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Omnipotent Government
by Ludwig von Mises




1. The Term "Planning"

It is obvious that in this age of international division of labor, on the one hand, and of government interference with business on the other, unrestricted sovereignty for each nation must lead to economic nationalism and through it to conflict. No one ventures to deny that economic nationalism and peace are incompatible. Therefore all projects for the establishment of a more satisfactory state of world affairs include proposals for the substi­tution of some kind of international coöperation for the permanent antagonisms of economic nationalism. The most popular of these suggestions are labeled World Planning or International Planning. Planning is the patent medicine of our day. People are convinced that it will cure all the evils of domestic and foreign affairs. The prestige of the catchword "planning" is so great that the mere men­tion of it is considered a solution of all economic problems.

In dealing with domestic affairs planning is used as a synonym for socialism. Sometimes only the German pattern of socialism—Zwangswirtschaft—is called planning, while the term socialism proper is reserved for the Russian pattern. At any rate planning always means planning by government authorities and execution of these plans by order of the government enforced by the police power. Planning is the antithesis of free enterprise and private ownership of the means of production. Planning and capitalism are utterly incompatible. Within a system of planning production is conducted according to the government's orders, not according to the plans of capitalist entrepreneurs eager to profit by best serv­ing the wants of consumers.

It is a delusion to believe that planning and free enterprise can be reconciled. No compromise is possible between the two methods. Where the various enterprises are free to decide what to produce and how, there is capitalism. Where, on the other hand, the government authorities do the directing, there is socialist planning. Then the various firms are no longer capitalist enterprises; they are subordinate state organs bound to obey orders. The former en­trepreneur becomes a shop manager like the Betriebsführer in Nazi Germany.

The idea of planning by the organized groups of the various branches of production is very popular with some businessmen. This would amount to a substitution of compulsory cartels for free enterprise and competition. It would set aside capitalism and put entrepreneur syndicalism in its place, something like a replica of the medieval guild system. It would not bring socialism, but all-round monopoly with all its detrimental consequences. It would impair supply and put serious obstacles in the way of technical improvements. It would not preserve free enterprise but give a privileged position to those who now own and operate plants, pro­tecting them against the competition of efficient newcomers. It would mean a partial abdication of the state for the benefit of small groups of wealthy men.

In reference to international affairs the word planning sometimes means world socialism with a unitary world management. More often, however, it means the substitution of coöperative interven­tionism of all or many governments for the independent inter­ventionism of every national government. We will have to deal with both of these conceptions.

But before beginning an economic examination of the problems involved it is desirable to make a few observations concerning the psychological roots of the popularity of the idea of planning.

2. The Dictatorship Complex

Man is born an asocial and antisocial being. The newborn child is a savage. Egoism is his nature. Only the experience of life and the teachings of his parents, his brothers, sisters, playmates, and later of other people force him to acknowledge the advantages of social coöperation and accordingly to change his behavior. The savage thus turns toward civilization and citizenship. He learns that his will is not almighty, that he has to accommodate himself to others and adjust his actions to his social environment, and that the aims and the actions of other people are facts with which he must reckon.

The neurotic lacks this ability to adapt himself to his environ­ment. He is asocial; he never arrives at an adjustment with the facts. But whether he likes it or not, reality has its own way. It is beyond the neurotic's power to eliminate the will and the actions of his fellowmen and to sweep everything before him. Thus he escapes into daydreams. The weakling, lacking the strength to get on with life and reality, indulges in reveries on dictatorship and on the power to subdue everybody else. The land of his dreams is the land in which his will alone decides; it is the realm in which he alone gives orders and all others obey. In this paradise only that happens which he wants to happen. Everything is sound and reasonable, i.e., everything corresponds exactly to his ideas and wishes, is rea­sonable from the viewpoint of his reason.

In the secrecy of these daydreams the neurotic assigns to himself the role of the dictator; he himself is Caesar. When addressing his fellow citizens he must be more modest. He depicts a dictatorship operated by somebody else. But this dictator is only his substitute and handyman; he acts only as the neurotic wants him to act. A day­dreamer who refrained from this cautious restriction and proposed himself for the post of the dictator, would risk being considered and treated as a lunatic. The psychiatrists would call his insanity megalomania.

