DemocracyThe God That Failed (15 page)

There is also no doubt that total
government
employment
increased during the monarchical age. But until the very end of the nineteenth century, government employment rarely exceeded 3 percent of the total labor force. Royal ministers and parliamentarians typically did not receive publicly funded salaries but were expected to support themselves out of their private incomes. In contrast, with the advances of the process of democratization, they became salaried officials; and since then government employment has continually increased. In Austria, for instance, government employment as a percentage of the labor force increased from less than 3 percent in 1900 to more than 8 percent in the 1920s and almost 15 percent by the mid-1970s. In France it rose from 3 percent in 1900 to 4 percent in 1920 and about 15 percent in the mid1970s. In Germany it grew from 5 percent in 1900 to close to 10 percent by the mid-1920s to close to 15 percent in the mid-1970s. In the United Kingdom it increased from less than 3 percent in 1900 to more than 6 percent in the 1920s and again close to 15 percent by the mid-1970s. The trend in Italy and almost everywhere else was similar, and by the mid1970s only in small Switzerland was government employment still somewhat less than 10 percent of the labor force.
¹⁸

A similar pattern emerges from an inspection of
inflation
and data on the
money
supply.
The monarchical world was generally characterized by the existence of a
commodity
money—typically silver or gold—and at long last, after the establishment of a single integrated world market in the course of the seventeenth and eighteenth centuries, by an inte
rnational gold standard. A commodity money standard makes it difficult, if not impossible, for a government to inflate the money supply. In monopolizing the mint and engaging in "coin-clipping," kings did their best to enrich themselves at the expense of the public. There also had been attempts to introduce an irredeemable fiat currency. Indeed, the history of
the Bank of England, for instance, from its inception in 1694 onward was one of the periodic suspension of specie payment—in 1696,1720,1745, and from 1797 until 1821. But these fiat money experiments, associated in particular with the Bank of Amsterdam, the Bank of England, and John Law and the Banque Royale of France, had been regional curiosities which ended quickly in financial disasters such as the collapse of the Dutch "Tulip Mania" in 1637 and the "Mississippi Bubble" and the "South Sea Bubble" in 1720. As hard as they tried, monarchical rulers did not succeed in establishing monopolies of
pure
fiat
currencies,
i.e., of irredeemable government paper monies, which can be created virtually out of thin air, at practically no cost. No particular individual, not even a king, could be trusted with an extraordinary monopoly such as this

¹⁷
Ibid, chap. 8. Predictably, government expenditures typically rose during war times. However, the pattern described above applies to war times as well. In Great Britain, for instance, during the height of the Napoleonic Wars government expenditures as a percentage of GDP climbed to almost 25 percent. In contrast, during World War I it reached almost 50 percent, and during World War II it rose to well above 60 percent. See ibid., pp. 440-41.

¹⁸
Ibid, chap. 5. In fact, the current share of government employment of about 15 percent of the labor force must be considered systematically underestimated, for apart from excluding all military personnel it also excludes the personnel in hospitals, welfare institutions, social insurance agencies, and nationalized industries.

It was only under conditions of democratic republicanism—of anonymous and impersonal rule—that this feat was accomplished. During World War I, as during earlier wars, the belligerent governments had gone off the gold standard. Everywhere in Europe, the result was a dramatic increase in the supply of paper money. In defeated Germany, Austria, and Soviet Russia in particular, hyperinflationary conditions ensued in the immediate aftermath of the war. Unlike earlier wars, however, World War I did not conclude with a return to the gold standard. Instead, from the mid-1920s until 1971, and interrupted by a series of international monetary crises, a pseudo gold standard—the gold exchange standard—was implemented. Essentially, only the U.S. would redeem dollars in gold (and from 1933 on, after going off the gold standard domestically, only to foreign central banks). Britain would redeem pounds in dollars (or, rarely, in gold bullion rather than gold coin), and the rest of Europe would redeem their currencies in pounds. Consequently, and as a reflection of the international power hierarchy which had come into existence by the end of World War I, the U.S. government now inflated paper dollars on top of gold, Britain inflated pounds on top of inflating dollars, and the other European countries inflated their paper currencies on top of inflating dollars or pounds (and after 1945 only dollars). Finally, in 1971, with ever larger dollar reserves accumulated in European central banks and the imminent danger of a European "run" on the U.S. gold reserves, even the last remnant of the international gold standard was abolished. Since then, and for the first time in history, the entire world has adopted a pure fiat money system of freely fluctuating government paper currencies.
¹⁹

¹⁹
See also Murray N. Rothbard,
What
Has
Government
Done
to
Our
Money?
(Auburn, Ala.: Ludwig von Mises Institute, 1990); Henry Hazlitt,
From
Bretton
Woods
to
World
Inflation
(Chicago: Regnery, 1984); Hans-Hermann Hoppe, "Banking, Nation States, and International Politics: A Sociological Reconstruction of the Present Economic Order,"
Review
of
Austrian
Economics
4 (1990); idem, "How is Fiat Money Possible? or, The Devolution of Money and Credit,"
Review
of
Austrian
Economics
7
,
no. 2 (1994).

