Richard M. Ebeling: Kríza politiky štátnych zásahov

The Crisis of the Monetary-‐Fiscal Interven6onist State By

Dr. Richard M. Ebeling Professor of Economics Northwood University Midland, Michigan

USA

Presented in Bra6slava, Slovakia under the sponsorship of the Conserva6ve Ins6tute, March 11-‐12, 2013

Monetary and Fiscal Policies before 1914

  Next year, 2014, marks the hundredth anniversary of the beginning of the First World War.

  All of Europe was transformed by that conflict, and especially in this part of the con6nent.

  The war cost as many as 50 million lives throughout Europe.

  It tore apart age-‐old empires and dynas6es, and new na6ons arose in their place.

  It is also a water-‐shed – a turning-‐point – in the monetary and fiscal policies that guided both old and new na6ons.

  Before 1914 – however imperfectly – the s6ll dominant idea of the most desirable monetary system was the gold standard.

  In 1892, Austria-‐Hungary had introduced a monetary reform act, which began to establish a gold-‐backed currency within the Hapsburg Empire.

  In 1892, the Russian Empire was officially put on a gold standard, as well.

  With the Austro-‐Hungarian and Russian monetary reforms, all of the major poli6cal and industrial countries of the Western world had placed their na6onal currency systems on a gold standard.

The Gold Standard and Its Ra6onale

Gold Krona


  A leading reason for establishing and maintaining a gold standard as the basis of a monetary system was the general belief that it was the only way to protect society from the abuse and misuse of a paper money controlled by government.

  There was a long history of paper money abuse:

  Revolu6onary America in the 1770s with the “Con6nental Notes”

  Revolu6onary France in the 1790s with the “Assignats”   Great Britain’s experience under the paper pound between 1797 and 1815, during its wars with Revolu6onary France

  The frequent deprecia6ons of the Austrian florin to fund government war deficits in the 19th century

  Many 19th century economists and enlightened statesmen agreed that only by requiring private banks and central banks to redeem banknotes for gold on demand could there be secured a sound and reliable currency to create a posi;ve economic environment to foster saving, investment, and capital forma;on to improve standards of living for all in society.

  This was considered especially important to improve the condi6ons of the poor, who were least likely to be able to protect their modest incomes and savings from the destruc6ve effects of infla6onary rises in prices.


American Revolu>onary Con>nental Note

1770s

French Assignat 1790s



“No doctrine in poli6cal economy rests on more obvious grounds that the mischief of a paper money not maintained at the same value with a metallic [gold] . . .

“Great as the evil would be if it depended on accident [gold produc6on], it is s6ll greater when placed at the arbitrary disposal of an individual or a body of individuals, who may have any kind or degree of interest to be served by an ar6ficial fluctua6on in fortunes; and who have at any rate a strong interest in issuing as much [inconver6ble paper money] as possible, each issue being itself a source of profit.

“Not to add, that the issuers have, and in the case of government paper [money], always have, a direct interest in lowering the value of a currency, because it is the medium in which its own debts are computed . . .

“Such power, in whosoever vested, is an intolerable evil.”

John Stuart Mill Principles of Poli;cal Economy (1848)

“Gold is the money of advanced na6ons in the modern age.

“No other money can provide the convenience of a gold currency in our age of rapid and massive commodity exchanges.

“Silver has become a troublesome tool of trade. Even paper money must yield to gold when it comes to monetary convenience in everyday life . . .

“Moreover, under the present condi6ons only a gold currency cons6tutes hard money.

“Neither a bank note and treasury note nor a silver cer6ficate can take the place of gold, especially in moments of crisis.”

Carl Menger Contribu;on to

the Currency Ques;on in Austria-‐Hungary (1892)

  During most of the 19th and the early years of the 20th centuries, the guiding idea was that governments should follow a fiscal policy “rule” of yearly balanced budgets.

  A balanced budget “rule” for managing the spending and taxing of the government was considered a way to assure transparency and responsibility in the financial affairs of government.

  A balanced budget made it easier and clearer for the ci;zen and the taxpayer to compare the “costs” and “benefits” from government spending ac;vi;es.