Nobody ever recommended a dictatorship aiming at ends other than those he himself approved. He who advocates dictatorship always advocates the unrestricted rule of his own will, although operated by an intermediary, an amanuensis. He wants a dictator made in his own image.

Now we may grasp the causes of the popularity of planning. Everything that men do has to be planned, is the realization of plans. In this sense all economic activity means planning. But those disparaging anarchic production and advocating planned economy are eager to eliminate the plans of everybody else. One will alone should have the right to will, one plan alone should be realized, namely, the plan which the neurotic approves, the reasonable plan, the only plan. All obstacles should be removed, all other people's power should be broken, nothing should prevent the wretched neurotic from arranging the world according to his whims. Every means is right if it helps to raise the daydreamer's reason to the throne.

The unanimous approval of planning by our contemporaries is only apparent. The supporters of planning disagree with regard to their plans. They agree only in the refutation of the plans brought forward by other people.

Many popular fallacies concerning socialism are due to the mis­taken belief that all friends of socialism advocate the same system. On the contrary, every socialist wants his own socialism, not the other fellow's. He disputes the other socialists' right to call them­selves socialists. In the eyes of Stalin the Mensheviks and the Trotskyists are not socialists but traitors, and vice versa. The Marxians call the Nazis supporters of capitalism; the Nazis call the Marxians supporters of Jewish capital. If a man says socialism, or planning, he always has in view his own brand of socialism, his own plan. Thus planning does not in fact mean preparedness to coöperate peacefully. It means conflict.

3. A World Government

The establishment of a supernational world government is an old idea of pacifists.

Such a world government is not needed for the maintenance of peace, however, if democracy and an unhampered market economy prevail everywhere. Under free capitalism and free trade no special provisions or international institutions are required to safeguard peace. Where there is no discrimination against foreigners, when everyone is free to live and to work where he likes, there are no longer causes for war.

We may grant to the socialists that the same holds true for a socialist world state, provided the rulers of this state do not dis­criminate against any races, linguistic groups, or religions. But if, on the contrary, discrimination is applied, nothing can hinder the outbreak of wars if those who are injured by it believe that they are strong enough to sweep it away.

All talk about the establishment of a world authority to prevent armed conflicts by the aid of a world police force is vain if favored groups or nations are not prepared to renounce their special privi­leges. If these privileges are to be maintained, a world state can be conceived only as the despotic rule of the privileged nations over the underprivileged. A democratic commonwealth of free nations is incompatible with any discrimination against large groups.

A world parliament elected by the universal and equal suffrage of all adults would obviously never acquiesce in migration and trade barriers. It is absurd to assume that the peoples of Asia would be prepared to tolerate the immigration laws of Australia and New Zealand, or that the predominantly industrial nations of Europe would agree to a policy of protectionism for the countries pro­ducing raw materials and foodstuffs.

One should not allow oneself to be misled by the fact that within individual countries minority groups have succeeded in obtaining privileges beneficial to themselves and detrimental to the majority of the nation. We have dealt sufficiently with this phenomenon. Suppose we assume that the intricacy of the problem of the eco­nomic consequences of protectionism should so confuse the minds

  of the international lawmakers that the representatives of those injured by trade barriers were temporarily deluded into withdraw­ing their opposition. It is not very likely, but it could happen. But it is certain that a world parliament, in which the representatives of those injured by the working of immigration barriers would form a compact majority, would never consent to their permanent preservation. Such are the hard facts which render the ambitious plans for a democratic world state or world federation illusory. Under present conditions it is utopian to indulge in such projects.

We have already pointed out that the maintenance of migration barriers against totalitarian nations aiming at world conquest is in­dispensable to political and military defense. It would undoubtedly be wrong to assert that under present conditions all kinds of mi­gration barriers are the outcome of the misguided selfish class in­terests of labor. However, as against the Marxian doctrine of imperialism, almost generally accepted today, it is necessary to emphasize that the capitalists and entrepreneurs in their capacity as employers are not at all interested in the establishment of immi­gration barriers. Even if we were to agree to the fallacious doctrine that profits and interest come into existence because the entrepre­neurs and capitalists withhold from the worker a part of what should rightly be paid to him, it is obvious that neither their short-run nor their long‑run interests push the capitalists and entrepre­neurs toward measures which raise domestic wage rates. Capital does not favor immigration barriers any more than it does Sozialpolitik, whose inextricable outcome is protectionism. If the selfish class interests of big business were supreme in the world, as the Marxians tell us, there would be no trade barriers. The owners of the most efficient plants are—under domestic economic freedom—not interested in protection. They would not ask for import duties were it not to compensate for the rise in costs caused by pro-labor policies.

