Re-sent Post on Cycles

Fri Sep 23 17:34:18 MDT 1994

     I'd like to make a few comments on Steve's response to
my post comparing the Austrian and Marxian theories of the
business cycle.  My original post was, of course, designed to
emphasize the COMMONALITY of the divergent theories,
especially with regard to their emphasis on the state-bank
induced inflationary dynamic that sets into motion the boom
phase of the business cycle.

     I think that Steve is correct to suggest that Austrians
might be a little naive in their preference to keep the state
out of credit.  Certainly this proposal flies in the face of
virtually the entire history of political economy.  To a
certain extent, however, one can view the Austrian approach
as a genuinely radical departure from that history.
Actually, within the Austrian approach, there have been
several competing proposals.  Some Austrians, like Hayek,
have proposed the "denationalization" of money and credit.
Larry White proposes a "free banking" scheme which would
smash all state-bank cartels and allow banks to compete in
the issuance of money.  Such a competition would prevent any
inflation in fiduciary media since "counterfeiters" would be
at a competitive disadvantage in any bust caused by the boom.
Mises and Rothbard, by contrast, have advocated a 100% gold
reserve requirement, such that NO money can be issued by any
bank which is not backed by gold reserves.  This is indeed,
how banks first evolved.  Paper certificates were "demand
liabilities," or redeemable "genuine warehouse receipts,"
that were used on the market as money-substitutes (gold-

     Historically, however, banks, like most other
industries, tried to gain a monopoly on the market.  Rothbard
explains that banks, by issuing "pseudo warehouse receipts
.... in excess of the actual weight of specie on deposit,"
engaged in a systematic counterfeiting operation.  Such
inflation, however, was checked by competing banks.  In their
growing incestuous relationship with the state, certain banks
sought to smash their competition.  Since bank runs were a
means of limiting individual bank inflations, the banks
sought to control runs through state regulation.  Governments
allowed banks to suspend specie payment.  They created
various fractional reserve requirements, diluted the
currency, and eventually provided "deposit insurance," which
protected banks far more than it protected "consumers."  The
final blow to "free" banking occurred with the establishment
of central banking.  Every previous central banking scheme
was the handmaiden of state militarization.  Banks had always
been the source of state borrowing for war.  The Federal
Reserve System established in 1913 was no different.  It was
the brainchild of an explicit movement of large Eastern
financial interests.  Eventually, the cartelization of
banking allowed the banks to inflate TOGETHER with less
concern for individual bank runs.  Through a host of
institutional mechanisms and through the elimination of the
gold standard, inflation has become the leitmotif of
twentieth century finance.

     So while Austrians advocate the separation of the state
from money and credit, they are certainly not naive with
regard to the historical record.  One might assume that they,
like the Marxists, do not wish to reify an historical fact as
a trans-historical reality.  Their proposals for change
strike at the heart of the state-banking nexus, and its
consequences:  inflation, depression, the export and
internationalization of state-financial manipulation, World
Bank imperialism, the development of underdevelopment, etc.,
etc., etc.

     One other clarification:  I think that it was not quite
accurate for me to suggest that the Austrians prefer
DEFLATION rather than INFLATION.  The Austrians view
deflation as a lowering of the money supply.  System-wide
deflationary credit contraction is almost always a
characteristic of the depressionary phase of the business
cycle, and to that extent, it is of course, a "good" thing,
simply because it aids in the liquidation of malinvestments
generated by the preceding boom.  The problem with the state
blocking this deflationary contraction is that malinvestments
are not always liquidated in such cases.  The result is a
kind of imbedded structural discoordination.

     Remember too, that the biggest gainers in the
inflationary game are DEBTORS, and that the biggest debtors
are almost always capital-intensive industries.  The "gains"
from monetary expansion are not simultaneously experienced by
ALL economic actors.  The "gains" are necessarily
differential.  Those who receive the "counterfeit" money
first are the greatest beneficiaries.  Hence, it is they who
have a CLASS interest in perpetuating the system of state-
banking.  It is no wonder then, that the cartellizing scheme
of the New Deal was modelled upon Mussolini's fascist Italy.
Corporativist fascism is a very real outgrowth of the dynamic
of state banking.

     Finally, as for the Great Depression, I would heartily
recommend Murray Rothbard's AMERICA'S GREAT DEPRESSION for a
fine Austrian historical perspective on that cataclysm.
While the fiscal manipulation of the state was not "big"
(from a relative standpoint) in the post-Crash years, observe
that it was HUGE in the years leading up to World War Two and
the post-War, Cold-War, permanent war economy.  The fiscal
"countercyclical" activities of the state are almost always
tied to both welfare AND warfare.

     Well, that's all for now.

                              - Chris

Dr. Chris M. Sciabarra
Visiting Scholar, N.Y.U. Department of Politics
INTERNET:  sciabrrc at
  BITNET:  sciabrrc at nyuacf


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