Interview Dr. Hunt Tooley: Hyperinflation, monetary policy and politics

Danny de Gracia interviews economist and Ludwig von Mises Institute scholar Dr. Hunt Tooley. Photo: AP File Photo / Vahid Salemi

SHERMAN, TX, August 13, 2012 – With the price of food and gasoline skyrocketing and rampant unemployment plaguing an already weak economy, more and more Americans are increasingly concerned about the direction the dollar is headed. The tumultuous and volatile movements of domestic markets has brought words like “dollar panic” “hyperinflation” and “Weimar” to the lips of ordinary people who before had no interest in monetary policy or the politics of central banking.

But just what does all this mean?

With so many wild economic explanations coming from pundits of the 24/7 news cycle and even more bizarre monetary policy claims being made by politicians seeking elected office, I sought out Austin College professor of history and Ludwig von Mises Institute scholar Dr. Hunt Tooley to help me make sense of just what is going on in the economy.

Tooley, whose broad scholarly expertise ranges from economics to military history, has been featured in The American Historical Review, The English Historical Review, Central European History, The Journal of Austrian Economics, The Independent Review and is also the author of several books. Here now is a transcript, with light edits for length and clarity.

Danny de Gracia: There seems to be a lot of confusion and contentious debate about what “inflation” is. Some people say inflation is a sudden rise in general prices, others say that inflation is an increase in dollars not backed by gold bars in Fort Knox, still others say that inflation is any increase in the money supply. What would you say is the best definition for inflation?

Dr. Hunt Tooley is an expert in military history and economics.

Dr. Hunt Tooley: Defining inflation as rising prices is like defining rain as increasing wetness.  Prices do indeed rise as a result.  But inflation is the expansion of the money supply.  Hence, the more the supply of money is created, the less each unit of money costs.  Supply rises, demand drops. 

So the dollar in your pocket and mine is now worth   less than it was before.  It buys less than it did before.  So yes, prices seem to rise, but it is the currency that is worth less.

And of course, those who have studied inflation have long since figured out that the expansion of the money supply is not simply a matter of printing one-dollar bills and tens and twenties, though it certainly is that. 

It is also the expansion of credit that comes about as a result of the intervention of the state in financial areas, in particular, the lowering of credit rates by various means.  So easy credit also produces inflation and hence, higher prices.

DDG: One of the things I frequently hear by elected officials and their economics experts is that inflation is necessary to keep America moving forward … that is to say, they believe that “new money” needs to be created to keep profits from falling. Others seem to think that having a debased dollar is good for business. What do you think about that?

Dr. Tooley: Right you are.  We hear this all the time from elected officials, academics, and all sorts of folks:  New money they say must be produced precisely to keep credit rates low.  This kind of eternal inflation then is supposed to result in an eternal condition of easy money.

Economists from Keynes to Phillips to Galbraith and beyond helped to ingrain this thinking in public life in America and elsewhere:  keep inflating, and the little guy will always have that money to start a business, et cetera. And then, there is the argument that you emphasize:  inflation to keep profits from falling. 

Well, this picture of a “healthy” gradual inflation at very best makes use of the most short-sighted, near-term thinking imaginable.  It makes no sense to think your profits are growing if these profits are soon wiped out by inflation.  And as for the prosperity of the little guy, the easy money policy is a recipe for mal-investment and disaster. 

Borrowing too much on an enterprise with marginal chances of survival usually ends in the ruin of the investors, that is, with the inevitable bust or correction of the business cycle.  And when this ruin rains down on the little guy, it is personally even more catastrophic than if a big company bet wrong and has to close a plant – although the little individuals are the ones who suffer most there, too, but as workers in the plant who adjusted their lives to work there, only to have the business go bust. 

It is “widow’s mite” situation.  Ruin is the result, not prosperity. 

DDG: What can you tell us about the Austrian school of economics and its view of money and credit? What is the difference between Austrian economics and the Chicago school or Keynesian economics?

Dr. Tooley: Austrian School scholars are much closer to the Chicago School in many respects, but they differ from both the Chicago School and from the Keynesian varieties of economists in a number of significant ways.  Thinking about money and credit is one of the most important.  Where Chicago School and Keynesian economists end up calling for continuous – even if “judicious” – inflation, the Austrian School ideal is the eradication of the intervention of the state into issues of private exchange. 

The Austrians see the market as a giant information exchange, and interventions of any kind – price controls, credit intervention, price ceilings or minimums, the privileging of special categories of people or companies – as a distortion of the market.  This means among other things that overall the market is less efficient than it would be in its unadulterated state. 

Greater efficiency of the market would mean that Ms. Jones from Seattle, who wants rice, and Mr. Smith from Charleston, who grows rice, could find each other and agree on a price of rice acceptable to both of them with less time and cost than in other conceivable ways of achieving exchange.  All this would be reflected in the price. 

Everyone benefits, even folks not involved in this individual exchange.

DDG: From time to time we hear people talking about the Weimar Republic hyperinflation crisis. What is hyperinflation anyways, and what exactly happened in the Weimar?