As long as there are migration barriers, wage rates fixed on the domestic labor market remain at a higher level in those countries in which physical conditions for production are more favorable—as, for instance, in the United States—than in countries offering less favorable conditions. Tendencies toward an equalization of wage rates are absent when the migration of workers is prevented. Under free trade combined with migration barriers there would prevail in the United States a tendency toward an expansion of those branches of production in which wages form a comparatively small part of the total costs of production. Those branches which require comparatively more labor (for instance, the garment trade) would shrink. The resulting imports would bring about neither bad busi­ness nor unemployment. They would be compensated by an increase in the export of goods which can be produced to the greatest advantage in this country. They would raise the standard of living both in America and abroad. While some enterprises are menaced by free trade, the interests of the bulk of industry and of the whole nation are not. The main argument advanced in favor of American protectionism, namely, that protection is needed to maintain the nation's high standard of living, is fallacious. American wage rates are protected by the immigration laws.

Pro‑labor legislation and union tactics result in raising wage rates above the level secured by the immigration laws. The social gains brought about by such methods are only apparent. If there is no tariff, they result either in a drop in wage rates or in unemployment, because the competitive power of domestic industries is weakened and because their sales drop concomitantly. If there is a protective tariff, they raise the prices of those commodities which on account of the increase in domestic production costs require protection. Thus the workers are hurt in their capacity as consumers.

Investors would not suffer if protection were denied to domestic industries. They are free to invest in those countries in which con-ditions seem to offer the best chances of profit. Only the interests of the capital already invested in some branches of industry are favored by protection.

The best evidence that big business does not derive an advantage from protection is provided by the fact that the biggest firms are operating plants in various countries. This is precisely the char­acteristic feature of large‑scale enterprises in this age of hyper-protectionism.[i]However, it would be more profitable for them (and, of course, at the same time more advantageous for consumers) if they were able to concentrate their entire production in plants located where conditions are most favorable.

The real barrier to a full use of the productive forces is not, as the Marxians say, capital or capitalism, but those policies designed to reform and to check capitalism which Marx branded as petty bourgeois. At the same time these policies beget economic nation­alism and substitute international conflict for peaceful coöperation under the international division of labor.

4. Planned Production

The more realistic suggestions for world planning do not imply the establishment of a world state with a world parliament. They propose international agreements and regulations concerning pro­duction, foreign trade, currency and credit, and finally foreign loans and investments.

Planners sometimes describe their proposals as measures to com­bat poverty and want. The description is ambiguous. All economic policies are designed as remedies for poverty. Laissez faire too is a method of abolishing poverty. Both history and economic theory have demonstrated that it has been more successful than any other policy. When the Japanese tried to expand their exports by under­selling, they too sought to improve the lot of the Japanese masses. If economic nationalism in other countries had not hindered their endeavors, they would not only have attained this end but would at the same time have raised the standards of living in the importing countries by providing their peoples with cheaper goods.

It is necessary to emphasize that we are not dealing here with plans for international charity. It would relieve much suffering if some nations were prepared to aid the starving masses in the poor countries by gratuitously distributing food and clothing. But such actions are outside the scope of strictly economic considerations. They are modes of consumption, not of production of goods.

We may first examine the proposals for regulating—by inter­national agreements of various governments or by the order of an international authority established for that task—the production of various commodities.

In the unhampered market the prices are the guides and regu­lators of production. Goods are produced whenever they can be produced at a profit and are not produced when production in­volves a loss. A profitable industry tends to expand and an un­profitable one to shrink. An industry is unprofitable if the prices which the producer can obtain for the products do not cover the cost of the materials and labor required for their production. The consumers therefore determine by their buying or nonbuying how much should be produced in every branch of industry. The amount of wheat produced is determined by the price which the consumers are ready to pay. An expansion of production beyond these limits would mean that factors of production (labor and capital), which in accordance with the demands of the consumers are needed for the production of other commodities, would be diverted to the satis­faction of needs which the consumers consider less urgent. There prevails under unhampered capitalism a tendency to fix the amount of production in every field at a level at which the marginal pro­ducer or producers i.e., those working under the least favorable conditions, neither make a profit nor incur a loss.

