This document summarizes the monetary and fiscal policies that existed in Europe prior to World War I, with a focus on the gold standard. It explains that before 1914, the gold standard was widely embraced as the preferred monetary system because it protected currencies from abuse by governments. The gold standard helped foster economic growth by providing a stable currency for savings and investment. However, World War I marked a turning point where countries increasingly abandoned the gold standard in favor of fiat paper currencies managed by governments and central banks.

1. 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

2. Monetary
and
Fiscal
Policies
before
1914
The
Gold
Standard
and
Its
Ra6onale

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
Gold
Krona
the
major
poli6cal
and
industrial
countries
of
the
Western
world
had
placed
their
na6onal
currency
systems
on
a
gold
standard.

3. Monetary
and
Fiscal
Policies
before
1914
The
Gold
Standard
and
Its
Ra6onale

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”
American
Revolu>onary

Revolu6onary
France
in
the
1790s
with
the
“Assignats”
Con>nental
Note

Great
Britain’s
experience
under
the
paper
pound
between
1797
1770s
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.
French
Assignat

This
was
considered
especially
important
to
improve
the
condi6ons
1790s
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.

4. Monetary
and
Fiscal
Policies
before
1914
The
Gold
Standard
and
Its
Ra6onale
“No
doctrine
in
poli6cal
economy
rests
on
more
“Gold
is
the
money
of
advanced
na6ons
obvious
grounds
that
the
mischief
of
a
paper
in
the
modern
age.
money
not
maintained
at
the
same
value
with
a
“No
other
money
can
provide
the
metallic
[gold]
.
.
.
convenience
of
a
gold
currency
in
our
“Great
as
the
evil
would
be
if
it
depended
on
age
of
rapid
and
massive
commodity
accident
[gold
produc6on],
it
is
s6ll
greater
when
exchanges.
placed
at
the
arbitrary
disposal
of
an
individual
“Silver
has
become
a
troublesome
tool
of
or
a
body
of
individuals,
who
may
have
any
kind
trade.
Even
paper
money
must
yield
to
or
degree
of
interest
to
be
served
by
an
ar6ficial
gold
when
it
comes
to
monetary
fluctua6on
in
fortunes;
and
who
have
at
any
rate
convenience
in
everyday
life
.
.
.
a
strong
interest
in
issuing
as
much
[inconver6ble
paper
money]
as
possible,
each
issue
being
itself
“Moreover,
under
the
present
condi6ons
a
source
of
profit.
only
a
gold
currency
cons6tutes
hard
money.
“Not
to
add,
that
the
issuers
have,
and
in
the
case
of
government
paper
[money],
always
have,
“Neither
a
bank
note
and
treasury
note
a
direct
interest
in
lowering
the
value
of
a
nor
a
silver
cer6ficate
can
take
the
place
currency,
because
it
is
the
medium
in
which
its
of
gold,
especially
in
moments
of
crisis.”
own
debts
are
computed
.
.
.
Carl
Menger
“Such
power,
in
whosoever
vested,
Contribu;on
to
is
an
intolerable
evil.”
the
Currency
Ques;on
in
Austria-­‐Hungary
(1892)
John
Stuart
Mill
Principles
of
Poli;cal
Economy
(1848)

5. Monetary
and
Fiscal
Policies
before
1914
Fiscal
Policy
and
Ra6onale
for
Balanced
Budgets

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
A
B
alanced
Budget
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.

6. Monetary
and
Fiscal
Policies
before
1914
Fiscal
Policy
and
the
Ra6onale
for
Balanced
Budgets

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.
“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)

7. Monetary
and
Fiscal
Policies
before
1914
Fiscal
Policy
and
the
Ra6onale
for
Balanced
Budgets
“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
Henry
FawceV
(1833-­‐1884)
amount
that
can
be
raised
is
limited
by
the
tax-­‐enduring
habits
of
the
people,
and
Millicent
G.
FawceV
must
be
as
small
as
possible
in
order
not
to
provide
discontent.
(1847-­‐1929)
‘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
R.
Dudley
Baxter
Essays
and
Lectures
on
Social
and
Poli;cal
Subjects
(1871)
(1827-­‐1875)

8. Monetary
and
Fiscal
Policies
before
1914
Ins6tu6ons
of
Liberalism:
The
Gold
Standard
Liberalism
and
the
Free
Society
and
Balanced
Budgets
“[Before
1914,
under
capitalism]
the
world