Dr. Tooley: Big question!  The Weimar inflation or the Great Inflation is the archetypal case of hyperinflation, though not the first by any means.  Government functionaries and other politicians in hyperinflation economies these days have invented a less scary term:  “high inflation.”  Like calling a Depression a “slump” or a “recession” or calling the American War Between the States “the late unpleasantness.”

But hyperinflation is a solid, useable term, and it simply means that in a given historical situation, the money supply is inflated so much that it spins out of control.   And more and more currency is printed, essentially, until the currency is not worth less, but worthless. 

The Weimar Republic was the new constitutional republican regime of Germany in the wake of German defeat and revolution at the end of World War I.  The old Imperial government had already begun inflating the currency to pay its debts, manipulating credit and so forth just before the war in 1912 and 1913.  And when the war started, Germany like every other belligerent in the war printed up money and carried out other inflationary measures in order to help pay the colossal costs of the war.

This condition was only accentuated from 1918 to 1920, when the Allies continued to blockade German, and from 1920 to 1923, when the Allies demanded payments for reparation of damages in the war.  But there is no doubt about it: the German governments – the Imperial governments of wartime and the postwar democratic governments – all cooperated in printing money and other expansionary manipulations, in order to pay their debts. 

So if one wanted to buy a German gold mark in 1918, the price was one paper mark.  In October 1923, if one wanted to buy a gold mark, the price was one trillion paper marks.  Hence:  the system was reduced to absurdity.  No one wanted to sell valuable goods for wheelbarrows of worthless paper, so goods were extremely scarce. 

The great middle classes of once-prosperous Germany were totally rearranged:  the savers losing everything, the debtors getting back to zero. An already hungry population was rendered more hungry. Rich tycoons shielded their wealth and even gained by means of colluding with the government in the inflation. The lives of countless millions were ravaged.

A new set of politicians determined to reset the whole system with a new currency in the fall of 1923.  It was a spectacular effort that started everything over with a new mark based on gold.  But enormous damage to culture and society and politics had already been done.

DDG: It seems like one of the greatest dangers of inflation is that it creates a massive distortion of both public policy and private affairs. For example, it causes people to invest in things which under ordinary circumstances would be considered unprofitable or risky.  It also causes government to have to constantly re-adjust its tax policy to keep collecting more and more revenues just to pay for the cost dilation of government services. There might even be military policy implications of inflation. What do you think?

Dr. Tooley: Yes, I think you are absolutely right.  The distortion of people’s lives is the greatest problem of inflation.  And your analysis of the extent of the problem is quite correct.  Public policy is distorted.  Private planning is disrupted.  Business and exchange become much less efficient and therefore more expensive.  Military costs, medical costs—all of this becomes more expensive, not only because of the actual falling value of money, but also because of the inefficiency introduced. 

DDG: Is it possible that our monetary system could be reformed or saved? What would you recommend is the best approach to putting purchasing power and more importantly, saving power back in the hands of the American people?

Dr. Tooley: Well, first of all, we have to put the blame squarely on the parties at fault.  The state controls the money supply and the currency as well as, a bit more indirectly, credit rates.  Richard Nixon once suggested that American housewives were to blame for inflation for not shopping around!  But it is not housewives – or any other group of private citizens – who control the production of currency and the expansion of credit in the United States:  it is a whole range of government agencies, including the “non-government” government agency, the Federal Reserve. 

So in the near term, at the very least, first step has to be auditing the Fed.  The House Bill has now passed, and the Senate must step up to its historic responsibility to the American people and do the same.  

In the longer term, the whole inflationary regime has to end, and this means that we have to reject fiat money – that is, currency without any backing by something of intrinsic value – and go back to something like the old gold standard that proved wonderfully efficient and elastic for over a hundred years until just before World War I.  This is a big order, since for the hundred years since then, we have been educated to think that money should be a tool of social policy, that the state should use its manipulative powers to save us from depression and all the rest.

One of the important aspects of all this goes back to ancient concerns about weights and measures.  For example, the injunctions about false weights and measures that run through the Old Testament are always linked to “justice.”  It is the manipulation of weights and measures – including money – that allows those less powerful in particular to be ripped off.  The powerful are not likely to allow this happen to themselves. 

The system of “justice” is closely associated with clear and transparent measures, ground rules, laws, etc.  Hence, for those well-meaning persons who hope to use the inflationary regime and inflationary policies to help people at the lower end of the socio-economic ladder, let me suggest that an opaque system that changes the very measurement of the money in someone’s wallet from day to day is not likely to increase “justice” in any society inflicted with it.

But of course, in the longest run, to end this entrenched system of inflation, the power of all governments over such private issues of exchange has to be decreased and eventually simply swept away. 

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Danny de Gracia

Dr. Danny de Gracia is a political scientist and a former senior adviser to the Human Services and International Affairs committees at the Hawaii State Legislature. From 2011-2013 he served as an elected municipal board member in Waipahu. As an expert in international relations theory, military policy, political psychology and economics, Danny has advised numerous policymakers and elected officials and his opinions have been featured worldwide. Now working on his first novel, Danny resides on the island of Oahu.

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