As a result, from the beginning of the democratic-republican age—initially under a pseudo gold standard and at an accelerated pace since 1971 under a government paper money standard—a seemingly permanent secular tendency toward inflation and currency depreciation has existed.

During the monarchical age with commodity money largely outside of government control, the "level" of prices had generally fallen and the purchasing power of money increased, except during times of war or new gold discoveries. Various price indices for Britain, for instance, indicate that prices were substantially lower in 1760 than they had been hundred years earlier; and in 1860 they were lower than they had been in 1760.
²⁰
Connected by an international gold standard, the development in other countries was similar.
²¹
In sharp contrast, during the democratic-republican age, with the world financial center shifted from Britain to the U.S. and the latter in the role of international monetary trend setter, a very different pattern emerged. Before World War I, the U.S. index of wholesale commodity prices had fallen from 125 shortly after the end of the War between the States, in 1868, to below 80 in 1914. It was then lower than it had been in 1800.
²²
In contrast, shortly after World War I, in 1921, the U.S. wholesale commodity price index stood at 113. After World War II, in 1948, it had risen to 185. In 1971 it was 255, by 1981 it reached 658, and in 1991 it was near 1,000. During only two decades of irredeemable fiat money, the consumer price index in the U.S. rose from 40 in 1971 to 136 in 1991, in the United Kingdom it climbed from 24 to 157, in France from 30 to 137, and in Germany from 56 toll6.
²³

Similarly, during more than seventy years, from 1845 until the end of World War I in 1918, the British money supply had increased about
six-fold.
²⁴
In distinct contrast
, during the seventy-three years from 1918 until 1991, the U.S. money supply increased more than sixty-four-fold

²⁰
See B.R. Mitchell,
Abstract
of
British
Historical
Statistics
(Cambridge: Cambridge University Press, 1962), pp. 468ff.

²¹
B.R. Mitchell,
European
Historical
Statistics
1750-1970
(New York: Columbia University Press, 1978), pp. 388ff.

²²
1930 = 100; see Ron Paul and Lewis Lehrmann,
The
Case
for
Gold:
A
Minority
Report
to
the
U.S.
Gold
Commission
(Washington, D.C.: Cato Institute, 1982), p. 165f.

²³
1983 = 100; see
Economic
Report
of
the
President
(Washington DC: Government PrintingOffice,1992).

In addition to taxation and inflation, a government can resort to
debt
in order to finance its current expenditures. As with taxation and inflation, there is no doubt that government debt increased in the course of the monarchical age. However, as predicted theoretically, in this field monarchs also showed considerably more moderation and farsightedness than democratic-republican caretakers.

Throughout the monarchical age, government debts were essentially war debts. While the total debt thereby tended to increase over time, during peacetime at least monarchs characteristically
reduced
their debts. The British example is fairly representative. In the course of the eighteenth and nineteenth centuries, government debt increased. It was 76 million pounds after the Spanish War in 1748,127 million after the Seven Years' War in 1763, 232 million after the American War of Independence in 1783, and 900 million after the Napoleonic Wars in 1815. Yet during each peacetime period—from 1727-1739, from 1748-1756, and from 1762-1775, total debt actually decreased. From 1815 until 1914, the British national debt fell from a total of 900 to below 700 million pounds.

In striking contrast, since the onset of the democratic-republican age British debt has only increased, in war
and
in peace. In 1920 it was 7.9

²⁴
See Mitchell,
Abstract
of
British
Historical
Statistics,
p. 444f.

²⁵
See Milton Friedman and Anna Schwartz,
A
Monetary
History
of
the
United
States,
1867-1960
(Princeton, N.J.: Princeton University Press, 1963), pp. 704-22; and
Economic
Report
of
the
President,
1
992.