  The ci6zen and taxpayer could make a more reasonable judgment whether they considered any government spending proposal to be “worth it” in terms of what had to be given up to gain the “benefit” from it.

  The trade-‐off, was explicit and clear: any addi6onal dollar of government spending on some program or ac6vity required an addi6onal dollar of taxes, and therefore, at the “cost” of one dollar less in the taxpayer’s pocket to spend on some desired private-‐sector use, instead.

  Or if taxes were not to be increased to pay for a new or expanded government program, the supporter of this increased spending had to explain what other exis6ng government program or ac6vity would have to be reduced or eliminated to transfer the funds to pay for the new proposed spending.

  This balanced budget “rule” was considered a wise and honest policy, since the ci6zens and taxpayers would always know the real cost of everything that government did.


Fiscal Policy and Ra6onale for Balanced Budgets

A Balanced Budget

“It is very temp6ng to a minister [in the government] to employ such an expediency, as enables him to make a great figure during his administra6on, without overburdening the people with taxes, or exci6ng any immediate clamors against himself. The prac6ce, therefore, of contrac6ng debt will almost infallibly be abused, in every government. It would scarcely be more imprudent to given a prodigal son a credit in every banker’s shop in London, than to empower a statesman to draw bills, in this manner, upon posterity.”

David Hume, “Of Public Credit” (1741) David Hume

(1711-‐1776)

  Unrestricted governmental borrowing power was the fiscal poison in the poli6cal brew.

  It gave poli6cians the ability to create an illusion:   They can give something for nothing – a vast array of “benefits” in the form of various government spending programs geared to win the support of special interest vo6ng groups.

  And with the appearance of no cost, or less than full cost, since a good part of the spending can be financed with borrowed money that imposes no immediate requirement to pay, and therefore no visible burden on the taxpayer.

  Such fiscal borrowing power is always too temp6ng for those in poli6cal power not to abuse it.


Fiscal Policy and the Ra6onale for Balanced Budgets

R. Dudley Baxter (1827-‐1875)

Henry FawceV (1833-‐1884) Millicent G. FawceV

(1847-‐1929)

“When addi6onal supplies of money are raised by addi6onal taxa6on, everyone knows exactly how, and to what extent, he is injured and inconvenienced by the new imposts [taxes]; consequently a strong pressure is brought to bear on the government to exercise increased economy, and to cut down all expenditure that is not absolutely necessary. Excessive taxa6on, therefore, in a country possessing free poli6cal ins6tu6ons, beings with it it’s own remedy.

“But when a country is in the habit of resor6ng to loans, there is no guarantee that the money raised is spent economically, nor yet that there was any urgent necessity for the expenditure.

“In his book, on Na;onal Debts [1871], Mr. Dudley Baxter says: ‘When money is raised by taxa6on within the year for which it is needed, the amount that can be raised is limited by the tax-‐enduring habits of the people, and must be as small as possible in order not to provide discontent.

‘By the same reason it must be spent economically, and made to go as far as possible. But when the money is raised by loans, it is limited only by the necessity of the interest [payment] not to be too large for the taxable endurance of the people, or provoking their discontent. Hence the limits of borrowing are about twenty 6mes larger than the limits to taxa6on, and an amount that is monstrous as a tax, is (apparently) a very light burden as a loan. In consequence, borrowing is freed from the most powerful check that restrains taxa6on. . .

When a loan is obtained the reason for economical expenditure is equally wan6ng, and borrowed money is commonly expended with much greater profuseness, and even wastefulness, than would be the case with taxes.’”

Henry Fawcek and Millicent G. Fawcek Essays and Lectures on Social and Poli;cal Subjects (1871)


Fiscal Policy and the Ra6onale for Balanced Budgets

Monetary and Fiscal Policies before 1914 Ins6tu6ons of Liberalism: The Gold Standard

and Balanced Budgets   The monetary prac6ce of a gold standard and the fiscal policy of a balanced budget were economic elements of the poli6cal philosophy of liberalism.