Conditions being such, a regulation providing for the expansion of production of a commodity would be to no purpose if the gov­ernment or international authority did not subsidize the submar­ginal producers in order to indemnify them for the losses incurred. But this would result in a corresponding restriction of the output of other commodities. Factors of production would be withdrawn from other branches to be used to expand the industry subsidized. The consumers, who as taxpayers provide the means needed for the subsidies, must restrict their consumption. They get smaller amounts of commodities of which they want to get more, and have the opportunity to get more of other commodities for which their demand is less intense. The intervention of the government does not comply with their individual wishes. At bottom they cannot consider its result an improvement of their condition.

It is not in the power of governments to increase the supply of one commodity without a corresponding restriction in the supply of other commodities more urgently demanded by consumers. The authority may reduce the price of one commodity only by raising the prices of others.

There are of course hundreds of millions of people who would be ready to consume more wheat, sugar, rubber, or tin if the prices were lower. The sales of every commodity increase with falling prices. But no government interference could make these com­modities cheaper without raising the prices of other commodities, e.g., meat, wool, or pulp. A general increase of production can be obtained only by the improvement of technical methods, by the accumulation of additional capital, and by a more efficient use of all factors of production. No planning—whether national or inter­national—can effect a general lowering of real prices and redress the grievances of those for whom prices are too high.

But most supporters of international planning have not the least intention of making raw materials and foodstuffs cheaper. On the contrary. What they really have in mind is raising prices and re­stricting supply. They see the best promise in the policies by which various governments—mainly in the last twenty years—have tried to put into effect restrictions and price increases for the benefit of special groups of producers and to the disadvantage of consumers. True, some of these schemes worked only for a short time and then collapsed, while many did not work at all. But this, according to the planners, was due to faults in technical execution. It is the es­sence of all their projects for postwar economic planning that they will so improve the methods applied as to make them succeed in the future.

The dangerous fact is that while government is hampered in en­deavors to make a commodity cheaper by intervention, it certainly has the power to make it more expensive. Governments have the power to create monopolies; they can force the consumers to pay monopoly prices; and they use this power lavishly.

Nothing more disastrous could happen in the field of interna­tional economic relations than the realization of such plans. It would divide the nations into two groups—the exploiting and the exploited; those restricting output and charging monopoly prices, and those forced to pay monopoly prices. It would engender insoluble conflicts of interests and inevitably result in new wars.

The advocates of these schemes try to justify their suggestions by pointing out that conditions are very unsatisfactory for the pro­ducers of raw materials and foodstuffs. There is overproduction, in these lines, they insist, and prices are so low that the producers lose money. The aim of their plans, they say, is to restore the profit­ability of production.

It is true that a good deal of the production of these commodities does not pay. The trend toward autarky makes it harder for the industrial nations to sell their manufactures abroad; consequently they have to restrict their buying of food and raw materials. Hence it is necessary to retrench production of food and raw materials; the submarginal producers must go out of business. It is very unfor­tunate for them, but they can blame only the politicians of their own countries who have been responsible for the hyper‑protectionist policies. The only way to increase the sales of coffee and to make prices go up on a nonmonopolized market is to buy more products from those countries in which coffee consumption would expand if their exports increased. But the pressure groups of the producers reject this solution and work for monopoly prices. They want to substitute monopolistic schemes for the operation of an unham­pered market. On an unhampered market the restriction in the out­put of raw materials and foodstuffs, made unavoidable by the protectionist policies of the producing countries, would take place automatically by the elimination of the submarginal producers—i.e., those for whom production does not pay at the market price. But the governments want to put into effect a much greater restric­tion for the sake of establishing monopoly prices.

It is often said that the mechanism of the capitalist market no longer works under present conditions. The submarginal pro­ducers, the argument runs, do not go out of business; they continue production; thus prices go down to a level at which production no longer pays any producer. Therefore government intervention is needed.