A remarkable distinction between the monarchical and the democratic-republican age also exists regarding the development and recognition of monetary theory. The early theoretician of fiat money and credit John Law, having had his turn at monetary reform from 1711-1720, secretly left France and sought refuge in Venice, where he died impoverished and forgotten. In distinct contrast, John Law's twentieth-century successor, John Maynard Keynes, who bore responsibility for the demise of the classical gold standard during the post-World War I era, and who left behind the Bretton Woods system which collapsed in 1971, was honored during his lifetime and is still honored today as the world's foremost economist. (If nothing else, Keynes's personal philosophy of hedonism and present-orientation, which is summarized in his famous dictum that "in the long run we are all dead," indeed sums up the very spirit of the democratic age.) Similarly, Milton Friedman, who bears much responsibility for the post-1971 monetary order and thus for the most inflationary peacetime period in all of human history, is hailed as one of the great economists. See further on this Joseph T. Salerno, "Two Traditions in Modern Monetary Theory: John Law and A.R.J. Turgot,"
Journal
des
Economistes
et
des
Etudes
Hu
maines
2, no. 2/3 (1991).

billion pounds, in 1938 8.3 billion, in 1945 22.4 billion, in 1970 34 billion, and since then it has skyrocketed to more than 190 billion pounds in 1987.
²⁶
Likewise, us government debt has increased through war and peace. Federal government debt after World War I, in 1919, was about 25 billion dollars. In 1940 it was 43 billion, and after World War II, in 1946, it stood at about 270 billion. By 1970 it had risen to 370 billion, and since 1971, under a pure fiat money regime, it has literally exploded. In 1979 it was about 840 billion, and in 1985 more than 1.8 trillion. In 1988 it reached almost 2.5 trillion, by 1992 it exceeded 3 trillion dollars, and presently it stands at approximately 6 trillion dollars.
²⁷

Finally, the same tendency toward increased exploitation and present-orientation emerges upon examination of government
legislation
and
regulation.
During the monarchical age, with a clear-cut distinction between the ruler and the ruled, the king and his parliament were held to be
under
the law. They applied preexisting law as judge or jury. They did not make law. Writes Bertrand de Jouvenel:

The monarch was looked on only as judge and not as legislator. He made subjective rights respected and respected them himself; he found
these rights in being and did not dispute that they were anterior to his authority.... Subjective rights were not held on the precarious tenure of grant but were freehold possessions. The sovereign's right also was a freehold. It was a subjective right as much as the other rights, though of a more elevated dignity, but it could not take the other rights away.... Indeed, there was a deep-seated feeling that all positive rights stood or fell together; if the king disregarded (a private citizen's) title to his land, so might the king's title to his throne be disregarded. The profound if obscure concept of legitimacy established the solidarity of all rights. No change in these rights could be effected without the consent of their holders.
²⁸

²⁶
See Sidney Homer and Richard Sylla,
A
History
of
Interest
Rates
(New Brunswick, N.J.: Rutgers University Press, 1991), pp. 188 and 437.

²⁷
See Jonathan Hughes,
American
Economic
History
(Glenview, Ill.: Scott, Foresman, 1990), pp. 432,498, and 589.

Furthermore, constrained by a commodity money standard, monarchs were unable to "monetize" their debt. When the king sold bonds to private financiers or banks, under the gold standard this had no effect on the total money supply. If the king spent more as a consequence, others would have to spend less. Accordingly, lenders were interested in correctly assessing the risk associated with their loans, and kings typically paid interest rates substantially above those paid by commercial borrowers. See Homer and Sylla,
A
History
of
Interest
Rates,
p. 84 and pp. 5, 99, 106, and 113f. In contrast, under the gold exchange standard with only a very indirect tie of paper money to gold, and especially under a pure fiat money regime with no tie to gold at all, government deficit financing is turned into a mere banking technicality. Currently, by selling its debt to the banking system, governments can in effect create new money to pay for their debt. When the treasury department sells bonds to the commercial banking system, the banks do not pay for these bonds out of their existing money deposits; assisted by open-market purchases by the government owned central bank, they create additional demand deposits out of thin air. The banking system does not spend less as a consequence of the government spending more. Rather, the government spends more, and the banks spend (loan) as much as before. In addition, they earn an interest return on their newly acquired bond holdings. See Murray N. Rothbard,
The
Mystery
of
Banking
(New York: Richardson and Snyder, 1983), esp. chap. 11. Accordingly, there is little hesitation on the part of banks to purchase government bonds even at below market interest rates, and rising government debt and increased inflation thus goes hand in hand.