation. Nationalistic totalitarianism, fueled by a politics of blame, would once again bring war to Asia and Europe. But this time the war would be waged with mass destruction weapons and the United States would be blamed because it is the center of global capitalism. Furthermore, if the anti-capitalist party gains power in Washington, we can expect to see policies of appeasement and unilateral disarmament enacted.
American appeasement and disarmament, in this context, would be an admission of guilt before the court of world opinion. Russia and China, above all, would exploit this admission to justify aggressive wars, invasions and mass destruction attacks. A future financial crash, therefore, must be prevented at all costs. But we cannot do this. As one observer recently lamented, "We drank the poison and now we must die."
No one knows what will happen in the future. The political consequences of the next financial crash may involve unanticipated psychological reactions. A president may win the people's confidence and thereby adopt the correct economic policy, despite anti-capitalist demagoguery. Such would invalidate the logic of this column.