The fact is true; but its interpretation and the conclusions drawn from the interpretation are entirely wrong. The reason the submar­ginal producers do not stop producing is that they are confident that government intervention will render their business profitable again. Their continued production gluts the market so that prices no longer cover the costs even of the other producers. In this as in so many other instances the unsatisfactory effects of a previous gov­ernment intervention are put forward as arguments for further intervention. Export sales drop because imports have been checked; thus the prices of export goods also drop; and then a demand arises for measures to make prices go up.

Let us look once again at conditions in American agriculture. From its early colonial beginnings there has been a continuous shifting of farming from less fertile to more fertile soil. There have always been submarginal farms on which production had to be dis­continued because the competition of farmers producing at lower costs rendered them unprofitable. But with the New Deal things took a new turn. The government interfered to the advantage of the submarginal farmers. All farmers had to submit to a propor­tional restriction of output. The government embarked upon a vast scheme for restricting output, raising prices, and subsidizing the farmers. In interfering for the special benefit of the submar­ginal farmer it did so to the disadvantage of everyone consuming food and cotton and to the disadvantage of the taxpayer. It bur­dened the rest of the nation in order to pay bounties to some groups. Thus it split the nation into conflicting classes—a class of bounty receivers and a more numerous class of bounty payers. This is the inevitable outcome of interventionism. The govern­ment can give to one group only what it takes from another.

The domestic conflicts engendered by such policies are very serious indeed. But in the sphere of international relations they are incomparably more disastrous. To the extent that monopoly prices are charged for food and raw materials the grievances of the have‑nots are justified.

Such are the prospects of international or world planning in the sphere of production of raw materials and foodstuffs. It would be difficult to imagine any program whose realization would contrib­ute more to engendering future conflicts and wars.

5. Foreign Trade Agreements

In the age of laissez faire commercial treaties were considered a means of abolishing, step by step, trade barriers and all other measures of discrimination against foreigners. In those days the most-favored‑nation clause was a requisite of such treaties.

Then the tide turned. With the ascendancy of interventionism imports were deemed disastrous to a nation's economic prosperity. Discrimination against foreigners then came to be regarded as a good means for promoting the well‑being of a country. The mean­ing of commercial treaties changed radically. Governments became eager to overreach one another in negotiations. A treaty was valued in proportion as it hindered the other nation's export trade and seemed to encourage one's own. Most‑favored‑nation treatment gave way to hostile discrimination.

In the long run there cannot be such a thing as "moderate" pro­tectionism. If people regard imports as an injury, they will not stop anywhere on the way toward autarky. Why tolerate an evil if there seems to be a way to get rid of it? Protectionism was bound to evolve into the license and quota system and into foreign exchange con­trol. The ultimate goal of nearly every nation's foreign‑trade policy today is to prevent all imports. This means autarky.

It is vain to expect anything from purely technical changes in the methods applied in international negotiations concerning foreign‑trade matters. If Atlantis is resolved to bar access to cloth manufactured abroad, it is of no importance whether its delegates must negotiate directly with the delegates of Thule, or whether the subject can be dealt with by an international board in which other nations are represented. If Atlantis is prepared to admit a limited amount—a quota—of cloth from Thule only because it wants to sell a corresponding quota of wheat to Thule, it is not likely to yield to a suggestion that it allot a part of this quota to other nations. If pressure or violence is applied in order to force Atlantis to change its import regulations so that greater quantities of cloth can be imported, it will take recourse to other methods of interventionism. Under a regime of government interference with business a government has innumerable means at hand to penalize imports. They may be less easy to handle but they can be made no less efficacious than tariffs, quotas, or the total prohibition of imports.

Under present conditions an international body for foreign-trade planning would be an assembly of the delegates of govern­ments attached to the ideas of hyper‑protectionism. It is an illusion to assume that such an authority would be in a position to contrib­ute anything genuine or lasting to the promotion of foreign trade.

Some people cling to the belief that while universal free trade and a world‑embracing division of labor are quite wrong, at least neighboring countries should enter into closer economic coöperation. Their economies could complement each other, it is argued, if they were prepared to form regional economic blocs. This doc­trine, first developed by German nationalism, is fallacious.

