Beware of Financial Repression

by Andreas Hoffmann

Government debt levels in many advanced economies, especially in Southern Europe, in the US and in Japan, have reached peacetime records. People are worried and rightly so: C. Reinhart and K. Rogoff have provided evidence that elevated debt-to-GDP ratios may contribute to stagnation or even debt crises. As austerity policies are unpopular with voters and growth remains rather sluggish, Reinhart and Rogoff suggest that governments might have to consider other options to reduce debt-to-GDP ratios. Debt should be liquidated via financial repression. It’s how governments typically dealt with high levels of debt in history, they say. This time is not different.

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South Africa and Ending Apartheid: W. H. Hutt and the Free Market Road Not Taken

William Hutt (left) with F.A. Hayek.
William Hutt (left) with F.A. Hayek.










by Richard M. Ebeling*

The public eulogies marking the passing of Nelson Mandela at the age of 95 on December 5, 2013 have refocused attention on the long struggle in South Africa to bring about an end to racial discrimination and the Apartheid system.

Forgotten or at least certainly downplayed in the international remembrance of Mandela’s nearly three decades of imprisonment and his historical role in becoming the first black president of post-Apartheid South Africa is the fact that through most of the years of his active resistance leading up to his arrest and incarceration he accepted the Marxist interpretation that racism and racial discrimination were part and parcel of the capitalist system.

Mandela was a member of a revolutionary communist cohort who were insistent and convinced that only a socialist reorganization of society could successfully do away with the cruel, humiliating, and exploitive system of racial separateness.

With the fall of communism in Eastern Europe and the Soviet Union in the late 1980s and early 1990s, the communist model of socialist transformation was too tarnished and delegitimized to serve a as a guidebook for post-Apartheid South Africa by the time that Mandela assumed office as the first black president in that country in May 1994.

Instead, Mandela’s government followed the alternative collectivist path of a highly “activist” and aggressive interventionist-welfare state, with its usual special interest politicking, group-favoritism, and its inescapable corruption and abuse of power. Its legacy is the sorry and poverty-stricken state of many of those in the black South African community in whose name the anti-Apartheid revolution was fought.

But this did not have to be the road taken by South Africa. There were other voices that also opposed the racial and Apartheid policies of the white South African government, especially in the decades after the Second World War.

These voices argued that racial policies in that country were not the result of “capitalism,” but instead were precisely the product of anti-capitalist government interventionism to benefit and protect certain whites from the potential competition of black Africans.

One of the most prominent of these voices was economist, William H. Hutt. Hutt had come to South Africa from Great Britain in 1928 and taught at the University of Cape Town until the 1970s, when he moved to the United States where he died in 1988. Born in 1899, he had attended the London School of Economics and studied under Edwin Cannan, the noted historian of economic thought and liberal free trade economist. Continue reading

The Euro: a Step Toward the Gold Standard?

by Andreas Hoffmann (University of Leipzig)

In a recent piece Jesus Huerta de Soto (2012) argues that the euro is a proxy for the gold standard. He draws several analogies between the euro and the classical gold standard (1880-1912). Like when “going on gold” European governments gave up monetary sovereignty by introducing the euro. Like the classical gold standard the common currency forces reforms upon countries that are in crisis because governments cannot manipulate the exchange rate and inflate away debt. Therefore, to limit state power and to encourage e.g. labor market reforms he views the euro as second best to the gold standard from a free market perspective. Therefore, we should defend it. He finds that it is a step toward the re-establishment of the classical gold standard.

There has been much criticism of the piece that mainly addresses the inflationary bias of the ECB. I actually agree with much of it. In particular, imperfect currency areas have the potential to restrict monetary nationalism. This can be welcomed just as customs unions that allow for free trade (at least in restricted areas). But I have some trouble with De Soto’s conclusions and the view that adhering to the euro (as did adhering to gold) gives an extra impetus for market reform – in spite of the mentioned e.g. labor market reforms in Spain. Continue reading

Government Revenues from Low-Interest Rate Policies

by Andreas Hoffmann and Holger Zemanek*

Over the last two years Carmen Reinhart and Belen Sbrancia have published a series of papers on financial repression and its historical role in financing government debt. They show that throughout the Bretton Woods period governments in many advanced economies repressed financial markets to liquidate the high levels of debt that had been accumulated by the end of World War II.

During this period, low policy rates reduced debt servicing costs. Financial repression raised the attractiveness of government bonds relative to other investments. Inflation liquidated government debt. The authors report an annual debt liquidation effect for, e.g., the US and UK government debt of about 3 – 4 percent of GDP (Reinhart and Sbrancia 2011).

Today government debt levels in many countries are comparable to those after the Second World War II! After all, good politicians do not need a World War. There are plenty of other ways to spend. But in the light of the European debt crisis, governments are feeling the need to correct the spending-revenue misalignments in order to make debt-service sustainable. Continue reading

Interests are More Powerful than Ideas?


by Mario Rizzo

There is an interesting interview with Ed Feulner, the outgoing president of the Heritage Foundation, in the weekend (Dec. 8-9) Wall Street Journal. The interview got me thinking about the progress made in the pro-economic-liberty cause, not only over the years of Heritage, but since, say, 1960. Continue reading

M. Friedman Goes to Washington

by Chidem Kurdas

Early in his career, long before he became a Nobel prizewinner and the household name for free market economist, Milton Friedman worked for the US Treasury. The following anecdote is from his 1998 memoir with his wife Rose, Two Lucky People.  This revealing example of how public officials operate illustrates, in Friedman’s words, “the interaction between bureaucratic self-seeking and supposedly objective analysis.”  It complements my previous post on whether politicians pursue the public good.

World War II had started. For Friedman and others at the Treasury, the main mission was to figure out how to finance the war effort while avoiding inflation.  Continue reading

Seven Billion People and Counting

 by Mario Rizzo  

There has been quite a lot a talk in the last few days about the coming (or already-here) seven-billion world population. It is a truly amazing number.

Many pro-market and orthodox Catholics  will say this is a good thing. Remember Adam Smith’s dictum “The division of labor is limited by the extent of the market.” It is true that a large population implies, in a system of natural liberty, larger markets, greater division of labor and hence greater productiveness of labor. There are many other advantages as well.

The orthodox Catholics will decry “artificial” birth control, including the use of condoms. Whether the use of condoms to prevent HIV transmission is morally permitted is still not clear in the papal teaching.

And yet there are massive numbers of people unable to feed themselves, dying of HIV, and unable to govern themselves in a way that produces peace. Unfortunately, it is just here that population is growing most rapidly.

So I may be forgiven if I think that seven billion people is a mixed blessing, at best.

Medieval Capitalism

by Jerry O’Driscoll  

Randall Collins is a distinguished sociologist and Weber scholar. In Weberian Sociological Theory (Cambridge University Press, 1986), Collins re-examines Weber’s contributions. It is a book favorable to Weber. In chapter 3, “The Weberian revolution of the High Middle Ages,” he employs Weber’s analysis to demonstrate that it was in medieval Europe that capitalism and modernity developed. “…The Middle Ages experienced the key institutional revolution, … the basis of capitalism was laid then rather than later, and that at its heart was the organization of the Catholic Church itself” (45).

Consider my post inspired by Gene Callahan’s earlier one. My interest is not in interpreting Weber, but understanding the history of the market economy. But much of the discussion in the prior post centered on interpreting Weber. Collins is relevant because he establishes the position I argued from a Weberian perspective. Continue reading