  The ideal for many, even though never prac6ced completely or without contradic6on and inconsistency, was a society in which the role of government was to protect and secure people’s individual liberty, and the ins6tu6ons necessary to do so:

  Rule of law   Cons6tu6onally limited government

  Civil rights: freedom of religion, speech, the press, of associa6on

  Secure and protected private property rights

  Domes6c freedom of exchange and foreign free trade

  Unrestricted compe66on (with limits only on the use of force and fraud)

  These ins6tu6ons, including a gold standard and balanced budgets, made up the poli;cal and economic “plan” of liberalism for liberty and prosperity for all in society.

Liberalism and the Free Society

“[Before 1914, under capitalism] the world was rapidly interna6onalizing itself . . .

“Free movement of commodi6es, restricted if at all only by customs tariffs; freedom, unques6oned in principle, of migra6on of people and of capital; all this facilitated by unrestricted gold currencies and protected by a growing body of interna6onal law that on principle disapproved of force or compulsion of any kind . . .

“At home, prac6cally all civilized countries professed allegiance to the democra6c ideal . . . The freedom of the individual to say, think, and do what he pleased was also within very wide limits generally accepted.

“This freedom included the freedom of economic ac6on: private property and inheritance, free ini6a6ve and conduct were essen6al elements of that [capitalist] civiliza6on . . .”

Joseph A. Schumpeter “Economic Interpreta6on of Our Time” (1941)

Monetary and Fiscal Policies A]er 1914

The Monetary and Fiscal World Turned Upside Down During and Aler World War I

  During the First World War, all the belligerent na6ons went off the gold standard and used the monetary prin6ng press to fund large por6ons of their war expenditures.

  In some countries aler the war in the early 1920s, such as Germany and Austria, there was con6nued and rapid expansion of their money supplies, leading to hyperinfla6ons.

  The effects on the countries experiencing hyperinfla6on were devasta6ng on the working and middle classes; it destroyed people’s savings, caused consump6on of capital, and weakened the ins6tu6ons of society.

  In the mid-‐1920s, there were akempts to restore versions of the gold standard, but there was no return to the type of gold standard that had existed before 1914.

  Similarly, the prac6ce of balanced budgets was not fully returned to.

  With the coming of the Great Depression in 1929-‐1930, deficit spending became the inten6onal policy of virtually every major government in the Western world.

German hyperinfla>on money to play with

Money to burn in

Germany’s hyperinfla>on


Socialism and the Interven6onist Welfare State

  Before the First World War an6-‐liberal ideas and movements had been emerging as challenges to the ideals and ins6tu6ons of a free society:

  Marxian socialism accused liberal society of causing all of man’s social ills, and called for the abolishing of capitalism and the pumng in its place government ownership of the means of produc6on and central planning of all economic ac6vity.

  The German Historical School accepted much of the socialist cri6que of liberal society, but called for a “middle way,” in which private property was preserved but regulated and controlled to serve the “na6onal interest” and “social good.”

  A complementary element to regula6on and control of private business was the establishment of the “welfare state” that would provide “social safety nets” for “the workers” – re6rement pensions, na6onal health care, unemployment insurance, government-‐ provided educa6on, public housing, work-‐place regula6on.

  The German “middle way” – the modern interven6onist-‐welfare state – became the poli6cal ideal and policy goal of many intellectuals and then policy makers both in Western Europe and North America in the last decades of the 19th century and the first decades of the 20th century.

  The First World War was the “great experiment” for all the countries at war to plan and regulate their economies and take responsibility for the “needs” of all in society as part of the “war-‐6me emergency.”

“My idea was to bribe the working class, or shall I say, to win them over, to regard the state as a social ins6tu6on exis6ng for their sake and interested in their welfare. It is not moral to make profits out of human misfortunes and suffering.

“Life insurance, accident insurance, sickness insurance should not be subjects of private specula6on. They should be carried out by the state . . .”

Oko von Bismarck (1892)

“Just as the [first world] war for the first 6me in history established the principle of universal military service, so for the first 6me in history it brought na6onal economic life in all its branches and ac6vi6es to the support and service of state poli6cs – made it effec6vely subordinate to the state . . .

