Remembrance Day – Lessons That Should Not Be Forgotten

Nov 12, 2011 by

Remembrance Day is when we pay respect to those who, fallen and still living,  have made sacrifices for the freedoms we enjoy.   In addition to paying homage to those who have made our way of life possible, we also take the time to remember the horrors, destruction, and seriousness of war. We do these things with the hope that we can either avoid war or only enter into war when all other means of preserving peace have failed.

With all that we do remember, one area that does not get as much attention as I believe it should has to do with remembering the preceding events that led up to the wars.  Wars just don’t happen. There are usually a number of events that happen that culminate in war.  Being aware of these events and remembering them is an important part of making sure that these do not happen again.

What follows are a few of the lessons learned from the period between World War I and World War II that I believe are worth remembering.  It is important to remember these events as they appear to have modern parallels that we need to be wary of.  

The Dark Side of Inflation

One of the economic concepts we have forgotten is the meaning of inflation.  We have also forgotten what its inevitable effects are.

When one thinks of inflation, one often thinks of rising prices.  However, rising prices are the effect of inflation.  Inflation is the increase of the money supply and/or credit.  Inflation results in more of a currency being created, often out of thin air, with the inevitable consequence being a currency that becomes worth less and less as more of it is being created and put into circulation.  The rising prices merely reflect the debasement that occurs from the increase in the money supply.

After World War I, Germany, as well as many other countries involved in the war, was faced with task of reconstructing that which had been destroyed during the war.  Additionally, Germany faced financial penalties, in the form of reparation payments, for the role that they played in the war.  The combined costs of rebuilding the country and the reparation obligations placed a heavy financial burden upon the German people.

One way Germanycould have met its financial obligations was to increase the taxes of its citizens.  However, raising taxes is not a very popular thing to do, and since politicians are elected by popular vote it is not a course of action they are willing to follow. 

The alterative solution was for the government to borrow funds.  Much of the debt that the German government issued was purchased by the German central bank.  The German central bank, like most central banks, had the ability to create new currency out of nothing.   This is basically the power and privilege to legally print money…and print money they did. 

As this process continued the German currency, the German mark, increasingly became worth less and less.  The result of this was higher prices, which reflected the fact that greater numbers of devalued marks were required to purchase everyday goods. 

The endgame of Germany’s policy of inflation was what is called hyperinflation.  This was a result of the printing of German marks getting out of control and the value of each mark in circulation becoming literally worthless.  Whereas the German mark was worth a little less than an American dollar at the end of World War 1 (1917),  at the height of the hyperinflation (1923) it would take 4.2 trillion German marks to purchase an American dollar, or 42 billion marks to purchase an American penny.

The groups that were affected the most were savers, pensioners, and the poor.  The purchasing power of the savings and pensions were reduced to almost nothing.  With the poor the prices of most things, especially the essentials of life, grew faster than the earnings of the poor were rising.

The effects of this were foreseen by John Maynard Keynes when he wrote the following in 1919:

“Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some… Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.” 

These thoughts of Keynes were echoed in the account of the German hyperinflation  ‘When Money Dies’, by Adam Ferguson., an.  One of the key lessons for that book is this:

“Inflation did not conjure up Hitler, any more than he, as it happened, conjured it. But it made Hitler possible”.

This lesson is relevant for us today.  The terms “fiscal stimulus” and “quantitative easing” are but new labels for the old inflation.  In the name of fighting the current financial crises, such measures are stated as the only solution to the problems.  What is often forgotten is that the financial crises of today are the result of the inflationary measures used to fight the financial crises of yesterday…and those crises are but a result of inflationary measures used to fight the crises before that.  For example the U.S. government has devoted trillions of dollars in fiscal stimulus to fight the effects of recession associated with the bursting of the housing bubble…which housing bubble was the result of the government administering fiscal stimulus to fight the recession associated with the crash of the “dot com” bubble…which bubble was created by the U.S. government applying stimulus to counteract the recession of the early 1990’s.

What we are seeing now is that the short term effects of the recent stimulus are not having their anticipated effects (i.e. a renewed economy). While the positive short-term effects are not being seen it can be certain, based on the amount of stimulus delivered, that the negative long term effects that accompany inflation are yet to be experienced.

Losing faith in liberal democracy

In addition to debasing the currency, another effect of the German hyperinflation was for the German people to lose faith in a liberal democratic form of government.  Again, a quote about interwar Germany from ‘When Money Dies’:

“Economic distress is leading the people to be much more amenable to authority as representing the only hope of salvation from the present state of affairs. Unemployment is taking the gild off the gingerbread of democracy…”

When Hitler became chancellor in 1933Germanyhad already experienced the following in less than 17 years:

a)      a humiliating defeat in World War I, the costs of reconstruction, and  the reparation penalties associated with the war,

b)      the effects of the hyperinflation of the 1920’s, and

c)       the beginnings of the great depression.

Each of these were seen by Germans, in some degree or another, as the bitter fruits of a liberal democratic form of governments and the poor decisions of their elected representatives.  As such, many Germans were demoralized and susceptible to an authoritarian figure taking charge of affairs.   This is especially true for an authoritarian figure that had the ability to place blame for the problems then being experienced, had a vision for the German people, and demonstrated that he could remedy the problems that they were having.

Most of the developed world has experienced, or has been on the verge of experiencing, challenging economic conditions for the past 3-5 years.  In theU.S.this has contributed to the Tea Party and the Occupy Wall Streetmovements. These movements have been relatively peaceful.   If economic trends continue as they have, history suggests that such movements have the potential of becoming more radical and less peaceful in the future.

The dangers of the total state

Nazi Germany has been described as a totalitarian state.  A totalitarian state is one in which the state controls directly, or indirectly, all the key activities of its citizens.  

The philosophy of Nazi Germany totalitarianism of is known as fascism. The word fascism is derived from the word fasces.  A fasces is a Roman symbol representing authority or power.  This symbol consists of a number of wooden rods tied together with an axe attached to the bundle.   The fasces represents a people unified under the will of the state…with the axe to remind the citizens what will happen if they step out of line.  

The basic philosophy of fascism is best summarized in the following:

“Economic initiative cannot be left to the arbitrary decisions of private, individual interest.  Open competition, if not wisely directed and restricted, actually destroys wealth instead of creating it…The proper function of the State in the Fascist system is that of supervising, regulating and arbitrating the relationships of capital and labour, employers and employees, individuals and associations, private interests and national interests…More important than the production of wealth is its right distribution, distribution which must benefit in the best possible way all the classes of the nation, hence, the nation itself. Private wealth belongs not only to the individual, but, in a symbolic sense, to the State as well.” (Mario Palmieri The Philosophy of Fascism, 1936)

An important characteristic of the totalitarian state is that it is a highly regulated state.  There is not an area of life that government does not regulate, or at least attempt to regulate.

The totalitarian state is also the bureaucratic state.  In the free society, people’s needs are met through voluntary associations of individuals guided by the principles of voluntary exchange and private charity.  In the totalitarian society, needs are met coercively through government organizations.  In those areas of the totalitarian society where private organizations are allowed to exist, there are bureaucratic bodies to provide oversight and make sure that these private organisations are doing the “right thing” (in other words, what the state wants them to do.)

It is important to remember that Hitler was able to do what he did in Germany through the regulations and bureaucracy that had been built up prior to him taking power.   Once in control he merely continued building upon that which had already been established.  Thus the importance of ensuring limits on the regulation and bureaucratization of society.  Doing so limits the power that can be exercised by a single person, or small group of people, if they ever are placed in a position of power.

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