As a rule neighboring countries offer similar natural conditions for production, especially in agriculture. Their economic systems are less likely to complement each other than to make them com­petitors on the world market. A customs union between Spain and Portugal, or between Bulgaria and Yugoslavia, or between Germany and Belgium would mean little. The main problems of foreign trade are not regional. The conditions for Spanish wine export could not be improved through free trade with Portugal, or vice versa. The same holds true for the production of machines in Germany and Belgium, or for agricultural production in Bul­garia and Yugoslavia.

6. Monetary Planning

The gold standard was an international standard. It safeguarded the stability of foreign exchange rates. It was a corollary of free trade and of the international division of labor. Therefore those who favored etatism and radical protectionism disparaged it and advocated its abolition. Their campaign was successful.

Even at the height of liberalism governments did not give up trying to put easy money schemes into effect. Public opinion is not prepared to realize that interest is a market phenomenon which cannot be abolished by government interference. Everybody values a loaf of bread available for today's consumption higher than a loaf which will be available only ten or a hundred years hence. As long as this is true, every economic activity must take it into ac­count. Even a socialist management would be forced to pay full re­gard to it.

In a market economy the rate of interest has a tendency to cor­respond to the amount of this difference in the valuation of future goods and present goods. True, governments can reduce the rate of interest in the short run. They can issue additional paper money. They can open the way to credit expansion by the banks. They can thus create an artificial boom and the appearance of prosperity. But such a boom is bound to collapse sooner or later and to bring about a depression.

The gold standard put a check on governmental plans for easy money. It was impossible to indulge in credit expansion and yet cling to the gold parity permanently fixed by law. Governments had to choose between the gold standard and their—in the long run disastrous—policy of credit expansion. The gold standard did not collapse. The governments destroyed it. It was as incompatible with etatism as was free trade. The various governments went off the gold standard because they were eager to make domestic prices and wages rise above the world market level, and because they wanted to stimulate exports and to hinder imports. Stability of for­eign exchange rates was in their eyes a mischief, not a blessing.[ii]

No international agreements or international planning is needed if a government wants to return to the gold standard. Every nation, whether rich or poor, powerful or feeble, can at any hour once again adopt the gold standard. The only condition required is the abandonment of an easy money policy and of the endeavors to com­bat imports by devaluation.

The question involved here is not whether a nation should return to the particular gold parity that it had once established and has long since abandoned. Such a policy would of course now mean deflation. But every government is free to stabilize the existing ex­change ratio between its national currency unit and gold, and to keep this ratio stable. If there is no further credit expansion and no further inflation, the mechanism of the gold standard or of the gold exchange standard will work again.

All governments, however, are firmly resolved not to relinquish inflation and credit expansion. They have all sold their souls to the devil of easy money. It is a great comfort to every administra­tion to be able to make its citizens happy by spending. For public opinion will then attribute the resulting boom to its current rulers. The inevitable slump will occur later and burden their successors. It is the typical policy of après nous le déluge. Lord Keynes, the champion of this policy, says: "In the long run we are all dead."[iii]But unfortunately nearly all of us outlive the short run. We are destined to spend decades paying for the easy money orgy of a few years.

Inflation is essentially antidemocratic. Democratic control is budgetary control. The government has but one source of revenue—taxes. No taxation is legal without parliamentary consent. But if the government has other sources of income it can free itself from this control.

If war becomes unavoidable, a genuinely democratic govern­ment is forced to tell the country the truth. It must say: "We are compelled to fight for our independence. You citizens must carry the burden. You must pay higher taxes and therefore restrict your consumption." But if the ruling party does not want to imperil its popularity by heavy taxation, it takes recourse to inflation.

The days are gone in which most persons in authority considered stability of foreign exchange rates to be an advantage. Devaluation of a country's currency has now become a regular means of restrict­ing imports and expropriating foreign capital. It is one of the methods of economic nationalism. Few people now wish stable foreign exchange rates for their own countries. Their own country, as they see it, is fighting the trade barriers of other nations and the progressive devaluation of other nations' currency systems. Why should they venture to demolish their own trade walls?

Some of the advocates of a new international currency believe that gold is not fit for this service precisely because it does put a check on credit expansion. Their idea is a universal paper money issued by an international world authority or an international bank of issue. The individual nations would be obliged to keep their local currencies at par with the world currency. The world authority alone would have the right to issue additional paper money or to authorize the expansion of credit by the world bank. Thus there would be stability of exchange rates between the vari­ous local currency systems, while the alleged blessings of inflation and credit expansion would be preserved.