The
monetary
prac6ce
of
a
gold
standard
and
the
was
rapidly
interna6onalizing
itself
.
.
.
fiscal
policy
of
a
balanced
budget
were
economic
“Free
movement
of
commodi6es,
restricted
if
elements
of
the
poli6cal
philosophy
of
liberalism.
at
all
only
by
customs
tariffs;
freedom,

The
ideal
for
many,
even
though
never
prac6ced
unques6oned
in
principle,
of
migra6on
of
completely
or
without
contradic6on
and
inconsistency,
people
and
of
capital;
all
this
facilitated
by
was
a
society
in
which
the
role
of
government
was
to
unrestricted
gold
currencies
and
protected
by
a
growing
body
of
interna6onal
law
that
on
protect
and
secure
people’s
individual
liberty,
and
the
principle
disapproved
of
force
or
compulsion
ins6tu6ons
necessary
to
do
so:
of
any
kind
.
.
.

Rule
of
law
“At
home,
prac6cally
all
civilized
countries

Cons6tu6onally
limited
government
professed
allegiance
to
the
democra6c
ideal
.
.
.
The
freedom
of
the
individual
to
say,

Civil
rights:
freedom
of
religion,
speech,
the
think,
and
do
what
he
pleased
was
also
press,
of
associa6on
within
very
wide
limits
generally
accepted.

Secure
and
protected
private
property
rights
“This
freedom
included
the
freedom
of
economic
ac6on:
private
property
and

Domes6c
freedom
of
exchange
and
foreign
free
inheritance,
free
ini6a6ve
and
conduct
were
trade
essen6al
elements
of
that
[capitalist]
civiliza6on
.
.
.”

Unrestricted
compe66on
(with
limits
only
on
the
use
of
force
and
fraud)
Joseph
A.
Schumpeter

These
ins6tu6ons,
including
a
gold
standard
and
“Economic
Interpreta6on
of
Our
Time”
(1941)
balanced
budgets,
made
up
the
poli;cal
and
economic
“plan”
of
liberalism
for
liberty
and
prosperity
for
all
in
society.

9. 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
German
hyperinfla>on
society.
money
to
play
with

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
Money
to
1929-­‐1930,
deficit
spending
became
the
inten6onal
burn
in
policy
of
virtually
every
major
government
in
the
Germany’s
Western
world.
hyperinfla>on

10. Monetary
and
Fiscal
Policies
A]er
1914
Socialism
and
the
Interven6onist
Welfare
State
“My
idea
was
to
bribe

Before
the
First
World
War
an6-­‐liberal
ideas
and
movements
had
been
the
working
class,
or
emerging
as
challenges
to
the
ideals
and
ins6tu6ons
of
a
free
society:
shall
I
say,
to
win
them

Marxian
socialism
accused
liberal
society
of
causing
all
of
man’s
over,
to
regard
the
state
social
ills,
and
called
for
the
abolishing
of
capitalism
and
the
pumng
in
its
as
a
social
ins6tu6on
place
government
ownership
of
the
means
of
produc6on
and
central
exis6ng
for
their
sake
planning
of
all
economic
ac6vity.
and
interested
in
their
welfare.
It
is
not
moral

The
German
Historical
School
accepted
much
of
the
socialist
cri6que
to
make
profits
out
of
of
liberal
society,
but
called
for
a
“middle
way,”
in
which
private
property
human
misfortunes
and
was
preserved
but
regulated
and
controlled
to
serve
the
“na6onal
suffering.
interest”
and
“social
good.”
“Life
insurance,

A
complementary
element
to
regula6on
and
control
of
private
accident
insurance,
business
was
the
establishment
of
the
“welfare
state”
that
would
sickness
insurance
provide
“social
safety
nets”
for
“the
workers”
–
re6rement
pensions,
should
not
be
subjects
na6onal
health
care,
unemployment
insurance,
government-­‐
of
private
specula6on.
provided
educa6on,
public
housing,
work-­‐place
regula6on.
They
should
be
carried

The
German
“middle
way”
–
the
modern
interven6onist-­‐welfare
out
by
the
state
.
.
.”
state
–
became
the
poli6cal
ideal
and
policy
goal
of
many
intellectuals
Oko
von
Bismarck
and
then
policy
makers
both
in
Western
Europe
and
North
America
in
the
(1892)
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.”