“Not supply and demand, but the dictatorial fiat of the state determined economic rela6onships – produc6on, consump6on, wages, cost of living . . .

“At the same 6me, and for the first 6me, the state made itself responsible for the physical welfare of its ci6zens; it guaranteed food and clothing not only to the army in the field but to the civilian popula6on as well . . .

“Here is a fact pregnant with meaning: the state became for a 6me the absolute ruler of our economic life, and while subordina6ng the en6re economic organiza6on to its military purposes, also made itself responsible for the welfare of the humblest of its ci6zens, guaranteeing him a minimum of food, clothing, hea6ng and housing.”

Gustav Stolper “Lessons of the World Depression”

Foreign Affairs (1931)


Socialism and the Interven6onist-‐Welfare State

Gustav Stolper (1888-‐1947)


The Great Depression and the New Monetary and Fiscal Era   The Great Depression saw the demise of many remaining liberal elements in society.

  Government took over greater responsibility to create employment, generate profits for business, and direct investment and produc6on.

  The monetary and fiscal “revolu6on” that was part of this change became not only jus6fied but ra6onalized as desirable and do-‐able “ac6vist” policy by John Maynard Keynes in his The General Theory of Employment, Interest, and Money (1936).

  The argument was that:

  Market economies are inherently unstable and suscep6ble to wide fluctua6ons in employment and output;

  If lel on its own, market economies may not return to “full employment” and will experience prolonged periods of high unemployment;

John Maynard Keynes

(1883-‐1946)

  Governments, through their monetary and fiscal policy tools can correct for the market’s mistakes and restore a sustainable level of “full employment”;

  Rather than balance its budget on a yearly basis, governments should run budget deficits in recession and depression years, and run budget surpluses during infla6onary or full employment years.

  The government’s budget would then be “balanced” over the phases of the business cycle.

  The budget deficits can be financed by borrowing either uninvested savings or by crea6ng new money.

“Public authority must . . . create addi6onal current incomes through the expenditure of borrowed or printed money . . .

“When more purchasing power is spent, one expects rising output at rising prices. Since there cannot be rising output without rising prices, it is essen6al to insure that the recovery shall not be held back by the insufficiency of the supply of money to support the increased monetary turnover . . .

“The increased s6mula6on of output by increased aggregate purchasing power is the right way to get prices up . . .

“I put in the forefront, for the reasons given above, a large volume of loan expenditure under government auspices. . .

“Preference should be given to those which can be made to mature quickly on a large scale . . . This is to get the ball rolling . . .

“I put in the second place the maintenance of cheap and abundant credit, in par6cular the reduc6on of the long-‐term rate of interest.”

John Maynard Keynes The Means to Prosperity (1933)


  Keynes made his argument for deficit spending and money crea6on in the early 1930s.

The Great Depression and the New Monetary and Fiscal Era

Keynes on the cover of Time magazine, December 31, 1965

Before the First World War: the Presump6on of Liberty

Freedom as a Personal End and a Social Means

  Before the First World War, the presump6on was that limi6ng government – including its power to spend, tax, and borrow, or print money – served as both an “end” and as a “means” to a good society.

  It was taken for granted by most people that individual freedom and the personal responsibility that goes with it was desirable as an end in itself.

  Individuals should be respected and expected to be the makers of their own life:

  Selec6ng their own ends or goals that give meaning and sa6sfac6on to their life on earth.

  Choosing their own personal means to achieve those ends, including the voluntary rela6onships they enter into with others, for both personal and community-‐related and social purposes

  And be responsible for their ac6ons and their consequences.   Individual freedom was also considered essen6al for a prosperous world because it was understood that it was beyond the ability of a government to plan or guide society and the ac6ons of the people in it.

  Individuals understand their own circumstances beker than any poli6cal planner can, and each individual serves his own interest and those of others by being lel free to use his own knowledge and abili6es as he considers best.

“What is the specie of domes6c industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident, can, in his own situa6on, judge much beker than any statesman or lawgiver can do for him.

