The Limit is the Thing
If you were ever lucky enough to study Economics, there are two things that you may well have looked at although neither is - strictly speaking – Economics. The first is the Wall Street Crash of 1929. Seemingly out of a clear blue sky, in fact there were already harbingers and pointers which some were clever enough to notice. Famously, Joe Kennedy sold everything because a shoe-shine boy tried to give him stock tips. But he was not alone, and in fact the crash itself, in the first instance, did not overly affect actual business. I’ve written before about the creation by Simon Kuznets of what we now call GDP, to measure how much business actually fell. The answer was about 30% over 3 years, sharp enough indeed. What DID for business was the intervention of the politicians, cutting wages and generally attacking business in many ways especially squeezing liquidity. It’s always liquidity. This led to the Great Depression of the 30’s in America, but not so much in UK. Britain’s adherence to the Gold Standard drained both liquidity and gold. It was not until the war came along that things picked up properly, but despite that quite a lot of serious infrastructure got built at great prices.
Much more important was the Great Inflation in Germany in the early 1920s. In case you have forgotten a loaf of bread went from 2 Marks to more than 2 billion marks in about 2 years. It was cheaper to burn the money than buy firewood and burn that. The problem stemmed from Germany losing WW1, when they borrowed hugely to fight the war and then had to pay reparations that were physically impossible to pay. At the start of the war they had some $1.5 billion in gold and by the end only $150million. The problem was the Weimar republic just printed more and more money which made it worth less and less, pandering to pressure groups and trying to appease people. It never works. The German Bundesbank refused (rightly) to release any of the gold. It was definitively removed from backing the trillions of useless notes. I well remember as a school boy getting a German stamp for 5 billion Marks.
Enter Hjalmar Schacht. He knew that Germany as a cohesive unit would be gone if he didn’t sort the currency. But what he also knew (he was, after all, a financial economist and banker) was that the endless printing of infinite amounts of banknotes was the underlying cause of where the country stood. Unless you are really not paying attention, does that ring any bells? It should do.
So Schacht had two brilliant ideas. The first was to say that the new all singing all dancing RentenMark would be backed by the land of Germany. What could be more safe? And secondly, he stated categorically (and an act was passed) to limit the number to 2.4billion. In other words, there was a finite number.
Now you may say that Herr Schmidt with his 1 Rentenmark share of Germany’s land was never going to pop into Bavaria and dig up his entitlement. But he sure as hell could tell that if there was a finite number of them, then there was some value. People were able to exchange what they had in worthless Marks at the rate of 1 TRILLION per 1 Rentenmark. There was in fact so many trillions that no one was really sure how many there were. We aren’t there yet but are definitely getting there.
So it worked. Germany’s experience with inflation was so searing that the Bundesbank’s remit was and remains specifically to avoid inflation. To some extent it survives to this day. And Schacht, as guardian of those Rentenmarks, refused credit to anyone even his own Government. To his own peers and business associates and even his own family.
And it worked. The inflation stopped almost overnight. People regained confidence in that bit of paper they received for their work. And Germany started to work again.
Now this is where the Economics bit comes in. If you buy something for $1 and you hold it for a while and it can be sold for $2, what is your profit? The answer is it is not $1 or 100%. Depending on the time you have held it, inflation will be more or less and that $1 profit will be well degraded. But if there are still the same number of dollars to measure your item against that means there is no eating away. That is the point. The yardstick by what you measure profit or value is shifting because of all the mistakes that have been made in fiscal management over the last few years. It’s why everything is accounted for in ever increasing numbers of dollars or pounds, and it never goes down.
I’ve said before the merry-go-round is relatively easy to stop. Remember my pal Hjalmar? “ There is no more, this is it.” There would be massive wailing and gnashing of teeth, but I can guarantee you inflation would stop dead, meaning interest rates could be kept down. Government borrowing would not need to keep on going up and similarly there would be no need to tax more and more aggressively. As I’ve said before, we have already reached the point of no return so there has to be another way.
Unfortunately, the present incumbents think the thing to do is to make a lot of rules and targets and enforce them. I won’t bore you with why it never works but I promise you it never does.
The biggest exercise in market direction was during the French revolution. Because times were tough, the government of the day decreed maximum prices below the market price. As any fool know, that immediately leads to a black market whereby the rich can afford what they want and the poor slowly starve to death. In the same way, farmers profits get reduced by maximum selling prices but their expenses continued to rise.
And of course it required a huge expansion of what we would call civil servants to enforce the rules. But here’s the thing. Mr. Market gives you all the information and incentives required to conduct an orderly, market clearing set of prices. The minute you constrain him by diktat things fall apart. Quite literally, even with the army and the bureaucrats doing their awful best, they could not feed Paris. Orders, price controls, requisitions, forced sales, and even forced labor couldn’t make it work. There were long lines, empty markets, and widespread hunger. But partly because it was such a disaster, slowly but surely the lack of food eased as people realised they had to NOT follow the rules. The Food Commission was abandoned and markets were restored. I frequently say noibody feeds London. It does it itself without any help.
When you prioritize bureaucrats targets over consumers wants and needs, you are headed for Revolution. Which they got in spades.