11. Monetary
and
Fiscal
Policies
A]er
1914
Socialism
and
the
Interven6onist-­‐Welfare
State
“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
.
.
.
Gustav
Stolper
“Here
is
a
fact
pregnant
with
meaning:
the
state
became
for
a
6me
the
(1888-­‐1947)
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)

12. Monetary
and
Fiscal
Policies
A]er
1914
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:
John
Maynard

Market
economies
are
inherently
unstable
and
suscep6ble
to
wide
Keynes
fluctua6ons
in
employment
and
output;
(1883-­‐1946)

If
lel
on
its
own,
market
economies
may
not
return
to
“full
employment”
and
will
experience
prolonged
periods
of
high
unemployment;

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.

13. Monetary
and
Fiscal
Policies
A]er
1914
The
Great
Depression
and
the
New
Monetary
and
Fiscal
Era

Keynes
made
his
argument
for
deficit
spending
and
money
crea6on
in
the
early
1930s.
“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.
.
.
Keynes
on
the
cover
“Preference
should
be
given
to
those
which
can
be
made
to
mature
of
Time
magazine,
quickly
on
a
large
scale
.
.
.
This
is
to
get
the
ball
rolling
.
.
.
December
31,
1965
“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)

14. Before
the
First
World
War:
the
Presump6on
of
Liberty
Freedom
as
a
Personal
End
and
a
Social
Means
“What
is
the
specie
of
domes6c

Before
the
First
World
War,
the
presump6on
was
that
limi6ng
industry
which
his
capital
can
government
–
including
its
power
to
spend,
tax,
and
borrow,
or
print
employ,
and
of
which
the
money
–
served
as
both
an
“end”
and
as
a
“means”
to
a
good
society.
produce
is
likely
to
be
of
the
greatest
value,
every

It
was
taken
for
granted
by
most
people
that
individual
freedom
individual,
it
is
evident,
can,
in
and
the
personal
responsibility
that
goes
with
it
was
desirable
own
situa6on,
judge
much
his
as
an
end
in
itself.
beker
than
any
statesman
or

Individuals
should
be
respected
and
expected
to
be
the
makers
lawgiver
can
do
for
him.
of
their
own
life:
“The
statesman,
who
should
akempt
to
direct
private

Selec6ng
their
own
ends
or
goals
that
give
meaning
and
people
in
what
manner
they
sa6sfac6on
to
their
life
on
earth.
ought
to
employ
their
capitals,

Choosing
their
own
personal
means
to
achieve
those
ends,
would
not
only
load
himself
with
a
most
unnecessary
including
the
voluntary
rela6onships
they
enter
into
with
others,
aken6on,
but
assume
an
for
both
personal
and
community-­‐related
and
social
purposes
authority
which
can
safely
be

And
be
responsible
for
their
ac6ons
and
their
consequences.
trusted,
not
only
to
no
single
person,
but
to
no
council
or

Individual
freedom
was
also
considered
essen6al
for
a
prosperous
senate
whatever,
and
which
world
because
it
was
understood
that
it
was
beyond
the
ability
of
a
would
nowhere
be
so
government
to
plan
or
guide
society
and
the
ac6ons
of
the
people
in
it.
dangerous
as
in
the
hands
of
a

Individuals
understand
their
own
circumstances
beker
than
man
who
had
folly
and
presump6on
enough
to
fancy
any
poli6cal
planner
can,
and
each
individual
serves
his
own
himself
fit
to
exercise
it.”
interest
and
those
of
others
by
being
lel
free
to
use
his
own
Adam
Smith
knowledge
and
abili6es
as
he
considers
best.
The
Wealth
of
Na;ons
(1776)

15. The
Post-­‐War
Growing
Interven>onist-­‐Welfare
State
The
Growing
Control
of
Government
Over
People’s
Lives

Aler
the
First
World
War,
it
came
increasingly
to
be
taken
for
“The
Welfare
State
contains
granted
that
it
was
the
duty,
responsibility,
and
“right”
for
the
nothing
in
itself
which
would
set
government
to
manage,
direct,
and
plan
the
society.
a
limit
to
its
own
ac6vi6es.
It
has
on
the
contrary
the

This
included
an
increasingly
vast
network
of
welfare
state
opposite
and
very
strong
programs
to
secure
the
individual
against
the
uncertain6es
of
life.
tendency
toward
further
and
further
expansion
.
.
.

