A CENTURY LATER, AND HERE WE ARE AGAIN!

ECONOMIC PERSPECTIVES 145 | January 2024

My last essay [EP 144] included reference to the concept of “added-value” as the true measure of the productive output of an enterprise. Here’s a reminder: the added-value of a business is the total of its sales revenue, minus the cost of what it buys in from other enterprises (and therefore part of their sales revenue). Although questions may arise on, for example, whether a distinction should be made between “capital” and “revenue” items; or how added-value differs from “gross profit”; or how the cost of public sector services should be treated in determining added-value  – but these issues are subsidiary to the main concept, as described above. 

When, in the broader sphere, we hear economists declare that what’s needed in our sluggish business environment is higher “growth”, they are of course referring to added-value. They are simply acknowledging that, if it is to grow, an economy must facilitate the creation of added-value by dismantling the shackles of bureaucratic meddling, and grant  entrepreneurs unimpeded access to markets, freeing them to innovate, trade and expand their businesses. In a word, to create wealth in the sense conveyed by the title of Adam Smith’s seminal masterpiece “The Wealth of Nations”.  Aside from the availability of natural resources, “wealth” is the accumulation of unspent added-value and, as “savings”, represents the seed-corn of capital needed to initiate a further round of productive enterprise. 

As I and others have noted many times, the conditions conducive to wealth-creation may be cited with nigh-mystical simplicity: civil freedom, low taxes, free trade and – especially - sound money.  In today’s world of inverted values we may recognise these divine attributes most easily by their ubiquitous absence: “civil freedom” against a tide of encroaching rules-based enslavement; “low taxes” when the ravages of a bloated state have ratcheted taxes to a confiscatory level; “free trade” against the onslaught of a new wave of mercantilist protectionism; and “sound money” at a time when currencies are being destroyed by unhinged, ceaseless fabrication. 

Lest any readers question the emphasis I place on “sound money”, I can only suggest you read (if you can bear to!) Adam Fergusson’s remarkable text, written 50 years ago, “When Money Dies – the Nightmare of Deficit Spending”, on the subject of German Hyperinflation after the first World War. Its astonishing revelations include the depth of institutional blindness that afflicted the entire political classes of Germany and Austria – and the herd-like gullibility of workers accepting weekly, then daily, wage-packets of freshly printed “milliards” of marks [“milliard” = one thousand million] scarcely capable of feeding a family of four, even assuming there was food to be bought. 

The minds of the most senior government officials were unable to perceive any connection between (i) the staggering collapse of the mark’s exchange rate against rival currencies; and (ii) the gigantic increases in note issue. The Chairman of the Reichsbank, Dr Rudolf Havenstein, “the mad banker whose one object was to swamp the country with banknotes”, in Fergusson’s words, “was merrily turning the handle of the printing press”. The cry on the street was “the dollar’s going up again” when, in reality, the dollar was stable – it was the mark that was going down. For those who, even now, proclaim that they don’t really understand money, it would be difficult to envisage a more vivid lesson than that which gripped Germany in 1922. To paraphrase Fergusson, before the eyes of its citizens the moral degeneration of the entire nation and its institutions replaced its sense of security, community-spirit and patriotism. The most law-abiding people in Europe could do nothing but watch, as the very essence of the nation’s fabric was systematically destroyed by the ravages of an inflation that completed the process of moral decay begun by the war. 

Spontaneously, there arose an obsessive yearning for a rebirth of the German soul, and all classes longed for a great leader possessed of the values of the legendary figures in early Teutonic history. Tragically, this longing was fully understood and exploited by Hitler who, with his passion for Wagner, was able to satisfy this craving by giving the German volk their hero - as well as a scapegoat for their woes, the Jews. 

It would be easy to conclude this brief essay with “………..and the rest is history.” But, as Churchill perceptively noted in a speech before Parliament in 1948, “those who fail to learn the lessons of history are doomed to repeat it.” Look around and what do you see? Has anything been truly learnt over this 100-year interlude? Vote-catching rhetoric instead of policies; state intervention instead of individual action; state benefits instead of work; waste on an immeasurable scale. We’ve certainly laid the groundwork: a decade of electronic debt proliferation and ultra-cheap borrowing  - in short, a latter-day resonance of the ubiquitous moral decay that enveloped Europe in 1922. Just wait until we get closer to the coming year’s elections in the UK, USA, Europe and elsewhere, and you’ll hear the standard aspirational tripe pouring from the caucuses, stumps and airwaves from politicians who will eradicate inequality in a something-for-nothing flurry. No dream is beyond the thrall of the feel-good fairy.

[EMILE WOOLF – 17 January 2024]