“The statesman, who should akempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary aken6on, but assume an authority which can safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presump6on enough to fancy himself fit to exercise it.”

Adam Smith The Wealth of Na;ons (1776)

The Post-‐War Growing Interven>onist-‐Welfare State

  Aler the First World War, it came increasingly to be taken for granted that it was the duty, responsibility, and “right” for the government to manage, direct, and plan the society.

  This included an increasingly vast network of welfare state programs to secure the individual against the uncertain6es of life.

  The presump6on was that the individual was not intelligent enough or not far-‐thinking enough to secure these things for himself.

  And that a market economy failed to provide them.

  At the same 6me, it was presumed that government possessed the knowledge, wisdom and ability to provide such things beker than individuals could do so for themselves.

  Thus, over the decades of the 20th century, and especially aler the Second World War, there developed a growing dependency upon the State for an increasing variety of everyday goods and services, for an expanding segment of the popula6on in the Western Welfare States.

  Every step in this direc6on, however, has inescapably brought with it a reduc6on in the liberty and freedom of choices of the individuals in the society.

  And has required an increasing por6on of the privately produced wealth of the society transferred to the hands and decision-‐making of the State for redistribu6on.

“The Welfare State contains nothing in itself which would set a limit to its own ac6vi6es. It has on the contrary the opposite and very strong tendency toward further and further expansion . . .

“This con6nuing expansion of the Welfare State, the tendency to cover more and more poten6al insecurity, to increase its benefits, and with them the burden it imposes, is highly dangerous because expansion is easy and temp6ng, while any going back on a measure which is later revealed as ill-‐advised is difficult and may well prove poli6cally impossible.”

Wilhelm Röpke Welfare Freedom

and Infla;on (1964)

The Growing Control of Government Over People’s Lives

The Post-‐World War Growing Interven>onist-‐Welfare State

“The very measures which the dominant ‘macro-‐economic’ theory has recommended as a remedy for unemployment, namely the increase of aggregate demand, has become a cause of a very extensive misalloca6on of resources which is likely to make later large-‐scale unemployment inevitable.

“The con6nuous injec6on of addi6onal amounts of money at points of the economic system creates a temporary demand which must cease when the increase of the quan6ty of money stops or slows down . . . [and which] draws labor and other resources into employments which can last only as so long as the increase in the quan6ty of money con6nues at the same rate.”

Friedrich A. Hayek “The Pretense of Knowledge” (1974)

  Under the influence of Keynes’ ideas, economists and policy-‐makers increasingly used fiscal and monetary policy in akempts to “macro-‐manage” the levels of employment and produc6on in their countries.

  All remaining legal connec6ons with and restric6ons resul6ng from a gold-‐backed money, were eliminated by the 1970s.

  Government spending and borrowing were freed from all restraint from the old balanced budget rule.

  Governments ran budget deficits in the name of keeping the economy in “balance.”

  Central banks provided the new money to cover the expenditures, and “mone6zed” the expanding debt of their governments.

  But the ra6onale for the deficits and the money crea6on became a self-‐fulfilling prophecy:

  The employments and investments created through monetary expansions and government spending can only last for as long as the money and spending con6nue in the same way and in the same direc6ons.

  Any stopping or slowdown in the spending with newly created money ends the employments and investments that are dependent upon those government expenditures.

Temporary “Fixes” from Keynesian Policies


Democracies in Perpetual Deficits “There was likle awareness that the dictates of poli6cal survival might run contrary to the requirements of macroeconomic engineering (assuming for now that the economic order is aptly described by the Keynesian paradigm).

“It was tacitly assumed either that the poli6cal survival of poli6cians was automa6cally strengthened as they came to follow more fully the appropriate fiscal policies, or that the ruling elite would act without regard to their poli6cal fortunes.

“But what happens when we make non-‐Keynesian assump6ons about poli6cs? What if we commence from the assump6on that elected poli6cians respond to pressures emana6ng from cons6tuents and the state bureaucracy?

“When this shil of perspec6ve is made in the poli6cal semng for analysis, the possibili6es that policy precepts may unleash poli6cal biases cannot be ignored.”