The
presump6on
was
that
the
individual
was
not
intelligent
enough
or
not
far-­‐thinking
enough
to
secure
these
things
for
“This
con6nuing
expansion
of
the
Welfare
State,
the
tendency
himself.
to
cover
more
and
more

And
that
a
market
economy
failed
to
provide
them.
poten6al
insecurity,
to
increase
its
benefits,
and
with
them
the

At
the
same
6me,
it
was
presumed
that
government
possessed
burden
it
imposes,
is
highly
the
knowledge,
wisdom
and
ability
to
provide
such
things
beker
dangerous
because
expansion
is
than
individuals
could
do
so
for
themselves.
easy
and
temp6ng,
while
any

Thus,
over
the
decades
of
the
20th
century,
and
especially
aler
the
going
back
on
a
measure
which
Second
World
War,
there
developed
a
growing
dependency
upon
the
is
later
revealed
as
ill-­‐advised
is
difficult
and
may
well
prove
State
for
an
increasing
variety
of
everyday
goods
and
services,
for
an
poli6cally
impossible.”
expanding
segment
of
the
popula6on
in
the
Western
Welfare
States.
Wilhelm
Röpke

Every
step
in
this
direc6on,
however,
has
inescapably
brought
with
Welfare
Freedom
it
a
reduc6on
in
the
liberty
and
freedom
of
choices
of
the
individuals
and
Infla;on
in
the
society.
(1964)

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.

16. The
Post-­‐World
War
Growing
Interven>onist-­‐Welfare
State
Temporary
“Fixes”
from
Keynesian
Policies
“The
very
measures
which
the

Under
the
influence
of
Keynes’
ideas,
economists
and
policy-­‐ dominant
‘macro-­‐economic’
makers
increasingly
used
fiscal
and
monetary
policy
in
akempts
to
theory
has
recommended
as
a
“macro-­‐manage”
the
levels
of
employment
and
produc6on
in
remedy
for
unemployment,
their
countries.
namely
the
increase
of
aggregate
demand,
has
become
a
cause
of
a

All
remaining
legal
connec6ons
with
and
restric6ons
resul6ng
very
extensive
misalloca6on
of
from
a
gold-­‐backed
money,
were
eliminated
by
the
1970s.
resources
which
is
likely
to
make

Government
spending
and
borrowing
were
freed
from
all
later
large-­‐scale
unemployment
restraint
from
the
old
balanced
budget
rule.
inevitable.
“The
con6nuous
injec6on
of

Governments
ran
budget
deficits
in
the
name
of
keeping
addi6onal
amounts
of
money
at
the
economy
in
“balance.”
points
of
the
economic
system

Central
banks
provided
the
new
money
to
cover
the
creates
a
temporary
demand
expenditures,
and
“mone6zed”
the
expanding
debt
of
their
which
must
cease
when
the
governments.
increase
of
the
quan6ty
of
money
stops
or
slows
down
.
.
.
[and

But
the
ra6onale
for
the
deficits
and
the
money
crea6on
which]
draws
labor
and
other
became
a
self-­‐fulfilling
prophecy:
resources
into
employments
which
can
last
only
as
so
long
as

The
employments
and
investments
created
through
the
increase
in
the
quan6ty
of
monetary
expansions
and
government
spending
can
only
last
money
con6nues
at
the
same
for
as
long
as
the
money
and
spending
con6nue
in
the
same
rate.”
way
and
in
the
same
direc6ons.
Friedrich
A.
Hayek

Any
stopping
or
slowdown
in
the
spending
with
newly
“The
Pretense
of
created
money
ends
the
employments
and
investments
that
Knowledge”
(1974)
are
dependent
upon
those
government
expenditures.

17. The
Post-­‐World
War
Growing
Interven>onist-­‐Welfare
State
Democracies
in
Perpetual
Deficits
“There
was
likle
awareness
that
the
dictates

Keynes
had
presumed
that
those
who
guided
of
poli6cal
survival
might
run
contrary
to
the
government
monetary
and
fiscal
policy
were
mo6vated
requirements
of
macroeconomic
engineering
by
and
focused
on
some
concep6on
of
a
definable
and
(assuming
for
now
that
the
economic
order
is
achievable
“common
good”
or
“general
welfare.”
aptly
described
by
the
Keynesian
paradigm).

But,
in
reality,
there
is
no
“objec6ve”
meaning
to
the
“It
was
tacitly
assumed
either
that
the
“common
good”
or
“general
welfare,”
other
than
the
poli6cal
survival
of
poli6cians
was
automa6cally
strengthened
as
they
came
to
individual
goods
and
welfares
of
the
individual
follow
more
fully
the
appropriate
fiscal
members
of
the
society,
as
they
define
and
pursue
policies,
or
that
the
ruling
elite
would
act
them.
without
regard
to
their
poli6cal
fortunes.