These plans fail, however, to take account of the crucial point. In every instance of inflation or credit expansion there are two groups, that of the gainers and that of the losers. The creditors are the losers; it is their loss that is the profit of the debtors. But this is not all. The more fateful results of inflation derive from the fact that the rise in prices and wages which it causes occurs at different times and in different measure for various kinds of commodities and labor. Some classes of prices and wages rise more quickly and to a higher level than others. While inflation is under way, some people enjoy the benefit of higher prices on the goods and services they sell, while the prices of goods and services they buy have not yet risen at all or not to the same extent. These people profiteer by virtue of their fortunate position. For them inflation is good business. Their gains are derived from the losses of other sections of the population. The losers are those in the unhappy situation of selling services and commodities whose prices have not yet risen at all or not in the same degree as the prices of things they buy for their own consumption. Two of the world's greatest philosophers, David Hume and John Stuart Mill, took pains to construct a scheme of inflationary changes in which the rise of prices and wages occurs at the same time and to the same extent for all commodities and services. They both failed in the endeavor. Modern monetary theory has provided us with the irrefutable demonstration that this disproportion and nonsimultaneousness are inevitable features of every change in the quantity of money and credit.[iv]

Under a system of world inflation or world credit expansion every nation will be eager to belong to the class of gainers and not to that of the losers. It will ask for as much as possible of the ad­ditional quantity of paper money or credit for its own country. As no method could eliminate the inequalities mentioned above, and as no just principle for the distribution could be found, antago­nisms would originate for which there would be no satisfactory solution. The populous poor nations of Asia would, for instance, advocate a per capita allotment, a procedure which would result in raising the prices of the raw materials they produce more quickly than those of the manufactured goods they buy. The richer nations would ask for a distribution according to national incomes or ac­cording to the total amount of business turnover or other similar standards. There is no hope that an agreement could be reached.

7. Planning International Capital Transactions

The most amazing suggestions for international planning con­cern foreign loans or investments. They aim at a fair distribution of the capital available.

Let us assume that American capitalists are prepared to grant a loan to the government of Venezuela or to invest money in a mine in Chile. What can an international body do in this case? Certainly it will not have the power to force the American capitalists to lend the money to China rather than Venezuela, or to make the invest­ment in Persian railroads instead of in Chilean mining

Or the American Government might want for various reasons to subsidize the construction of motor roads in Mexico. Would the international authority order it to subsidize Greek textile plants instead?

The international capital market has been disintegrated by eco­nomic nationalism, as has every other branch of economic interna­tionalism. As investments and loans mean business and not charity, capitalists have lost the incentive to invest abroad. It will be hard work, and it will take a good while, to rebuild the international money and capital market. The interference of international au­thorities would not further these endeavors; it would be more likely to hinder them.

Labor unions are likely to be hostile to capital export because they are eager to raise as far as possible the domestic marginal pro­ductivity of labor. Many governments put a general embargo on capital export; foreign loans and investments are not permitted without a special government license. It is not probable that a change will occur immediately after the war.

The poorer countries have done all that they could to promote the disintegration of the international capital market. Having in­flicted as much harm as possible upon foreign capitalists and en­trepreneurs, they are now anxious to get new foreign capital. How­ever, today they meet only with reluctance. Capitalists shun unre­liable debtors, and labor is unwilling to let capital emigrate.

[i]For instance, the American motor-car manufacturers or the big oil, margarine, and soap concerns. The American automobile manufacturers do not advocate protection. In Germany the Association of Manufacturers of Machinery was the only organization which (up to 1933) had the courage to fight openly the protectionist program of the nationalist parties.

[ii]Such is the essence of the monetary teachings of Lord Keynes. The Keynesian school passionately advocates instability of foreign exchange rates.

[iii]Lord Keynes did not coin this phrase in order to recommend short-run policies but in order to criticize some inadequate methods and statements of monetary theory (Keynes, Monetary Reform, New York, 1924, p. 88). However, the phrase best characterizes the economic policies recommended by Lord Keynes and his school.

[iv]See Mises, Theory of Money and Credit (New York, 1934), pp. 137–145, and Nationalökonomie (Geneva, 1940), pp. 375–378.


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