James M. Buchanan and Richard E. Wagner

The Consequences of Mr. Keynes (1978)

  Keynes had presumed that those who guided government monetary and fiscal policy were mo6vated by and focused on some concep6on of a definable and achievable “common good” or “general welfare.”

  But, in reality, there is no “objec6ve” meaning to the “common good” or “general welfare,” other than the individual goods and welfares of the individual members of the society, as they define and pursue them.

  When such discre6onary powers over spending and borrowing and money crea6on were placed in the hands of those in poli6cal authority, it was inevitable that it would be used to advance the “interests” of those in control of the monetary and fiscal policy tools.

  Poli6cians want to be elected and re-‐elected;   Bureaucrats want larger budgets and more authority for their departments;

  Special interest groups wish to use the spending, taxing, and regula6ng powers of the State for their own benefit at the expense of others in society.

Democracies in Deficit: The Example of America

In the 67 years since the end of the Second World War in 1945, the U.S. federal government has run budget deficits in 55 of those years, and budget surpluses in only 12 of those years.

  At the beginning of the 21st century the U.S government debt stood at $5.6 trillion.

  By the end of the George W. Bush administra6on, the government’s debt had doubled to $10.6 trillion.

  Aler four years of the Barack Obama administra6on the debt had increased by more than 50 percent, to $16.3 trillion.

  And under the president’s projec6ons, debt will rise to $25.4 trillion by 2020.



Democracies in Perpetual Debt: Selected European Union Countries

  The majority of these EU member countries have accumulated government debt above 60 to 80 percent of GDP, or higher.

The Crisis of the Monetary-‐Fiscal, Interven>onist-‐Welfare State

  The 19th century free market economists and liberals have turned out to be correct.

  When governments have the discre6onary ability to borrow money to cover their expenditures;

  When governments through their central banks may increase the quan6ty of money in their economies without limit or restraint;

  Then, governments spend and borrow seemingly without end.

  But what we are witnessing in Europe and the United States is the realiza6on that there are limits to the Monetary-‐Fiscal, Interven6onist-‐Welfare State.

  A country’s private sector economy finally reaches a point when it is unable to generate the produc6on and wealth to feed the taxa6on and the borrowing to maintain the current levels of government spending, including interest on the accumulated debts of the past.

  Yet, throughout Europe and in the United States there is (some6mes violent) opposi6on to either repealing or even reducing any of the “en6tlement” welfare state programs to which several genera6ons, now, have become addicted and dependent.

  The implicit psychology among large numbers of the popula6on is that either:

  The fiscal crises are not real, and are due to “the rich” failing to pay their “fair share” in higher taxes; or,

  If the current financial difficul6es can “somehow” be “managed,” things will return to “normal” and the path of ever-‐growing and guaranteed income and wealth transfers from the State can be restored to their pre-‐crisis trajectory of expansion.

Hiding from the reality of the bankruptcy of the

Welfare State


  Given the demographic trends of an aging popula6on, and the degree of tax and regulatory burden on the private sectors in Europe and the United States:

  There is no return to the seeming poli6cal “paradise” of a guaranteed life at “someone” else's expense through the illusion of “something for nothing” on the basis of perpetual borrowing and debt accumula6on;

  The “magic” of monetary expansion cannot change the fact that in the long run produc6on and jobs are dependent on real savings and sound market-‐oriented investment guided by compe;;ve market prices that inform those on the “supply-‐side” what others on the ”demand-‐side” actually desire and are willing and able to pay.

  Markets can adapt to ever-‐changing market condi;ons only with an open compe;;ve market for goods and services, as well as capital, resources and labor.

  Long-‐term sustainable prosperity and job security cannot be purchased with ar6ficial subsidies that direct investment and labor into employments that can only last for as long as the government money con6nues to be spent in a par6cular way.

  Improvements in material wellbeing cannot be obtained at the price of interna6onal trade restric6ons and hidden protec6onist manipula6ons limi6ng the flow of imports and exports.