When
such
discre6onary
powers
over
spending
and
“But
what
happens
when
we
make
non-­‐
borrowing
and
money
crea6on
were
placed
in
the
Keynesian
assump6ons
about
poli6cs?
What
hands
of
those
in
poli6cal
authority,
it
was
inevitable
if
we
commence
from
the
assump6on
that
that
it
would
be
used
to
advance
the
“interests”
of
elected
poli6cians
respond
to
pressures
those
in
control
of
the
monetary
and
fiscal
policy
tools.
emana6ng
from
cons6tuents
and
the
state
bureaucracy?

Poli6cians
want
to
be
elected
and
re-­‐elected;
“When
this
shil
of
perspec6ve
is
made
in
the

Bureaucrats
want
larger
budgets
and
more
poli6cal
semng
for
analysis,
the
possibili6es
authority
for
their
departments;
that
policy
precepts
may
unleash
poli6cal
biases
cannot
be
ignored.”

Special
interest
groups
wish
to
use
the
James
M.
Buchanan
and
spending,
taxing,
and
regula6ng
powers
of
the
Richard
E.
Wagner
State
for
their
own
benefit
at
the
expense
of
The
Consequences
of
others
in
society.
Mr.
Keynes
(1978)

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

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

20. 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:
Hiding
from
the
reality

The
fiscal
crises
are
not
real,
and
are
due
to
“the
rich”
failing
to
pay
of
the
bankruptcy
of
the
their
“fair
share”
in
higher
taxes;
or,
Welfare
State

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.

21. The
Crisis
of
the
Monetary-­‐Fiscal,
Interven>onist-­‐Welfare
State
The
Need
to
Turn
Away
from
the
Interven6onist-­‐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.

22. The
Crisis
of
the
Monetary-­‐Fiscal,
Interven>onist-­‐Welfare
State
Facing
the
Reality
of
the
End
of
the
Paternalis6c
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
Ludwig
von
Mises
situa6on.
People
do
not
want
to
accept
the
fact
that
the
public
budget
has
to
(1881-­‐1973)
be
radically
reduced.”
Ludwig
von
Mises
“Adjus6ng
Public
Expenditure
to
the
Economy’s
Financial
Capacity”
(1930)

23. The
Crisis
of
the
Monetary-­‐Fiscal,
Interven>onist-­‐Welfare
State
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.
“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)

24. The
Crisis
of
the
Monetary-­‐Fiscal,
Interven>onist-­‐Welfare
State
A
Return
to
Gold
–
and
Maybe
Monetary
Freedom
“Why
have
a
monetary
system

It
will
always
be
too
much
of
a
tempta6on
for
those
based
on
gold?
in
poli6cal
power
and
authority
to
turn
to
the
monetary
prin6ng
press
to
advance
their
ambi6ons
and
intrigues
“Because,
as
condi6ons
are
today
with
special
interest
groups
who
help
secure
their
and
for
the
6me
that
can
be
posi6ons
in
government.
foreseen
today,
the
gold
standard

Real
monetary
reform,
therefore,
calls
for
a
along
makes
the
determina6on
of
money’s
purchasing
power
restora6on
of
a
link
between
government
currency
independent
of
the
ambi6ons
and
outstanding
and
a
“real”
commodity
such
as
gold
to
limit
the
abuse
of
poli6cal
control
over
the
crea6on
of
machina6ons
of
governments,
of
money.
dictators,
of
poli6cal
par6es,
and
of
pressure
groups.

In
the
s6ll
longer
term,
it
might
be
reasonable
to
ask:
“The
gold
standard
alone
is
what
Should
government
have
any
role
and
control
over
the
19th
century
freedom-­‐loving
money
in
a
truly
free
society?
[liberals]
(who
championed

Or,
perhaps,
money,
too,
should
be
one
of
those
representa6ve
government,
civil
market-­‐desired
commodi6es
that
would
be
decided
liber6es,
and
prosperity
for
all)
upon
and
supplied
by
the
market
through
a
system
of
called
sound
money.”
compe66ve
private
free
banking?
Ludwig
von
Mises

With
such
reforms
the
remainder
of
the
“The
Gold
Problem”
(1965)
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.