  The path to a sustainable recovery and an advance from the current economic problems plaguing Europe and the United States requires a turning away from the paternalis6c interven6onist-‐state – and a return to the ideas, spirit, and policies of free market liberalism that were the founda6on of Europe’s and America’s original prosperity.

The Need to Turn Away from the Interven6onist-‐Welfare State


  The “en6tlement” mentality that others in society “owe you a living” must be, finally, given up.   Refusing to do so merely delays the necessary reforms and policy changes that are required if recovery is to really come.

“Whenever there is any talk about decreasing public expenditures, the advocates of this fiscal spending policy voice their objec6on, saying that most of the exis6ng expenditures as well as the increases in expenditures, are inevitable. Any no6on of applying the concept of austerity to the machinery of the public sector is to be rejected.

“What exactly does ‘inevitable’ mean in this context? That the expenditures are based on various laws that have been passed in the past is not an objec6on if the argument for elimina6ng these laws is based on their damaging effects on the economy.

“The metaphorical use of the term ‘inevitable’ is nothing but a haven in which to hide in the face of the inability to comprehend the seriousness of our situa6on. People do not want to accept the fact that the public budget has to be radically reduced.”

Ludwig von Mises “Adjus6ng Public Expenditure to the Economy’s Financial Capacity” (1930)

Ludwig von Mises (1881-‐1973)

Facing the Reality of the End of the Paternalis6c State


“The worst of these misconcep>ons is the . . . idea that the main difference between the state’s and the private sector’s budget is that in the private sector’s budget expenditures have to be based on revenues, while in the public sector’s budget it is the reverse, i.e., the revenue raised must be based on the level of expenditures desired.

“The illogic of this sentence is evident as soon as it is thought through. There is always a rigid limit for expenditures, namely the scarcity of means. If the means were unlimited, then it would be difficult to understand why expenses should ever have to be curbed.

“If in the case of the public budget it is assumed that its revenues are based on its expenditures and not the other way around, i.e., that its expenses have to be based on its revenues, the result is the tremendous squandering that characterizes our fiscal policy.

“The supporters of this principle are so shortsighted that they do not see that it is necessary, when comparing the level of public expenditures with the budgetary requirements of the private sector, not to ignore the fact that enterprises cannot undertake investments when the required funds are used up for public purposes.”

Ludwig von Mises “Adjus6ng Public Expenditures to the Economy’s Financial Capacity” (1930)

A Return to Fiscal Sustainability Through a Balanced Budget Policy   Crucial to this change in policy direc6on is a move back to government managing its finances on the basis that its expenditures must be limited to its revenues – a balanced budget;

  It must be remembered that there is a cost to every dollar or Euro taxed away by government in the form of less produc6ve private investment and produc6on that could have occurred instead.


“Why have a monetary system based on gold?

“Because, as condi6ons are today and for the 6me that can be foreseen today, the gold standard along makes the determina6on of money’s purchasing power independent of the ambi6ons and machina6ons of governments, of dictators, of poli6cal par6es, and of pressure groups.

“The gold standard alone is what the 19th century freedom-‐loving [liberals] (who championed representa6ve government, civil liber6es, and prosperity for all) called sound money.”

Ludwig von Mises “The Gold Problem” (1965)

A Return to Gold – and Maybe Monetary Freedom   It will always be too much of a tempta6on for those in poli6cal power and authority to turn to the monetary prin6ng press to advance their ambi6ons and intrigues with special interest groups who help secure their posi6ons in government.

  Real monetary reform, therefore, calls for a restora6on of a link between government currency outstanding and a “real” commodity such as gold to limit the abuse of poli6cal control over the crea6on of money.

  In the s6ll longer term, it might be reasonable to ask: Should government have any role and control over money in a truly free society?

  Or, perhaps, money, too, should be one of those market-‐desired commodi6es that would be decided upon and supplied by the market through a system of compe66ve private free banking?

  With such reforms the remainder of the 21st century could finally overcome the poli6cal paternalism and government planning and redistribu6ng mentality that replaced the earlier liberal era as part of the result from the tragedy of the First World War.

Richard M. Ebeling: Kríza politiky štátnych zásahov

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